0001 1 TRANSCRIPT OF PROCEEDINGS BEFORE THE 2 TEXAS LOTTERY COMMISSION AUSTIN, TEXAS 3 REGULAR MEETING OF THE 4 TEXAS LOTTERY COMMISSION THURSDAY, MAY 14, 2009 5 6 COMMISSION MEETING THURSDAY, MAY 14, 2009 7 8 BE IT REMEMBERED THAT on Thursday, the 14th day 9 of May 2009, the Texas Lottery Commission meeting was 10 held from 9:05 a.m. to 1:48 p.m., at the Offices of the 11 Texas Lottery Commission, 611 East 6th Street, Austin, 12 Texas 78701, before CHAIRMAN MARY ANN WILLIAMSON, and 13 COMMISSIONERS DAVID J. SCHENCK and J. WINSTON KRAUSE; 14 and the following proceedings were reported via machine 15 shorthand by Lorrie A. Schnoor, a Certified Shorthand 16 Reporter of the State of Texas, RMR, CRR, and the 17 following proceedings were had: 18 19 20 21 22 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Ms. Mary Ann Williamson 4 COMMISSIONERS: Mr. David J. Schenck 5 Mr. J. Winston Krause 6 GENERAL COUNSEL: Ms. Kimberly L. Kiplin 7 DEPUTY EXECUTIVE DIRECTOR: 8 Mr. Gary Grief 9 DIRECTOR, CHARITABLE BINGO OPERATIONS: Mr. Philip D. Sanderson 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE PROCEEDINGS, THURSDAY, MAY 14, 2009............. 8 3 AGENDA ITEM NO. I - Meeting Called to Order..... 8 4 AGENDA ITEM NO. II - Consideration of and 5 possible discussion and/or action on recognition of service by former Texas Lottery Commission 6 Chairman James A. Cox, Jr....................... 88 7 AGENDA ITEM NO. III - Report, possible discussion and/or action on ethics, 8 administrative procedure, and open government laws pertaining to the Texas Lottery 9 Commission...................................... 8 10 AGENDA ITEM NO. IV - Consideration of and possible discussion and/or action on the 11 process for conducting Texas Lottery Commission meetings............................. 30 12 AGENDA ITEM NO. V - Report, possible 13 discussion and/or action on the 2008 Charitable Bingo Annual Report.................. 34 14 AGENDA ITEM NO. VI - Consideration of and 15 possible discussion and/or action, including adoption, on amendments to 16 TAC 402.402 16 relating to Registry of Bingo Workers........... 40 17 AGENDA ITEM NO. VII - Report, possible discussion and/or action on the 18 Bingo Advisory Committee........................ 43 19 AGENDA ITEM NO. VIII - Report by the Charitable Bingo Operations Director and 20 possible discussion and/or action on the Charitable Bingo Operations Divisions 21 activities, including updates on status of licensees, rulemaking and form revisions, 22 audits, pull-tab review, special projects, and upcoming operator training................... 47 23 24 25 0004 1 TABLE OF CONTENTS 2 PAGE 3 AGENDA ITEM NO. IX - Report, possible discussion and/or action on lottery sales 4 and revenue, game performance, new game opportunities, advertising, market research, 5 and trends...................................... 108 6 AGENDA ITEM NO. X - Report, possible discussion and/or action on transfers 7 to the State and the agencys budget status..... 122 8 AGENDA ITEM NO. XI - Consideration of and possible discussion and/or action on 9 Lotto Texas procedures.......................... 126 10 AGENDA ITEM NO. XII - Report, possible discussion and/or action on the 11 81st Legislature................................ 129 12 AGENDA ITEM NO. XIII - Report, possible discussion and/or action on the agencys 13 FY 2010-2011 legislative appropriations request......................................... 135 14 AGENDA ITEM NO. XIV - Report, possible 15 discussion and/or action on the agencys contracts....................................... 137 16 AGENDA ITEM NO. XV - Report, possible 17 discussion and/or action, including extension, on the drawing studio and production 18 services contract............................... 139 19 AGENDA ITEM NO. XVI - Report, possible discussion and/or action on external and 20 internal audits and/or reviews relating to the Texas Lottery Commission, and/or on the 21 Internal Audit Departments activities........... 140 22 AGENDA ITEM NO. XVII - Report, possible discussion and/or action on the agencys 23 Survey of Organizational Excellence.............. 21 24 AGENDA ITEM NO. XVIII - Report, possible discussion and/or action on the 25 Mega Millions game and/or contract............... 141 0005 1 TABLE OF CONTENTS 2 PAGE AGENDA ITEM NO. XIX - Report, possible 3 discussion and/or action on GTECH Corporation... 142 4 AGENDA ITEM NO. XX - Report by the Executive Director and/or possible 5 discussion and/or action on the agencys operational status, agency procedures, 6 and FTE status.................................. 142 7 AGENDA ITEM NO. XXI - Consideration of the status and possible entry of orders in: 8 A. Docket No. 362-09-2460 Eagle Stop B. Docket No. 362-09-2463 OMI 9 C. Docket No. 362-09-2913 Medinas Food Mart D. Docket No. 362-09-2914 1187 Stop & Go 10 E. Docket No. 362-09-2916 E&M Business Ventures, Inc. 11 F. Docket No. 362-09-2912 West Side Stop G. Docket No. 362-09-2692 Shop N Go 12 H. Docket No. 362-09-2695 Time Saver Grocery I. Docket No. 362-09-2696 Cooks Mini Mart 13 J. Docket No. 362-09-2697 Sunrise Market K. Docket No. 362-09-2691 United Drive In 14 No. 4 L. Docket No. 362-09-1915 909 Corner 15 M. Docket No. 362-09-1918 Mitty Mart N. Docket No. 362-09-1912 Jacks Corner 16 Store O. Docket No. 362-09-1911 H L D Food 17 Mart.................................... 154 18 P. Docket No. 362-08-3475 Super Corner Q. Docket No. 362-08-3474 El Amigo 19 R. Docket No. 362-08-3473 Lucky 1 Food Mart S. Docket No. 362-08-3476 7 am 20 Food Store.............................. 153 21 T. Docket No. 362-09-2515.B - Bnai Brith Youth Organization 22 U. Docket No. 362-08-2516.B Bnai Brith Mens Club 23 V. Docket No. 362-08-2517.B Lou Rosenberg Scholarship Fund........................ 50/152 24 AGENDA ITEM NO. XXII - Public comment........... 143 25 0006 1 TABLE OF CONTENTS 2 PAGE 3 AGENDA ITEM NO. XXIII - Commission may meet in Executive Session: 4 A. To deliberate the appointment, employment, and duties of the Executive Director 5 pursuant to Section 551.074 of the Texas Government Code. 6 B. To deliberate the duties and evaluation of the Deputy Executive Director 7 pursuant to Section 551.074 of the Texas Government Code. 8 C. To deliberate the duties and evaluation of the Internal Audit Director pursuant 9 to Section 551.074 of the Texas Government Code. 10 D. To deliberate the duties and evaluation of the Charitable Bingo Operations 11 Director pursuant to Section 551.074 of the Texas Government Code. 12 E. To deliberate the duties of the General Counsel pursuant to Section 551.074 13 of the Texas Government Code. F. To deliberate the duties of the Human 14 Resources Director pursuant to Section 551.074 of the Texas Government 15 Code. G. To deliberate the duties of the Ombuds 16 pursuant to Section 551.074 of the Texas Government Code. 17 H. To receive legal advice regarding pending or contemplated litigation 18 pursuant to Section 551.071 (1) (A) and/or to receive legal advice regarding 19 settlement offers pursuant to Section 551.071 (1) (B) of the Texas 20 Government Code and/or to receive legal advice pursuant to Section 551.071 (2) 21 of the Texas Government Code, including but not limited to: 22 First State Bank of DeQueen et al. v. Texas Lottery Commission 23 James T. Jongebloed v. Texas Lottery Commission 24 USA v. David Crawford and TLC 25 0007 1 TABLE OF CONTENTS 2 PAGE 3 Texas Lottery Commission v. Leslie Warren, Texas Attorney General Child Support 4 Division, Singer Asset Finance Company L.L.C., and Great-West Life & 5 Annuity Insurance Company Employment law, personnel law, 6 procurement and contract law, evidentiary and procedural law, and general 7 government law Lottery Operations and Services contract 8 Mega Millions game and/or contract Request for Attorney General Opinion 9 No. RQ-0771-GA.......................... 151 10 AGENDA ITEM NO. XXIV - Return to open session for further deliberation and possible 11 action on any matter discussed in Executive Session............................... 152 12 AGENDA ITEM NO. XXV - Adjournment............... 160 13 REPORTER'S CERTIFICATE.......................... 161 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 THURSDAY, MAY 14, 2009 3 (9:05 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN WILLIAMSON: Good morning. I'd 6 like to call the meeting of the Texas Lottery 7 Commission to order. Today is May 14th, 2009. Time 8 is 9:05. Commissioners Schenck and Krause are 9 present, so we have a quorum. 10 I'd like to welcome our newest 11 Commissioner Krause to the group. Thank you for the 12 service to us and the State of Texas, and we welcome 13 you here. 14 COMMISSIONER KRAUSE: Happy to be here. 15 AGENDA ITEM NO. III 16 CHAIRMAN WILLIAMSON: We will be going 17 out of order on our agenda. For right now, Item No. 18 II, the person involved in that is not here yet, so we 19 will go on to Item No. III. 20 And just for your information, Item XVII 21 will be moved up, and we will hear that this morning. 22 And also Item XVI T, U and V will be heard this 23 morning. 24 So having said that, we are going to -- 25 Ms. Kiplin is going to report on -- discuss on the 0009 1 ethics, administrative procedure, and open government 2 laws pertaining to the Texas Lottery. 3 MS. KIPLIN: Commissioners, good 4 morning. Thank you. 5 Commissioner Krause, this item is 6 generally added to a commission meeting agenda when we 7 have a newly appointed commissioner just to go through 8 some parts of laws, government laws, as it pertains to 9 Texas Lottery commissioners. And so I'm going to ask 10 for Chairman Williamson and Commissioner Schenck's 11 indulgence on this. 12 Commissioner Schenck, I think this is 13 your third time to go through this, so you might -- 14 might have questions that you might want to ask me. 15 In front of you, for each of you, is a 16 blue binder. It's a binder. This is actually a 17 guideline that's published by the Texas Ethics 18 Commission. It's been annotated, or marked up, in 19 blue to point out provisions that are part of the 20 Texas Lottery Commission Enabling Statutes, either 21 Chapter 466 or Chapter 467 of the Government Code that 22 are different or need to be highlighted and brought to 23 your attention. So I'll bring this to your attention. 24 This is for you-all to take with you, if you'd like. 25 I guess the first thing I'd like to say 0010 1 is that if at any time you ever have a question as it 2 pertains to these areas of law or any law that relates 3 to the Lottery Commission, please feel free to give me 4 a call. And if I'm not available, there's an attorney 5 on my staff that can help you. 6 The first thing I'd like to take up is 7 the ethics law in this guideline. And if you can turn 8 to the -- the third page on that, this is a -- Part I, 9 these are the standards of conduct and conflict of 10 interest. I'm not going to read this. These are 11 should-nots that are part of general law as it relates 12 to standards of conduct and conflict of interest. And 13 I think the general rule of thumb is, don't accept any 14 gift or favor or service or take anything that would 15 influence you in the discharging of your duties or 16 impair your independence of judgment in performing 17 your duties. 18 I also would point out, in terms of a 19 conflict of interest, a need for you to determine 20 whether you have a private or personal interest in a 21 matter that comes before the Commission. And if you 22 do, and we're available -- the attorneys are available 23 to help you work through "Do you really? What's the 24 definition of that?" If you do, then you must 25 disclose that fact to your colleagues, and at that 0011 1 point, you must refrain from participating or voting 2 in that matter. 3 There are conflicts of standard or 4 ineligibility provisions that are unique to the 5 Lottery Commission. I'm going to direct your 6 attention to Page 14 of this guideline, and you can 7 see those are set out. This page is all in blue. 8 These are the eligibility standards, and I think it -- 9 I think it's fairly common sense. If you own or 10 control more than 10 percent interest in a business 11 entity that has business before the Commission, you're 12 not eligible to participate, or are employed in the 13 management of that entity, and so forth. And I'm 14 going to leave that for your reading. I think it's 15 fairly self-explanatory. 16 I do want to point out, though, as it 17 relates to lottery games and prizes in particular, you 18 may not purchase a ticket or claim, collect or receive 19 a lottery prize or a share of a lottery prize. And 20 that prohibition also extends to your family members 21 that reside with you in your -- in your principal 22 place of residence if that's considered to be their 23 principal place of residence. And that -- those 24 family members are spouse, child, brother, sister or 25 parent. So know that there's an outright prohibition 0012 1 in terms of participating or claiming a prize on 2 that -- on that level. 3 If you don't have any questions on any 4 of that, I'd like to go to the next part, which is 5 Part II, which are the acceptance of benefits. 6 The general gift laws -- again, the 7 general rule is do not accept a gift where it's 8 intended to influence you in your official capacity. 9 There are dollar amounts for gifts that 10 are -- that are the general gift rule that are in the 11 ethics statutes that set a threshold for a nominal or 12 de minimis gift. Please note that that is not the 13 same for the Lottery Commission statutes. There is no 14 de minimis or dollar threshold. So a meal could 15 trigger a prohibited gift to you. Know that. 16 Now, there is an exception that's been 17 carved out in the Lottery Commission, and it's to 18 recognize that you can carry any rule to -- you know, 19 to extreme and then it results in an absurdity, and 20 that is if the gift is given to you on account of a 21 relationship independent of the lottery -- for 22 example, a relative or a professional relationship, 23 then that's acceptable. 24 And the reason for that is because on 25 Page 5 of the guideline, you can see those that you 0013 1 may not accept gifts from; and one in particular, the 2 last bullet, is you can't receive a gift from somebody 3 who has won a prize greater than $600 in that prize 4 amount if they've won it within the last two years. 5 You know, at some point, it's nonsensical. 6 By the way, this is not only directed to 7 commissioners, it's also directed to staff. 8 I can tell you that my mother continues 9 to play the lottery. And I continue to receive, you 10 know, gifts for my birthday or on Christmas from her. 11 I don't know if she's hit 600. I probably would have 12 heard about that. But the point is that's that's 13 obviously -- that's independent -- if I received a 14 gift from her or a meal, a Thanksgiving meal, from 15 her, that would be independent of my status here as a 16 Texas Lottery Commission employee because of the fact 17 that she's my mom. 18 COMMISSIONER SCHENCK: You're sure about 19 that, Kim? 20 (Laughter) 21 MS. KIPLIN: It gets dicey days. I will 22 say that your -- it becomes dicey on some days. 23 So know that. 24 Also, as it relates to gifts, for gifts 25 to state agencies, if somebody says, "Oh, please 0014 1 accept this in your capacity as a commissioner but on 2 behalf of the Lottery Commission," actually, you 3 actually have to have express authority in our -- in 4 the agency's organic law to be able to accept a gift 5 on behalf of the state agency. The Lottery Commission 6 does not have that express authority. So we are not 7 able to accept gifts on behalf of the state agency. 8 Know that. 9 The next part of this guideline that I'd 10 like to touch upon is the abuse of office. And in 11 particular, the rule that I would like for you to take 12 away is that government property can only be used for 13 governmental purpose. It can't be used for personal 14 or private purposes. 15 Now, there has been exception that's 16 been carved out, and these are Penal Code provisions 17 by the way, that says it's okay and it's not a 18 criminal act if you accept frequent flyer mileages -- 19 mileage on travel that was state travel. That's 20 actually been carved out. The agency can create a 21 policy where that doesn't go to the employee, that 22 actually goes to the agency. I'm not aware of any 23 agencies that have done that just because it's tough 24 to keep up with, but know that you can do that. 25 Particular, know about political 0015 1 campaigns. Employees may not use -- or anybody may 2 not use state time or state employment to work on an 3 individual's campaign. 4 And specific to the Lottery Commission 5 and a lottery commissioner, I do want to point out in 6 our Government Code 467.025, this is an interesting 7 provision. And what it says is that a commissioner 8 may not directly or indirectly coerce, attempt to 9 coerce, demand or advise a person to pay, lend or 10 contribute anything of value to another person for a 11 political purpose. It's pretty broad. 12 This particular statutory provision has 13 been the subject of two Attorney General opinions: 14 One, back in '96 was the original one, and that 15 actually -- that AG opinion expanded the terms in this 16 to also include solicit. So know that it's in 17 soliciting, so you can't -- you can't potentially put 18 your name on a steering committee letterhead and 19 solicit funds. 20 Also, that 1996 opinion asked the 21 question whether -- "Well, is this in the capacity -- 22 official capacity of a commissioner, or does it also 23 extend to individual?" And the answer is: It is also 24 in your individual capacity. 25 Now, I can say that we -- this agency 0016 1 requested a recent AG opinion, and that was rendered 2 last summer, 2008, about the scope of the particular 3 provision and the opinion, and it has indicated that 4 some of the analysis is more factual in nature in 5 terms of hosting a fund-raising event, soliciting for 6 a contribution. And so what they've said is that's 7 really a factual analysis. 8 This provision is a ground for removal 9 by the Governor. And the AG opinion actually did 10 conclude it's really the governor's call in terms of 11 whether it's within the scope or not, but please know 12 that that does exist in terms of fund-raising. 13 If we can turn to another category which 14 is "Other Employment," know that a Texas Lottery 15 commissioner may not accept any employment or 16 remuneration from a person that has a significant 17 financial interest in the lottery or a bingo 18 commercial lessor, bingo distributor, or bingo 19 manufacturer. 20 The definition of person with a 21 significant financial interest is -- is listed on Page 22 10 of your guideline, so I'll leave that to you for 23 reading. And if you have any questions, feel free to 24 call me. 25 Know also that there is a revolving door 0017 1 once you leave your position as a Texas Lottery 2 commissioner, and that's contained in Section 467.108 3 of the Government Code. And Chapter 467 is the 4 chapter for the Texas Lottery Commission, and we can 5 help you with that, if you need to. 6 Know that you have to file personal 7 financial statements with the Ethics Commission 8 annually. I know each of you have done that. And 9 that will be an annual obligation or duty on your part 10 for so long as you are a lottery commissioner. 11 Know also that appropriated funds may 12 not be used to influence the legislature. This is the 13 anti-lobbying provision. State officers and state 14 employees cannot use appropriated funds, cannot lobby. 15 Now, there is an exception where an 16 agency can be a resource when called upon by the 17 legislature, and we are no different than any other 18 agency. We are called upon to be and act as a 19 resource and provide information to the legislature, 20 and we do do that. 21 Any questions on the ethics guideline? 22 Running through it really quickly, I know it's a real 23 broad overview. Any questions, feel free to call me. 24 We're available to answer those for you. 25 I'd like to turn to key -- two key parts 0018 1 of the Administrative Procedure Act now that will 2 impact you or affect you as a lottery commissioner. 3 Two parts of that. One are contested cases. Those 4 have to do with enforcement cases against your 5 licensees. 6 You-all sit as a decision-maker, the 7 three-member commission, in terms of taking 8 disciplinary action, either revocation, suspension, or 9 on the bingo side, an imposition of a monetary fine. 10 So know that when we have a contested case, there is a 11 prohibition in the Administrative Procedure Act on ex 12 parte communications. And what that means is that you 13 cannot engage in a conversation, a communication, 14 about a matter of fact or law that's involved in that 15 case with one party and not have all parties present. 16 That's the ex parte communication. 17 Now, there has been an exception that's 18 been carved out because the -- there is an 19 acknowledgment that agencies handle matters that are 20 technical or very legal in nature. And so you can 21 call upon the services of an individual within the 22 agency, an agency employee, to assist you in 23 evaluating the case and that to help you with any 24 questions you may have. 25 For the legal aspects, we've carved out, 0019 1 we have a special counsel, and that's Sandy Joseph. 2 And she's available. She does not participate in the 3 contested case matters. She is available for the 4 commissioners, any questions that you have. And, 5 Commissioner Krause, I'll introduce you to Sandy -- 6 well, actually, she's going to be coming before you on 7 another matter, and so you will see her. 8 The other aspect of the Administrative 9 Procedures Act is rulemaking. That is a way that a 10 commission establishes its policy, rules to clarify 11 and interpret their statutes; and you-all are the 12 Commission, the body, that is charged with adopting 13 rules. And you're going to have a rule that's before 14 you today that's -- it's at the end of the process. 15 There are really three parts of a 16 rule-making process. The first part is proposing 17 amendments to a rule or rule to the public for public 18 comment, second part is the public comment, and the 19 third part is the adoption of that rule, or action, I 20 should say. Sometimes this agency has chosen -- or 21 the Commission has chosen not to adopt a rule. 22 The last part of government I wanted to 23 touch upon really is open government, the open records 24 and the open meetings. I really -- I'm going to leave 25 that to you. I know that you're required to take the 0020 1 open government training through the Office of the 2 Attorney General -- it's that online training -- 3 within 90 days of when you were qualified as a 4 commissioner. So I'm going to leave all the detail to 5 that. And if you have any questions, feel free to 6 call me. 7 A couple of general rules I do want you 8 to remember is as it relates to the Open Records Act, 9 now known as the Public Information Act, anything you 10 reduce to writing, anything you write down, an e-mail 11 that you receive, an e-mail that you create, if it's 12 being created in your capacity as a Texas Lottery 13 Commissioner, it is subject to the Open Records Act. 14 Now, there may be exemptions that we might be able to 15 request a decision to protect that from being publicly 16 disclosed, but know that it is something that is 17 subject, and we would need to have that at some point 18 to either produce it or to the requestor or to produce 19 it to the Office of the Attorney General for an in 20 camera review, so know that. 21 Also, under the Open Meetings Act, know 22 that a meeting of the Commission is subject to the 23 provisions of that act, and meetings have to be open 24 to the public because of the -- obviously, the Open 25 Meetings Act. 0021 1 Know generally that a meeting is any 2 deliberation between a quorum of a commissioner and 3 another person, or a quorum itself, which you're 4 discussing public business of this agency. We have a 5 quorum when we have two, because we have -- you know, 6 obviously, a three-member commission. 7 So know that unless your discussions are 8 part of an open meeting -- and obviously, there are 9 exceptions. You can deliberate in a closed meeting in 10 executive session -- you're prohibited from having 11 those discussions. There are some exceptions like 12 social gatherings and so forth, but you can't talk 13 about the business of this agency in that context. 14 And then with that, I'll finish. And if 15 you have any questions, Commissioner Krause, happy to 16 answer them. If they've triggered any questions for 17 you-all, I'm happy to answer them. 18 COMMISSIONER KRAUSE: I've been properly 19 schooled. 20 (Laughter) 21 AGENDA ITEM NO. XVII 22 CHAIRMAN WILLIAMSON: All right. Thank 23 you, Ms. Kiplin. 24 Now we'll go on to Item XVII, and this 25 is the report, possible discussion and/or action on 0022 1 the agency's Survey of Organizational Excellence. 2 Janine Mays with the Lottery will be here, along 3 with -- 4 DR. LANDUYT: Noel Landuyt. 5 CHAIRMAN WILLIAMSON: All right. Okay, 6 great. And I have a Gerald Busald. Is he with you 7 guys? 8 MS. HAYS: No. 9 CHAIRMAN WILLIAMSON: Okay. For public 10 comment. Afterwards, I suppose. 11 MS. HAYS: Good morning, Commissioners. 12 Welcome, Commissioner Krause, to the Texas Lottery 13 Commission. 14 My name is Janine Mays, and I'm the HR 15 Division Director. With me this morning is Dr. Noel 16 Landuyt from the University of Texas Organizational 17 Excellence Group. And Dr. Landuyt has agreed to come 18 and share with us the results of our survey of 19 organizational excellence for 2009. 20 DR. LANDUYT: Great. Thank you. 21 Again, my name is Noel Landuyt. I work 22 at the University of Texas at Austin at the Center for 23 Social Work Research. 24 And if I may, I'd just -- I can give you 25 just a very brief foundation of the survey. The 0023 1 survey is an employee attitudinal assessment that's 2 actually been taken part in the state, placed in the 3 state since about '79, and it is a assessment of human 4 resources that is asked for by the Legislative Budget 5 Board in the governor's office for strategic planning 6 instructions to occur every two years for agencies as 7 part of the strategic plan. 8 And what we do is, agencies -- and we 9 survey almost all state agencies, about a quarter of a 10 billion state employees every two years. We ask them 11 a series of questions about what they think about the 12 work environment, what they think about various 13 aspects of communication and supervision, leadership 14 and so forth, and then we compile those results and 15 return them back to the agency. It's kind of -- it's 16 more than a job satisfaction, more than an 17 organizational health assessment. It's an ongoing 18 research effort and ongoing understanding of human 19 resources. 20 And so the results for the Lottery 21 Commission, they just finished the assessment, again, 22 in 2009. And the way that the survey is designed is 23 it asks a series of about 80 items, and then they're 24 collapsed into different constructs which kind of 25 capture the organization. 0024 1 On the PowerPoint slide, you'll see that 2 the 20 constructs are laid out from top to bottom, 3 starting with supervisory effectiveness, and they're 4 grouped in five different areas -- work group, 5 accommodations, organizational features, information 6 and personal -- and then those items are collapsed 7 into those scores. The scores range from 100 to 500, 8 with 500 being on the high side, 100 being on the low. 9 And what we do here is we display out the relative 10 highs and lows, and we list the five highest are in 11 blue, the five lowest are in red. And you can see how 12 the agency fared along those lines. 13 When we look at the high side, we have 14 some what I would consider to be very strong scores. 15 Any score that's approaching 400, when you come to a 16 perceptional employee attitudinal assessment, it's a 17 very strong score. The agency had a very substantial 18 response rate as well. That really was very 19 representative. And so we have really high scores 20 that center around physical environment, that is the 21 facilities to which they work, how well they're 22 maintained, the safety of those facilities. 23 Strategic, how well the agency is able 24 to see kind of what's on the horizon, strategically 25 address those things. 0025 1 Quality, that reflects the level of 2 service that employees deliver, and that's very 3 strong. 4 And then two others that we don't 5 typically see in agencies as being high, and that's 6 job satisfaction and time and stress. The job 7 satisfaction can be a high one, but time and stress 8 typically is not for the work environment, and those 9 are very high scores for the agency. 10 On the flip side, on the low side, we 11 see that we have supervisory effectiveness, team 12 effectiveness, goal oriented, and internal. Typically 13 what we see for agencies is, we usually see a triad 14 there. We usually see internal communication, team 15 effectiveness and supervisory effectiveness kind of go 16 hand-in-hand. If one of those is low, typically all 17 three of those are low. 18 And also along fair pay, and the fair 19 pay score being above a 300, that is above the state 20 average for that, but that's still one of the lower 21 ones. 22 What we also do on the next slide is we 23 track the data with trend data and over time data, and 24 this is a look back at the last time we took the 25 survey, the last time. If we were to extend it -- 0026 1 what I did in preparation for this meeting is I looked 2 back at the last three iterations, and what I've seen 3 is a consistent increase in the scores, which is very 4 positive. 5 And so what we have here is a graphic 6 looking at the scores from this time to last time, and 7 what we see is that there are improvements in all 8 areas except for change orientation. 9 Now, I should caution or just say that 10 it takes about a five-point difference to be 11 statistically significant, so some of those 1s and 2s, 12 the 3s, the 4, that really -- that could be noise. It 13 is in the right direction, though, but it could be 14 noise. But definitely when you see increases of 18 15 and 10 and 12 or 17, you definitely have increases 16 in -- significant increases in scores over time, which 17 shows that the perception by employees has improved 18 over time, and so that -- that's fairly -- that's a 19 good substantial one. 20 Now, what we do as well on the next 21 slide is we benchmark the state various ways so that 22 you have some sort of benchmark or comparison. 23 Now, this slide -- while we do that on 24 all the items and we do that on all the constructs, 25 this is looking at the dimensional level. 0027 1 What we do is we looked at how the rest 2 of the state compares to lottery. Now, the gold bar 3 goes all the way up to -- for the first one, work 4 group, goes all the way up to 358. Now, the 358 is 5 the lottery average for that dimension work group, and 6 what we have is three comparisons there. 7 We compare agencies by similar size. So 8 the size of the agency, the number of employees you 9 have with other state agencies that are about that 10 size. We compare you by the similar mission, and 11 every agency has a different -- falls under a 12 different article, and you-all are economic 13 development, probably? Yeah, I'd have to look that 14 up. You-all -- there's public safety, there's 15 education, there is general government, there's 16 economic development. 17 And then we give my -- all agency 18 average. So what you see on this is that your agency 19 scored higher than all of the benchmarks on all three. 20 Does that mean that everything is going great? Well, 21 it certainly means that in comparison to the other 22 state agencies, you score higher. Still means that 23 the agency always has things to work on. There's 24 always room for improvement. And relative to the 25 agency's performance to the other state, that one 0028 1 scores higher. 2 So this is an ongoing analysis. What we 3 do is we return -- the agency has asked to return it 4 as part of the strategic planning instructions to the 5 LBV and the governor's office. The auditor's office 6 uses it when it does a workforce summary sheet. 7 Sunset uses it when we -- when an agency goes for 8 Sunset. So it gets returned on all levels of 9 government. 10 And we'll be asking agencies again to 11 participate in the fall, but you-all -- the agency has 12 opted to participate several times annually, and so 13 they probably will not participate again until next 14 year or the year after. 15 I'd be happy to answer any questions or 16 get more specific. 17 CHAIRMAN WILLIAMSON: Great. Thank you. 18 Good report. 19 Commissioners, do you have any 20 questions? 21 COMMISSIONER SCHENCK: Are we going to 22 hear separately from Janine or -- 23 CHAIRMAN WILLIAMSON: Do you have any 24 comments, Janine? 25 MS. HAYS: I don't have any additional 0029 1 comments, other than we have definitely gone up in the 2 last three years that I've been here. 3 We're using this information in HR to 4 help our agency to maintain and continue to improve in 5 our employee relations issues, so we had a very good 6 response rate this year. We've had good response 7 rates in the years before. And so we will be using 8 this information to help us and understand all the 9 global aspects of our agency. 10 Did you-all have any questions for me? 11 COMMISSIONER SCHENCK: Well, I have a 12 couple -- a question and a comment. 13 MS. HAYS: Okay. 14 COMMISSIONER SCHENCK: Janine, I take it 15 you agreed that conducting this survey every other 16 year at this point is probably in our best interest 17 and consistent with our -- 18 MS. MAYS: Yes. 19 COMMISSIONER SCHENCK: -- positive pace 20 here? 21 MS. MAYS: I do. 22 COMMISSIONER SCHENCK: Okay. Well, I 23 commend you and Jim and Tom and Anthony Sadberry, who 24 is no longer with us, and Lauren Bloom who is not with 25 us anymore. These are significant -- this is 0030 1 significant progress. This was a challenge the agency 2 was facing. 3 We, like any organization, have the 4 potentially diametrically opposed metrics of 5 productivity and job satisfaction, and we're not 6 constructing the pyramids of Giza here. This is 7 supposed to be an environment that people feel 8 comfortable being in, and I think we're making great 9 steps in that direction. That's really a product of 10 the hard work of you and others, including Jim and 11 Tom. And I want to give you that credit because I 12 think it's a very significant accomplishment. 13 MS. HAYS: Thank you. 14 CHAIRMAN WILLIAMSON: All right. 15 DR. LANDUYT: All right. Thank you. 16 AGENDA ITEM NO. IV 17 CHAIRMAN WILLIAMSON: Okay. Item No. 18 II, which is consideration and discussion or action on 19 the recognition of Chairman Cox. We're still waiting 20 for him to arrive. We have not been able to contact 21 him, so we'll still hold on that and -- okay. 22 All right. So we will go on down to 23 Item IV. This is consideration of and possible 24 discussion on the process of conducting Texas lottery 25 Commission meetings. 0031 1 And this was put on at my request. I 2 wanted us to -- Commissioners, to think about how our 3 practice of public comment -- and actually Kim, I 4 asked you to prepare a comment, and if you'd go ahead 5 and enter that first. 6 MS. KIPLIN: I did. And, Commissioners, 7 I have in front of you, just for easy reference to the 8 extent you want to take a look at it, examples of 9 rules that other agencies have and guidelines that the 10 Railroad Commission has on its website on comment, you 11 know, the guidelines on comment at -- that that 12 particular governing body, that agency, takes. 13 But just to give you just a bit of 14 framework, I'd like to talk a little bit about the 15 Open Meetings Act as it relates to this issue of 16 comment and tell you that a meeting under the Open 17 Meetings Act is open to the public when the public is 18 permitted to attend. The Act is not entitled for the 19 public to choose the items to be discussed or to speak 20 about the items on the agenda. 21 Now, an agency, a commission, a 22 government body -- and this commission has done 23 that -- can give the public the opportunity to make 24 comment. 25 The agency began with its first set of 0032 1 three commissioners in 1993, and the Commission at 2 that point did allow for members of the public to 3 comment on specific items that were noticed. 4 Beginning with Tom Clowe as the 5 chairman, and I think that was about 2000, an 6 additional agenda item was added that's entitled 7 "Public Comment," and you'll see that that's on your 8 agenda. I'd liken that more to an open mic comment. 9 The thing to remember about the public 10 comment item is because it's not specific in terms of 11 giving the note -- the public adequate notice about 12 what's being discussed, your deliberations under the 13 Open Meetings Act are very limited. You can't go into 14 the meat of the comment. You can deliberate to adding 15 it to -- as an agenda item on a future Commission 16 meeting. That's about it. 17 So I've given these to you -- for what 18 it's worth to you-all. Like I said, some agencies 19 have established the process by administrative rule. 20 Others have not. They've done it either by practice. 21 Our agency, that's how we've done it. Some -- the 22 Railroad Commission has actually set out its practice 23 on the website to give folks an understanding of how 24 their comment is going to be received. 25 The rules that we looked into go into 0033 1 mainly time limitations, you know, for each item, how 2 long you'll give -- the Commission would give 3 somebody, ranging three to five. Under the public 4 comment item, interestingly, there are some agencies 5 that have said, "Okay, under this particular agenda 6 item, max is an hour, or max is 30 minutes. So, you 7 know, when we hit that, we're done." 8 With that, I'll stop talking. And if 9 there's any questions that you have, I'll be glad to 10 answer those. 11 CHAIRMAN WILLIAMSON: And rather than us 12 discussing it at this meeting, since we have so many 13 things on our item, what I'd look like to do is think 14 about it and over the next month kind of come up with 15 your ideas, share them with Kim or whatever, and then 16 next meeting, we can discuss it and see how we want to 17 approach this, if we want to make a rule or if we want 18 to just set out a practice that we can publish out on 19 the -- on our Web page just so everybody that comes to 20 a meeting understands and we all understand what sort 21 of practice or rule, whatever we decide to do, how we 22 want to handle that. 23 COMMISSIONER SCHENCK: I'd be happy to 24 do that. 25 My initial thought, Kim, is that I don't 0034 1 think we need a formal rule. We have the right, I 2 think, just to -- so long as we're giving people 3 notice of what we're talking about, but I'll just 4 state for the record at this point that I'm happy to 5 think about this and I hope we'll have this on the 6 agenda so if the public can hear whatever we're 7 talking about next time, but my biggest picture of 8 viewing this is it's a public agency, and to the 9 extent we can facilitate public comment, I'm for it, 10 but I want to make sure that it's orderly. And I'm 11 looking forward to whatever discussions we have on 12 that. 13 CHAIRMAN WILLIAMSON: Do you have any 14 comments, Commissioner? 15 COMMISSIONER KRAUSE: No, ma'am. 16 AGENDA ITEM NO. V 17 CHAIRMAN WILLIAMSON: All right. Great. 18 All right. Let's go on to -- Phil, 19 let's go ahead and start with you with Item V, report, 20 possible discussion and/or action on the 2008 21 Charitable Bingo Annual Report. 22 MR. SANDERSON: Commissioners, I've 23 placed before you a draft copy of the report. I 24 previously e-mailed a version to you for review. 25 One of the action plans from our 0035 1 2008-2010 Comprehensive Business Plan for the Lottery 2 Commission was a production of an annual report for 3 the Charitable Bingo Operations Division. The annual 4 report contains historical and general information on 5 bingo in Texas, information that's helpful to remain 6 in compliance with the Act and rules, and specific 7 information on recent activities within the division. 8 The staff is finalizing the production of this report 9 and is planned to publish it electronically on our 10 website. 11 Attached also in your notebook is a 12 table of contents, and the agenda item today is for 13 your discussion. If there's any comments you have on 14 the draft copy or if you'd just like to take time to 15 look at it and get your informal comments back to us, 16 we can revise any -- make any changes, and then we'll 17 have this published on the website. 18 The -- one of the bills in current 19 legislation, House Bill 1474, contains a provision 20 that would require the Commission to approve a report 21 to be given to the legislature on the -- by June 1st 22 of each even numbered year, and the information that 23 is in this current annual report is what's also going 24 to be required by the legislature should that bill 25 move on to passage. 0036 1 I'll be glad to answer any questions. 2 CHAIRMAN WILLIAMSON: Okay. In looking 3 at our binder here, we just had the table of contents. 4 MR. SANDERSON: That's all I put in 5 there was the table of contents. I set next to your 6 notebook -- 7 CHAIRMAN WILLIAMSON: Okay. 8 MR. SANDERSON: -- the draft copy. 9 CHAIRMAN WILLIAMSON: Okay. 10 COMMISSIONER SCHENCK: Well Phil, thank 11 you. This is -- you always do a good job with this 12 report. I know that you have e-mailed it to me. I 13 haven't had a chance to look at it in any detail. I'm 14 sure the format is following exactly the same format 15 you've used in years passed -- 16 MR. SANDERSON: Yes, sir. 17 COMMISSIONER SCHENCK: -- with the data 18 updated. I'm going to, for my part, take a look at 19 that, and I'll give you any comments on that I have 20 separately. I appreciate it. 21 MR. SANDERSON: Sure. Thank you. 22 CHAIRMAN WILLIAMSON: Okay. Kim, is 23 this an action item? 24 MS. KIPLIN: I think that it is. You're 25 asking the chairman to sign off in representing the 0037 1 the Commission; and in doing that, there needs to be a 2 vote of the Commission to approve it, on the annual -- 3 CHAIRMAN WILLIAMSON: To approve this, 4 this draft? 5 MS. KIPLIN: No, not the draft. 6 MR. SANDERSON: Not the draft. 7 MS. KIPLIN: I think what I heard Phil 8 say is that he wants you-all to take the time to read 9 it if you want, give him comments. And then when it's 10 ready for final approval, then it would be an action 11 item. 12 CHAIRMAN WILLIAMSON: Okay. So it's not 13 an action item now? 14 MS. KIPLIN: That's correct. 15 MR. SANDERSON: It's not necessarily an 16 action item. 17 CHAIRMAN WILLIAMSON: Okay. 18 MS. KIPLIN: And as far as I know -- I 19 could be wrong. You can step on me Phil. I don't 20 think there is a deadline or a timeline. This is not 21 driven by any statute. This is a product of the bingo 22 division that you guys have created. 23 MR. SANDERSON: That's correct. 24 MS. KIPLIN: So there's no timeline or 25 deadline. 0038 1 CHAIRMAN WILLIAMSON: Good. 2 COMMISSIONER KRAUSE: Well, this 3 communication of the legislature is not duplicative of 4 anything that we hear, or is this basically the same 5 reports that the Commission gets? 6 MR. SANDERSON: This information is just 7 a report of the activities of the division and of the 8 bingo industry. And the legislation that's been filed 9 that contains the requirement for the Commission to 10 file a report with the legislature of course has not 11 passed yet. 12 What's in the bill, the items that are 13 enumerated in the bill, what has to be reported to the 14 legislature, are contained within this annual report. 15 This has additional information other than that, but 16 it does contain the required, or what would be 17 required if the bill passes. 18 COMMISSIONER KRAUSE: All right. Well, 19 I guess what my thinking is is that in order to make, 20 you know, this as effective as possible for the bingo 21 division and, you know, not duplication of effort for 22 communicating to the Commission and the legislature, 23 you know, if we just had one kind of report that we 24 see, we like, and we send it on to the legislature 25 complies with what they want, then that's good for all 0039 1 of us. 2 MR. SANDERSON: There will be just one 3 report, yes, sir. 4 COMMISSIONER KRAUSE: Perfect. 5 CHAIRMAN WILLIAMSON: Any other 6 comments, Commissioners? 7 COMMISSIONER SCHENCK: I will just 8 suggest, for Commissioner Krause's benefit, that we 9 have the Bingo Advisory Committee. It's a nine-member 10 committee that meets once a quarter. It's a very 11 interesting meeting, and I think it -- I would 12 encourage you to visit with those people and get their 13 input on this industry. It's very -- the regulations 14 here are about as complex as ERISA, and yet it's -- 15 COMMISSIONER KRAUSE: Lord, all mighty. 16 (Laughter) 17 COMMISSIONER SCHENCK: The industry is 18 very interested and very engaged. 19 You'll see from this report that there 20 is a clear trend in this industry that there are fewer 21 and fewer people coming, and yet somehow we're 22 managing to get slightly flat or maybe slightly 23 increased revenues for the charities and the 24 distributions, which are regulated by statute and are 25 complex in terms of we're talking about gross receipts 0040 1 and net receipts and things of that nature. Still has 2 to keep going up, so it's a challenge to learn this 3 industry, and I think that people at the BAC will be 4 very eager to get to know you and to share their 5 thoughts with you about this industry, and I encourage 6 you to visit with them when you get the chance. 7 COMMISSIONER KRAUSE: Okay. 8 AGENDA ITEM NO. VI 9 CHAIRMAN WILLIAMSON: Okay, good. Let's 10 go on to Item VI, consideration and discussion or 11 action on adoption on amendments of 16 TAC 402.402 12 relating to registry of bingo workers. 13 Ms. Joseph. 14 MS. JOSEPH: Good morning, 15 Commissioners. For the record my name is Sandra 16 Joseph, Special Counsel. 17 Before you is a draft rule prepared for 18 submission to the Texas Register in order to adopt 19 Bingo Rule 16 TAC Section 402.402 relating to the 20 registry of bingo workers without changes to the 21 proposed text as it was published in the March 6, 2009 22 issue of the Texas Register. 23 The purpose of the proposed amendments 24 is to provide clarification and additional definition 25 to the rule which concerns the registry of bingo 0041 1 workers. 2 The rule was published for comment for a 3 period of 30 days. In addition, a public hearing was 4 held; however, no comments were received. 5 Staff recommends adoption of the 6 proposed amendments without changes. 7 CHAIRMAN WILLIAMSON: Do you have any 8 questions, Commissioners? 9 COMMISSIONER SCHENCK: I don't think so. 10 I believe that you -- we've talked about this 11 before -- 12 MS. JOSEPH: Yes. 13 COMMISSIONER SCHENCK: -- and made 14 modifications on a few of my comments. 15 And again, for Commissioner Krause's 16 benefit, every -- at the end of each one of these 17 meetings, we will have a list of cases. You'll be 18 surprised how many people who have been convicted of 19 various interesting crimes, notwithstanding that, 20 decide that they want to be bingo workers and file 21 applications to include in our registry or for -- in 22 our registry and need to be removed from the registry. 23 My only comment on this is not anything 24 related to this rule; but at some point, I'd love to 25 see us either get legislature authority, or if we 0042 1 don't need it, adopt a rule relating to recovery of 2 our fees and time and expenses in cleaning up this 3 registry, that the operators and conductors need to 4 know and need to communicate very clearly to the 5 people that they're hiring that if you've been 6 convicted of a crime that bingo work is not what's for 7 you. 8 So I appreciate your work on this rule, 9 and I'm going to propose that we adopt it, assuming 10 that the other commissioners agree. 11 CHAIRMAN WILLIAMSON: All right. Do you 12 want to -- 13 COMMISSIONER SCHENCK: I will make that 14 motion. 15 CHAIRMAN WILLIAMSON: Make the motion? 16 COMMISSIONER SCHENCK: I move we adopt 17 the rule. 18 CHAIRMAN WILLIAMSON: Second? 19 COMMISSIONER KRAUSE: Second. 20 CHAIRMAN WILLIAMSON: All in favor? 21 Aye. 22 COMMISSIONER SCHENCK: Aye. 23 COMMISSIONER KRAUSE: Aye. 24 CHAIRMAN WILLIAMSON: Motion is passed. 25 0043 1 MS. JOSEPH: Ms. Kiplin. 2 MS. KIPLIN: Commissioners, I have the 3 order adopting the rule. I can pass it down to y'all. 4 AGENDA ITEM NO. VII 5 CHAIRMAN WILLIAMSON: Let's see. And 6 while we're doing that we will go on to Item VII, 7 which is report, possible discussion and/or action on 8 the Bingo Advisory Committee. 9 Phil, is there anybody from the 10 committee here today? 11 MR. SANDERSON: There is no one here 12 from the BAC. 13 CHAIRMAN WILLIAMSON: All right. 14 MR. SANDERSON: This is a carryover 15 agenda item from the last meeting where there was 16 discussion about activities or functions that 17 particular members of the BAC perform or had that may 18 require them to be removed from the Bingo Advisory 19 Committee. Commissioner Schenck attended the BAC 20 meeting and spoke with the committee members, and I 21 believe this agenda item is to allow him to provide 22 you with an update of his conversations. 23 CHAIRMAN WILLIAMSON: Commissioner 24 Schenck, would you like to share with us your -- 25 COMMISSIONER SCHENCK: I guess I would, 0044 1 now that you mention it, Phil, some extemporaneous 2 comments on this subject. 3 I have a concern, which I have made 4 clear is my -- only my concern at this point, 5 obviously -- we haven't discussed this because we 6 don't do that. 7 We have a Bingo Advisory Committee, as I 8 just mentioned, with nine members on it. They serve 9 at the pleasure of this commission. It is a 10 statutorily created organization. 11 And by virtue of their service on the 12 Commission, the members carry the perimeter of the 13 agency, and they speak on behalf of their constituency 14 which are divided up into manufacturers and 15 distributors. There's a seat for them. There's 16 several seats for charitable organizations and so on. 17 I have some concern that we don't have 18 at present a rule that allows us to consider under 19 what circumstances we should be informed of 20 developments affecting members of that board. And I 21 suggested to the BAC that I would like their advice 22 before I propose anything specific here. 23 And the suggestion I asked for them to 24 consider was whether and under what circumstances the 25 Commission should be made aware of any developments 0045 1 affecting individual members, have been proposed in 2 particular that a accusation or allegation of a felony 3 or a crime of moral turpitude or an offense involving 4 gaming is something that I thought perhaps we might 5 like to know about, and there could be a distinction 6 between a conviction for such an activity or a 7 allegation. 8 And I am waiting their advice to us on 9 how exactly we should proceed; but in my view, we do 10 do background investigations on -- and conduct 11 interviews on prospective applicants to sit on the 12 BAC. And thereafter, I am concerned that we need to 13 make clear to the public and to the industry that the 14 BAC is an organization we're entirely comfortable with 15 its membership. So I'm suggesting we need to -- some 16 mechanism in place to have either self reporting or 17 reporting to us of developments affecting the members. 18 CHAIRMAN WILLIAMSON: Any questions? 19 COMMISSIONER KRAUSE: Sounds reasonable 20 to me. 21 CHAIRMAN WILLIAMSON: When do you think 22 they'll get back with us, Phil, or -- 23 MR. SANDERSON: The chair of the 24 committee directed the members to think about it. 25 Their next meeting is actually scheduled for August 0046 1 the 6th, I believe the first Wednesday in August. And 2 at that meeting is when they'll have their formal 3 discussion and prepare what I would assume to be their 4 recommendation to the Commission. 5 CHAIRMAN WILLIAMSON: Is that -- was -- 6 do you agree with that statement? 7 COMMISSIONER SCHENCK: My understanding 8 is they would be talking in the meanwhile -- 9 MR. SANDERSON: Yes. 10 COMMISSIONER SCHENCK: -- and that 11 August, we're looking forward to their 12 recommendations. 13 MR. SANDERSON: Yes. 14 COMMISSIONER SCHENCK: Of course, I 15 didn't commit anyone to a particular position with 16 respect to whether we would adopt whatever 17 recommendation they would make, but I wanted them to 18 have the opportunity to speak to us about what they 19 think we should know about their members. 20 MR. SANDERSON: Yes, sir. 21 CHAIRMAN WILLIAMSON: So let's keep this 22 as an agenda item for next time, even if there may not 23 be a report, until such time we get a report. Is that 24 okay? 25 COMMISSIONER SCHENCK: That would be 0047 1 great. 2 AGENDA ITEM NO. VIII 3 CHAIRMAN WILLIAMSON: Okay. Let's do 4 that. We'll keep that. So we -- let's go on to No. 5 8, report by the Charitable Bingo Operations Director 6 on their activities, update, statuses, licenses, rule 7 making and form revisions, audits, pull-tab review, 8 special projects, and upcoming operator training. 9 MR. SANDERSON: Commissioners, in your 10 notebook are the monthly activity reports for March of 11 2009 and April of 2009. And I'll be glad to answer 12 any questions if you have them. 13 COMMISSIONER SCHENCK: Phil, for my 14 benefit, can you remind me where we assigned the cost 15 associated with the training classes? 16 MR. SANDERSON: The cost for the 17 training classes is about one-third down on the 18 page -- on the second page under "Education." 19 COMMISSIONER SCHENCK: And are we 20 collecting that from fees in some way, or is that just 21 part of your operating budget? 22 MR. SANDERSON: That's just part of our 23 operating budget. 24 We do have a mechanism that if an 25 organization or organizations in a location request a 0048 1 training class be held, then we will assess them the 2 travel costs to be reimbursed, but not the salary. 3 COMMISSIONER SCHENCK: But over the 4 course of the last couple years, if I'm remembering 5 correctly, we put together a considerable effort and 6 expense and online training program. And in addition 7 to that, you're, in conjunction with our various 8 satellite offices across the state, are going from 9 region to region to conduct live training courses for 10 people who are, for whatever reason, not participating 11 in the online classes. 12 MR. SANDERSON: Yes, sir. We do have a 13 very successful online program. Well over a thousand 14 individuals since we've implemented it back in June of 15 last year have taken the class. The -- 16 COMMISSIONER SCHENCK: And there is a 17 test at the end of the class. 18 MR. SANDERSON: There's a test 19 throughout the presentation. 20 COMMISSIONER SCHENCK: Okay. And what's 21 the failure rate of that test, Phil? 22 MR. SANDERSON: It's -- the failure rate 23 is probably about 10, 15 percent. 24 COMMISSIONER SCHENCK: Okay. And do we 25 let them retake the test? 0049 1 MR. SANDERSON: And they -- then -- and 2 they can retake the test. We don't tell them which 3 questions they miss, so they have to go back and look 4 at the -- 5 COMMISSIONER SCHENCK: That's not quite 6 the bar exam. 7 (Laughter) 8 COMMISSIONER SCHENCK: But this is part 9 of our mandate to make sure that there's -- we have a 10 whole different -- set of different species of 11 licensees, bingo workers, we have conductors, the 12 actual charities, and they have various rules that 13 they have to comply with, which I mentioned are pretty 14 complex. So to help them with that, we're conducting 15 these training classes. 16 MR. SANDERSON: Yes, sir. The training 17 is statutorily required, that the operators that 18 are -- individuals that are listed as operators for an 19 organization must attend the training. In our 20 training rule, we require the bingo chairperson to 21 attend the training. We recommend that the officers 22 of the organizations take the class while they're not 23 required to. And there are some workers that actually 24 take the class, and at this time, they're not required 25 to. 0050 1 The last several months, we have had an 2 extensive effort in training on the onsite classes, 3 primarily as a result of a rule change requiring that 4 all the operators attend the training instead of just 5 one operator, and so that's the reason why the 6 training costs at this point are a little higher than 7 what they normally would be. 8 Once we get through this first round of 9 ensuring everyone has an operator that's trained, then 10 we'll go back to probably just having six to eight 11 classes a year that will be conducted at various 12 locations around the state and emphasize the online 13 class for individuals. 14 COMMISSIONER SCHENCK: Thanks, Phil. 15 CHAIRMAN WILLIAMSON: Any other 16 questions, Commissioners? 17 COMMISSIONER KRAUSE: No, ma'am. 18 AGENDA ITEM XXI 19 CHAIRMAN WILLIAMSON: All right. Again, 20 at this point, I think we will go ahead and start -- 21 we're going to skip down to Item XXI. And, Kim, do 22 you want to take up T, U and V all at the same time? 23 MS. KIPLIN: Yes, if that pleases the 24 Commission, I think that would be best the way to 25 handle that time efficiency. 0051 1 Commissioners, if I could call people 2 forward, these are -- what you have under these Items 3 T, U and V are the Bnai Brith Youth Organization, Bnai 4 Brith Mens Club, Lou Rosenberg Scholarship Fund. And 5 if I could call the enforcement attorney, Steve White 6 and Phil Sanderson to the table, and then also I 7 believe Ms. Clark, Michelle Clark. And a 8 representative of one of the organizations, Mr. Rosen, 9 is here. I'll also, just for the record, indicate 10 that Mr. Fenoglio is here. He may or may not wish to 11 speak or comment during the course of this discussion. 12 I'm looking at Mr. Fenoglio to see if that's a correct 13 assessment of his position. 14 MR. FENOGLIO: Yes, it is. I'm -- I 15 have not been privy to the documents, but I will try 16 to respond, if appropriate. 17 MS. KIPLIN: So, Commissioners, if I 18 could turn it over to the staff to lay out these 19 proposed agreed orders; and then Ms. Clark, I'm sure, 20 would probably have comments on behalf of the 21 Respondents. 22 The -- just to kind of set the tone, 23 Mr. White, Steve White, is a member of the Legal 24 Services Division. He is the enforcement attorney. 25 He represents the bingo division in this matter. 0052 1 As the general counsel, I'm here to help 2 you-all go through the deliberations and potential 3 action on this matter, so just to kind of separate the 4 roles so you know what role I'm serving and what role 5 Mr. White is. 6 I will also tell you that Sandy Joseph 7 is here as a special counsel and has been carved out 8 in this to assist each of you to the extent that you 9 wish to have that assistance. I think that's 10 accurate. I'm looking at Ms. Joseph, yes. So with 11 that, I'll stop talking and turn it over to Mr. White 12 and Mr. Sanderson. 13 MR. WHITE: Thank you. For the record, 14 my name is Stephen White. I'm the assistant general 15 counsel with the Lottery Commission. 16 You have before you three agreed orders 17 under Tabs T, U, V under Item XXI. These three agreed 18 orders involve three organizations who conducted bingo 19 at the Daytime Bingo Hall in Midland, Texas. The 20 facts and issues are pretty much identical in all 21 three cases. The only real differences are the names 22 and the amounts of money involved. 23 These -- the allegations in these three 24 cases came to light when there was a theft occurred at 25 the bingo hall in which $100,000 was stolen out of a 0053 1 safe inside the bingo hall. When the police began 2 investigating the theft, they began asking questions, 3 particularly why was there $100,000 sitting in the 4 safe in the bingo hall including entirely of bingo 5 proceeds when the statute requires bingo proceeds be 6 deposited into the organization's bingo account by the 7 next business day. 8 As they began asking questions of the 9 bingo workers, they discovered, were told, of two 10 courses of conduct, first being over state 11 involving -- excuse me -- overstated prizes. The 12 second involved withholding of sales of pull-tabs. 13 The overstate of prizes involved 14 basically if the organization conducted a bingo game 15 and paid a hundred dollar prize, they'd report it as 16 having paid, for instance, maybe $200. The difference 17 was put in the safe in the bingo hall rather than 18 deposited into the bingo account, and the document -- 19 the daily report for that day would under a -- excuse 20 me -- over report the prize by a hundred dollars, and 21 therefore the adjusted gross -- adjusted gross 22 receipts would be a hundred dollars under reported by 23 a hundred dollars. 24 The second course of conduct involved 25 simply not reporting the sales of instant pull-tabs. 0054 1 And for the new commissioner, an instant pull-tab, if 2 you don't know, is a little piece of cardboard, costs 3 usually a dollar or $2, and you flip it off, three 4 little tabs, to see if you're a winner. 5 And they would just simply not report 6 those sales, put the money into the safe in the bingo 7 hall and, again, not indicate those sales on the daily 8 report. 9 As a result of this, the local police 10 officials contacted the bingo division requesting an 11 audit be conducted. An audit was conducted for a 12 one-year period. The audit found that approximately 13 $247,000 total amongst the three organizations in 14 overstated prizes, and approximately another 71,000 15 total between the three organizations of withheld 16 pull-tab sales. 17 When this all came to light, obviously 18 these things stopped. The organizational officers 19 said they were unaware this was occurring. They took 20 action to make sure it did not happen again. 21 Eventually these three agreed orders 22 were negotiated which entailed the organizations 23 paying approximately I think $65,000 apiece in 24 administrative penalties, another $25,000 in 25 reimbursement to the agency for audit costs, 0055 1 investigative costs, litigation costs, as well as a 2 number of safeguards to ensure this does not occur 3 again. 4 And with that, I'll answer any questions 5 you might have. 6 CHAIRMAN WILLIAMSON: Phil, do you have 7 anything you'd like to add? 8 MR. SANDERSON: I believe Mr. White has 9 laid out all the information as it relates to the 10 background of the audits and of the agreed orders. 11 The -- one thing is the penalties are 12 roughly -- around penalties and additional cost, one 13 item that is also in the agreed order is that they'll 14 agree to pay for any subsequent follow-up audits or 15 inspections that we do to reimburse the agency up to 16 $7,000 for the next three years of any subsequent 17 follow-ups that we perform. 18 COMMISSIONER SCHENCK: When you say 19 "they," you're talking about the -- 20 MR. SANDERSON: The organizations, yes, 21 the three organizations. 22 COMMISSIONER SCHENCK: All right. Where 23 did this money go? I mean, people were stuffing money 24 in a safe basically, and then somebody broke in and 25 stole it? 0056 1 MR. WHITE: Yes, sir. The money was, I 2 think, pretty clearly stolen. Who stole it, that has 3 never been solved, that crime. 4 Where the money went is not quite clear. 5 Some of it was used for promotional expenses that at 6 the time were not authorized by the Commission, 7 specifically, I think, purchase of beverages for 8 customers, including alcoholic beverages, door prizes, 9 and bingo bucks, which were basically coupons for free 10 bingo, were given away as door prizes. But there's 11 never been a counting. It doesn't appear that the 12 entire $300,000 in missing funds was used for that. 13 So to answer your question, some were 14 used for promotional expenses that were not reported 15 or authorized at the time by the Commission, and 16 probably the majority of it or -- is simply 17 unaccounted for. 18 COMMISSIONER SCHENCK: Was this a 19 commercial lessor's location? Is this -- you say the 20 officers of the organization basically threw their 21 hands up and were clueless. Who was taking the money 22 and putting it in the safe? 23 MR. WHITE: Well, the actual -- it was 24 the bingo workers under the direction of somebody. 25 COMMISSIONER SCHENCK: Do we not -- I 0057 1 don't know that we can approve -- I can approve this 2 with "somebody" as the answer. 3 MR. WHITE: Yes, sir. I mean, the 4 commercial lessor, the owner of the -- yeah, the 5 commercial lessor seems to have been the person in 6 charge, but I think he disputes that. 7 COMMISSIONER SCHENCK: There's an 8 ongoing criminal investigation, I gather -- 9 MR. WHITE: Yes, sir. 10 COMMISSIONER SCHENCK: -- in Midland? 11 Did you get -- did we try to depose that 12 person in connection with this proceeding? 13 MR. WHITE: The commercial lessor? 14 COMMISSIONER SCHENCK: Yeah. 15 MR. WHITE: Yes, sir, he has been 16 imposed. 17 COMMISSIONER SCHENCK: Okay. Did he 18 invoke the Fifth? 19 MR. WHITE: No, sir. 20 COMMISSIONER SCHENCK: Okay. So what 21 did he say? He didn't know what was happening? 22 MR. WHITE: He says -- and that's the -- 23 Mr. Fenoglio represents the commercial lessor. There 24 is an ongoing case in that, so I'm a little reluctant 25 to talk too much about it, but, you know, he says he 0058 1 was aware these things were occurring, but he didn't 2 think he was responsible because he's not the 3 organization. He -- the organizations are responsible 4 for the -- conducting of bingo, not the commercial 5 lessor. 6 COMMISSIONER SCHENCK: Okay. And did we 7 talk to the officers of the organization to see how 8 often they were physically present at any of these 9 events? 10 MR. WHITE: Yes, sir. We deposed -- 11 yes, the officers of the organization, one from each 12 organization. And I can't recall exactly how often 13 they said they were present. Once or twice a week, I 14 think is what they all seemed to indicate, if I 15 remember correctly. 16 COMMISSIONER KRAUSE: Who owns the safe? 17 MR. WHITE: That's not quite clear. I 18 mean, it's... 19 COMMISSIONER KRAUSE: Who has access to 20 it? 21 MR. WHITE: At the time lots of people 22 had access to it. Perhaps part of the problem. 23 The safe -- the commercial lessor does 24 not own the building. And so I guess at least one of 25 the safes is in the floor, so I guess that makes it 0059 1 part of the real property, so it's owned by the 2 corporation or person who owns the building perhaps. 3 COMMISSIONER KRAUSE: There's more than 4 one safe? 5 MR. WHITE: Yes, sir. And the -- 6 COMMISSIONER KRAUSE: Which safe was the 7 money taken from? 8 MR. WHITE: It was taken out of the 9 floor safe. 10 COMMISSIONER KRAUSE: Okay. 11 COMMISSIONER SCHENCK: I don't know, but 12 it seems irregular to me to be stuffing money -- 13 $100,000 in the floor. I mean, Phil, we don't do 14 that. 15 MR. SANDERSON: Well -- 16 COMMISSIONER SCHENCK: That's not done. 17 MR. SANDERSON: Well, you know, as 18 Mr. White mentioned, the requirement and statute is 19 that the proceeds from any bingo occasion be deposited 20 by the next business day. 21 Our understanding and their logic, what 22 we were told by individuals as it relates to the 23 pull-tab sales, were that they would keep some of the 24 pull-tab sales -- the money from those pull-tab sales 25 and put it in the safe and report it at a later date 0060 1 to help balance out their deposits as the playing 2 seasons -- you know, the fluctuation in playing 3 seasons, the high and low seasons. 4 COMMISSIONER SCHENCK: That sounds 5 absurd, Phil. 6 MR. SANDERSON: I'm not disagreeing with 7 you. This is a -- but this is the information they 8 provided to us. 9 Also -- 10 COMMISSIONER SCHENCK: Phil, in what 11 form did they provide that to you? 12 MR. SANDERSON: That was through the -- 13 I believe depositions and also statements provided to 14 the police department during their investigation. 15 We're not aware of it up until the -- 16 COMMISSIONER SCHENCK: But these are not 17 the parties to this settlement that we're being asked 18 to consider today, or are they? 19 MS. CLARK: If I -- 20 COMMISSIONER SCHENCK: Were these the 21 conductors, or were these the commercial lessors? 22 MR. WHITE: Well, the -- with regards to 23 the withholding of the pull-tab sales, probably most 24 information came from the workers, who were just -- 25 you know, their position is, "We were just doing what 0061 1 we were told." 2 But to that extent, it sounds a bit 3 absurd, but it does appear that's what was occurring, 4 because at least in regard to that portion of the 5 money, they kept these sort of -- I'd call them ghost 6 records undated, unsigned pull-tab sale reports, which 7 have the pull-tab sales on the documents and the 8 amounts of money received, and they were all just 9 sitting in the safe -- in a file cabinet. And what 10 they said is, when business was slow, they'd take out 11 one of these pull-tab sales reports that already had 12 the invoice number of the pull-tabs and the amount of 13 money, and then they would date it and sign it and 14 take money out of the safe and report it as having 15 been sold on the date they signed it and deposit it on 16 that date. 17 COMMISSIONER KRAUSE: Who do the workers 18 work for? 19 MR. WHITE: They get paid by the 20 organizations. 21 COMMISSIONER SCHENCK: Commissioner 22 Krause, many of these organizations -- the challenge 23 with these charities is the charities are not as 24 active as you might hope in connection with actually 25 running the bingo. Phil, is that -- 0062 1 MR. SANDERSON: That's what we are 2 seeing out in the industry. That's one of the reasons 3 for the bingo chairperson is to try to get the 4 organizations to be -- accept more responsibility. 5 COMMISSIONER SCHENCK: So we have 6 locations of bingo halls that are owned or operated by 7 commercial lessors who will offer their services to 8 eligible charities to run these organizations. 9 Meanwhile, there's rent payments and there's the snack 10 bar and there's whatever else going on. 11 COMMISSIONER KRAUSE: So it's really 12 more than just a real property rental. It's a service 13 that they're providing? 14 COMMISSIONER SCHENCK: Yeah. 15 COMMISSIONER KRAUSE: Kind of a turnkey, 16 come in and have your bingo event at our place. Is 17 that right? 18 MR. SANDERSON: Well, they -- in 19 simplistic terms, I believe that's correct. 20 The -- in this particular case, the 21 organizations are the people that we licensed. We 22 licensed each one of the three organizations to 23 conduct bingo, and they designate at that time a 24 designated operator, a person that would be in charge 25 of their bingo operations. 0063 1 The commercial lessor in this case was 2 the designated operator. They had indicated that he 3 was the -- on the signature of all the bank accounts 4 as it related to the bingo activities for all three 5 organizations. And they turned basically -- like you 6 said, they turned the operation over to him to operate 7 and to run. 8 After -- my understanding is, after they 9 were made aware of the activities that were going on, 10 they did implement some internal controls, and that's 11 one of the reasons why we've looked at the possible 12 terms in the agreed order. 13 My first inclination, and Ms. Clark can 14 verify, was I sent a notice to them that they had two 15 choices, either surrender their license or go to 16 hearing. And they asked for a conference, and they 17 indicated that they were not aware of all the 18 activities that were going on. They had instituted 19 some internal controls. They had hired an accounting 20 firm separate to come out and do monthly audits and 21 inventory. They've got two people that sign the daily 22 cash reports now and verify the deposits. 23 COMMISSIONER SCHENCK: Who else, Phil, 24 is operating -- there's this -- I assume his name is 25 Gary Garrison is the lessor, the guy who was actually 0064 1 running the physical operation out there? 2 MR. SANDERSON: Yes, sir. 3 COMMISSIONER SCHENCK: Okay. Was it 4 just Bnai Brith that was -- 5 MR. SANDERSON: There were three 6 organizations, Bnai Brith Youth Club, Bnai Brith Mens 7 Club and Lou Rosenberg Scholarship Fund. 8 COMMISSIONER SCHENCK: Is that 9 everything that was going on? I mean, these three 10 charities are all the bingo -- the licensed bingo 11 conductors that -- 12 MR. SANDERSON: At that location. 13 COMMISSIONER SCHENCK: Is that right? 14 MR. SANDERSON: They're the only three 15 that conduct at that location, yes, sir. There were 16 no other organizations utilizing that facility. 17 COMMISSIONER SCHENCK: So as best we can 18 tell, for some period of time -- have we ever audited 19 this particular... 20 MR. SANDERSON: We audited them in the 21 past, but it was -- the audits on -- focused more on 22 the expenses and the distributions and not on the 23 income. This was one of the first audits after the 24 internal audit had recommended that we look at 25 proceeds. 0065 1 COMMISSIONER SCHENCK: How long had 2 this -- has been licensed Mr. Garrison? I mean, do we 3 know? I mean, it's not the last year or so? 4 MR. WHITE: Well, the commercial lessor 5 has been licensed for quite a long time. Gary 6 Garrison purchased the business from his father 7 sometime in 2005, I believe. 8 COMMISSIONER SCHENCK: And do we know 9 that we've accounted for all of the pull-tab purchases 10 that these guys have made to make up what they've had 11 come in the door and what's been sold at this point? 12 MR. SANDERSON: During that -- well, 13 during the one year for the audit period. We went -- 14 we have followed up with some inspections and records 15 review since the audit started and also concluded, one 16 to verify that the actions and the controls that they 17 had put in place they were following and that they 18 were actually properly reporting the prize payouts and 19 reporting all the pull-tab sales. And from all 20 indications that I have, we have accounted for -- or 21 they have accounted for either through the audit and 22 subsequent to that for all the pull-tabs that they 23 purchased. 24 We did a short analysis of the 25 activities prior to the audit period. There was some 0066 1 discrepancies, but it was minimal, and so we chose not 2 to go any further back. We just focused on the one 3 year. 4 CHAIRMAN WILLIAMSON: Ms. Clark, would 5 you like to offer some comments, please? 6 MS. CLARK: Yes, thank you very much. 7 Commissioners, it's an honor to be here. 8 I am the attorney representing the three 9 charity organizations: Bnai Brith Mens Club, Bnai 10 Brith Youth Organization and the Lou Rosenberg 11 Scholarship Fund. And for the most part, staff has 12 completely and accurately represented the situation at 13 hand. 14 As soon as the irregularities were 15 discovered by the Commission -- the Charitable Bingo 16 Division's audit commission, my clients implemented 17 protective and safeguarding measures to ensure that 18 those irregularities did not occur again. 19 I think the staff will agree with us 20 that since the irregularities were discovered, every 21 recommendation that they have made has been accepted 22 by my client organizations. And to the extent that 23 follow-up checks and sample periods of inspections 24 have occurred, other than the minimal discrepancies 25 represented by Mr. Sanderson, no further indications 0067 1 exist that the irregularities discovered in the audit 2 have occurred again. 3 My clients are very desirous of ensuring 4 that the bingo is conducted in accordance with the 5 Bingo Enabling Act, and their charities and the 6 charitable activities that are undertaken by these 7 three organizations depend heavily upon the charitable 8 distributions made as a result of the conduct of bingo 9 in these communities. 10 We are confident that the penalties 11 assessed in this agreed order are very significant, 12 punitive, and enough to get the attention of everyone 13 involved in conducting bingo at this location of the 14 seriousness of complying with the rules and 15 regulations and have agreed to continuing ongoing 16 changes in the procedures and the processes they use 17 to conduct bingo in order to make sure that these 18 things do not happen again. And my clients 19 respectfully request your approval of these orders. 20 There is, as you have pointed out, some 21 question about where the stolen money went; and 22 unfortunately, that information appears to be beyond 23 the grasp of any of the parties to this particular 24 contested case. And instead my clients ask if we 25 could be punished for the irregularities that were 0068 1 discovered, put the safeguards in place and move 2 forward so that the charities and the Jewish 3 communities in Midland and Odessa are able to benefit 4 from the conduct of bingo. Thank you. 5 If you have any questions, I'd be happy 6 to answer them. 7 CHAIRMAN WILLIAMSON: Do y'all have any 8 questions? 9 COMMISSIONER SCHENCK: I think we 10 have -- 11 COMMISSIONER KRAUSE: How does the 12 commercial lessor get paid? 13 MS. CLARK: The commercial lessor is 14 paid rent, and -- 15 COMMISSIONER KRAUSE: Just a straight 16 rent, or is it a participating rent? 17 MR. ROSEN: No, by -- I believe by 18 statute, that must be a straight rent, and there are 19 controls on exactly what the rent can be per session. 20 CHAIRMAN WILLIAMSON: Mr. Rosen, would 21 you please introduce yourself? 22 MR. ROSEN: Certainly. I'm David Rosen. 23 I'm the acting president of Bnai Brith Mens Club, and 24 I say "acting president" because once all these 25 actions came to light, nobody else was willing to run 0069 1 for office and take on the burden of coming to these 2 sessions and working with the Commission. 3 (Laughter) 4 CHAIRMAN WILLIAMSON: Thank you. All 5 right. 6 COMMISSIONER SCHENCK: Well, I'm 7 familiar with Bnai Brith. And I don't get excited 8 about imposing a penalty, but it seems to me this is 9 outrageous. I mean, nobody was watching what was 10 going on here. I mean, now we're talking looking 11 backwards, I understand, but I don't see how this 12 happened. We don't know how long it was going on. I 13 guess I'm not asking questions. I'll ask a question. 14 Have you filed a civil claim against 15 Mr. Garrison or the organization, whatever the title 16 of it is? 17 MS. CLARK: My clients have not. 18 CHAIRMAN WILLIAMSON: And my other 19 question is: We did the audit period from 2005 to 20 2006. This is 2009. And I'm not an attorney, and I 21 know justice moves slowly, but that's a -- to me a 22 really long period of time before this was brought 23 before us. I guess, what took so long? 24 MR. SANDERSON: Well, the first thing is 25 the theft was reported -- the burglary and theft was 0070 1 reported in June of 2006. The Midland Police 2 Department,along with the, I believe, FBI, DPS and the 3 IRS, seized the record at the hall in July of 2006. 4 They requested that we conduct an audit to assist them 5 in determining how much money was potentially stolen 6 or lost. Through our process -- and we opened up a 7 complaint and we investigated it as a complaint. 8 The actual audit did not start until 9 November of 2006, and it covered the time period of 10 July 1st of 2005 through June the 30th of 2006. The 11 audit was completed in, I believe, November of 2007, 12 and the final audit reports were issued shortly 13 thereafter in December, I believe. The letter 14 determination letter that I sent out was on -- in 15 March of 2008. Then they requested a conference in 16 May of 2008. We had several hearings pending during 17 the negotiations of the agreed order, and that brings 18 us here today. 19 COMMISSIONER SCHENCK: A hundred 20 thousand dollars went missing from the safe. 21 MR. SANDERSON: Yes, sir. 22 COMMISSIONER SCHENCK: How much more 23 money -- I think you've told me this, Steve, but I've 24 forgotten -- how much more money are we unable to 25 account for during the audit period? 0071 1 MR. SANDERSON: The total for the three 2 organizations, there was -- the initial pull-tabs that 3 were not reported that were found in the safe was 4 $71,141 net. The overstated prizes for the regular 5 bingo games where they were paying out -- as Mr. White 6 stated, they'd pay out a hundred dollars and report to 7 us that they paid out 200, that accounted for 8 $247,000. And then there were additional pull-tabs 9 that we could not find any record of that they were 10 sold but we had invoices from the manufacturers or 11 from the distributors that the organizations had 12 purchased those, as well as invoices from the 13 organizations that they had purchased those pull-tabs, 14 with no records of those being sold, and it was 65,000 15 for a total of $383,000 over that time period. 16 MS. CLARK: If I may interject, those 17 numbers sound worse than they actually are because the 18 pull-tabs that were held in a steady stream were 19 eventually reported and were turned over. There was a 20 small portion of the funds that were stolen that 21 probably fell into that category. 22 And then with respect to the unreported 23 pull-tabs, there is no indication that those were sold 24 and the money withheld. However, the indication and 25 the conclusion was that they were not reported. And 0072 1 we don't know whether they walked off, whether they 2 were lost by the Midland Police Department when they 3 were seized, so I would back out of that all of the 4 numbers related with the pull-tabs and stick with the 5 approximately 247 among the three organizations. 6 COMMISSIONER SCHENCK: Was someone asked 7 under oath in connection with this whether there were 8 any pull-tabs or other bingo-related products that 9 should have been reported that were purchased other 10 than through licensed manufacturers and distributors? 11 In other words, have we closed the universe of what 12 was being sold inside this bingo hall so that when 13 your audit went to go look for receipts from licensed 14 manufacturers and distributors, that was the entire 15 universe we should have been looking for? 16 MR. WHITE: Sir, I do not recall asking 17 that question about having sold pull-tabs from -- 18 COMMISSIONER SCHENCK: Because I can 19 remember other cases, Phil, where we've had people 20 selling pull-tabs that were not coming from licensed 21 manufacturers and distributors. 22 MR. SANDERSON: That is correct. 23 COMMISSIONER SCHENCK: As you sit here 24 today, no one can assure me that there wasn't another 25 half million of unlicensed pull-tabs being sold out of 0073 1 here and going into a floor safe? 2 MR. WHITE: I cannot, sir. I did not 3 ask that question in the depositions. 4 MS. CLARK: The question was not asked. 5 COMMISSIONER SCHENCK: Can you tell me 6 whether or not that's true? Do you know for a fact? 7 MS. CLARK: I have never made inquiry. 8 There has never been any indication that that has 9 occurred. 10 CHAIRMAN WILLIAMSON: I assume y'all are 11 still conducting bingo. 12 MS. CLARK: We are. 13 CHAIRMAN WILLIAMSON: Okay. Do you -- 14 are you still using Gary Garrison or Daytime Bingo or 15 whatever? 16 MS. CLARK: We -- he's the -- Gary 17 Garrison -- Daytime Bingo continues to be the 18 commercial lessor, but they do not participate in any 19 of the day-to-day operations of bingo. 20 CHAIRMAN WILLIAMSON: Okay. 21 MR. ROSEN: Nor does Mr. Garrison have 22 any signature power on any of the checking accounts. 23 COMMISSIONER SCHENCK: Each one of these 24 organizations is recognized by National Bnai Brith? 25 MR. ROSEN: No. 0074 1 COMMISSIONER SCHENCK: No. 2 MR. ROSEN: No, the Lou Rosenberg 3 Scholarship Fund is a separate organization. 4 COMMISSIONER SCHENCK: And that's just 5 in Midland? 6 MR. ROSEN: Yes. 7 COMMISSIONER SCHENCK: Can you tell me a 8 little bit about its background? How long has it been 9 around? 10 MR. ROSEN: Goodness. Golly. It was 11 probably established after the death of Lou Rosenberg, 12 which was a long time ago, around 1975. Lou Rosenberg 13 was a stalwart of the Jewish community, and a 14 scholarship fund was established in his name at the 15 time of his passing. And subsequently, we thought -- 16 it was thought that to help fund this scholarship 17 fund, we could conduct charitable bingo. 18 COMMISSIONER SCHENCK: And have other 19 proceeds come into the Lou Rosenberg Scholarship Fund 20 or another source of income? Has -- have there been 21 private donations made of some -- 22 MR. ROSEN: I'm not a member of that 23 board, so I can't speak specifically to that. I think 24 there have been small other donations to it, yes. 25 COMMISSIONER SCHENCK: And have funds 0075 1 been disbursed? 2 MR. ROSEN: Oh, yes. 3 COMMISSIONER SCHENCK: The scholarship 4 fund is sending people to college, to your knowledge? 5 MR. ROSEN: To my knowledge, yes. I 6 mean, it -- generally the awards are based on need and 7 scholarship. In other words, if you're wealthy and 8 are not pretty sharp, you don't get funds. 9 COMMISSIONER SCHENCK: Okay. The other 10 two, Bnai Brith Youth Organization and Mens Club are 11 recognized by National Bnai Brith? 12 MR. ROSEN: That's correct. 13 COMMISSIONER SCHENCK: Okay. 14 CHAIRMAN WILLIAMSON: Questions? 15 Questions? 16 Just a couple more. 17 On the penalty, the payout schedule, 18 what if a payment is missed, or how do we enforce the 19 collection of that -- those monthly payments? 20 MR. SANDERSON: Do you want -- 21 MR. WHITE: Well, the first thing to do 22 would be a violation of the order and their license 23 would be revoked as a result of violating the order. 24 We also have the option of referring the 25 case to the Attorney General for collection of the 0076 1 full amount. 2 COMMISSIONER SCHENCK: Can you tell me 3 why you haven't filed a suit to get this money back? 4 I would have done that. 5 MS. CLARK: I'm not certain that I 6 actually can answer that question for you. I would 7 need to make sure that I could get my client's 8 permission to discuss the conversations that we may or 9 may not have had. 10 COMMISSIONER SCHENCK: Yeah, you know 11 why I'm wondering. 12 MS. CLARK: Of course. 13 CHAIRMAN WILLIAMSON: That may be 14 something for later. 15 COMMISSIONER SCHENCK: I appreciate -- 16 but I appreciate your answer. 17 MS. CLARK: Absolutely. 18 COMMISSIONER SCHENCK: Where do you 19 practice, by the way? 20 MS. CLARK: Here in Austin. 21 COMMISSIONER SCHENCK: Well, Phil, what 22 do you -- what is your suggestion here? Are you 23 comfortable with this outcome? 24 MR. SANDERSON: In -- as I mentioned 25 earlier, the -- my initial inclination was to have 0077 1 them surrender their license or we'd go to hearing for 2 revocation. 3 After meeting with the organizations' 4 officers and discussing the plans that they had 5 implemented and the internal controls that they had 6 implemented, additionally the follow-up investigations 7 and inspections that we have done both undercover and 8 on-site, announced, to indicate that they have 9 improved their operations. 10 Just, for example, the net proceeds the 11 year before the audit period for the three 12 organizations ranged between 35 and $45,000 in 2004. 13 In 2008 it's between 175 and $225,000. So they've 14 definitely increased their net proceeds through better 15 oversight and better controls. And so with that, 16 all -- taking all that into account, that's -- I feel 17 comfortable with the recommendations in the agreed 18 order. 19 COMMISSIONER SCHENCK: Phil, did you 20 ever look into whether, backwards looking, these three 21 charities were actually functioning in the way you 22 would expect a charity to be functioning? 23 MR. SANDERSON: As far as oversight -- 24 proper oversight goes or the use of the proceeds? 25 COMMISSIONER SCHENCK: No. I mean being 0078 1 something other than a repository for the officers 2 involved. 3 MR. SANDERSON: As I mentioned before, 4 all the prior audits focused on expenses of the bingo 5 operation as well as the charitable use of the 6 proceeds that were disbursed from the bingo account. 7 And to my recollection, I don't recall any citings or 8 violations in those two areas other than some minimal 9 disallowed expenses. 10 COMMISSIONER SCHENCK: Well, I mean, 11 I'll speak my mind here. I mean, I want to be 12 comfortable that the Bnai Brith side of this is 13 separated by a clean wedge from what, to me, is 14 obvious criminal conduct. And I'm gathering that 15 certainly looks to be the appearance. It would be -- 16 there are a couple of things I would have expected to 17 see in terms of parting here, but are there other 18 conveniently available halls to Bnai Brith in Midland 19 other than this one? 20 MS. CLARK: No. 21 COMMISSIONER SCHENCK: So this is it? 22 MS. CLARK: Not immediately available. 23 COMMISSIONER SCHENCK: Unless you want 24 to build your own hall? 25 MS. CLARK: Correct. 0079 1 COMMISSIONER SCHENCK: I'm out of 2 questions. 3 CHAIRMAN WILLIAMSON: You're out of 4 questions? Commissioner? 5 COMMISSIONER KRAUSE: I have no further. 6 CHAIRMAN WILLIAMSON: Last question: 7 The dollar amounts, the agreed amounts, because when I 8 started to compare the amount that was in the case 9 versus what you agreed to, there obviously is a 10 difference between those two amounts. So I guess the 11 question is: How did you get to those agreed amounts? 12 Is this -- what do we do with the difference there? 13 MR. SANDERSON: The -- 14 CHAIRMAN WILLIAMSON: Just your thoughts 15 on where you came in with this. 16 MR. SANDERSON: The penalty assessed in 17 each one of the situations was based on the findings, 18 overall findings, that they failed to deposit proceeds 19 by the next business day and they falsified the daily 20 cash reports and the quarterly reports. And the 21 statute provides for a $1,000 penalty per violation 22 per occasion and -- or actually per violation per 23 instance, so every bingo occasion was a separate 24 instance of two violations. 25 Based on the number of occasions that 0080 1 each organization conducted and using round numbers, 2 it came to about $320,000 penalty assessed for each 3 organization. 4 Historically, first violations that we 5 assess penalties is at 20 percent of what the -- you 6 know, the 1,000. So when it was assessed at 7 20 percent or $200 per violation, it came out to 8 around $64,000 per organization. 9 Additionally, we assessed them for the 10 cost of the -- conducting the audit. We negotiated a 11 cost for the litigation -- from the legal side, as 12 well as negotiated a expected reimbursement for any 13 future audits or inspections we do for the next three 14 years after the terms of the agreed order are signed. 15 The total assessed in all four of those categories is 16 around $100,000 per organization. So there's about 17 $300,000 total in penalties and, as I mentioned 18 earlier, around 380,000 that was not actually 19 deposited. Some of those funds were based on 20 indication and comments and statements from the 21 workers they did use for some promotional items that 22 may or may not have been authorized out of the bingo 23 account. There's no documentation for them. So 24 that's where the penalty -- of how I landed that. 25 CHAIRMAN WILLIAMSON: All right. I have 0081 1 no further questions. 2 COMMISSIONER SCHENCK: I have one more. 3 CHAIRMAN WILLIAMSON: All right. 4 COMMISSIONER SCHENCK: Is Bnai Brith 5 committed to cooperate with the district attorney's 6 office in Midland connected with this? 7 MR. WHITE: Well, one of the terms of 8 the agreed order is that they will cooperate in a 9 ongoing investigation involving Gary Garrison or 10 Daytime Bingo, Inc. So by the terms of the agreed 11 order, hopefully they will be cooperative. 12 CHAIRMAN WILLIAMSON: Do you want to see 13 if he has any comments? 14 MS. KIPLIN: Mr. Fenoglio, do you have 15 any comments that you'd like to make at this time? 16 MR. FENOGLIO: Yes, I do. For the 17 record my a name is Stephen Fenoglio. I'm an attorney 18 in Austin, and I represent Daytime Bingo. 19 I want to point out that Daytime -- or 20 that Mr. Garrison was initially apparently a suspect 21 in the case, took a lie detector test given by a 22 former, I believe it was, Midland Police Department 23 examiner, passed it, and was no longer a suspect in 24 the theft case. Mr. Garrison has, I believe, answered 25 98 percent of the questions Mr. White has asked him in 0082 1 two depositions. Without disclosing attorney-client 2 advice, Mr. Garrison answered all of those questions. 3 He has given statements to Midland 4 Police Department. And I think in hindsight, everyone 5 would agree this was the lousiest thing that someone 6 came up with. The evidence is clear that the 7 decisions to hold back pull-tabs was made long before 8 Gary Garrison was ever involved in that location. 9 I can tell you, having represented 10 charities, lessors, manufacturers and distributors in 11 the bingo world since about 1994 when the Lottery 12 Commission took over jurisdiction of charitable bingo 13 that the holdback to levelized revenues has occurred, 14 at least that's the urban legend, if you will, in many 15 locations across the state. And I believe 16 Mr. Sanderson is aware of some of those other 17 locations, not the -- not allowed by law, clearly 18 prohibited by law, but in certain venues -- for 19 example, South Texas when the winter Texans leave, 20 those halls hemorrhage red ink. And if they didn't 21 historically have a way to levelize their revenues, 22 they would just go out of business. They couldn't pay 23 for payroll and the like. 24 Again, I'm not trying to justify what 25 has happened, but I think this isn't the first time 0083 1 that the withholding to report later pull-tabs 2 occurred. I don't think any of us are clear as to the 3 precise date or approximate date that practice was 4 started, but it was started several years before the 5 audit process. 6 Insofar as the alleged -- I think we've 7 addressed the alleged theft. And then the other issue 8 is the withholding of certain prize fees. 9 No one is clear after -- I guess there 10 were a total of eight depositions taken, or maybe ten, 11 when that practice was started, but again, it was 12 started long before Gary Garrison ever started. 13 Mr. Garrison's case, by the way, was 14 initially tied to these three cases. At the request 15 of staff, it was separated, and we're set for hearing 16 on the merits in July of this year on related 17 allegations. 18 COMMISSIONER SCHENCK: What related 19 allegations? 20 MR. FENOGLIO: Allegations -- I guess 21 there are three different complaints that the staff 22 filed that allege that Gary Garrison was directly 23 responsible for the missing pull-tabs. Gary Garrison 24 was -- and I'm paraphrasing, Commissioner Schenck -- 25 directly responsible for the decision to withhold 0084 1 certain prizes and divert those funds, and I think 2 those -- and some exceptions, those are the two 3 allegations -- underlying allegations in the case that 4 are set for trial the last week of July of this year. 5 COMMISSIONER SCHENCK: Steve, as you sit 6 here, can you assure me that all the money that Bnai 7 Brith was -- would be owed by proper operation 8 statutes has been paid to them? 9 MR. WHITE: Is that addressed to -- 10 MR. FENOGLIO: You're talking -- okay. 11 And you're talking about -- I want to be clear -- for 12 the audit period -- I mean, your question is extremely 13 broad. 14 The only thing that I've looked at -- 15 I'm not trying to hide the ball, Commissioner Schenck, 16 but the only thing I've looked at is from the audit 17 period of June 1 of '05 forward. 18 COMMISSIONER SCHENCK: That's fine. 19 Okay. Can you assure me that they have been paid all 20 the monies they've been owed under the statute from 21 all of the gaming -- well, I shouldn't say gaming -- 22 bingo activities that were conducted by your client? 23 MR. FENOGLIO: Well, I don't believe my 24 client conducted the bingo. I don't think anyone has 25 proven -- and, matter of fact, I think the charities 0085 1 have admitted that they were conducting the bingo 2 through the use of their employees; but I think there 3 are monies that are missing. So no, Commissioner 4 Schenck, I think the audits have identified monies 5 that were missing. Other than those monies, I'm 6 unaware, and I have inquired -- we've retained a 7 separate consulting CPA to audit the auditor's audits, 8 and we've not identified anything that they have 9 missed. 10 I will say that I -- having represented 11 a number of charities in audits where they found 12 nothing wrong or very minimal wrong, all the way to 13 this type of practice, it is not uncommon that they 14 will lose inventory. And so I think to have the hard 15 and fast rule that an auditor says, "Well, if you 16 purchased it, you must account for it by paying for 17 it" flies in the face of any retail business, be it a 18 7-11 or what have you. 19 COMMISSIONER SCHENCK: I will agree with 20 you, unless the retail business happens to be stuffing 21 money in a floor safe that disappears and no one can 22 explain it. 23 MR. FENOGLIO: Well, again, in retail -- 24 I mean, convenience stores, 35 percent -- up to 25 35 percent is lost, and no one can account for that. 0086 1 The customer -- but be that as it may, I don't think 2 it's a good practice to have a floor safe where you 3 hide monies. 4 COMMISSIONER SCHENCK: Well, it's 5 contrary to our law, isn't it? You're supposed to -- 6 MR. FENOGLIO: Oh, no question, it is. 7 COMMISSIONER SCHENCK: So it's not a 8 good -- not a good practice. It's illegal. 9 MR. FENOGLIO: And I think I already 10 said that earlier. 11 COMMISSIONER SCHENCK: Can you assure me 12 that your client wasn't obtaining pull-tabs or other 13 bingo products from other than licensed 14 manufacturers -- 15 MR. FENOGLIO: Yes. 16 COMMISSIONER SCHENCK: -- during the 17 audit period? Thank you. 18 CHAIRMAN WILLIAMSON: Okay. In light of 19 time and other considerations, I'm sure we'll have 20 more opportunity to discuss this again. 21 MR. FENOGLIO: Yes, the Daytime aspect. 22 CHAIRMAN WILLIAMSON: Thank you all for 23 showing. If the other commissioners have no further 24 comments or questions, I think we make a motion -- can 25 we do all three of them at once, or do you want to do 0087 1 one at a time? 2 MS. KIPLIN: Mr. White -- I think as 3 long as the record is clear whatever your motion is 4 that it relates to all three, or if not, then to 5 separate that out. 6 CHAIRMAN WILLIAMSON: Okay. 7 MS. KIPLIN: And, you know, your 8 options -- if you want me to go through that, your 9 options are: You can approve the agreed order or 10 orders, you can reject the agreed order or orders, you 11 can direct the staff to go back and work out a 12 different agreement, or you can direct the staff to 13 take these matters to the State Office of 14 Administrative Hearings. Those are the options that I 15 can think of that are available to you. 16 Staff's recommendation is that you vote 17 to approve these -- the settlements and the proposed 18 agreed orders. 19 CHAIRMAN WILLIAMSON: Do you -- 20 COMMISSIONER SCHENCK: I am pretty 21 close. 22 I think I'm going to move that we adopt 23 staff's recommendation with respect to these three 24 orders. 25 COMMISSIONER KRAUSE: I'll second that. 0088 1 I think that we need to try and learn 2 what we can from this and go ahead and move on. 3 CHAIRMAN WILLIAMSON: Okay. Vote to 4 adopt, ayes? 5 COMMISSIONER SCHENCK: Aye. 6 CHAIRMAN WILLIAMSON: Aye. 7 COMMISSIONER KRAUSE: Aye. 8 CHAIRMAN WILLIAMSON: Motion has passed. 9 Thank y'all. 10 We will take a 15-minute break. 11 MS. KIPLIN: Commissioners, just so I 12 can put on the record -- I'm sorry -- I do have the 13 three agreed orders, and I'll pass those to you-all 14 for your signature. 15 CHAIRMAN WILLIAMSON: Okay. We will 16 take a 15-minute break and then go back to Item II. 17 Thank you. 18 (Recess taken) 19 AGENDA ITEM NO. II 20 CHAIRMAN WILLIAMSON: All right. We are 21 back. We will -- we're back in session at 10:52. We 22 will be on Item No. II, consideration and/or possible 23 discussion or action on recognition of service by 24 former Texas Lottery Commissioner Chairman James 25 Cox -- A. Cox, Jr. 0089 1 There will be many people speaking about 2 you and to you, Jim. And so what I'd like to do is 3 start with those staff people that have expressed an 4 interest and a desire to make some remarks about you. 5 So if those people would come up, please. I believe 6 it was Catherine, Phil -- and you're certainly welcome 7 to stay there -- and Gary. 8 Catherine, I'll go ahead and let you 9 start. 10 MS. MELVIN: Thank you, Chairman. Jim. 11 I'm a little nervous, so -- don't read what I wrote 12 here. I'm going to try to do this. 13 (Laughter) 14 MS. MELVIN: Six years ago, you and two 15 other commissioners interviewed me for the position of 16 internal audit director for the Texas Lottery 17 Commission. While I had done my own research and 18 already knew I was interested in the position, your 19 comments and the questions you asked during that 20 interview impressed me greatly. Your commitment of 21 service to the state, your belief in the achievement 22 of excellence for this agency, and your vision of 23 integrity and accountability were readily apparent 24 just in that interview. Over the years, I can say 25 that I've been fortunate to witness all of these in 0090 1 practice firsthand. 2 As I was thinking of what I would say 3 today, I tried to think of some funny stories that we 4 had in common that I might share with everybody. And 5 as you can imagine, there were many (Laughter) that 6 came to mind, but rather than regale everyone with 7 stories about due diligence or the subtleties of 8 inherent versus control risk or the joys of attribute 9 sampling or (Laughter) my personal favorite, tolerable 10 deviation rates, I thought I'd leave those as our 11 private jokes and just simply say how very much I 12 enjoyed the common bond we shared as fellow auditors, 13 speaking the same language. 14 You've been a tireless champion for the 15 independence and integrity of the internal audit 16 function. I speak for my entire division when I say 17 thank you for supporting our efforts and guiding us in 18 the work we do. 19 You certainly left your imprint here at 20 the Texas Lottery Commission. You should be proud 21 that you helped frame the agency's core values and 22 that the agency is a better place as a result of the 23 foundation you have laid. Through your words, your 24 action, the example you set, you remind us all to be 25 better employees, better citizens and better people. 0091 1 You expected our best efforts and gave no less in 2 return. I couldn't have asked for a better mentor. 3 Thank you. 4 CHAIRMAN COX: Thank you, Catherine. 5 Thank you very much. 6 (Applause) 7 CHAIRMAN WILLIAMSON: Phil. 8 MR. SANDERSON: Chairman Cox, similar to 9 Cat, you interviewed me a little over two years ago, 10 along with Chairman Clowe, and I appreciate the 11 opportunity and the support that you gave me and 12 giving me this position and the opportunity to help 13 bingo grow. 14 It's been a pleasure and an honor to 15 work with you over the last couple of years, and I 16 want to thank you everything that you have done for 17 the bingo division. And through your leadership, I 18 believe the agency and the division and the industry 19 have got a very well-respected interest together now 20 and have a common interest. 21 The -- your appearances at the Bingo 22 Advisory Committee shows your support and commitment 23 to the bingo industry. I know each one of the members 24 there appreciated your attendance in those meetings. 25 And because of your presence, I believe it has helped 0092 1 with the working relationship between the division, 2 the agency and the industry. 3 Thank you very much, and I hope you have 4 a fruitful future. 5 (Applause) 6 CHAIRMAN WILLIAMSON: And last but not 7 least, Gary. 8 MR. GRIEF: Good morning, Commissioners. 9 And thank you for giving me the opportunity to say a 10 few words to Chairman Cox. 11 Jim, it seems like only yesterday when 12 Chairman Tom Clowe told me that he had recruited a new 13 commissioner here at the agency. I can remember Tom 14 telling me that this new commissioner had gaming 15 experience and management experience and that Tom 16 thought that he would be a real asset to the agency. 17 Tom could not have been more accurate in his 18 assessment. 19 From day one, you came into this agency 20 and you immediately set about learning all that you 21 could about our organization. You were interested in 22 all aspects of the business. You were such a quick 23 stud that, many times, I couldn't keep up (Laughter) 24 with feeding you information so you could learn more. 25 I quickly learned that I should start 0093 1 using your experience and your expertise to help us 2 make improvements and particularly in the area of our 3 financial business. 4 I can still remember being very nervous 5 shortly after I hired Kathy Pyka, our controller. I 6 wasn't nervous at all about Kathy's skills and 7 abilities and experience, which were above reproach, 8 but I was very nervous that she would pass the 9 Chairman Cox test, and that would be her first meeting 10 with you. You may not remember that meeting, but I am 11 sure that Kathy remembers it, and I certainly remember 12 it very well. And I'm very pleased to say that Kathy 13 did pass that test with flying colors. 14 I also think back and recall our 15 experience together as the legislature explored the 16 feasibility of video lottery several years ago. And I 17 can recall vividly sitting in meetings with state 18 leadership as we discussed all the ups and downs of 19 potentially bringing video lottery here to Texas. I 20 can remember watching you speak at those meetings with 21 authority and from experience, and I can recall how 22 proud I was during that time to be a member of your 23 team. 24 I also remember the transition that the 25 agency went through as Tom passed the gavel as 0094 1 chairman to you. I can recall that you had some 2 reservations initially about becoming the chairman; 3 but again, with some gentle coaxing, you took on this 4 challenge. In short order, you settled in as chairman 5 and you took on a leadership role for this agency and 6 had great success and you represented us well to the 7 legislature, to the public and to the media. 8 For what you have meant to me 9 personally, the word mentor jumps to the front of my 10 mind. As I was putting together these comments this 11 morning, I did a thesaurus check on the word mentor. 12 And what came up was advisor, counselor, guide, tutor 13 and teacher. And I obviously picked the right word as 14 you have been all of those things, not just to me, but 15 to other members of the team here at the Texas Lottery 16 Commission. 17 Jim, the time I've shared with you has 18 been a privilege and honor and an incredible learning 19 opportunity. I thank you for your leadership, your 20 service and your friendship, and I wish you the very 21 best of luck in your future endeavors. 22 Thank you, Commissioners. 23 (Applause) 24 CHAIRMAN WILLIAMSON: Now, Ramon Rivera 25 with GTECH has some comments to make. 0095 1 MR. RIVERA: Mr. Chairman. 2 Chairman, Commissioners, thank you for 3 allowing me to say a few words on this very special 4 occasion. 5 Commissioner -- or, Chairman, I speak on 6 behalf of the 500 employees at GTECH Texas, or 6,000 7 associates worldwide, but I bring to you a special 8 message from the members of the GTECH senior staff, 9 many of which you have met and worked with over the 10 course of your tenure at the Texas Lottery Commission. 11 Jim, if I can take the liberty, over the 12 course of the last eight years, we've had the pleasure 13 of working with you directly and indirectly and have 14 felt the gamut of human emotion. We waited with 15 anticipation as solutions to complex and difficult 16 problems took effect. We shared joy and exhilaration 17 when those plans, many that were years in the making, 18 proved successful. We shared in the disappointments 19 and the frustrations when things didn't quite go our 20 way. We worked together, we joined forces, when 21 action needed to be taken immediately, brought to us 22 by forces which were outside our control. 23 I would like to say to you right now and 24 in front of the Commission that you have been a beacon 25 for us, and a beacon for all who worked with you an 0096 1 example of leadership. 2 And I turn now to Peter Drucker, an 3 organizational thinker who defined leadership thus: 4 Management is doing things right. Leadership is doing 5 the right things. And your mantra, your message, has 6 been doing the right things for the school children of 7 Texas. It was an easy mantra to follow. And we 8 really appreciate what you've done. 9 I have to say for the record that we 10 didn't always see eye to eye on things, but I also 11 want to put on the record that you won every argument. 12 (Laughter) 13 I want to give you a personal message 14 now. I'm going to take advantage of this and say 15 something to you from me, and that is the lessons that 16 you have taught me over the eight years that you've 17 been here. I am -- I can't -- I have -- I had to get 18 some help in describing what I mean. And I went to 19 John Luther and I found this quote: Good character is 20 more to be praised than outstanding talent. Most 21 talents are, to some extent, a gift. Good character, 22 by contrast, is not given to us. We have to build it 23 piece by piece, by thought, choice, courage and 24 determination. 25 You have taught me that lesson, 0097 1 Mr. Chairman, and I hope that I can apply that in all 2 of my future dealings. 3 On behalf of everyone at GTECH, we wish 4 you the best in your future endeavors, and we thank 5 you for helping us become a better organization. And 6 you have, as you know. 7 CHAIRMAN COX: Thank you very much. 8 MR. RIVERA: Jim, the school children of 9 Texas and the citizens of Texas are better off for 10 your service. We will miss you, sir. 11 CHAIRMAN COX: Thank you, Ramon. 12 (Applause) 13 CHAIRMAN WILLIAMSON: Mr. Chairman, at 14 this time, Gary has a presentation for you. 15 CHAIRMAN COX: Okay. 16 MR. GRIEF: Jim, on behalf of the 17 Commission and the staff, we have just a small token 18 of our appreciation for you. We have -- on the box, 19 it reads, "James A. Cox, Jr., Chairman, 2002-2009. In 20 appreciation of your service." And inside, we have a 21 gavel that is engraved with "James A. Cox, Chairman, 22 Texas Lottery Commission." Your name is on the 23 handle. We hope you enjoy this and remember us when 24 you when you look at it. 25 CHAIRMAN COX: Thank you. 0098 1 (Applause) 2 CHAIRMAN WILLIAMSON: We're not through 3 yet. We all have to have our little say. (Laughter) 4 So you have to just sit down and bear 5 with us. 6 CHAIRMAN COX: Okay. 7 CHAIRMAN WILLIAMSON: Commissioner 8 Schenck, would you like to make a comment? 9 COMMISSIONER SCHENCK: I would. I'll be 10 brief. 11 It's hard to match what's already gone 12 before. It's all accurate, and it's all very 13 impressive. 14 And, Jim, I'll just add that I have not 15 been here that long; but when I came on to this 16 commission, I was to be, I'll confess, a little 17 intimidated with you and Tom who, as far as I was 18 concerned, were right from central casting in terms of 19 people I'd want to put in charge of a large agency, in 20 charge of a lot of money, to make the public 21 comfortable with how it was proceeding. 22 Your skills, your background and your 23 talents are unique and have served this agency 24 extremely well, and I'm so glad to have had the 25 opportunity to serve with you. 0099 1 I'm looking forward to serving with our 2 new commissioners and our new chairman, and everyone 3 brings their own unique skills. And I wish I had 4 yours. I have different skills, but I -- as I say, 5 it's been a pleasure working with you. 6 And I've got to say that during the time 7 that you've been chairman of this agency, I think 8 we've generated something like $7 billion to the 9 school children of Texas. That's bought a lot of 10 books and a lot of erasers and a lot of chalk. And so 11 there are kids today that are going to college and 12 doing exciting and great things in Texas in no small 13 part due to your efforts in working tirelessly with 14 the legislature, with the governor's office, with 15 GTECH, all of whom have been pulling for and making 16 this happen. And I think that you deserve all of our 17 respect and our appreciation for your efforts here. 18 And you certainly have mine. 19 CHAIRMAN COX: Thank you, David. 20 (Applause) 21 CHAIRMAN WILLIAMSON: Now I'm going to 22 put Commissioner Krause on the spot since he really 23 hasn't had an opportunity to serve with you, but I 24 know he knows you. So I'll give you the opportunity 25 to make a comment or two. 0100 1 COMMISSIONER KRAUSE: Well, Jim and I 2 served on the Board of Trustees of Tarrytown 3 University, Tarrytown United Methodist Church, 4 together for a couple of years, you know, for a lot of 5 the time on different terms from me. And so we've 6 gone to church together for a long time, and I've 7 known Jim. 8 It sounds like you did a great job here, 9 so I hope to be able to do the same. 10 CHAIRMAN COX: I know you will. 11 CHAIRMAN WILLIAMSON: Thank you. 12 (Applause) 13 CHAIRMAN WILLIAMSON: I have huge shoes 14 to fill. And every time when I have a doubt, I go, 15 "Okay, what would Jim do? Should I call him? No I 16 don't want to bother him, but what would he do?" 17 Following you and Tom is a huge 18 responsibility. I'm looking forward to it. I'm in 19 awe of what you've done. And being a fellow CPA, of 20 course, is always endearing to me, so we can talk 21 about all of that auditing stuff. And I look forward 22 to your counsel because I will be calling you. 23 And now it's your turn to make comments. 24 CHAIRMAN COX: Okay. Well, I had 25 planned to spend this afternoon preparing some things 0101 1 to say for tomorrow's meeting. 2 (Laughter) 3 CHAIRMAN WILLIAMSON: But off-the-cuff 4 is so much better. 5 CHAIRMAN COX: And I will tell you that 6 I'm really moved by this -- whatever we call this; 7 celebration, I guess we'd call it. 8 When I -- I met Tom in about 2001, and 9 maybe 2000. The governor's office had said there's a 10 guy in town that knows some stuff about gambling, and 11 you might want to get to know him. And Tom and I had 12 lunch most every month for about two years. And one 13 day, I got a call from the governor's office, and they 14 said, "How would you like to serve on that 15 commission?" And I said, "Boy, that" -- when I 16 applied for commissioner work, that was the one I 17 wanted. And I initially served on the General 18 Services Commission and then was appointed here. 19 And while there have been bumps, I think 20 this has been a period of uniform growth for the 21 agency, for the people of the agency, for our mission, 22 for our relationships. You know, we -- when Tom came 23 here, there were a number of challenges, and he didn't 24 sugar coat any of them when he asked me to join him 25 over here. 0102 1 But working with Tom and with all of 2 you -- Gary, I didn't even know you when I came here. 3 You -- the first meeting I think I came to, you were 4 either sitting back there or weren't even here. I 5 don't know which. And all of a sudden, you come to 6 the floor and, gosh, your growth has just been really 7 quite alongside that of the agency. 8 I would hesitate to say that we were one 9 of the lowest agencies in esteem, but we certainly 10 weren't one of the highest. And I think now we are. 11 I think this is the best agency in state government. 12 We've got great management. We've got good 13 relationships, and that was so important. We were 14 insular when Tom came here. We were withdrawn. We 15 were antagonistic, even, with those people that we 16 really need to help us do well. And those 17 relationships have improved substantially, right along 18 with the people from our side that are working. 19 Ramon, I'll say particularly for you, we 20 appreciate so much the effort that GTECH has taken to 21 help us be the best lottery in the world. I've told 22 you that that's what we want to be. And you've done 23 everything you can, you and your people, to help us 24 get there. And I know that you will help the 25 Commission as things go forward in achieving that 0103 1 goal. 2 It's been an honor to work here, and 3 it's been a pleasure. 4 My tennis buddies said, "Aren't you glad 5 to have that albatross off your back?" And I said, "I 6 don't know how you can say that." And they said, 7 "Well, gosh, you know, just -- you do a lot of work, 8 you don't get paid anything, your name shows up in the 9 paper where you don't want it." And just, you know, 10 except for that last part, it's not true. It's true I 11 don't (Laughter) get paid. It's true that I don't 12 want my name in the paper, but the work is such a 13 pleasure because it's so rewarding. The people 14 appreciate what you do, and they approve and they get 15 better at what they're doing. And all of those things 16 are incredibly important to me and incredibly 17 rewarding. 18 I'm so sorry that I didn't get to see 19 Chairman Clowe today. I understand he was here 20 earlier and had to go to a DPS meeting. He has made 21 such a difference in my life. He's been -- you used 22 that term "mentor," Gary, and I can use it not only 23 for you and a number of others but certainly for Tom. 24 You know, y'all have all helped me understand. Nelda 25 helped me understand what goes on over there and -- to 0104 1 the extent that I understand it now. (Laughter) And 2 Catherine has helped me understand the difference 3 between the kind of auditing I did and the kind of 4 auditing she does. And Mike has helped me understand 5 how you run a business within a governmental 6 framework, and that's a very different challenge than 7 running a business in the private sector. You have to 8 look at things in a different way and think about 9 what's going to happen in the future even more than 10 you have to think about those things when you're more 11 in control of your destiny. 12 And, Kathy, the -- your addition here as 13 controller was so welcome. You know, this was -- as 14 is true in many state agencies, this was an 15 organization in which the department heads were left 16 with a great deal of financial authority and not a lot 17 of guidance on how to use it, and you have 18 consolidated that authority and helped people 19 understand how to use authority and what's important 20 about controlling the state's money, money of the 21 school children of Texas. 22 Phil, you have had an incredible 23 opportunity given to you, and Ms. Melvin created that 24 opportunity. Her audit, I think, set bingo on the way 25 to becoming a highly professional organization, and 0105 1 I'm confident that you can make that happen. It's 2 going to be a lot of work and it's going to take some 3 time, but you have the leadership skills that you need 4 to do that job, and you've got the guidance from 5 Catherine and others that I know will help you get 6 there. 7 And Commissioners, David, you've been a 8 wonderful addition to this commission. We didn't have 9 a lawyer for years, and we always wanted one. And 10 when we got one, we were awfully glad we had one. 11 It's a skill that Tom and I didn't have. We sat, two 12 of us, at that table for a couple years, I guess, and 13 they ran a couple of lawyers in on us from time to 14 time and they had to leave for various reasons. But 15 now you've got two lawyers and two CPAs, if we count 16 Winston twice. (Laughter) And I think that's the 17 perfect skill set for this commission. 18 And Mary Ann, you have dug in like we 19 couldn't have dreamed, and the work you've done with 20 the legislature and the governor's office says that 21 our relationships with those -- with the leadership 22 are only going to improve, and that, as you know, is 23 the key to survival and to growth and improvement. So 24 I'm awfully glad that you're going to be taking us 25 over. 0106 1 And Winston, as you say, we've known 2 each other for a good deal of time. I have a great 3 deal of respect for you, and I know that you will 4 serve well in that chair. That was the chair where -- 5 let's see. I never sat in that one. I sat in that 6 one over there (Laughter) and then that one in the 7 middle. But who was sitting here? 8 MS. KIPLIN: Tom. Tom. 9 CHAIRMAN COX: Tom sat there most 10 recently, but -- 11 MS. KIPLIN: Rollie. 12 CHAIRMAN COX: Rollie sat there. 13 MS. KIPLIN: Fernando. 14 CHAIRMAN COX: Fernando briefly, and -- 15 gosh -- what was the name of the lady who was 16 sitting -- 17 MS. KIPLIN: Betsy. 18 COMMISSIONER SCHENCK: Betsy Whitaker. 19 CHAIRMAN COX: Besty Whitaker. Yeah. 20 Betsy was sitting there when I came. 21 And so I wish all of y'all well. And 22 thank you very much for all the things you've said and 23 all the things you mean to me, and good luck. 24 CHAIRMAN WILLIAMSON: Thank you. 25 (Applause) 0107 1 CHAIRMAN WILLIAMSON: All right. One 2 more little thing. The staff put together a little 3 video for you. 4 CHAIRMAN COX: Oh, my goodness. 5 CHAIRMAN WILLIAMSON: And then we're 6 done. 7 Oh, before we do that, I just want to 8 note for the record that Chairman Tom Clowe was here 9 present to speak to Jim but had to leave, and also 10 former Railroad Commissioner Jim Nugent was here as 11 well, so I want to get that on the record. 12 So video please. 13 (Video playing) 14 FEMALE SPEAKER: James A. Cox, Jr., of 15 Austin is the newest member of the Texas Lottery 16 Commission. Appointed by Governor Rick Perry in May, 17 the new commissioner brings a background in gaming to 18 his new post, having already worked in the industry 19 for quite a while. 20 CHAIRMAN COX: I have about 20 years 21 experience in gaming as a public accountant and as a 22 casino operator. 23 FEMALE SPEAKER: Cox says he believes 24 the lottery has maintained a high level of integrity 25 in its games and efficiency in its operations during 0108 1 its ten years of existence. 2 CHAIRMAN COX: It's the kind of thing 3 that I think represents the lottery very well. There 4 are obviously men who are highly respected, their fine 5 integrity, high accomplishments, and those are the 6 kinds of things that we like to stand for. So I think 7 these are the right kind of spokesmen for the Texas 8 Lottery to have. And it looks like Troy and Emmitt 9 are working pretty hard. 10 They don't like to see the odds of their 11 winning getting smaller. The most important aspect I 12 think of the lottery operation is to be -- be operated 13 effectively and efficiently and that its reputation, 14 its integrity, be beyond question. 15 (Applause) 16 (Video ends) 17 CHAIRMAN WILLIAMSON: Thank you. 18 Thank you Commissioner, Mr. Chairman. 19 CHAIRMAN COX: Thank you, Madam 20 chairman, Commissioners. 21 AGENDA ITEM NO. IX 22 CHAIRMAN WILLIAMSON: All right. We 23 will go on to Item 9, Ms. Pyka, report, possible 24 and -- discussion and action on lottery sales and 25 revenue, game performance, new game opportunities, 0109 1 advertising, market research, and trends. 2 MS. PYKA: If you'll give us a few 3 minutes, Madam Chair, to get set up. 4 Good morning, Commissioners. My name is 5 Kathy Pyka, controller for the agency. With me this 6 morning are our products manager, Robert Tirloni, and 7 our research coordinator, Dr. David Sizemore. 8 The first chart for you that we have 9 this morning reflects revenue from sales and net 10 revenue to the state through the week ending May the 11 9th, 2009. Total sales through this 36-week period 12 amounted to $2.54 billion, a decline of 1.4 percent. 13 Prize expense is $1.6 billion, a decline of 14 2.4 percent, for sales contribution of $942.5 million. 15 Net revenue to the state is 16 $637 million, reflecting a 1.2 percent increase as 17 compared to the $629.7 million figure for the same 18 period in fiscal year 2008. 19 Commissioner Krause, for the purposes of 20 calculating the $637 million figure of net revenue to 21 the state, I want to kind of give a background on our 22 calculation here. 23 The first element of expense that we 24 have is retailer commission, and each retailer 25 receives 5 percent of their sales amount for retailer 0110 1 commissions, so that's how we arrive at the 2 $127.3 million figure. The fee paid to the lottery 3 operator vendor is 2.6999 percent, and that represents 4 the $68.7 million figure, followed by $109.4 million 5 for our administrative allowance. 6 While the statute provides for 7 12 percent in our statute for the administrative 8 allowance, we are not currently appropriated that full 9 12 percent. The General Appropriations Act actually 10 identifies the amount that we will be appropriated 11 within that 12 percent. Right now, it's just a little 12 bit above 10 percent in total appropriation. 13 Just going back to the previous slide 14 for a second, the $1.6 billion figure is a percentage 15 of overall sales, leaving us 63 percent as prize 16 payout as compared to 63.6 percent for the same period 17 last fiscal year. 18 And then our next slide summarizes the 19 change in sales by game from fiscal year 2008 to 2009. 20 The total decline of $37.2 million, or 1.4 percent, is 21 composed of $4.8 million in a gain for our online 22 product and a $42 million decline for our instant 23 ticket product. 24 Beginning with the jackpot games that 25 are portrayed with the white font, we have a 0111 1 $9.9 million growth in sales comparing fiscal year 2 2009 to fiscal year 2008. Our Mega Millions, 3 Megaplier and Texas Two Step games are all reflecting 4 positive year-over-year gains compared to fiscal year 5 2008. 6 Moving down to the Daily games, we 7 currently reflect a $5 million decline compared to 8 fiscal year 2008 sales, and this decline is slowly 9 going down month over month followed, again, by the 10 instant decline of $42 million. 11 Our next slide for you provides a review 12 of our historical net revenue trends. I wanted to 13 begin by sharing this just to give the perspective of 14 where we started the fiscal year at in which our cash 15 basis transfers to the state began the fiscal year 16 with a 10-1/2 percent decline comparing our transfers 17 to fiscal year 2008. And just as a reminder, during 18 the month of September, the state had experienced 19 Hurricane Ike in which we attributed about 12 to 20 $14 million of sales decline for that time period. 21 And as you can see, month over month, we 22 have showed a trend of that decline decreasing with 23 the period ending April 30th with an overall 24 1.2 percent gain, or almost 1.3 percent gain, year 25 over year on transfers to the state. 0112 1 Robert will now move forward with your 2 sales comparison by game. 3 MR. TIRLONI: Good morning, 4 Commissioners. For the record, my name is Robert 5 Tirloni. I am the products manager for the 6 Commission. 7 This next slide shows total fiscal year 8 to date sales of 2.54 billion broken down by our two 9 product categories, our instant games and our online 10 games. Instant games are representing 75.5 percent of 11 total sales, with online games making up the other 12 24-1/2 percent. 13 As way of background for our new 14 commissioner, we are a very heavy instant sales state. 15 The bulk of our sales do come from our scratch-off 16 tickets. Those typically tend to be easier for us to 17 market because they are pretty much physically in 18 front of customers when they do go into our licensed 19 retail locations, and we have a great deal variety in 20 that product category. 21 And also just for clarification, 22 "online" does not refer to the Internet in terms of 23 lottery games. There's usually a great deal of 24 confusion about that. But our online game are -- 25 games are our drawing games, such as Lotto Texas and 0113 1 Mega Millions and Pick 3, and so on. And the term was 2 around in the lottery industry way before the Internet 3 started. 4 This next slide just takes our online 5 game sales for the fiscal year to date and breaks it 6 down by product category. So you can see that Pick 3 7 is and continues to be our best-selling online game, 8 and that's the red portion of the pie chart. 9 And we've talked about this for quite a 10 few months in a row, if Mega Millions would overtake 11 Lotto Texas in sales, and it did just do that. Mega 12 Millions is now the second best-selling online game at 13 $137 million -- excuse me -- that is thanks to the two 14 rather large jackpots we have had. We had a 15 $212 million jackpot back in March, and then we -- 16 Mega Millions climbed up to $225 million just earlier 17 this month, towards the beginning of May, and that's 18 helped push Mega Millions ahead of Lotto Texas thus 19 far for the year. 20 Again, a similar chart but this is 21 reflecting our instant ticket sales broken down by 22 price point. So our top selling price points for our 23 scratch-off games are the five, the two, the ten and 24 the three. And this pie chart represents the almost 25 $2 billion we've seen in instant ticket sales this 0114 1 fiscal year through the week ending Saturday, May 9th. 2 I do have a couple of other products 3 updates for you this month. Since we didn't meet in 4 April, our last meeting was in late March, and we have 5 sold two Lotto jackpot tickets since that time. On 6 Wednesday April 8th, Timewise location in Houston sold 7 a Lotto Texas jackpot that was advertised at 8 $10 million. The player chose annual payments, and 9 they are receiving $400,000 a year for the next 25 10 years. That was a Quick Pick ticket. We already have 11 paid this claim. The winner has come forward. And 12 we've already paid Timewise their retailer bonus of 13 $100,000. 14 MR. GRIEF: Robert, just for the 15 commissioners' information, how frequently do our 16 players choose the annuitized jackpot? 17 MR. TIRLONI: That's been pretty rare 18 over time. Lately, most -- for the past few years, 19 the cash value has been the more popular choice 20 between the two. 21 We have recently had some players, 22 though, who have come in and claimed their prizes and 23 have expressed to us, because of economic conditions, 24 they prefer to have the annual payment option where 25 the state is making the investments and guaranteeing 0115 1 their payments for the next 25 years. 2 The second ticket, we sold since we last 3 met occurred just a few weeks ago. Big Country Mart 4 in Burleson sold the jackpot ticket for the Wednesday, 5 May 6 drawing. That was advertised as a $11 million 6 jackpot. That ticket was a cash value option prize. 7 The value of that cash value is 7.1 million. We've 8 not had any contact yet on this jackpot win. And the 9 Big Country Mart is eligible for the $110,000 bonus, 10 and we're working with that retailer right now on 11 paying them their bonus. 12 The last bit of product news I have for 13 you today, Commissioners, is our brand new Spotlight 14 game. This is our $500 million Blockbuster game. 15 A Spotlight game has been rather 16 successful in the lottery industry in many other 17 jurisdictions. It typically has a elevated print run, 18 so we print far more tickets than normal, and has an 19 elevated prize payout. And what that allows you to do 20 is have all of the callouts that you have on the side 21 of the ticket. 22 So this game is $20 price point, as I 23 said. We've printed approximately 33 million tickets, 24 and that allows us to have these callouts of over a 25 half a billion dollars in total prizes in the game. 0116 1 The game has 40 $1 million prizes, and it has 10 2 $2-1/2 million prizes. And there's over a million 3 prizes from the $100 to $500 range. And so this game 4 starts on Monday, the 18th. 5 Staff has been working on it for many 6 months. We've also been working very diligently with 7 our advertising agencies. We have a full advertising 8 campaign that starts on Monday when the game launches. 9 Our first advertising flight will run 10 for five weeks. We'll be on air for three weeks, off 11 for two and then back on for another two. 12 All of our retail locations have point 13 of sale to support this game, and there are retailer 14 bonuses associated with this game, retailer pack 15 settlement contests that are associated with it. And 16 we also have a special website called 17 TexasBlockbuster.com which you can link to off of the 18 lottery's website, and it's basically a website that 19 is totally dedicated to this game. It talks about how 20 you can play. It has some interactive features for 21 players to experience. And we have a rather large 22 concerted effort that we're putting forward with our 23 claim centers so as winners come forward and claim 24 their prizes, we're going to have a whole feature on 25 that website that's dedicated to the winners of this 0117 1 game. So staff is very excited, and we've been 2 planning this game, as I said, for quite a while, and 3 we wanted to let you know about it. 4 We do have a big spokesperson who is 5 trying to communicate the huge size of this game and 6 communicate how big it is, and our elephant, Paige, I 7 believe her name was, is kind of the spokesperson for 8 this game. And this is just an example of our play 9 station insert. Like I said, that has already been 10 distributed to our retail locations. And again, we're 11 trying to convey to the public the the size, the large 12 size, of this game. And as it says, this game does 13 have more million-dollar prizes than any other game 14 ever produced by the lottery. And the $500 million 15 worth of total prizes is the largest number of prizes 16 ever in a game produced in the lottery's history. 17 CHAIRMAN WILLIAMSON: Great. Any 18 questions, Commissioners? 19 COMMISSIONER SCHENCK: No, thank you. 20 MR. TIRLONI: Madam Chair, we have one 21 more section. Dr. Sizemore is going to give a brief 22 update on some research initiatives. 23 MR. SIZEMORE: Thank you, Robert. 24 Good morning, Commissioners, Chair 25 Williamson. I am David Sizemore the research 0118 1 coordinator for the lottery, and I have the pleasure 2 to present to you today some public opinion material 3 that we collect on a monthly basis through our market 4 research vendor, and we present this to you twice a 5 year now. 6 To give you some brief perspective and 7 contextualize things, I'll give you a sense of what 8 the survey itself is about very generally and then 9 specifically the questions that we're presenting to 10 you today. 11 This opinion material is part of a 12 larger monthly tracking study, a market research 13 study, that we have conducted through our research 14 firm Ipsos Reid. And we've been collecting data along 15 these lines, as well as the other questions that are 16 asked, since the 1990s. And some of the material that 17 we're presenting today has been gathered since the 18 mid-1990s. 19 And this is part of a larger project 20 where there's a battery of questions that are asked 21 having to do with participation, advertising, whether 22 advertising has been seen, for example, and some views 23 about different psychographic elements, things -- the 24 way people think basically. And this is posed monthly 25 to 400 respondents. And in October, we collected data 0119 1 for the segmentation study, which is a much larger 2 effort, from 1200 participants. 3 And, again, this is about game 4 awareness, advertising recall and image of the 5 lottery, which is what we'll be presenting to you 6 today. 7 We also add on different questions as 8 needed depending on what people are interested in 9 internally in finding out from the market. So the 10 following items are just three pieces from this 11 broader survey that is conducted monthly. 12 The first slide asks respondents 13 whether -- and the extent to which they are informed 14 about the lottery and what it does, and this is a 15 seven-point scale where one is uninformed and seven is 16 very informed. And you'll see the blue at the bottom 17 for the second quarter of 2009 was at 54 percent, 18 which means that 54 percent of respondents said that 19 they were not informed about the lottery and what it 20 does. And this is, again, all rolled up from the 21 monthly surveys into one quarter. So the sample sizes 22 at the bottom are 1200 larger for the October section 23 as well. 24 34 percent of respondents said that they 25 were, in fact, informed, and 12 percent fell in the 0120 1 middle or did not know or were neutral. 2 The second slide deals with the overall 3 opinion respondents have of the Texas Lottery. And -- 4 I'm sorry -- the question is actually listed right at 5 the top underneath the gold stripe under the title. 6 "How would you describe your overall opinion of the 7 Texas Lottery?" And 47 percent of respondents for the 8 second quarter of 2009 said that they had a positive 9 view, while 33 percent had a negative view. And I 10 should note at this point, as we go through some of 11 this, there's relative stability across all of these 12 measures, so these are pretty fairly constant 13 responses over time. 14 And the final slide asked respondents 15 whether they thought the Texas Lottery was operated 16 fairly and honestly. Fortunately enough, there's some 17 good news here. The -- 55 percent of respondents said 18 that they agreed that the Texas Lottery was operated 19 fairly and honestly, but the good part is that only 20 21 percent thought it was not. And that's the lowest 21 we have on record for this period which dates back to 22 the third quarter of 2006. And about 24 percent for 23 this most recent quarter were in the middle of the 24 road or they didn't have an answer. 25 That's all I have. I'd be happy to 0121 1 answer any questions. Thank you. 2 COMMISSIONER SCHENCK: Good report. 3 Thank you. 4 COMMISSIONER KRAUSE: I've got a 5 question. 6 MR. SIZEMORE: Yes, sir. 7 COMMISSIONER KRAUSE: For those people 8 that say that they believe that the lottery is not 9 being operated honestly, do you ever ask them why they 10 think that? 11 MR. SIZEMORE: Yes, we have in the past, 12 and -- 13 COMMISSIONER KRAUSE: That would give us 14 something to work with. 15 MR. SIZEMORE: Commissioner Clowe has 16 actually asked in the past that we follow up with the 17 source of this information, why they think that, and 18 we have been gathering that over time. So I don't 19 have that with me today necessarily, but I'd certainly 20 be happy to provide that to you if you'd like to see 21 it. 22 CHAIRMAN WILLIAMSON: Why don't you 23 provide that? And if you're not here next time, at 24 least give it to Kathy and we can present it. 25 COMMISSIONER KRAUSE: Sure. 0122 1 CHAIRMAN WILLIAMSON: I think that would 2 be good information. 3 MR. SIZEMORE: Certainly. 4 MR. TIRLONI: Commissioners, that's what 5 we have for you today. We're happy to answer any 6 other questions you might have. 7 CHAIRMAN WILLIAMSON: Any questions? 8 All right. Thank you. 9 MR. TIRLONI: Thank you. 10 AGENDA ITEM NO. X 11 CHAIRMAN WILLIAMSON: Let's go on to 12 Item X, Pyka again, the transfers to the state and the 13 agency's budget. 14 MS. PYKA: For the record, again, Kathy 15 Pyka, controller for the Lottery Commission. 16 Commissioner Krause, I'll give you a 17 little background lesson on this one too. 18 Section 466.355 of the Government Code 19 outlines the specific purposes of the state lottery 20 account including the requirement that each month we 21 make a transfer to the Foundation School Fund by the 22 15th of the month of any balance remaining from sales 23 following the payment of prize expenses and the cost 24 of operation and administration of the lottery. And 25 then as well, we also make a quarterly allocation of 0123 1 unclaimed prizes to the state treasury, with the first 2 10 million of that going to the Department of State 3 Health & Human Services, with the balance of it going 4 to the General Revenue Fund each quarter. So I wanted 5 to give you that background before we move into this 6 item. 7 And the first report in your notebook 8 includes the transfers and the allocations to the 9 Foundation School Fund for the period ending 10 March 31st of 2009. The total cash transfer was 11 $579.7 million for the first seven months of the 12 fiscal year. 13 The second page of your notebook gives 14 you the detail on the transfers to the Foundation 15 School Fund and the amount of unclaimed prizes. So of 16 the $579.7 million that was transferred to the state, 17 548.3 million was the amount transferred to the 18 Foundation School Fund, with a balance of 31.4 million 19 transferred out from unclaimed prizes. So as of the 20 end of March, this represented a seven-tenths of a 21 percent increase to the Foundation School Fund; but 22 the good news is, we also wrapped up the April 23 transfer following the transmission of this notebook 24 material. We finished that on the 8th of May and made 25 a transfer of $79.9 million, which leaves us with an 0124 1 incremental gain on transfers of $7.1 million year 2 over year, or a 1.2 percent increase. So at this 3 point in time, cumulative transfers to the Foundation 4 School Fund through the period of March were $11.2 5 billion. 6 The item -- the notebook item also 7 includes an update on our operating budget. Through 8 the second quarter, which ended February 28th, our 9 lottery account budget is $193.8 million, and of that 10 amount, 91.5 percent was obligated through an 11 encumbrance or expenditure through the end of the 12 second quarter. The bingo operations budget funded 13 out of the General Revenue Fund is 15.5 million, with 14 53.8 percent obligated through the end of the second 15 quarter. 16 This concludes my presentation. I'd be 17 happy to answer any questions that you might have. 18 COMMISSIONER SCHENCK: Kathy, it's 19 starting to look like we're going to get really 20 close -- 21 MS. PYKA: We really -- 22 COMMISSIONER SCHENCK: -- to that 23 billion-dollar threshold. 24 MS. PYKA: We are getting really close. 25 Certainly, you know, this is the time of the year that 0125 1 we begin the accounting process to look at any 2 unobligated administrative funds. And at this point 3 in time, we know that that's a minimum of $10 million 4 of unspent admin. And if you recall last year, we did 5 a $13-1/2 million transfer of unspent admin in August, 6 so we're continuing to look at that. And like I said, 7 I -- that is a commitment that it's at least minimum 8 of $10 million through what we know right now. 9 COMMISSIONER SCHENCK: Okay. Thank you. 10 CHAIRMAN WILLIAMSON: For Commissioner 11 Krause's edification, would you explain the $1 billion 12 goal, such as it were? 13 MS. PYKA: Yes. Certainly over the 14 historical years, the Commission reached a threshold 15 of $1 billion in annual transfers to the Foundation 16 School Fund and worked very hard to get to that 17 threshold. And last fiscal year, we were just under 18 that. And so when we talk about Foundation School 19 Fund transfers, whether it be internal to the agency 20 or by our legislative body, that million-dollar target 21 seems to be the thing that we are measured against, so 22 we speak about the million -- the billion-dollar 23 figure quite often. 24 CHAIRMAN WILLIAMSON: Thank you. All 25 right. Let's go on. Any other questions or comments? 0126 1 AGENDA ITEM NO. XI 2 CHAIRMAN WILLIAMSON: Let's go on to 3 Item 11, the discussion on the Lotto Texas procedures, 4 please. 5 MS. PYKA: Again, for the record, Kathy 6 Pyka, controller for the agency. 7 Commissioners, in accordance with our 8 Agency Directive MD-001 and Procedure AD-SS-PP-001, 9 these are all of our procedures related to policies 10 that impact the agency and how we prepare policies and 11 procedures. 12 Any procedures that affect Lotto Texas 13 players are required to be presented to the Commission 14 for your consideration and approval to post the 15 proposed procedure in the Texas Register on the 16 agency's website in order to receive public comment. 17 I have three procedures that all reflect 18 very minor changes for your consideration. The first 19 of that the grouping is 0C-JE-002, and the previous 20 version of this procedure was approved on October 28th 21 of 2008. We've made modifications in the procedure to 22 update the process and how we do the data entry of the 23 advertised jackpot amount. 24 The second procedure is OC-JE-005, which 25 was previously updated and approved on April 26th of 0127 1 2006. This procedure reflects minor, minor 2 modifications, grammatical modifications. 3 And then the final procedure is 4 procedure OC-WP-001. It was approved on November 26, 5 2006. And we've updated this procedure to reflect 6 that the claim center is processing prizes up to and 7 including $1 million. The other edits of the 8 procedure are very minor in nature. 9 Commissioners, I'm providing the 10 recommendation that these procedures be approved for 11 publication in the Texas Register and on the agency's 12 website. If approved and in compliance with our 13 agency's overall procedure guidelines, the procedures 14 will be published in the Texas Register and on the 15 agency's website for a minimum of 30 days before 16 obtaining public comment on these procedures. 17 This concludes my presentation. I'd be 18 happy to answer any questions. 19 COMMISSIONER SCHENCK: My only question 20 is these -- some of these changes are so small, I'm 21 not sure they require -- well, maybe they do, Kim -- 22 require Commission action, but adding a space after a 23 period? 24 MS. KIPLIN: Well, we've actually 25 discussed that internally. And I think that in an 0128 1 abundance of caution, because this has been the scope 2 of the state auditor's recommend -- findings and 3 recommendations, the staff made the decision that it 4 would be best just to bring it to y'alls -- your -- 5 you-all's level to follow the process that was set out 6 and recommended by the state auditor's office. And 7 then I think once we get through that, then revisit 8 the issue of substantive versus non-substantive 9 changes. We acknowledge these -- best I can read 10 them -- happy to have people correct me. I think 11 they're not substantive changes. But with that in 12 mind, the staff is bringing them to you because this 13 is -- 14 COMMISSIONER SCHENCK: Okay. 15 MS. KIPLIN: -- what we need to do. 16 COMMISSIONER SCHENCK: I appreciate 17 that. I don't have any questions for good grammar. 18 CHAIRMAN WILLIAMSON: Commissioner? 19 COMMISSIONER KRAUSE: There is no way I 20 could have any questions about this. 21 (Laughter) 22 CHAIRMAN WILLIAMSON: Okay. So is there 23 a motion to approve the status recommendations to post 24 the proposed changes in the Texas Register and on the 25 agency's website for a minimum of 30 days in order to 0129 1 receive public comments on the proposed changes and to 2 have the staff conduct a public hearing on the 3 proposed changes following the 30 days posting in the 4 Texas Register and on the agency's website. 5 Is there a second? 6 COMMISSIONER KRAUSE: Second. 7 CHAIRMAN WILLIAMSON: All in favor, say 8 aye. 9 COMMISSIONER SCHENCK: Aye. 10 COMMISSIONER KRAUSE: Aye. 11 CHAIRMAN WILLIAMSON: Aye. 12 Vote is 3-0. 13 MS. PYKA: Thank you, Commissioners. 14 CHAIRMAN WILLIAMSON: Let's see. 15 COMMISSIONER SCHENCK: And for the 16 record I moved, so -- 17 MR. GRIEF: Appreciate that. 18 AGENDA ITEM NO. XII 19 CHAIRMAN WILLIAMSON: Nelda will report 20 on the 81st Legislature, Item No. XII. 21 MS. TREVIO: Good morning, 22 Commissioners. For the record, I'm Nelda Trevio, the 23 director of governmental affairs, and I have some 24 updates to provide you today. 25 In your notebook we provided you a 0130 1 complete tracking report of all the bills the agency 2 is tracking this legislative session. We are tracking 3 186 bills out of the over 7900 bills that have been 4 filed. 5 In addition to those bills with specific 6 impact to the agency, many bills on the tracking 7 report relate to state agencies across the board. For 8 example, there are bills related to purchasing and 9 contracting, open records, open meetings and human 10 resource related legislation. 11 Today we have provided you four separate 12 tracking reports that we thought would be helpful in 13 highlighting some of the 186 bills the agency is 14 tracking. The first report is a list of bills filed 15 specifically related to the administration of the 16 lottery. The second report is a list of bills 17 specifically related to charitable bingo. The third 18 report is a list of bills authorizing new 19 responsibilities to the Lottery Commission, and the 20 last report is a listing of other bills filed 21 generally related to gaming. And I'll be referring to 22 these four reports in my report. 23 At this time I would like to mention 24 some of the bills noted on the report related to the 25 state lottery, and there are five bills that I would 0131 1 like to bring to your attention. These include the 2 following: House Bill 357 by Representative Chente 3 Quintanilla. This is the bill that would authorize 4 the sale of lottery tickets at locations for which a 5 person holds a permit issued under the Alcoholic 6 Beverage Code for on-premise consumption of alcoholic 7 beverages. The bill was briefly discussed by the 8 House on May the 12th; however, Representative 9 Quintanilla postponed further consideration on the 10 bill. As a result of that, the bill is basically dead 11 by procedural action. 12 House Bill 1299 by Representative Chris 13 Turner. This bill requires the Lottery Commission to 14 create and market a scratch-off game to benefit the 15 Veterans' Assistance Fund. This bill is set on 16 today's House calendar, which in accordance with the 17 rules of the House is the last day for House Bills to 18 be considered. 19 House Bill 1963 by Representative Edmund 20 Kuempel. This bill repeals the provision in the State 21 Lottery Act that correlates the Lottery Commission's 22 advertising budget with the percentage paid out in 23 prizes. The bill was considered by the House on March 24 the 31st and was passed on a vote of 142-5. Senator 25 John Whitmire sponsored the bill in the Senate, and 0132 1 this passed -- the bill passed this -- on Monday, and 2 it was passed on a vote of 25-6. The bill has been 3 now sent to the Governor, and the Governor can either 4 sign the bill, let the bill become law without his 5 signature, or he can veto the bill. 6 House Bill 2509 by Representative 7 Charlie Geren. The purpose of this bill is to 8 primarily clarify the definitions of adult and minor 9 in the State Lottery Act and to address the 10 inconsistency that currently exists between the 11 definitions in the Property Code and in the State 12 Lottery Act. This bill was considered by the House on 13 April the 9th and passed on a vote of 148-0. Senator 14 Jeff Wentworth is the sponsor in the Senate, and the 15 bill is on the Senate Intent Calendar and it is 16 anticipated the bill will be considered by the Senate 17 in the next several days. 18 House joint Resolution 37 by Richard 19 Raymond. This joint resolution would amend the 20 constitution to dedicate lottery proceeds to fund 21 public education and would prohibit any advertisement 22 or promotion that would encourage or attempt to 23 influence a person to purchase tickets for the purpose 24 of supporting public education. This joint resolution 25 was considered by the House yesterday evening, and it 0133 1 was passed on a vote of 141-0. 2 Referring now to the tracking report of 3 bills related to charitable bingo, I want to bring to 4 your attention and provide you an update on House Bill 5 1474 by Representative Charlie Geren. This bill 6 generally includes provisions related to the 7 regulation and operation of bingo, including 8 provisions to streamline licensing and other 9 administrative processes. It also provides for 10 reforms on the accounting and reporting requirements 11 for licensees, increases the allowable number of 12 temporary licenses for organizations wanting to 13 conduct bingo from 12 to 24, amends the charitable 14 distribution formula, and deletes some obsolete 15 language. This bill was considered by the House on 16 May the 1st and passed on a vote of 125-0. Senator 17 Chris Harris is the Senate sponsor, and the bill is 18 scheduled to be considered by the Senate State Affairs 19 Committee at their hearing today. And Phil Sanderson 20 will be attending the hearing to serve as an agency 21 resource to the committee. 22 With regard to the tracking report of 23 bills authorizing new responsibilities to the 24 Commission, I'd like to bring to your attention House 25 Bill 222 by Representative Jose Menendez, and this is 0134 1 the bill that authorizes poker gamings and creates a 2 poker gaming division at the Lottery Commission for 3 the regulation of these activities. This bill is also 4 set on the House calendar for today. And, again, 5 today is the last day, based under the House rules, 6 for House Bills to be considered by the House. 7 Referring to the last report that we 8 provided you today on gaming related bills, I want to 9 bring to your attention HCR 220 by Representative 10 Edmund Kuempel. And this concurrent resolution was 11 filed on May the 11th and relates to the legislature 12 requesting the Lieutenant Governor and the Speaker to 13 create a joint interim committee to study the gaming 14 industry in Texas and its potential economic impact. 15 Lastly, some very brief comments related 16 to a few other items. 17 For the record, each member of the 18 Lottery Commission appeared before the Senate 19 Nominations Committee on April the 8th, and the full 20 Senate confirmed each of the appointments on April the 21 16th on a vote of 31-0. 22 The Conference Committee for Senate Bill 23 1, the general Appropriations Act, has adopted their 24 recommendations related to the agency's appropriations 25 for the 2010 and 2011 biennium. Kathy will be 0135 1 providing you an update on this item on the next 2 agenda item. 3 And finally, this regular legislative 4 session concludes on June the 1st. At this time the 5 Governmental Affairs staff will look at the 186 bills 6 that we're tracking, we'll identify those bills that 7 have been enacted, and we'll begin our coordination of 8 the Legislative Implementation Project for the agency. 9 This concludes my report, and I'll be 10 glad to answer any questions you might have. 11 COMMISSIONER SCHENCK: Good report. I 12 have no questions. 13 COMMISSIONER KRAUSE: No questions. 14 MS. TREVIO: Thank you. 15 AGENDA ITEM NO. XIII 16 CHAIRMAN WILLIAMSON: Thank you, Nelda. 17 Let's see. Ms. Pyka, you're up again to 18 report on the 2010-2011 legislative appropriations 19 request. 20 MS. PYKA: For the record, again, Kathy 21 Pyka, controller for the agency. 22 As Nelda mentioned, Commissioners, the 23 Conference Committee on Senate Bill 1 met and 24 considered pending items related to our budget on May 25 the 5th. I wanted to provide each of you an update of 0136 1 the action by the Conference Committee. 2 In summary, the committee approved the 3 deletion of our restriction on transferring funds into 4 the Commission's advertising strategy. Previously, we 5 were not allowed to move funding into that strategy. 6 The strategy will now be under the general 7 restrictions of the Article IX, general appropriation 8 transfers. 9 Second, the committee authorized an 10 additional five-tenths of a percent retailer 11 commission for the payment of retailer sales 12 performance commissions. 13 And then third, the committee provided a 14 capital budget increase rider for $2-1/2 million for 15 the acquisition of an automated charitable bingo 16 system, and this rider is contingent upon the agency 17 realizing an increase in lottery dedicated revenues 18 above the biennial revenue estimate outlined in Rider 19 10 of the appropriation bill. 20 The capital budget increase must be 21 certified by the comptroller of revenue -- Comptroller 22 of Public Accounts before we'd be able to actually 23 utilize it if those dollars were to materialize. 24 Commissioners, this concludes my 25 presentation. I'd be happy to answer any questions. 0137 1 CHAIRMAN WILLIAMSON: Commissioners? 2 Thank you. 3 MS. PYKA: Thank you. 4 AGENDA ITEM NO. XIV 5 CHAIRMAN WILLIAMSON: Mike Fernandez, 6 report on agency's contracts, Item XIV. 7 MR. FERNANDEZ: Good morning, Madam 8 Chair, Commissioners. My name is Mike Fernandez. I'm 9 the director of administration. 10 Item XIV in your notebook is a report on 11 the agency's contracts. As you know, we bring this in 12 front of the Commission every quarter. It's two 13 spreadsheets, one detailing prime contracts and one 14 detailing high-risk contracts. 15 Just for your information, Commissioner 16 Krause, all of the contracts that are listed in prime 17 contracts, the staff takes no action on those 18 contracts without bringing them in front of the 19 Commission and briefing you on the same. 20 So with that, if you have any questions, 21 I'd be happy to to answer them. 22 CHAIRMAN WILLIAMSON: Any questions, 23 Commissioners? 24 COMMISSIONER SCHENCK: Mike, we have one 25 contract, I think, we're renewing? 0138 1 MR. FERNANDEZ: Yes, sir. That's the 2 next agenda item, Commissioner Schenck. 3 One thing I would point out since we do 4 bring those contracts in front of you before we take 5 any action, and that was, as you know, a result of a 6 Sunset recommendation -- since what you're seeing in 7 essence every quarter is the same contract and the 8 only change that would have been taken was once we had 9 come to you and explained it, you -- if your 10 preference would be, we can bring the renewals or we 11 can bring any change in front of you as we have always 12 done with a list -- associated list, but instead of 13 noticing this item out, we could put it in your 14 Thursday packets quarterly, if that would be -- in the 15 sake of time. It's your pleasure. 16 CHAIRMAN WILLIAMSON: We'll take that 17 into consideration and talk about it. 18 MR. FERNANDEZ: Yes, ma'am. 19 COMMISSIONER SCHENCK: Mike, it's -- by 20 my count, we have 13 prime or high-risk contracts 21 coming up for expiration August 31st. 22 MR. FERNANDEZ: That's correct. That's 23 correct. And -- 24 COMMISSIONER SCHENCK: We're renewing 25 most of them, it looks like. 0139 1 MR. FERNANDEZ: Yes, sir. And when you 2 take a look at those, Commissioner Schenck, all of 3 those have been -- the ones that you see where we say 4 "Intent to extend," all of those have been in front of 5 the Commission this year in terms of that. And what 6 you'll find is that those are options in the contract 7 that we can execute, and I would say that virtually 8 all of those will be extended via letter. 9 CHAIRMAN WILLIAMSON: All right. Any 10 questions from you, Commissioner Krause? 11 COMMISSIONER KRAUSE: No, ma'am. 12 AGENDA ITEM NO. XV 13 CHAIRMAN WILLIAMSON: All right. Thank 14 you -- okay -- Mike. Item No. 15, the possible 15 discussion, action, extension of the drawing studio 16 and production services contract. 17 MR. FERNANDEZ: Yes, Madam Chair. This 18 is the contract that Commissioner Schenck was just 19 referencing. 20 This particular contract has to do with 21 drawing studio production services. It's currently 22 held by M&S Works. The contract expires August 31st 23 of this year. 24 For your information, in the past, the 25 past time -- and this goes out on RFP. The past few 0140 1 times -- perhaps longer than that, but at least the 2 past three times that we've bid this, we've only 3 received one bid, and that's from M&S Works. 4 We have here -- our contract specialists 5 have received some inquiries here in the past few 6 months about this particular contract from other 7 companies. And although we believe that this contract 8 will be executed August -- early August, our concern 9 is that if it is awarded to another contractor, 10 there's -- we're concerned about the time to reposture 11 the equipment or do the conversion. So what we are -- 12 what the staff is intending to do and wants to bring 13 to your attention is that we intend to extend that 14 contract up to six months on a 30-day basis. So if in 15 the event we do see another contractor, we'll have 16 ample time to do the conversion. 17 CHAIRMAN WILLIAMSON: All right. Thank 18 you. Any questions? Thank you, Mike. 19 AGENDA ITEM NO. XVI 20 CHAIRMAN WILLIAMSON: Next is internal 21 auditor Cat Melvin having reports on internal audits, 22 reviews and... 23 MS. MELVIN: Thank you. Thank you, 24 Commissioners. For the record, Catherine Melvin, 25 director of the internal audit division. 0141 1 Commissioners, I have just one item of 2 update. This is related to external audits of the 3 agency. We received notice that the controller's 4 office will be conducting a post-payment audit of the 5 agency, and so that entrance conference was held last 6 month -- I believe it was April 8th -- and they had a 7 team of auditors on-site. This is a standard audit 8 that the controller's office does of state agencies. 9 They come in look and look at expenditures 10 periodically. 11 The auditors have completed their 12 on-site field work, and we should be seeing some 13 preliminary issues, if any, in the very near future. 14 AGENDA ITEM NO. XVIII 15 CHAIRMAN WILLIAMSON: Thank you. Any 16 questions? Thank you. 17 Let's go on to Item 18, Gary Grief on 18 report or actions on Mega Millions games. 19 MR. GRIEF: Commissioners, under this 20 item, the only thing I want to update you on is we 21 continue to have discussions with the Power Ball 22 consortium, those discussions centering on Power Ball 23 allowing the Mega Millions states to sell Power Ball 24 tickets and the Power Ball states being allowed to 25 sell Mega Millions tickets. There are various 0142 1 subcommittees that have been formed among both groups 2 that are working out the details of that. There are 3 still some significant votes that have to be taken 4 amongst both groups. We anticipate that those may 5 occur within the next 30 to 60 days, but as soon as 6 those do occur, I'll keep you apprised. 7 CHAIRMAN WILLIAMSON: Thank you. Any 8 questions? 9 All right. Gary, the GTECH -- report on 10 GTECH Corporation. 11 AGENDA ITEM NO. XIX 12 MR. GRIEF: Commissioners, I have 13 nothing to report to you other than what is already in 14 your notebooks this morning under that item. 15 CHAIRMAN WILLIAMSON: Any questions, 16 Commissioners? 17 Thank you. 18 AGENDA ITEM NO. XX 19 CHAIRMAN WILLIAMSON: Let's go to item 20 20; once again, Gary, report on operational status, 21 agency procedures, FTE status of the agency. 22 MR. GRIEF: Commissioners, the normal 23 and routine FTE report is in your notebook. Other 24 than that, the one thing I do want to bring to your 25 attention: For the past few years, we've been able to 0143 1 do branded scratch-off games that involved M.B.A. 2 teams here in Texas and major league baseball teams, 3 and we've had some measure of success in running those 4 games. However, there has always been a league 5 moratorium, if you will, in the NFL against allowing 6 NFL teams to be involved in their respective state 7 lotteries across the country. 8 We've now entered into negotiations, 9 since that moratorium has been lifted by the NFL, with 10 both the Houston Texans and the Dallas Cowboys. We've 11 had one meeting and we anticipate having another 12 couple of meetings over the next week or two and with 13 our hope eventually being to be able to offer 14 scratch-off games for both the Texans and the Cowboys. 15 And we're very excited about that possibility, and 16 I'll keep you apprised as we continue to have those 17 meetings. 18 CHAIRMAN WILLIAMSON: Great. We're 19 excited, too. All right. 20 Any questions? 21 AGENDA ITEM NO. XXII 22 CHAIRMAN WILLIAMSON: All right. At 23 this time what I'm going to do is we're going to have 24 public comment, because I have one gentleman here, and 25 then we will break for executive session after that. 0144 1 MS. KIPLIN: Do you want to take up the 2 remainder of the enforcement orders also or would you 3 like to wait until after? 4 CHAIRMAN WILLIAMSON: I think we'll wait 5 till after. 6 MS. KIPLIN: All right. 7 CHAIRMAN WILLIAMSON: Gerald Busald -- 8 did I say that properly? 9 MR. BUSALD: Busald, yes. 10 CHAIRMAN WILLIAMSON: Busald. If you 11 could say what you're going to say in five minutes, 12 please, sir. 13 MR. BUSALD: Well, I'll do my best to. 14 CHAIRMAN WILLIAMSON: And if you'll hand 15 those down there and they can disburse those to us, 16 please, if you have something to hand to us. 17 MR. BUSALD: I have one for the court 18 reporter as well. 19 CHAIRMAN WILLIAMSON: All right. 20 MR. BUSALD: Yes, Commissioners. For 21 the record, my name is Gerald Busald. I'm a professor 22 of mathematics at San Antonio College. The staff 23 knows me well, even though the commissioners are all 24 new to me. 25 I just have several things in this 0145 1 package. One is just something that shows that 2 because of public comment, there have been eight major 3 changes made to the Texas Lottery because of 4 recommendations that I have brought forth. And 5 Commissioner Cox just documented that in the May 16th 6 of 2007 minutes, and so I wanted you to be aware that 7 I'm just not someone who comes all the time. I come 8 because I think there's something that could make the 9 lottery better, and you need to be able to hear that. 10 And I don't know that five minutes I can do it. I'm 11 going to do it as fast as I can. 12 What brought me here was a Dateline NBC 13 story that ran on May 3rd of 2009. I don't know how 14 many -- if you've seen it or not. But it's about how 15 lottery clerks steal from the lottery playing public. 16 And it's something that is important. 17 California considered it important 18 enough to where they did an underground sting 19 operation, if you will, where they took lottery 20 tickets to retailers and asked the clerks to check 21 them, found out if they were winners or not, and of 22 course many of the clerks cheated people. They didn't 23 give them what they were due. 24 Lottery players are the most important 25 part to you. And it's up to the Lottery Commission, I 0146 1 think, to be proactive in protecting them. 2 I have the transcript here, but I have 3 the web -- the web address of the webcast of this 4 particular thing in here. And it's -- you must see 5 this to be aware of what is actually happening. 6 Minnesota did a similar sting operation 7 and they have five clerks charged with felony theft. 8 It happens. There are people who steal from Texas 9 lottery players, and it's Texas lottery clerks. 10 There's not a criminal background check on the clerks 11 at the individual stores, and I know that might be an 12 impossible task. I know it's done on the bingo 13 operators but not there. 14 The security -- I put a spotlight on 15 security because it's one of these things that, in a 16 way, lotteries have liked to avoid because they don't 17 want players to know that they might be cheating 18 because it makes them less likely to play. My thought 19 is that the lottery needs to be proactive rather than 20 reactive in this regard. 21 Commissioner Cox said, "Well, when we 22 receive a complaint we do investigate, but that is not 23 going to catch a lot -- a good number of those who 24 steal from Texas Lottery players. 25 Of course the installation of the ticket 0147 1 checkers has been a huge help in this area, but not 2 everybody uses them. Still some people hand them over 3 to the clerks. There are clerks who have tickets 4 ready and able. 5 I don't know if the lottery actually 6 does checks on those retailers who claim inordinate 7 amount of prizes themselves. Some lotteries are 8 instituting rules against cashing a lottery ticket at 9 the same place that it's purchased by clerks who work 10 there trying to prevent the clerks from stealing. It 11 does happen. It happens in Texas. Texas -- I want 12 Texas to be more like California and less like New 13 York. 14 In this report, if you watch it, the 15 response of New York basically was, they sent out a 16 little ticket like we can send out on our things 17 warning the lottery player -- the lottery clerks that 18 NBC was doing an investigation trying to trap you. 19 Instead of worrying about the players, they were 20 worried about their clerks being caught because it is 21 bad publicity for a clerk to be prosecuted. However, 22 there's a positive to that, and one of the things that 23 happened in California was that many of the retailers 24 who were claiming prizes very regularly all of a 25 sudden stopped claiming prizes when people were 0148 1 starting to be prosecuted for the crime of stealing 2 from lottery players. And there's different 3 subterfuges they do. They have a ticket prepared 4 that's a lesser amount, they switch tickets, and say, 5 "No, your ticket was worth" this much rather than what 6 it was really worth. They claim grand prizes. And 7 you have to watch this if -- I think it's part of your 8 responsibility to know what happens in the lottery 9 industry. 10 And Dateline -- this is like a 20-minute 11 show, so it was obviously very extensive. And it 12 followed a similar show in Canada that did the same 13 thing and found clerks cheating people on a regular 14 basis. And it happens. 15 I know that the funds for security in 16 the Texas Lottery Commission have actually been 17 decreased. The security division is not what it once 18 was. And I think that robs the agency of a means of 19 going out and actually finding clerks who steal. Is 20 it entrapment to say, "Check my tickets, and how much 21 is it worth?" I don't think that's entrapment. 22 That's finding the people who will steal. And we need 23 to get those people not being the people who cash 24 lottery tickets who check lottery tickets. It's a 25 weak link in the system. 0149 1 And so I think that my real hope is that 2 methods will be instituted and that this will be taken 3 a little bit more seriously. 4 I'm sure Gary got the same -- I actually 5 put copy of a -- of an e-mail that was sent to all the 6 lottery directors, so I'm sure this found its way to 7 Gary from the New York Lottery asking about this 8 particular investigation and what comments -- whether 9 you actually did stings or not -- quote, stings. And 10 basically -- and then following through with the 11 notice to the retailer saying, "Watch out. They're 12 trying to catch you," instead of, you know -- that's 13 the last thing. "Don't cheat, but, you know, maybe 14 it'll be okay to cheat a little bit later once this 15 investigation is not ongoing." I think it's just the 16 totally wrong message. 17 And so it's part of your 18 responsibility -- you know, I think it's your 19 responsibility to protect the player. We've always 20 said that integrity is very important to the lottery. 21 I've heard that many, many times. I believe I have 22 had a part in helping increase the integrity of the 23 lottery and their advertising practices, helped get 24 some of those things through that make the lottery 25 better than it was, and I think that the lottery, 0150 1 because of the national limelight on this particular 2 issue right now, it cannot be ignored. And I don't 3 know that you can depend on staff to do it. You need 4 to investigate yourself to see that this is being done 5 and then what actions you might take to prevent it. 6 The lottery players are important. 7 And, you know, I know there may not be a 8 desire to see a story that a lottery clerk is arrested 9 for cheating a player, and some states -- Iowa chose 10 to let the operator decide whether they would bring 11 criminal charges against their clerk or not rather 12 than the state actually following through and seeing 13 that this person is prosecuted. 14 You talked -- I mean, we just saw the 15 whole thing with bingo, and you said there's crooks 16 out there. There's something obviously illegal. It 17 does happen. And the lottery needs to make sure that 18 those people are prosecuted, not hidden under the rug, 19 not just reacted to, but somehow be proactive in 20 finding these people who do this practice. It does 21 happen. 22 CHAIRMAN WILLIAMSON: And it's a little 23 more than five minutes, but we certainly appreciate 24 your concern. And I know that people in this agency, 25 we have seen that NBC bit, so we were aware of that, 0151 1 and we appreciate you bringing it before the 2 Commission. Thank you very much. 3 MR. BUSALD: Thank you. 4 You're welcome. 5 AGENDA ITEM NO. XXIII 6 CHAIRMAN WILLIAMSON: Okay. At this 7 time I move that the Texas Lottery Commission go into 8 executive session, and it's to deliberate the 9 appointment, employment, and duties of the Executive 10 Director; the duties and evaluation of the Deputy 11 Executive Director, Internal Audit Director, 12 Charitable Bingo Operations Director, and Ombuds, and 13 to deliberate the duties of the General Counsel and 14 Human Resources Director pursuant to Section 551.074 15 of the Texas Government Code; and to receive legal 16 advice regarding pending or contemplated litigation 17 pursuant to Section 551.071(1)(A) and to receive legal 18 advice regarding settlement offers pursuant to Section 19 5551.071(1)(B) of the Texas Government Code; and to 20 receive legal advice pursuant to Section 551.071(2) of 21 the Texas Government Code, including, but not limited 22 to, those items posted on the open meetings notice for 23 purposes of receiving legal advice. 24 Is there a second? 25 COMMISSIONER SCHENCK: I second the 0152 1 motion. 2 CHAIRMAN WILLIAMSON: All in favor, say 3 "Aye." 4 COMMISSIONER SCHENCK: Aye. 5 COMMISSIONER KRAUSE: Aye. 6 CHAIRMAN WILLIAMSON: Aye. 7 The vote is 3-0. The Texas Lottery 8 Commission will go into executive session. The time 9 is 12:15. Today is May the 4th (sic), 2009. So we'll 10 see ya. 11 (Off the record for executive session: 12 12:15 p.m. to 1:40 p.m.) 13 AGENDA ITEM NO. XXIV 14 CHAIRMAN WILLIAMSON: All right. The 15 Texas Lottery Commission is out of executive session. 16 The time is 1:40 p.m. 17 Is there any action to be taken as a 18 result of the executive session? 19 COMMISSIONER SCHENCK: No. 20 AGENDA ITEM NO. XXI 21 CHAIRMAN WILLIAMSON: No. If not, then 22 let's move on to Agenda Item XXI, and these are all of 23 the -- for consideration of the status and possibly -- 24 possible order of entries in Docket A through S. So 25 Ms. Kiplin, if you would just start that. 0153 1 MS. KIPLIN: Commissioners, if I could 2 ask that you pass the letters P, Q, R and S, those 3 cases all involve the same individual, and there was a 4 motion to reopen each of those cases that was filed 5 with the State Office of Administrative Hearings. It 6 was filed, I believe, a couple of days ago. The staff 7 doesn't oppose that motion, so it's not ripe now for 8 y'all's consideration, so I'd like to take those off 9 of your docket. 10 CHAIRMAN WILLIAMSON: Do we need to -- 11 MS. KIPLIN: You're fine with passing 12 them. 13 CHAIRMAN WILLIAMSON: Okay. 14 MS. KIPLIN: Okay. Great. 15 CHAIRMAN WILLIAMSON: So we don't have 16 to do any official -- 17 MS. KIPLIN: You don't have to do 18 anything. 19 CHAIRMAN WILLIAMSON: Okay. 20 MS. KIPLIN: Just want to make sure 21 y'all are comfortable. It's your agenda. So that 22 leaves -- 23 CHAIRMAN WILLIAMSON: I'm sure that it 24 would be fine, unless either Commissioner has a 25 problem. Okay. 0154 1 MS. KIPLIN: So that leaves letters A 2 through O. And, Commissioners, in each of these cases 3 it involves a licensed sales agent or lottery retailer 4 who, in each of these cases, the administrative law 5 judge has recommended revoking that retailer's 6 license, the underlying basis is that the retailer -- 7 when we swept the retailer's account for monies owed 8 the lottery, there were insufficient funds available. 9 There's one or two thresholds that will 10 be at play in these cases. One is that they swept the 11 account, money was not available, and they never did 12 pay the lottery, and so that's a, one, you didn't pay 13 and you're out. 14 The other one is the lottery where we've 15 swept their account, they -- and NSF, they paid, and 16 if it occurs four times in a calendar year, the 17 lottery has a rule that says, "We will revoke your 18 license." 19 And so the staff recommends that you 20 vote to approve the administrative law judge's 21 proposal for decision that contains the findings of 22 fact and conclusion of law and adopt the 23 recommendation by the ALJ to revoke the license in 24 each of these cases. 25 CHAIRMAN WILLIAMSON: I so move the 0155 1 motion. 2 COMMISSIONER SCHENCK: I second the 3 motion. 4 CHAIRMAN WILLIAMSON: All in favor, say 5 "Aye." 6 COMMISSIONER SCHENCK: Aye. 7 COMMISSIONER KRAUSE: Aye. 8 CHAIRMAN WILLIAMSON: Aye. 9 Motion passes. 10 MS. KIPLIN: Commissioners, I have 11 orders for you to sign in each of these cases. 12 COMMISSIONER SCHENCK: And while we're 13 doing that signing, which will be extensive, can you 14 refresh my recollection for the benefit of our new 15 commissioner what our success rate is in recovering 16 these funds from these people and what our remedies 17 are? 18 MS. KIPLIN: Well, in terms of success 19 rates, I'm going to ask Mr. Anger, who is the lottery 20 operations division director, to come forward because 21 the matter of collecting the money and then enforcing 22 that which is owed is in his division. 23 I can tell you that our remedies are 24 limited under the State Lottery Act as it relates to 25 lottery licensees on the -- on a hearing on the 0156 1 merits. It's either revocation or suspension. 2 I will tell you that the agency and the 3 State Lottery Act does provide for extraordinary 4 summary suspension power. And what that means is that 5 when we have a return by the bank, we notice -- 6 immediately notice a -- some -- the fact that we're 7 summarily suspending that individual's license, and 8 they do have an opportunity for a show-cause hearing 9 within ten days. But bottom line is, as soon as we 10 have an NSF that's reported to us, we immediately 11 deactivate the terminal so that there is no further 12 sales. 13 COMMISSIONER SCHENCK: Michael, how do 14 we make out in these things? 15 MR. ANGER: For the record, my name is 16 Michael Anger, and I'm the lottery operations 17 director. And short answer to that question is very 18 well. 19 We have a very successful collection 20 rate with regard to collecting the monies owed to the 21 state by our licensees, and it's under .02 percent of 22 all lottery sales. 23 We do have a pretty diverse set of tools 24 that are available to us to engage in collections 25 activity should we need to go to those. 0157 1 COMMISSIONER SCHENCK: And one of those 2 includes going -- proceeding directly against officers 3 and directors of the licensee? 4 MR. ANGER: We can file liens, we can 5 pursue freezing of bank accounts, and we can also 6 engage in doing cash register seizures of business 7 locations, and those are all tools that we use at 8 various points in time. 9 COMMISSIONER SCHENCK: Thank you. 10 MS. KIPLIN: We have the same 11 authority -- it's in our State Lottery Act -- that we 12 can, for purposes of collection and enforcement, treat 13 lottery proceeds as if it were a tax. And so we have 14 all the authority that the comptroller has under the 15 tax code for that purpose. And that's where our our 16 authority lies. 17 COMMISSIONER SCHENCK: How often do we 18 end up seizing a cash register? 19 MR. ANGER: We don't do a substantial 20 number of those each year, but we do engage in cash 21 register seizures. 22 COMMISSIONER SCHENCK: Constable or 23 someone else to go out there with us and -- 24 MR. ANGER: We work either with our 25 investigators or we work with a member of local law 0158 1 enforcement to go out and conduct those seizures. 2 Absolutely. 3 And we could engage in other activities, 4 including seizing the contents of a retail 5 establishment. As Kim alluded to, the comptroller's 6 office does engage in that activity. We have not 7 engaged in that practice in the past. 8 COMMISSIONER SCHENCK: Commissioner 9 Krause, a couple of times I have suggested, though 10 it's never gotten its way over to the legislature, 11 that a lot of these people are selling wine and beer 12 by virtue of licenses they hold from the state. If it 13 were up to me, and it's not, I would have those people 14 lose their licenses to continue to sell regulated 15 products like tobacco and alcohol until they've paid 16 what they owe to the Foundation School Fund. But my 17 understanding from my asking that question in the past 18 is that our collection rate on these funds that these 19 people are all owing us is very high. Ultimately, 20 most of this will get collected one way or another. 21 MR. ANGER: It is. We have an extremely 22 low bad debt expense when compared to other 23 organizations like our own and just, quite frankly, 24 Fortune 500 businesses. We have a very successful 25 collection rate. 0159 1 MR. GRIEF: Mike, can you also speak, 2 even the bad debt, the .02, how we charge that off 3 against the bond fund? 4 MR. ANGER: You know, I can't get into 5 the mechanics of the accounting transaction, but we do 6 collect during the application process both for the 7 initial application and for renewals a fee that's a 8 part of that application fee that goes to the Pool 9 Bond Fund that the agency maintains, and that's 10 maintained up to a cap of $5 million. And so we 11 collect monies that allow us to be in a position to 12 allow money that we can't collect to flow on through 13 to the state in the event that, you know, we were to 14 have someone default and not be able to pay their 15 obligations to us. 16 COMMISSIONER SCHENCK: Great. 17 CHAIRMAN WILLIAMSON: All right. Thank 18 you. 19 Kim, do you need to enter those into the 20 record? 21 MS. KIPLIN: No, I've got them. I'll 22 just reflect that y'all have signed all the orders 23 that were presented to you by me, and those are in the 24 Dockets A through O. 25 You did make a motion to approve them, a 0160 1 second, and the vote was 3-0. 2 AGENDA ITEM NO. XXV 3 CHAIRMAN WILLIAMSON: Okay. Good. 4 Then, I guess, at this point, is there a motion to 5 adjourn? 6 COMMISSIONER SCHENCK: I would so move. 7 CHAIRMAN WILLIAMSON: Is there a second? 8 COMMISSIONER KRAUSE: Second. 9 CHAIRMAN WILLIAMSON: All in favor? 10 COMMISSIONER SCHENCK: Aye. 11 COMMISSIONER KRAUSE: Aye. 12 CHAIRMAN WILLIAMSON: Aye. 13 Motion passes 3-0. 14 We are adjourned. 15 (Meeting adjourned: 1:48 p.m.) 16 17 18 19 20 21 22 23 24 25 0161 1 CERTIFICATE 2 STATE OF TEXAS 3 COUNTY OF TRAVIS 4 5 I, LORRIE A. SCHNOOR, RMR, CRR and Certified 6 Shorthand Reporter in and for the State of Texas, do 7 hereby certify that the above-mentioned matter occurred 8 as hereinbefore set out. 9 I FURTHER CERTIFY THAT the proceedings of such 10 were reported by me, later reduced to typewritten form 11 under my supervision and control, and that the foregoing 12 pages are a full, true, and correct transcription of the 13 original notes. 14 IN WITNESS WHEREOF, I have hereunto set my hand 15 this _____ day of _______________________, 2009. 16 17 18 ______________________________ Lorrie A. Schnoor, RMR, CRR 19 Texas CSR #4642 Expiration: 12/31/2009 20 Firm Registration No. 276 Kennedy Reporting Service, Inc. 21 1801 Lavaca, Suite 115 Austin, TX 78701 22 Tel. (512) 474-2233 23 24 25