0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 6 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 7 WEDNESDAY, MAY 28, 2008 § 8 9 COMMISSION MEETING 10 WEDNESDAY, MAY 28, 2008 11 12 BE IT REMEMBERED THAT on Wednesday, 13 the 28th day of May 2008, the Texas Lottery Commission 14 meeting was held from 9:06 a.m. to 1:14 p.m., at the 15 Offices of the Texas Lottery Commission, 611 East 6th 16 Street, Austin, Texas 78701, before CHAIRMAN JAMES A. 17 COX, JR., and COMMISSIONERS DAVID SCHENCK and FERNANDO 18 C. REYES, JR. The following proceedings were reported 19 via machine shorthand by Aloma J. Kennedy, a Certified 20 Shorthand Reporter of the State of Texas, and the 21 following proceedings were had: 22 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Mr. James A. Cox, Jr. 4 COMMISSIONERS Mr. David Schenck 5 Mr. Fernando C. Reyes, Jr. 6 GENERAL COUNSEL: Ms. Kimberly L. Kiplin 7 EXECUTIVE DIRECTOR: 8 Mr. Anthony J. Sadberry 9 TAXPAYER SERVICES MANAGER, CHARITABLE BINGO OPERATIONS: 10 Mr. Bruce A. Miner 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE 3 AGENDA ITEM NO. I - Meeting Called to Order..... 7 4 AGENDA ITEM NO. II - Report by the Charitable Bingo Operations Director and 5 possible discussion and/or action on the Charitable Bingo Operations Division’s 6 activities...................................... 7 7 AGENDA ITEM NO. III - Report, possible discussion and/or action on lottery sales 8 and revenue, game performance, new game opportunities, advertising, market research, 9 and trends...................................... 9/68 10 AGENDA ITEM NO. IV - Report, possible discussion and/or action on transfers 11 to the State.................................... 30 12 AGENDA ITEM NO. V - Report, possible discussion and/or action on Bingo indirect 13 and administrative expenses..................... 33 14 AGENDA ITEM NO. VI - Report, possible discussion and/or action on the 80th 15 Legislature..................................... 33 16 AGENDA ITEM NO. VII - Report, possible discussion and/or action on the agency’s 17 contracts....................................... 36 18 AGENDA ITEM NO. VIII - Consideration of and possible discussion and/or action on 19 external and internal audits and/or reviews relating to the Texas Lottery Commission 20 and/or on the Internal Audit Department’s activities...................................... 52 21 AGENDA ITEM NO. IX - Report, possible 22 discussion and/or action on the Mega Millions game and/or contract................... 53 23 AGENDA ITEM NO. X - Report, possible 24 discussion and/or action on GTECH Corporation..................................... 57 25 0004 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XI - Report by the Executive Director and/or possible 4 discussion and/or action on the agency's operational status, agency procedures, 5 and FTE status.................................. 66 6 AGENDA ITEM NO. XII - Report, possible discussion and/or action on the agency's 7 Strategic Plan for 2009-2013.................... 68 8 AGENDA ITEM NO. XIII - Consideration of and possible discussion and/or action, including 9 proposal, on amendments to rule 16 TAC §401.362 relating to Retailer's Financial 10 Responsibility for Lottery Tickets Received and Subsequently Damaged or Rendered 11 Unsaleable, for Winning Lottery Tickets Paid and for Lottery-Related Property................ 75 12 AGENDA ITEM NO. XIV - Consideration of the 13 status and possible entry of orders in: A. Docket No. 362-08-1337 – Pak Food Store 14 B. Docket No. 362-08-2121 – Four Seasons Grocery 15 C. Docket No. 362-08-2120 – Crew Connection of Galveston 16 D. Docket No. 362-08-2047.B – In the Matter of the Refusal to Add Michael 17 Hattenbach to the Texas Lottery Commission’s Registry of Approved 18 Bingo Workers E. Case No. 2008-527 – Houston Council 19 of the Blind............................. 100 20 AGENDA ITEM NO. XV - Public comment............. 98 21 22 23 24 25 0005 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XVI - Commission may meet in Executive Session: 4 A. To deliberate the duties and evaluation of the Executive Director pursuant to 5 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 11 Operations Director pursuant to Section 551.074 of the Texas 12 Government Code E. To deliberate the duties of the 13 General Counsel pursuant to Section 551.074 of the Texas Government Code 14 F. To receive legal advice regarding pending or contemplated litigation 15 pursuant to Section 551.071(1)(A) and/or to receive legal advice 16 regarding settlement offers pursuant to Section 551.071(1)(B) of the 17 Texas Government Code and/or to receive legal advice pursuant to 18 Section 551.071(2) of the Texas Government Code, including but not 19 limited to: Shelton Charles v. Texas Lottery 20 and Gary Grief First State Bank of DeQueen, et al., 21 v. Texas Lottery Commission James T. Jongebloed v. Texas 22 Lottery Commission 23 24 25 0006 1 TABLE OF CONTENTS (continued) 2 PAGE 3 The Lotter Ltd Employment law, personnel law, 4 procurement and contract law, evidentiary and procedural law, 5 and general government law Lottery Operations and Services 6 contract Mega Millions game and/or 7 contract............................ 98 8 AGENDA ITEM NO. XVII - Return to open session for further deliberation and possible action 9 on any matter discussed in Executive Session.... 100 10 AGENDA ITEM NO. XVIII - Adjournment............. 106 11 REPORTER'S CERTIFICATE.......................... 107 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0007 1 P R O C E E D I N G S 2 WEDNESDAY, MAY 28, 2008 3 (9:06 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN COX: Good morning. 6 Commissioner Schenck is here; Commissioner Reyes is 7 here. I'm Jim Cox. It's 9:06 on May 28, 2008. Let's 8 call this meeting of the Texas Lottery Commission to 9 order. 10 AGENDA ITEM NO. II 11 CHAIRMAN COX: Agenda Item No. II, 12 report by the Charitable Bingo Operations Director and 13 possible discussion and/or action on the Charitable 14 Bingo Operations Division's activities. 15 I understand that Mr. Sanderson is on 16 vacation, and Bruce Miner will make that report today. 17 MR. MINER: Yes, sir. Good morning, 18 Commissioners. For the record, my name is Bruce 19 Miner, and I'm filling in for Phil Sanderson while he 20 is out of the office for two weeks. 21 In your notebook under Tab II is the 22 monthly activity report of the Bingo Operations 23 Division. I just have a few items I would like to 24 point out. 25 First, the next Bingo Advisory 0008 1 Committee meeting is tentatively scheduled for 2 August 6th. And any Commissioner that wishes to 3 attend, please let Phil know. And if more than one 4 Commissioner desires to attend, we will work with you 5 on a schedule for attending the BAC meeting. Also I 6 would like to thank Commissioner Schenck for his 7 attendance and participation in the recent BAC meeting 8 on May 14th. I know the bingo industry greatly 9 appreciated that. 10 And also the Bingo Division is 11 participating in the North American Gaming Regulator's 12 Association conference being held June 9 through 13 in 13 New Orleans. And Phil Sanderson and two of his staff 14 will be presenters for two of the breakout sessions, 15 one on pull-tabs and another on fraud audit and 16 investigations. 17 And that's all I have for prepared 18 comments. Are there any questions? 19 CHAIRMAN COX: Commissioner? 20 COMMISSIONER SCHENCK: No questions 21 from me, Bruce. Thanks. 22 CHAIRMAN COX: Did you do the meeting 23 by electronic means or were you personally there? 24 COMMISSIONER SCHENCK: No. I 25 personally came down and, unfortunately, arrived late 0009 1 because the plane was diverted to San Antonio for a 2 while. 3 CHAIRMAN COX: Several of the people 4 told me they really appreciated your attending. 5 And do you have any questions? 6 COMMISSIONER REYES: No questions, no. 7 CHAIRMAN COX: I hope that you'll be 8 able to attend one of those meetings soon. And 9 whenever it fits your schedule, just call Phil, and he 10 will set you up. 11 COMMISSIONER REYES: Great. Okay. I 12 will do that. Thank you. 13 CHAIRMAN COX: There was a meeting of 14 the Licensing and Regulatory Committee, and the 15 subject of that was bingo. Is Nelda going to report 16 on that? Or, Kim, do you know? 17 MS. KIPLIN: Yes, sir, I believe she 18 is. 19 CHAIRMAN COX: Okay. Great. Thank 20 you. 21 AGENDA ITEM NO. III 22 CHAIRMAN COX: Okay. Item III, report, 23 possible discussion on lottery sales and revenue, game 24 performance, new game opportunities, advertising 25 market research and trends. 0010 1 Ms. Pyka and Mr. Tirloni. 2 MS. PYKA: Good morning, Commissioners. 3 My name is Kathy Pyka, Controller for the agency. 4 With me to the right this morning is Robert Tirloni, 5 the agency's Product Manager. 6 Our first chart for you this morning 7 reflects revenue from sales and net revenue to the 8 state through the week ending May 17th of 2008. Total 9 sales for this 38-week period amounted to 2 billion 66 10 million dollars, a decline of $49 million, or 11 1.8 percent as compared to Fiscal Year 2007 sales. 12 Prize expense for this period is $1.7 billion, a 13 $5.9 million change from Fiscal Year 2007. And our 14 sales contribution is $967.9 million at this point in 15 time. 16 Net revenue to the state reflects a 17 $44 million decrease as compared to the $693 million 18 figure for the same period in Fiscal Year 2007. And 19 the $1.7 billion amount recorded as prize expense as a 20 percentage of sales is 63.6 percent for the current 21 time period, as compared to 62.6 percent for the same 22 period last fiscal year. 23 CHAIRMAN COX: Okay, Kathy. Now, I 24 notice that both Mega Millions and Lotto Texas are at 25 $16 million. 0011 1 MS. PYKA: That is correct. 2 CHAIRMAN COX: Mega Millions got up in 3 the three figures, and then it got hit at what, about 4 $200 million? 5 MS. PYKA: It was $196 million, sir. 6 CHAIRMAN COX: 196. So how did that 7 run at 196 compare with the previous run of about 8 that? Did it take longer, shorter time? 9 MS. PYKA: Actually, that particular 10 run took probably about the same amount of time as the 11 previous run that we read at 196. But if we compare 12 it to a year ago, it took a bit longer. 13 CHAIRMAN COX: Took a bit longer? 14 MS. PYKA: Yes. 15 CHAIRMAN COX: Now, at $16 million on 16 Lotto Texas, we're a little above breakeven? 17 MS. PYKA: We're actually $547,000 18 short from sales supporting the $16 million advertised 19 jackpot right now. 20 CHAIRMAN COX: So if I remember, not a 21 year ago, 11 or $12 million was breaking us even? 22 MS. PYKA: We definitely were in that 23 $12 million range. And from a year ago to today, we 24 have certainly seen a difference in interest factor 25 that is being used to calculate the support for Lotto 0012 1 Texas. 2 CHAIRMAN COX: Is the interest factor 3 the principal cause of the high break-even point, do 4 you think? 5 MS. PYKA: The interest factor I 6 believe is the principal cause. And, of course, we 7 are seeing a slight shortfall in sales as compared to 8 a year ago. But it's predominantly interest factor in 9 my opinion, unless Robert has any other input. 10 MR. TIRLONI: I agree with Kathy's 11 comments about Lotto. 12 CHAIRMAN COX: Okay. Now, what we're 13 seeing up here, I've seen several clips from other 14 states that this is the norm rather than the 15 exception. I saw that California was down -- Gary, 16 could you come up. You've been sending me some things 17 on other states, and maybe you could help, if they 18 need any help, Kathy and Robert talk about how this 19 looks compared to what's going on in other states. 20 MR. GRIEF: Good morning. For the 21 record, my name is Gary Grief. I'm the Deputy 22 Executive Director for the Lottery Commission. 23 I've seen the same clips that you have, 24 Mr. Chairman. In fact, I sent those to you from time 25 to time. Not having seen the detailed balance sheets 0013 1 like we see here today, my sense is, from the general 2 numbers that are being thrown out, is that what we're 3 seeing and hearing from other states is that 4 predominantly the high cost of fuel seems to be 5 fueling the decline in lottery sales in many of our 6 comparable states across the country. 7 CHAIRMAN COX: And that's pretty much 8 what we've heard from our retailers as well, I think. 9 MR. GRIEF: Yes, it is. We're heard 10 that they're suffering not just in lottery sales but 11 in sales of all of their other products in the 12 convenience store situations as well. 13 CHAIRMAN COX: Okay. Thank you, Gary. 14 MR. GRIEF: Yes. 15 CHAIRMAN COX: You might stick around 16 until they finish. 17 MS. PYKA: Our next slide for you this 18 morning summarizes the sales and game from Fiscal Year 19 2007 to 2008. As noted on the previous slide, the 20 total decline from Fiscal Year 2007 sales is 21 1.8 percent, or $49 million, and this overall decline 22 includes an $18.1 million decline on our on-line 23 games, or 2.8 percent, and $30.9 million on our 24 instant games, or 1.5 percent. 25 The jackpot games are portrayed with a 0014 1 white font, reflecting a $33.1 million decline. Daily 2 games are presented with the green font and reflect an 3 overall gain of $14.9 million, as compared to our 4 Fiscal Year 2007 sales. 5 I would like to note, while Pick 3 6 sales does reflect an 18-and-a-half million dollar 7 decline, the addition of Pick 3, Sum It Up, Daily 4 8 and Daily 4-Sum It Up reflexes an overall $23 million 9 gain over our Fiscal Year 2007 Pick 3 sales, and that 10 represents a 10.3 percent gain over Pick 3. 11 The next slide -- 12 CHAIRMAN COX: Kathy -- 13 MS. PYKA: Yes, sir? 14 CHAIRMAN COX: -- are those numbers on 15 your -- those games you just commented on, the Pick 3 16 and Pick 4 and the respective Sum It Ups, are they 17 about what you had forecasted? 18 MS. PYKA: They are. When we go back 19 and look at our original revenue forecast for the 20 games, we are seeing slightly above what we had 21 forecasted on the original revenue estimate. We're 22 doing quite well with the addition of those new daily 23 games. 24 CHAIRMAN COX: Excellent. 25 MS. PYKA: And our next slide, 0015 1 Commissioners, includes Fiscal Year 2008 sales, year 2 to date, by game. As noted on this slide, within the 3 green area of the pie chart, 75.9 percent of sales are 4 $2 billion from instant tickets, with 7.7 percent of 5 sales, or $205.4 million, from Pick 3, followed by 6 five-and-a-half percent, and $146.9 million from Lotto 7 Texas; 4.8 percent of sales, and $127.9 million from 8 Mega Millions, followed by Daily 4 at $30.3 million, 9 and $6.6 million for Daily 4-Sum It Up. 10 CHAIRMAN COX: That tiny little pink 11 slice there, Cash 5, have we looked at the possibility 12 of either pulling it down or replacing it with 13 something or trying to rejuvenate it? It looks 14 awfully small and I know that -- 15 MR. TIRLONI: This one? 16 CHAIRMAN COX: That one. 17 MR. TIRLONI: This one, Chairman, 18 that's Pick 3 Sum It Up. 19 CHAIRMAN COX: Oh, I'm sorry. 20 MR. TIRLONI: That's okay. 21 CHAIRMAN COX: Which one is -- 22 MR. TIRLONI: Cash 5 is the orange. 23 CHAIRMAN COX: Okay. Then the Sum It 24 Ups we know are going to be small -- 25 MR. TIRLONI: Yes, sir. 0016 1 CHAIRMAN COX: -- relative to -- so the 2 Megaplier -- of those games, the Megaplier is the 3 biggest, and the Pick 3 Sum It Up is 4.6. And the 4 Pick 4-Sum It Up -- 5 MR. TIRLONI: Yes. This is the 6 Daily -- 7 CHAIRMAN COX: -- point 6. Okay. 8 Thank you for correcting me on that. 9 MR. TIRLONI: Yes. The real thin 10 sliver is the Daily 4-Sum It Up, and then that second 11 thin sliver is the Pick 3 Sum It Up. 12 CHAIRMAN COX: Okay. Thank you, 13 Robert. 14 MR. TIRLONI: You're welcome. 15 MR. GRIEF: If I could, Mr. Chairman, I 16 would like to point one thing out of interest. This 17 is something that you've heard me say over time. 18 We do have the Sum It Up game for both 19 Pick 3 and for Daily 4. If you look at our Pick 3 20 base game sales of $205 million, well, it's so much 21 larger, exponentially larger than our Daily 4 base 22 game sales of $30.3 million. 23 However, if you look at the Sum It Up 24 add-on game for each, Daily 4-Sum It Up is actually 25 ahead of Pick 3 Sum It Up. Now, I believe that's a 0017 1 direct result of the impact you have when you 2 introduce an add-on feature at the same time as you 3 introduce the base game; whereas, if you tried an 4 add-on feature down the road after the fact, after the 5 game has been implemented and played, then you see a 6 much smaller impact as far as sales and revenue go. 7 And I just bring that to the 8 Commission's attention. As we move forward and we try 9 to introduce new games with new features, you'll hear 10 staff bring that to your attention. And this is just 11 a great real-world example of just that fact. 12 CHAIRMAN COX: So if we were to 13 introduce a Megaplier type feature for Lotto Texas, do 14 you think it would be very slow catching on? 15 MR. GRIEF: I think it would be -- I 16 think we would have a much smaller impact than, for 17 example, the Megaplier feature that we have on our 18 Mega Millions game which was introduced at the same 19 time as the Mega Millions game was introduced. 20 CHAIRMAN COX: So you're going to have 21 to promote it and just kind of see if it grows? 22 MR. GRIEF: Yes, sir. 23 CHAIRMAN COX: And we don't have a lot 24 of money for promotion? 25 MR. GRIEF: No, sir. 0018 1 CHAIRMAN COX: Okay. Thank you, Gary. 2 MR. GRIEF: Thank you. 3 MS. PYKA: Robert will now discuss 4 sales by price point. 5 MR. TIRLONI: Commissioners, this next 6 slide hasn't changed much since we looked at it last 7 month. This is our instant ticket sales broken down 8 by price point. It's representing the $2 billion 9 we've seen in instant sales thus far this fiscal year. 10 The $5.00 price point is the leading price point 11 still, followed by the $2.00 and then the $10.00. And 12 the $3.00 continues to be the fourth best selling 13 price point. The $1.00 is not too far behind. 14 Commissioners, I would like to get out 15 of this presentation for a moment and show you a 16 feature on our website that we thought would be of 17 interest to you. So I'm going to get onto our home 18 page here. And you see in the upper right-hand 19 corner, this is our scratch-off and store locator, so 20 I'll click on that. And this gives the public players 21 some pretty interesting search capabilities in terms 22 of finding retail locations and actually finding 23 specific games. 24 CHAIRMAN COX: Is this a mock-up or is 25 this live? 0019 1 MR. TIRLONI: No. This is live on our 2 website right now. 3 CHAIRMAN COX: Thank you. 4 MR. TIRLONI: So, for example, let's 5 say -- and I'll just pick a zip code in the Austin 6 area. I'll pick Cedar Park zip code. I'm just 7 picking a zip code outside of Austin. This is Cedar 8 Park zip code. And I'm just going to do a general 9 search. 10 And so now this has listed for me every 11 retailer in the City of Cedar Park. It gives the 12 retailer name, the address, obviously the city and 13 zip, the store's phone number, and it also gives the 14 smoking status. And so that's the complete list of 15 all of the lottery retailers in Cedar Park. 16 I can refine that search if I want to, 17 so I'll delete off the zip. And let's say I just want 18 to select by city. So let's do another city right 19 outside of Austin. Let's pick Bastrop. And let's say 20 I want to -- let's say I live in Bastrop and I want to 21 play -- let's pick one of our core games. Here is Set 22 For Life game. And then I can search in Bastrop for 23 the Set For Life game. 24 Let me scroll down. And so these are 25 all the stores, all the retailers in Bastrop that 0020 1 currently have the game 828, Set For Life. And again, 2 the smoking status is also noted. I think Michael 3 Anger talked to you about this a few meetings back. 4 But we were going to build the -- or add the smoking 5 data to this feature of the website while it was being 6 developed. 7 And up here, if I wanted to be very 8 specific when I was doing the search, if I wanted to, 9 let's say, find a location that did allow smoking, I 10 could do that as well. 11 And so now that I've put in Bastrop and 12 I've asked for smoking locations and I've given a 13 specific game, it gives me the one retailer in Bastrop 14 that has 828, Set For Life, that's also a smoking 15 location. And you can even click on a map to map that 16 location. It looks like it's on Highway 71 in 17 Bastrop. 18 So we just wanted to show you that 19 feature and let you know that that was new and 20 available on the website. Our customer service line 21 gets a lot of phone calls asking from players where 22 they can find specific games that they're interested 23 in playing. And so they're more than happy to make 24 those phone calls and answer those questions, but this 25 gives players the ability to do that search for 0021 1 themselves and -- 2 COMMISSIONER SCHENCK: Can you go back 3 to the home page. 4 MR. TIRLONI: Sure. 5 COMMISSIONER SCHENCK: Do you think 6 that's conspicuous enough for people to find? 7 MR. TIRLONI: We've talked about the 8 location and if it's big enough. Our concern about 9 listing it over in this column (indicating left-hand 10 column) is that there's a lot of information. At the 11 time we believed that it's kind of set off by itself 12 and separate and not too difficult for players to find 13 there. 14 COMMISSIONER SCHENCK: Michael, do you 15 have an opinion on that? 16 MR. ANGER: Certainly. For the record 17 my name is Michael Anger, and I'm the Lottery 18 Operations Director. 19 Commissioner, in response to that 20 question, when we first developed this and mocked it 21 up -- we do have other links on the left-hand side of 22 the column there you see under the "Games" section. 23 If a player is under the "Games" section and looking 24 at our scratch-offs, there is another link that is 25 specific for scratch-off locator. And then also under 0022 1 "Retailers," there is a separate link for the store 2 locator feature, which both of those mirror over to 3 the page that Robert just walked you through a demo 4 on. 5 And one of the discussions we had was 6 that wasn't prominent enough. And so we went out and 7 we looked at other sites, and we focused on looking at 8 retail sites -- Best Buy, Target -- you know, some of 9 the larger big bucks on-line operators to see what 10 they're doing as far as store locator features. And 11 typically they place hyperlinks at the top of their 12 page like that. You know, it's a small link, but they 13 always have it on the front page at the top of the 14 page. 15 And so we did land on doing this. One 16 of the things, though, that we can certainly monitor 17 going forward -- and we are working with IR to 18 possibly mock up some different ways to lay this out 19 on the page -- but we can monitor page views and how 20 frequently people click through to that link. So what 21 we'll do is, we'll monitor this, now that we've got it 22 up, and monitor that activity and, if we need to 23 highlight it more, make those changes. We'll 24 continue, you know, to tweak that and change that to 25 make sure that that's clearly, you know, out there in 0023 1 front of the player. 2 COMMISSIONER SCHENCK: It's right 3 there. If you were -- how do I say this? If you 4 looking for a smoke-free location, you wouldn't know 5 that the capacity was on our website. Are we handing 6 out information to the retailers to help people know 7 that those features are available? 8 MR. ANGER: What we can do is, we can 9 highlight that information. We have an area of the 10 website that's focused just on our retailers. So what 11 we can do is, we can make that information with regard 12 to the smoking aspect of things, we can do a story on 13 that and we can also do a story in our RoundUp 14 publication to communicate that information out that 15 that feature is now available. So -- 16 COMMISSIONER SCHENCK: What about 17 adding a special needs icon at the bottom of that 18 left-hand column, "Are wheelchair accessible," 19 "Smoke-Free Location Needs" or something of that 20 nature? 21 MR. ANGER: We can certainly look at 22 doing something like that, absolutely. 23 CHAIRMAN COX: Good idea, Commissioner. 24 COMMISSIONER SCHENCK: Thank you, Mike. 25 MR. TIRLONI: You bet. 0024 1 Commissioners, I was asked to clarify a 2 discussion that took place last month during this 3 presentation. Chairman Cox, you and I last month were 4 having a dialogue back and forth about Lotto Texas and 5 Mega Millions, similar to what we were talking about 6 earlier today about the funding of Lotto. We were 7 talking about how, when the jackpot got hit, that had 8 an impact on sales, because the games couldn't get 9 rolling and get up or roll to those appealing levels 10 where players started coming into the game. 11 And at one point, we referenced the 12 fact that the Lotto game loses money at those levels. 13 And I believe you and I understood that to mean that 14 the game was underfunded at those levels, just as we 15 talked about today. Lotto being at 16 is currently 16 underfunded. And I think what you and I meant was 17 that sales were not supporting the jackpot that was 18 advertised. But I was just asked to clarify on the 19 record that Lotto does not lose money and none of our 20 games lose money. And what we were referring to at 21 that time was that the game was underfunded. And so I 22 was just asked to clarify that. 23 CHAIRMAN COX: Okay. Well, now that 24 you've clarified it, would you clarify your 25 clarification? I don't believe I understand what you 0025 1 told me. 2 COMMISSIONER SCHENCK: When you say, 3 "We're not losing money," you mean that the lottery 4 isn't paying out money that it didn't get from the 5 game, it's just that the payout amount is not what we 6 either -- if we're paying what we advertised, we're 7 not netting what we would have expected. Is that 8 right? 9 MR. TIRLONI: Currently if we're 10 advertising a $16 million jackpot like we are now and 11 we're under-funded by $500,000, or $547,000, if there 12 is a winning ticket sold, the difference between what 13 we're advertising and what sales supports will be 14 pulled from the reserve fund so that we can pay the 15 advertised amount. 16 CHAIRMAN COX: King's X on reserve 17 fund. 18 MR. GRIEF: But the short answer, 19 Commissioner Schenck, to your query is: Yes, we're 20 having to pay out more than the anticipated payout 21 percentage for that particular draw. 22 COMMISSIONER SCHENCK: But in all 23 events, we're taking in more than we're paying out, 24 obviously. 25 MR. GRIEF: That's correct. 0026 1 CHAIRMAN COX: Okay. Let me give you a 2 very simple example. Let's play like that there is no 3 annuitized amount, that it's only a cash amount, and 4 let's play like the percentage that we take out of the 5 pot is 50 percent, and let's play like the jackpot is 6 $16 million. When we get to $16 million, will sales 7 have been at least $32 million? 8 MS. PYKA: In the scenario that you're 9 providing, sales will not be at $32 million, so the 10 difference will increase prize expense. And our 11 clarification point is, the state is still making an 12 overall positive contribution to the Foundation School 13 Fund. While prize expense is generated to be at 50 14 percent, prize expense may go up to 50.56 percent, but 15 we're still providing 37.X percent to the Foundation 16 School Fund. We have not gone into negative status. 17 We're not losing money, bottom line. 18 CHAIRMAN COX: Okay. Then let's take 19 the $4 million level, same set of assumptions. 20 MS. PYKA: Yes. 21 CHAIRMAN COX: If we're hit the first 22 time, will sales cover -- will 50 percent of sales 23 cover the prize? Will 100 percent of sales cover the 24 prize? 25 MS. PYKA: Generally not, no. 0027 1 CHAIRMAN COX: Okay. 2 MS. PYKA: I mean, most -- 3 CHAIRMAN COX: So there is a break-even 4 point where sales just cover the prize. That's the 5 number that I've been talking about. Is that the 6 number y'all have been talking about? 7 MS. PYKA: We do talk about the 8 break-even point, Chairman. 9 CHAIRMAN COX: Okay. 10 MS. PYKA: And I think the sensitivity 11 to the statement last time was, we didn't want it to 12 appear that, bottom line, we have lost money for the 13 state, we have gone into a negative status, bottom 14 line. 15 CHAIRMAN COX: There is a place at 16 which we do; if we get hit at $4 million, we do? 17 MR. GRIEF: We do what? 18 CHAIRMAN COX: If we get hit at 19 $4 million the first night, we don't have sales of 20 $4 million? 21 MS. PYKA: That's correct. 22 MR. GRIEF: That is correct. 23 CHAIRMAN COX: Okay. The number that 24 I'm looking for when I ask, "Where is breakeven?" is 25 when do we get to the point where sales covers the 0028 1 non-annuitized jackpot? And I've been hearing -- I 2 used to hear 11, and now I'm hearing 16. So I just 3 want to be sure that we know what I'm talking about. 4 You know, I understand what you're talking about. 5 You're talking about when do we cover at 50 percent? 6 MS. PYKA: Right. 7 CHAIRMAN COX: But I'm talking about 8 when do we cover -- when do we get out of a loss 9 position? 10 MR. GRIEF: And there has definitely 11 been a disconnect on that. 12 CHAIRMAN COX: Okay. 13 MR. GRIEF: We need to reconcile that. 14 CHAIRMAN COX: Let's reconnect that. 15 And maybe if y'all want to make a presentation next 16 time. Or if I'm the only one who has been using the 17 term differently than y'all have, you can just make it 18 to me. 19 MR. GRIEF: Very good. 20 COMMISSIONER SCHENCK: And I would 21 appreciate that as well. 22 MR. GRIEF: Why don't we just plan on 23 bringing that back to the next Commission meeting. 24 CHAIRMAN COX: Good. 25 MS. PYKA: Commissioners, that's all we 0029 1 have this morning on this item, unless you have any 2 questions. 3 CHAIRMAN COX: I have a question back 4 on the website. Put in Austin and $50 ticket. 5 MR. TIRLONI: I can't list the $50. 6 I'll have to actually choose the name for you, 7 Chairman. 8 CHAIRMAN COX: Okay. 9 MR. TIRLONI: Okay? That's the whole 10 list. 11 CHAIRMAN COX: That's the whole list. 12 MR. TIRLONI: I could keep scrolling 13 for you, but it's pretty long. But, you know, Austin 14 is incorporating a pretty large area. 15 CHAIRMAN COX: Okay. 16 MR. TIRLONI: I mean, you've got a lot 17 of zip codes listed in here. 18 CHAIRMAN COX: With that many, there's 19 no way of telling what percentage that is of the 20 total? 21 MR. TIRLONI: We could certainly get 22 that number for you, the percentage of retailers that 23 are selling the $50. 24 CHAIRMAN COX: Do you know about what 25 it is right now, off the top of your head? 0030 1 MR. TIRLONI: I'll see if Ramon known 2 that number off the top of his head. 3 MR. RIVERA: No, I don't, but I can get 4 it for you, Robert. 5 MR. TIRLONI: We can get it for you. 6 CHAIRMAN COX: Okay. Thank you. 7 MR. TIRLONI: And we do have two 8 fifties that are active right now, so we would also 9 have to -- this is just one of the fifties that I 10 pulled up for you. There is a second one also. 11 CHAIRMAN COX: Okay. 12 MR. TIRLONI: That is not even showing 13 right now. 14 CHAIRMAN COX: Thank you. 15 MR. TIRLONI: You're welcome. 16 AGENDA ITEM NO. IV 17 CHAIRMAN COX: Okay. Agenda Item No. 18 IV, report and possible discussion and/or action on 19 transfers to the state. 20 Ms. Pyka. 21 MS. PYKA: Again for the record, Kathy 22 Pyka, Controller for the Lottery Commission. 23 Tab IV includes information on the 24 agency's transfers to the state. The first report in 25 your notebook reflects the transfers and allocations 0031 1 to the Foundation School Fund and the allocation of 2 unclaimed prizes for the period ending April 30, 2008. 3 Total transfers to the state through 4 this period amounted $651.4 million. This represents 5 a 4.4 percent decrease from the total amount 6 transferred through April of 2007. 7 The second page in your notebook 8 includes the detailed information for the monthly 9 transfers. Of the $651.4 million transfer to the 10 state, $621 million was transferred to the Foundation 11 School Fund, with a balance of $30.4 million 12 transferred from unclaimed lottery prizes. 13 And the final document in your notebook 14 includes a report of lottery sales, expenditures and 15 transfers from Fiscal Year 1992 to date. Total 16 cumulative transfers to the Foundation School Fund 17 through April of this year totaled $10.3 billion. 18 Commissioners, this concludes my 19 presentation. I would be happy to answer any 20 questions. 21 CHAIRMAN COX: Kathy, I'm looking on 22 Page 2 of 2 at the bottom table, "Quarterly Detail of 23 Unclaimed Prizes Transferred." 24 MS. PYKA: Yes, sir. 25 CHAIRMAN COX: Are those transfers to 0032 1 the multi-categorical teaching hospital account and 2 the general fund, are those statutory formulas? 3 MS. PYKA: They are. It's actually a 4 combination of statutory formula as well as general 5 appropriations bill. The statute directs us to look 6 at statute first and then define in appropriations 7 bill if anything has been appropriated to these 8 agencies. And so the first $10 million is included in 9 the Department of State Health Services appropriation 10 bill, that they are to get the first $10 million. And 11 then, of course, the balance or any excess is 12 transferred to GR, per statute. 13 CHAIRMAN COX: Okay. So they get 10. 14 MS. PYKA: Yes. 15 CHAIRMAN COX: Everything above that 16 goes to the general -- 17 MS. PYKA: Correct. They do get the 18 first 10. 19 CHAIRMAN COX: Okay. Thank you. 20 MS. PYKA: You're welcome. 21 Any other questions I might be able to 22 answer? 23 CHAIRMAN COX: Commissioner? 24 COMMISSIONER SCHENCK: I have no 25 questions. Thanks, Kathy. 0033 1 COMMISSIONER REYES: I have no 2 questions, Kathy. 3 MS. PYKA: Thank you. 4 AGENDA ITEM NO. V 5 CHAIRMAN COX: Okay. Item No. V, I'm 6 going to pass for the time being. 7 AGENDA ITEM NO. VI 8 CHAIRMAN COX: Item No. VI, report, 9 possible discussion and/or action on the 80th 10 Legislature. 11 Ms. Trevino. 12 MS. TREVINO: Good morning. 13 Commissioners, for the record, I'm Nelda Trevino. I'm 14 the Director of Governmental Affairs. 15 In your meeting notebook, we provided 16 you a copy of the agenda for the House Licensing and 17 Administrative Procedures Committee hearing that was 18 held on May the 15th. Committee members in attendance 19 included Chairman Keno Flores, Rep. Delwin Jones and 20 Rep. Senfronia Thompson. 21 The committee considered the interim 22 charge related to charitable bingo and the Bingo 23 Enabling Act. Phil Sanderson was in attendance and 24 served as a resource to the committee. 25 Additionally, we previously provided 0034 1 you copies of the agency's responses to information 2 that had been requested from the committee. As noted 3 on the agenda, the committee heard from various 4 representatives from the bingo industry. Most of the 5 testimony provided at the hearing centered on matters 6 related to commercial lessors and specifically with 7 Littlefield Corporation. 8 Additionally, Chairman Flores requested 9 representative from Aces Wired, that they provide the 10 committee at a later date with information related to 11 their amusement with prize machines. No action was 12 taken by the committee. And as of this date, there 13 have been no additional requests to the agency for any 14 additional information. 15 It is anticipated the committee will 16 hold a future hearing related to their interim charges 17 to adopt recommendations to be included in their 18 interim committee report for the next Legislature's 19 consideration. 20 Lastly, at this time there are no other 21 updates to provide related to Senate or other House 22 committee interim hearings. 23 This concludes my report, and I'll be 24 glad to answer any questions. 25 COMMISSIONER SCHENCK: Thank you Nelda. 0035 1 I don't have any questions. 2 COMMISSIONER REYES: No questions. 3 Thank you, Nelda. 4 CHAIRMAN COX: Nelda, there have been 5 no other interim charges that we've been invited to 6 participate in, other than Chairman Flores? 7 MS. TREVINO: That's correct. 8 CHAIRMAN COX: Okay. And is there a 9 time limit after which there won't be any interim 10 charges? 11 MS. TREVINO: You know, there is not. 12 I'm trying to recall, Chairman Cox. I don't believe 13 that there is a hard deadline for the committees to 14 provide their interim committee reports. But 15 typically it's in the fall, certainly before the next 16 session begins. Some committees, just depending on 17 the committee, sometimes they provide the reports 18 maybe right in January. But I think most committees 19 really make an effort to get their committee report 20 submitted either to the Lt. Governor's office or to 21 the Speaker's office during the fall period, the 22 latter part of the fall. 23 So hearings could take place literally 24 all through the summer and then through the early fall 25 also. 0036 1 CHAIRMAN COX: Okay. Thank you. 2 MS. TREVINO: You bet. 3 AGENDA ITEM NO. VII 4 CHAIRMAN COX: Okay. Item No. VII, 5 report, possible discussion and/or action on the 6 agency's contracts. 7 Mr. Jackson. 8 MR. JACKSON: Good morning, 9 Commissioners. For the record, my name is Tom 10 Jackson. I'm the Purchasing and Contracts Manager for 11 the Commission. 12 Commissioners, in your notebook under 13 Tab No. VII is a report on prime contracts that has 14 been updated for your review. I would be happy to 15 respond to any questions. 16 CHAIRMAN COX: Tom, I see that we still 17 have what I perceive to be a crunch date at August 18 31st. Have you had any success in changing some of 19 these contract years or is that just a problem that I 20 perceive that isn't a real problem? 21 MR. JACKSON: It's not a real problem, 22 Commissioner. We have had some luck in changing some 23 of the dates on the smaller contracts or other 24 contracts. The prime contracts, each time we put 25 those out for bid, we do make an effort to change the 0037 1 dates where possible, but many times it is not 2 possible. We do get with -- 3 CHAIRMAN COX: Mr. Fernandez, did you 4 have something you wanted to say? 5 MR. FERNANDEZ: No, sir. 6 CHAIRMAN COX: Okay. 7 Excuse me, Tom. Go ahead. 8 MR. JACKSON: We do get with the end 9 users to find out if there is a possibility of 10 changing that date, and we get their feedback from 11 them and then make the decision as to what dates we 12 have to use. 13 CHAIRMAN COX: What are the arguments 14 for the 8/31? Is it fiscal year -- 15 MR. JACKSON: Fiscal year. 16 CHAIRMAN COX: -- it's nice to end a 17 contract with the fiscal year and start afresh one -- 18 MR. JACKSON: That's correct. 19 CHAIRMAN COX: -- with a new fiscal 20 year? And it doesn't create a time crunch on your 21 part? 22 MR. JACKSON: No, sir. We put those 23 out to the end users about a year in advance, and then 24 we work from that time frame forward. And that allows 25 us plenty of time to put it out for bid, to gather all 0038 1 the information to need to gather and to complete the 2 process. 3 CHAIRMAN COX: Okay. Thank you. 4 COMMISSIONER SCHENCK: At our last 5 meeting we were talking about some of those challenges 6 we were facing with respect to sales and whether we 7 were going to approach our advertising contractors to 8 see what help they could give us, if any, in advance 9 of renegotiating these contracts. Have we talked to 10 them about that? 11 MR. JACKSON: I met with our contract 12 administrators and gave them instructions to make 13 every effort they can, not just on the advertising 14 contract but other contracts where there is a renewal 15 or an extension, to make an effort to try to get 16 pricing reduced where we can, where it's possible, see 17 what options we do have, and we are working towards 18 that goal, yes. 19 COMMISSIONER SCHENCK: My thought -- I 20 think it's time, if I'm remembering right -- it was 21 that it would be nice if these people we have 22 contracts with now would, to the extent they have 23 additional advertising space or something else 24 available, to help us in the interim, go ahead and do 25 that for us. 0039 1 MR. FERNANDEZ: I'm sorry. 2 Commissioner, could you repeat the last part of 3 your -- 4 COMMISSIONER SCHENCK: Well, if you 5 recall, in the last meeting we were talking about the 6 sales figures declining and the fact that we had some 7 of these contracts, including advertising contracts, 8 coming up for renewal in the not-too-distant future, 9 and we were going to approach those contracts, those 10 vendors, to see if there was additional advertising 11 space that they could allow us, or additional outlet, 12 additional times they could be advertising under the 13 existing contract, to go beyond their contract 14 obligations, if they had the ability to do it. 15 MR. ANGER: One thing that we do on an 16 annual basis, Commissioner, is we work with the 17 advertising agency and through the media buying firm 18 that they use, the workgroup, we -- all of our dollars 19 are aggregated and all the purchases are done through 20 the workgroup. 21 And so as a standing matter, we do ask 22 the agency to go out and negotiate the very best rates 23 for us and, in addition, to leverage what is a pretty 24 significant buy in the State of Texas, as advertising 25 contracts go. Even though we have limited advertising 0040 1 dollars, it's still a significant size expenditure 2 with regard to media purchases. 3 So one of the things they do is, they 4 provide to us under the contract terms a report -- and 5 it might be useful. I can get you a copy of it -- 6 they provide a report to us of the added value that 7 they were able to negotiate based on the size of the 8 media purchases that we make. 9 So we do get some additional leveraged 10 dollars, if you will, or free media promotion that 11 takes place as a result of the large buy that we make. 12 COMMISSIONER SCHENCK: Yes. Well, I'm 13 thinking that the time to really question is now. 14 We're a big buyer. When Wal-Mart buys from vendors, 15 they beat them down on price, they get additional 16 concessions. 17 MR. JACKSON: Yes. 18 COMMISSIONER SCHENCK: And I'm saying I 19 want additional concessions. I want Tracey Locke 20 beating on whoever it is. If it's Channel 5 up in 21 Dallas and they're not giving us additional time, I 22 want them looking at Channel 4, Channel 11 and whoever 23 else they have to look at to get us stuff -- to get us 24 advertising time that we need. I mean, our sales 25 figures are down. I fear we're going to come in under 0041 1 a billion dollars this year for the first time in 2 three years, and I would like to know that we're 3 beating every bush we can to get those numbers up. 4 MR. FERNANDEZ: For the record, my name 5 is Mike Fernandez, the Director of Administration. 6 We'll have those conversations with 7 them. And what we can do is that as part of that -- 8 and I'll certainly meet with Michael and his staff and 9 Tom and his staff -- what we can do is that we can 10 monitor what kind of quotes they're getting from those 11 different channels, to see if we can ratchet those 12 numbers down in terms of our cost, and track that. 13 COMMISSIONER SCHENCK: But I'm not just 14 looking at reducing costs. If we have an existing 15 contract, I'm looking at getting additional -- 16 MR. FERNANDEZ: Hours. 17 COMMISSIONER SCHENCK: -- media time, 18 hours, billboard space, whatever else it is and, if 19 they don't give it to us, then we ought to look 20 somewhere else the next time we are sending out that 21 contract. 22 MR. FERNANDEZ: Very good. 23 COMMISSIONER REYES: Just for my 24 information, what is your definition of a prime 25 contract for the lottery? 0042 1 MR. JACKSON: Commissioner, those are 2 not the highest dollar contracts. Those are contracts 3 the Commission has asked us to keep in front of you 4 and to provide you with information as time goes on 5 for those particular contracts. They're key contracts 6 that we use in our business to operate the business. 7 COMMISSIONER REYES: So do you have 8 other contracts that are -- I guess maybe instead of 9 the word "prime" -- major contracts -- 10 MR. JACKSON: Yes, we do. 11 COMMISSIONER REYES: -- that are not 12 listed on here? 13 MR. JACKSON: Yes. 14 MR. FERNANDEZ: Commissioner, we could 15 have contracts on the technology side, lease contracts 16 that can have a value of a million dollars that may 17 not be on this list. One of the things that we're 18 doing is that we're going back through right now -- 19 and it's part of another process -- to take a look at 20 how we define, how we actually define prime contracts. 21 And to be very honest with you, it's 22 hard to determine where that came from, you know. And 23 Ms. Kiplin might be able to address it better than I. 24 But I suspect that in the beginning, there were 25 contracts that were directly related to the business 0043 1 of the lottery, and those contracts were then set 2 forth and brought on an ongoing basis to the 3 Commission for your information. 4 One of the things that we're looking at 5 now is to thoroughly ensure that the contracts that 6 are being listed are those contracts that we would 7 term have a direct impact on the business. And the 8 value could be $100,000 or it could be $32 million but 9 we feel would have -- that could be high risk but 10 would directly impact the business. So our staff in 11 Contracts and Purchasing is going back through that 12 exercise right now. We want to make sure that we have 13 all of them captured. 14 COMMISSIONER REYES: Okay. I just 15 wanted to make sure why these were listed. 16 CHAIRMAN COX: Commissioner, you asked 17 a very good question. For a little background that 18 you may already have, this board really has no 19 authority over purchasing of these -- now, correct me 20 if I'm wrong, Ms. Kiplin -- but the Lottery Act gives 21 all of the purchasing authority to the Executive 22 Director. 23 However, back in 2003 or so, the Sunset 24 Commission came in and made a recommendation that we 25 oversee some of the major contracts, even though we 0044 1 don't have contractual authority. Now, that was never 2 enacted into law, but we have adopted that as 3 practice. 4 I heard somebody say these are the 5 contracts the Commission wanted to see. That was 6 before I got on this Commission that that decision was 7 made. And I think that while I like seeing those 8 contracts that are important to the ordinary course of 9 business -- and I think that's what we've got here; 10 that's just kind of what it looks like -- I think that 11 just on a trial basis, I would like to see the other 12 big contracts that we have. 13 MR. FERNANDEZ: Would you like to see 14 those at a million dollars and above? 15 CHAIRMAN COX: Well, I would like to 16 see -- how many would there be if we had $500,000 and 17 above? 18 MR. FERNANDEZ: I don't think it's an 19 excessive -- I don't think -- 20 CHAIRMAN COX: Why don't you just find 21 a cut-off where you think that they're, if not 22 essential to the ongoing operation, that they're an 23 ad hoc kind of thing that we just might want to know 24 about. 25 MR. FERNANDEZ: Get a value of a half a 0045 1 million or more? 2 CHAIRMAN COX: I think giving us a 3 better idea of what kind of contracting is going on 4 beyond the contracts that we should already know about 5 because they're here every month. 6 MR. FERNANDEZ: Again -- and what we 7 can also show you is the total contracts that we have. 8 CHAIRMAN COX: Okay. 9 COMMISSIONER REYES: That's good. That 10 would work. 11 CHAIRMAN COX: Sizing. 12 MR. FERNANDEZ: Okay. 13 COMMISSIONER REYES: Thank you very 14 much, Mr. Chairman. 15 MR. FERNANDEZ: Thank you. 16 CHAIRMAN COX: Excellent. 17 MR. FERNANDEZ: Commissioner Schenck, 18 to follow up on yours, what we'll develop very quickly 19 is a plan of action, and we'll share that with you and 20 the other Commissioners in terms of that. 21 COMMISSIONER SCHENCK: Let me just 22 express -- I think it's useful to act on these issues 23 when we bring them up from month-to-month. And the 24 concern I had last month was, we talked about the 25 fiscal year coming to an end in a pretty short order, 0046 1 and we were talking about whether we couldn't get 2 additional media buys, whether we couldn't approach 3 Tracey Locke and get them to basically wield the power 4 they have with the budget we give them over that 5 advertising time. And we're talking about a fairly 6 finite period. 7 So I'm not really, I think, needing a 8 report as much as I think we just need to communicate 9 to Tracey Locke that if there is additional time that 10 we can get from the people that they're contracting 11 with, that we ought to ask them, just to see if we can 12 get it. I will really appreciate it if we can do that 13 today. 14 MR. ANGER: We'll absolutely do that. 15 And I want you to know, Commissioner, that staff is 16 committed to always optimizing, you know, what we get 17 for our media dollars. But we'll renew that request 18 to the advertising agencies and work closely with them 19 to see if there is any additional leverage that we can 20 get throughout the remainder of the fiscal year and 21 also going forward. 22 COMMISSIONER SCHENCK: Well, the sense 23 I think I'm trying to convey to you and I want 24 conveyed to Tracey Locke and back out is that -- I 25 don't want to suggest there is a crisis, because 0047 1 there's not -- but I think there's an urgency in terms 2 of how we act to try to maximize these numbers during 3 the short period that we have left in the fiscal year, 4 because the Legislature is going to come, they're 5 going to have to fund schools, you know, less than 6 they've been getting the last couple of years. So I 7 think to the extent we can get additional buys without 8 additional dollars, I think we need to do it. 9 CHAIRMAN COX: Commissioner, I would 10 tell you that, unbeknowst to you, you are 11 communicating this directly to the Tracey Locke 12 representative. If you would like to meet her and 13 speak with her either right now or at the break, 14 actually it's right there. 15 COMMISSIONER SCHENCK: Okay. I think 16 we -- I think the message has been sent. 17 (Laughter) 18 CHAIRMAN COX: Anything further? 19 MR. FERNANDEZ: Well, if it pleases the 20 Chair, I would be happy to brief on the status of the 21 consulting. 22 CHAIRMAN COX: I think that would be 23 excellent. 24 MR. FERNANDEZ: Okay. As you know, we 25 had put a bid on the street to acquire the services of 0048 1 a consultant to help us work through an exercise of 2 reviewing operational resource requirements, 3 associated costs, and then look at the market to see 4 what types of options we have as we move forward in 5 developing an RFP for 2011 for the lottery operator 6 services. That bid had been put out twice. The 7 second time we had concluded with the recommendation 8 to the Executive Director to award to a firm here in 9 Texas, or a national firm, actually. 10 Subsequent to that, we entered into 11 contract negotiations, which we were very pleased with 12 the way they went. But, consequently, our RFPs and 13 our contracts call for disclosure, that if the firm 14 does business or has any relationship, either the 15 principals or members or spouses of the principals 16 with any of our prime contractors, which we list in 17 the RFP, they have to disclose that. And as certainly 18 I know you know, that could run the gamut of 19 relationships in terms of employment or other business 20 relationships. 21 As we began to move forward in 22 developing the final contract, or the contract, they 23 disclosed to us that they had recently entered into 24 and begun an engagement to do audit work with a 25 subsidiary of a prime contractor of ours. And because 0049 1 of that, we had to withdraw the offer and cease 2 negotiations on that contract. 3 What we have done is that we have 4 met -- 5 CHAIRMAN COX: Mike, let me stop you 6 right there. Was that plain on its face in their 7 proposal and we just missed it or did they disclose 8 that to us subsequently? 9 MR. FERNANDEZ: They disclosed that 10 subsequently to us. What occurred -- it appears to be 11 an issue of timing. As we were going through this 12 process with them -- what that firm does is that they 13 run a scan against their contract database. All 14 contracts, once they've been entered into, are entered 15 into the database. 16 As we were proceeding through our 17 process, they had another vertical or another part of 18 their company, their audit vertical, was going through 19 similar processes, I'm sure, across the country. One 20 of the particular contracts was with the subsidiary. 21 So what happened, once that contract got signed and 22 entered into the database and the work had begun, very 23 quickly they ran a scan, and that scan turned up 24 that -- 25 CHAIRMAN COX: So it was in the process 0050 1 of negotiation at the time they filed -- they didn't 2 omit it? 3 MR. FERNANDEZ: No. They were just 4 unaware of it. 5 CHAIRMAN COX: They updated after they 6 filed? 7 MR. FERNANDEZ: Absolutely. 8 CHAIRMAN COX: Okay. Thank you. 9 MR. FERNANDEZ: So what we're currently 10 doing -- as you know, there is a variety of different 11 contracting vehicles in the state. The Department of 12 Information Resources has direct contracts, TXMAS, 13 which has been changed a little since I first began to 14 deal with it, which is a list of federal contractors 15 that have been vetted at the state level and can be 16 contracted with directly. 17 What we did immediately is that we ran 18 a list of all contractors that fell into this category 19 off of TXMAS and began to review their capabilities, 20 the principals of those companies and their prior 21 engagements in both state and private sector. 22 We have opened up discussions with one. 23 We've contacted two, but we have opened up discussions 24 last -- I guess last Thursday with one of those firms, 25 and we are currently in conversation with them today. 0051 1 So hopefully, if they can provide the full spectrum of 2 services that are required, I believe that we will 3 pursue that avenue of contracting. 4 COMMISSIONER SCHENCK: Thank you. No 5 questions. 6 COMMISSIONER REYES: In your 7 contracting process, you don't have -- when you're 8 negotiating or when you're going to go into a 9 contract, you don't have like a backup in case 10 something doesn't work with the one that you selected? 11 MR. FERNANDEZ: We did absolutely, 12 Commissioner. What there were, that bid -- I believe 13 originally there were five bids, I believe originally, 14 to that. Two or three of the bidders failed to 15 qualify under the terms. And we actually scored -- 16 the team -- our committee actually scored two separate 17 contractors. So there was another contractor that was 18 rated at No. 2. Our concern was, even though they met 19 the MQs, they met the qualifications, it was the 20 opinion and recommendation of the committee that we 21 didn't recommend them to do this particular job. 22 COMMISSIONER REYES: Okay. Thank you. 23 CHAIRMAN COX: Mike, are you confident 24 that you will get a qualified bidder? 25 MR. FERNANDEZ: Well, let me answer 0052 1 that this way: I am confident that we will not 2 recommend a company to the Commission or to the 3 Executive Director that we do not believe is 4 competent. 5 CHAIRMAN COX: Okay. So you're going 6 to -- however much you have to shake the sticks, 7 you're going to shake them until you shake a qualified 8 contractor out of there? 9 MR. FERNANDEZ: That's our goal. 10 CHAIRMAN COX: This is an incredibly 11 important contract. I know you know that. And we 12 need the very best of help in crafting this RFP. 13 MR. FERNANDEZ: Absolutely. 14 CHAIRMAN COX: Thank you very much. 15 AGENDA ITEM NO. VIII 16 CHAIRMAN COX: Okay. Item No. VIII, 17 consideration of and possible discussion and/or action 18 on external and internal audits and/or reviews 19 relating to the Texas Lottery Commission and/or on the 20 Internal Audit Department's activities. 21 You're not Ms. Melvin. 22 MS. WINKLER: No, sir. I'm Brenda 23 Winkler with Internal Audit, and I'm sitting in for 24 Catherine today. And she's asked me to let you know 25 that she didn't have anything to report this month. 0053 1 CHAIRMAN COX: Nothing to report this 2 month? 3 MS. WINKLER: No, sir. 4 CHAIRMAN COX: Okay. Thank you, 5 Brenda. 6 AGENDA ITEM NO. IX 7 CHAIRMAN COX: Report, possible 8 discussion and/or action on the Mega Millions game 9 and/or contract. 10 Director Sadberry. 11 MR. SADBERRY: Good morning, 12 Commissioners. For the record, my name is Anthony 13 Sadberry, Executive Director. 14 I do not have anything to report to you 15 on this agenda item on the Mega Millions game and our 16 contract. I would be happy to respond to any 17 questions you might have on that. 18 COMMISSIONER SCHENCK: Thank you, 19 Anthony. 20 COMMISSIONER REYES: No questions. 21 Thank you. 22 CHAIRMAN COX: Anthony, you have told 23 us, I think maybe informally in the past -- I can't 24 remember whether it's been subject to discussion at 25 this meeting -- that there might be some discussions 0054 1 going on as to Powerball and Mega Millions working 2 together in some phase or other. Is there anything to 3 talk about on that? 4 MR. SADBERRY: There is nothing current 5 on that. These potential discussions go back as far 6 as when Chairman Clowe, as you know, was on the board 7 and you approached it, either contemporaneously with 8 or soon after the entry of Texas into a multi-state 9 game, pursuant to the statutory enabling authority 10 that gave this lottery the authority to do so. 11 And I know at least one of the early-on 12 overtures in that direction was when Deputy Director 13 Gary Grief -- I'm not sure what capacity he was in at 14 the time. He may have been Acting Executive Director 15 at the time; I believe he was -- participated in a 16 meeting of the directors of Mega Millions, which is 17 the game we participate in, the multi-state game, and 18 mentioned that possibility among others. 19 Shortly after I came on board, I 20 attended a meeting of the Mega Millions directors in 21 which we furthered those discussions. They have been 22 carried forward. I think two years ago at the 23 meeting, the LaFleur's conference, in conjunction with 24 that, we had an actual meeting with some of the 25 Powerball directors in New York, Manhattan, at the 0055 1 offices of one of our vendors to discuss that 2 possibility. 3 We've had ongoing dialogue on the 4 possibility of having joint-sponsored games or other 5 marketing initiatives between the two groups, without 6 an actual combination or merger of the groups. What 7 you may be thinking of most recently is the spring 8 meeting of NASPL at which the Mega Millions directors 9 typically attend and may have a meeting which is 10 scheduled in Napa in June. One of several items that 11 may be on the agenda is a renewal of that discussion. 12 At this point I would not characterize 13 it as being something that has legs to it or has 14 crystalized into a formal proposal. I think it's just 15 a continued dialogue in consideration of that as one 16 among several possibilities that may exist between 17 these two major multi-state games. 18 CHAIRMAN COX: So if there is a 19 national game that would be available to all the 20 states that conduct lotteries, do you think it would 21 ultimately come by the combination of these two or 22 from some third party that might start a whole other 23 game? 24 MR. SADBERRY: I think, again, without 25 having specifics, the more likely scenario would be, 0056 1 if it were a national game, would be by combination of 2 these two, because I think collectively they comprise 3 the majority. Of the states typically, Mega Millions 4 has a certain population base to its state membership, 5 and Powerball may describe its membership differently. 6 But a combination of those two would probably present 7 the most optimal opportunity for a national-sponsored 8 game, were it to occur. 9 For example, we had a special meeting 10 in Detroit a couple of years ago at which time we were 11 looking at a national game, and that was a raffle 12 game. And you get into all kinds of issues, such as 13 each state's enabling statute and lawful authority. 14 And as Gary will tell you, the Texas experience on the 15 raffle game, for example, in the Attorney General's 16 opinion that came out on that, which at this point 17 precludes our participation, absent some amendatory 18 language in our enabling statute in such a game, would 19 be the type of issue that other states would face as 20 well as far as their ability to participate, which 21 would not necessarily preclude the groups from going 22 forward with the game. It might just determine if 23 there were enough states who can and will participate 24 to go forward with that. 25 I guess my bottom line point is, these 0057 1 are the types of issues that are continually under 2 consideration, sometimes more prominently than others, 3 certainly with the Mega Millions directors. And at 4 this point we're not at a stage where it's either 5 likely that there will be a vote to specifically go 6 forward with an initiative so much as these are just 7 the types of things that are constantly on the table 8 for discussion purposes. 9 CHAIRMAN COX: Questions? 10 COMMISSIONER SCHENCK: No, thank you. 11 COMMISSIONER REYES: No questions. 12 CHAIRMAN COX: Thank you, Director 13 Sadberry. 14 AGENDA ITEM NO. X 15 CHAIRMAN COX: Item No. X, report, 16 possible discussion and/or action on GTECH 17 Corporation. 18 Director Sadberry. 19 MR. SADBERRY: Commissioners, I do not 20 have anything to report to you on this item on GTECH 21 Corporation. In your folders, the usual. We have 22 provided certain continued information about the 23 corporate activities that appear to have some 24 relevance to the items of interest to this board with 25 GTECH and its parent company, Lottomatica, may be 0058 1 doing by way of example in terms of mergers and 2 acquisition, debt restructuring, meetings of the 3 board, organizational structure and changes and 4 matters of that nature. That information is in your 5 folders. I would be happy to respond to any questions 6 you might have. 7 We continue to have the standing 8 committee of the Attorney General's office, Department 9 of Public Safety and the Lottery Commission, the 10 three-member committee that was established at the 11 request of Chairman Clowe and the board at that time, 12 to monitor anything that occurs that may require or 13 suggest the need for in-depth review. And information 14 of this nature, more specific type of information of 15 that nature is always provided to this committee for 16 their information purposes. And we receive feedback 17 from time to time and will advise you of any 18 outstanding matters that suggest it should come to 19 your attention for that purpose. What you have today 20 is general information. 21 COMMISSIONER SCHENCK: Anthony, I 22 should report that -- I believe you were in 23 attendance -- we had a meeting with the General 24 Counsel for GTECH, and we had some spirited and direct 25 conversations about the contract, the relationship 0059 1 with the parent company and GTECH's operations in 2 Texas. 3 MR. SADBERRY: This is true. And I 4 will tell you, Commissioner, I've had a follow-up 5 communication -- I think Ramon is still here -- from 6 Ramon, who was not in that meeting but who received a 7 briefing from his General Counsel. And I responded to 8 that communication, and the General Counsel of the 9 Lottery Commission is typically made aware of these 10 types of discussions as well. 11 I can report to you that in my 12 estimation, these are ongoing discussions. I think 13 the importance of these issues continues to be 14 highlighted. It is my intention, as you well know, to 15 continue to make them a matter of high priority, that 16 the Lottery Commission act as appropriate in 17 monitoring and overseeing the activities of its major 18 lottery operator in this regard, GTECH, on any issues 19 of any nature that suggests we should be mindful and 20 aware of same. I think that message was communicated 21 well in our meeting, and the response that I received 22 suggests that to be the case. 23 COMMISSIONER REYES: I have no 24 questions. 25 CHAIRMAN COX: Anthony, one of the 0060 1 things we continually look at is the number of 2 qualified bidders that might respond to the lottery 3 operator request for proposal. I seem to recall that 4 during the last month, one of the players other than 5 GTECH was awarded a major contract, maybe 6 Pennsylvania? 7 MR. SADBERRY: Pennsylvania, I think 8 possibly Ohio -- am I right, Gary? -- Pennsylvania and 9 Ohio, and possibly others. I know there is activity 10 now with Consortium in Washington D.C. in which GTECH 11 may have some participation. I'm not sure exactly 12 what their role, if any, might be. And that seems to 13 somewhat in a state of limbo, from what I've read 14 recently. 15 CHAIRMAN COX: Could you or one of your 16 staff be more specific on either Pennsylvania, Ohio, 17 or both, what happened in those states? 18 MR. SADBERRY: Gary -- I'll ask Gary to 19 come forward. I think I could give you a general 20 background. I'm sure Gary has more specific knowledge 21 and information on it. 22 MR. GRIEF: Good morning. Once again 23 for the record, Gary Grief, Deputy Executive Director. 24 Yes, Mr. Chairman. Interlott is the 25 company that you're speaking of. They have come into 0061 1 the Commission's headquarters in this very room, given 2 a lengthy and detailed overview to us of their 3 capabilities and their vision of the industry in 4 general. They have won a couple of what are 5 considered to be large state contracts recently. I 6 see them as a very viable competitor with GTECH at 7 this point. The proof will be in the pudding as they 8 bring on these larger states and implement new systems 9 in those states. 10 I also see Scientific Games as a 11 potential competitor for the lottery operator services 12 here. Although there was a development in New Jersey, 13 I believe -- New Jersey -- in which GTECH, Scientific 14 Games competed for that contract, GTECH was the 15 apparent successful proposer. 16 Scientific Games filed a protest, had 17 the decision thrown out, and it was rebid. And in 18 that rebid, Scientific Games did not bid. So I can't 19 answer for them, their strategy in bidding or not 20 bidding. But I do believe in my mind there are two 21 strong competitors for Texas at this time, and that is 22 Interlott and GTECH. 23 I am not quite sure about Scientific 24 Games and what their company strategy is. They 25 obviously are the major player in printing instant 0062 1 tickets. I'm not so convinced that their ongoing 2 strategy is going to be in providing on-line game 3 services and the field and marketing services that go 4 with that. 5 CHAIRMAN COX: Now, the first of next 6 month we're going to be visiting Scientific Games. I 7 was under the impression we were going to be looking 8 at their on-line -- at their lottery operator 9 capability. But you think that presentation may be 10 less than that? 11 MR. GRIEF: No, sir, I do believe we'll 12 be looking at their on-line capability. 13 CHAIRMAN COX: Okay. 14 MR. GRIEF: I'm just speculating, based 15 on the fact that Mike Chambrello, their president, has 16 appeared before this Commission in the past and did 17 not give a definite answer as to whether or not they 18 would be bidding on the Texas contract in the future. 19 I think he qualified his answer as they would have to 20 examine their company's position at the time and then 21 also with the recent developments in New Jersey and in 22 these other states where Interlott has won bids not 23 over GTECH but sometimes over Scientific Games or in 24 the absence of Scientific Games. 25 CHAIRMAN COX: Does Interlott have an 0063 1 international presence? 2 MR. GRIEF: Yes, they do. They're 3 headquartered out of Greece. 4 CHAIRMAN COX: So do they do work for 5 lotteries on an international basis? 6 MR. GRIEF: Yes, sir, they do. 7 CHAIRMAN COX: Do you know what some of 8 their big clients are? 9 MR. GRIEF: I believe in the Country of 10 Greece is their biggest international. If I'm -- 11 MR. RIVERA: Taiwan and Greece. 12 MR. GRIEF: Am I correct? Taiwan -- 13 MR. RIVERA: Taiwan and Greece. 14 MR. GRIEF: -- has been another one. 15 And Ramon is telling me from the gallery, Korea as 16 well. 17 COMMISSIONER SCHENCK: South Korea I 18 presume? 19 (Laughter) 20 MR. GRIEF: Yes. 21 CHAIRMAN COX: Anything further? 22 COMMISSIONER SCHENCK: Yes. 23 Gary, if you know, what was the nature 24 of the bid protest in New Jersey? 25 MR. GRIEF: I can't recall, but perhaps 0064 1 Mr. Rivera could shed some light on that. 2 MR. RIVERA: Good morning, 3 Commissioners. Ramon Rivera, Account General Manager 4 for GTECH in Texas. 5 I'm going to go off of memory right 6 now, but there was some dispute over the selection 7 method and how the various factors were pointed by the 8 Evaluation Committee in New Jersey. 9 COMMISSIONER SCHENCK: The end result 10 is, before the points were adjusted, Scientific Games 11 was bidding and won, and after the adjustment they 12 didn't want to bid anymore? 13 MR. RIVERA: No, sir. In the initial 14 responses to the RFP, the State of New Jersey selected 15 GTECH -- 16 COMMISSIONER SCHENCK: Oh, I'm sorry. 17 MR. RIVERA: -- as the successful 18 proposer. There was a protest after that submitted by 19 Scientific Games. And the protest -- and I'm going 20 off of memory now, sir -- had to do with whether or 21 not the evaluation committee properly adjusted or took 22 into account the pointing factors that they used in 23 the ultimate selection. It went before the Finance 24 Department of the State of New Jersey. The decision 25 was made to re-issue the RFP. And two bidders -- 0065 1 COMMISSIONER SCHENCK: When they 2 reissued the RFP, did they change the scoring process 3 or was it kept the same? 4 MR. RIVERA: I don't recall. I can't 5 answer that. But the two bidders for the second RFP 6 were GTECH and Interlott, and that contract has not 7 been let yet. 8 MR. GRIEF: One other thing I'll add, 9 current event, just read it this morning in one of the 10 on-line daily publications. In the Ohio lottery 11 matter in which Interlott was selected as the apparent 12 successful proposer, GTECH has now filed a formal 13 protest, so that one is still to be determined. 14 CHAIRMAN COX: How big is the Ohio 15 lottery, Gary? 16 MR. RIVERA: Commissioner, going off 17 memory, about 8,000 -- eight to 9,000 retailers. It's 18 a very large lottery compared to our 16 -- 19 CHAIRMAN COX: About half the size of 20 Texas? 21 MR. RIVERA: Yes. But in general, it's 22 still considered a large lottery. 23 CHAIRMAN COX: Okay. 24 COMMISSIONER REYES: No questions. 25 CHAIRMAN COX: Thank you very much. 0066 1 AGENDA ITEM NO. XI 2 CHAIRMAN COX: Item XI, report by the 3 Executive Director and/or possible discussion and/or 4 action on the agency's operational status, agency 5 procedures and FTE status. 6 Director Sadberry. 7 MR. SADBERRY: Commissioners, I do not 8 have anything, in addition to what has been discussed, 9 specifically to report to you. Information and data 10 regarding the FTE status is in your notebook. And I 11 would be happy to address any questions you might 12 have. 13 CHAIRMAN COX: Commissioner? 14 COMMISSIONER SCHENCK: Well, I'll ask 15 one question. How is it we end up with a total of a 16 quarter of a full-time employee somewhere? I 17 understand we get half-time workers, but where do we 18 find a quarter of a worker? 19 MR. SADBERRY: Let me ask Janine Mays, 20 the Director of HR, or whomever might be needed to 21 assist with answering that question, to come forward 22 if you don't mind, please. 23 COMMISSIONER SCHENCK: Or three- 24 quarters? 25 MS. MAYS: I had to get a little help 0067 1 before I came up. 2 Good morning -- thank you, Kathy -- 3 Janine Mays, HR Director. That's the three-quarter 4 position in Internal Audit. 5 COMMISSIONER SCHENCK: Okay. So we 6 have someone working three-fourths time? 7 MS. MAYS: Right. 8 CHAIRMAN COX: So we must have a couple 9 of halves, because the ombuds is a half. Right? 10 MS. MAYS: The ombuds is a half, and 11 the Internal Auditor person is a little more than a 12 half. 13 MS. PYKA: We have one more half in 14 Retailer Services -- 15 MS. MAYS: Thank you. 16 MS. PYKA: -- budgeted but vacant. 17 CHAIRMAN COX: Okay. Great. 18 COMMISSIONER SCHENCK: I wasn't aware 19 we had anything other than a half. Appreciate it. 20 MS. MAYS: Does that answer it? 21 COMMISSIONER SCHENCK: Thank you. 22 COMMISSIONER REYES: No questions. 23 CHAIRMAN COX: Okay. Item XII, report, 24 possible discussion and/or action on the agency's 25 Strategic Plan for 2009. 0068 1 Now, before we do this, Gary, let's 2 take a short break. 3 (Recess: 10:13 a.m. to 10:34 a.m.) 4 CHAIRMAN COX: Okay. Let's come back 5 to order, please. 6 AGENDA ITEM NO. III (continued) 7 CHAIRMAN COX: I want to call back 8 Robert Tirloni. He has a report on a question that we 9 asked him earlier. 10 Gary, you're next. 11 MR. TIRLONI: Commissioners, Ramon 12 Rivera checked for us during the break. And there are 13 approximately 41 percent of our retailers that are 14 carrying the $50 game. There's two fifties that are 15 currently out and active. And we are going to be 16 launching our third $50 game in the next few weeks, in 17 June. 18 COMMISSIONER REYES: No questions. 19 CHAIRMAN COX: Thank you, Michael. 20 AGENDA ITEM NO. XII 21 CHAIRMAN COX: Okay. Report, possible 22 discussion and/or action on the agency's Strategic 23 Plan for '09 through '13. 24 Gary Grief and Robert Elrod. 25 MR. ELROD: Morning. 0069 1 MR. GRIEF: Good morning, 2 Commissioners. Once again for the record, my name IS 3 Gary Grief. I'm the Deputy Executive Director. And 4 with me this morning is Robert Elrod from the 5 Administration Division. 6 Today I want to bring to your attention 7 the development of the agency's Strategic Plan for 8 Fiscal Years 2009 through 2013. The Strategic Plan is 9 a document required by the Legislature every two years 10 from all state agencies, and it's intended to be a 11 long-term formal plan that communicates an agency's 12 goals, objectives, directions and outcomes to various 13 audiences, including the Governor and the Legislature, 14 client and constituency groups and the agency 15 employees, as well as the general public. 16 The document will serve as the 17 foundation for the agency's strategic planning and 18 budget structure through which the agency will 19 ultimately develop a legislative appropriations 20 request -- commonly referred to as an LAR -- later 21 this year. And the LAR will reflect the decisions 22 about how the agency's fiscal resources are going to 23 be allocated. 24 The Strategic Plan also outlines our 25 agency goals and objectives and produces strategies 0070 1 for the agency to follow to achieve those goals. Our 2 2009-2013 plan is the result of a team effort that has 3 spanned several months of work and has involved staff 4 from all areas of the organization. 5 We've had designated liaisons 6 contribute from each division, and those liaisons had 7 responsibility for providing the content from their 8 respective departments. Again this year I designated 9 Robert Elrod as the Project Manager for the 10 development of our Strategic Plan, and Robert did his 11 usual exceptional work in putting together a detailed 12 workplan and a timeline and managing the project 13 agency-wide. 14 Each of the Commissioners should have 15 received by now a draft of the Strategic Plan 16 document. And we will be bringing this plan before 17 you for formal consideration and approval in the June 18 Commission meeting. The document is a result of a 19 lengthy process that has included several formal 20 meetings that were convened as part of our long-range 21 planning process, together with smaller workgroup 22 meetings that focused on particular areas of expertise 23 in the agency. 24 At we have worked to develop this plan. 25 We have been very mindful of our agency's business 0071 1 plan which, unlike the Strategic Plan which is 2 required by the Legislature, the business plan was 3 originally developed in response to a recommendation 4 from the Sunset Commission. And we have once again 5 ensured that there is consistency between the 6 Strategic Plan and the agency's Business Plan. In 7 addition, we have also incorporated into the Strategic 8 Plan the agency's budget structure, which has been 9 approved by the Governor's office and the Legislative 10 Budget Board. 11 Our expectation is that the Strategic 12 Plan, in combination with the agency's Business Plan, 13 will serve as our road map for future activities and 14 provide assurance that those activities ultimately 15 support the vision and goals of the State of Texas. 16 Again, this agenda item is just for 17 informational purposes only today. We will be seeking 18 your formal approval of the plan at the next meeting. 19 We would be happy to answer any questions that you 20 might have about the plan or the process at this time. 21 COMMISSIONER SCHENCK: Gary, I very 22 much appreciate this effort. I know it's a lot of 23 work and it's very important. I'm looking forward to 24 talking about this more at the next meeting. 25 MR. GRIEF: Very good. 0072 1 COMMISSIONER REYES: I also want to 2 thank you. I think this Strategic Plan is very 3 important to the future of the lottery. So thank you 4 for your effort, and I'll look at it a little bit more 5 carefully and have some questions for you next time. 6 MR. GRIEF: Thank you, Commissioner. 7 Again, I want to recognize Mr. Elrod 8 for all the hard work and time he put into this 9 project again this year. 10 CHAIRMAN COX: Robert, we appreciate 11 that very much. 12 MR. ELROD: Thank you. 13 CHAIRMAN COX: Gary, let's talk a 14 little history on the Business Plan. The Strategic 15 Plan I guess we have had always with us. 16 MR. GRIEF: Yes, sir. 17 CHAIRMAN COX: In 2003 or 2004, as you 18 said, at the recommendation of the Sunset Advisory 19 Commission, we engaged Prof. Gary Cadenhead from The 20 University of Texas, McCombs School, to lead a team 21 that developed a business plan for us. Now, I know 22 that Dr. Cadenhead is retired. Do we still get help 23 on that plan, as we update it, from anyone at McCombs 24 or do we do that in-house now? 25 MR. GRIEF: We're doing that in-house 0073 1 now. We are still following the model that 2 Dr. Cadenhead and his team helped us set up at the 3 time. And in summary, our Business Plan is focused on 4 action items. And what we come together and decide 5 is: What are the most important business action items 6 that we need to undertake over the next period of 7 time? And that's usually a period of three to five 8 years. 9 And we lay those out very specifically, 10 and each division tracks those action items and we 11 meet as a group once every six months to review where 12 we are with those action items. What we have to 13 ensure is that those action items don't contradict or 14 conflict with but, rather, complement all of the items 15 that we've laid out in our agency's Strategic Plan. 16 CHAIRMAN COX: And do the same teams 17 work on the update of the -- Robert, for instance, 18 does he work on the Business Plan as well? 19 MR. GRIEF: Robert certainly did help 20 us this year in helping us organize and keep on track 21 with the Business Plan, in a similar fashion as he 22 worked with us on the Strategic Plan. 23 CHAIRMAN COX: Okay. Now the Strategic 24 Plan is an organic document that we work with, of 25 course, on a regular basis. I think Kathy has to work 0074 1 with it for a lot of what she does, and I'm sure you 2 do as well. You mentioned that you meet every six 3 months on the Business Plan? 4 MR. GRIEF: Yes. 5 CHAIRMAN COX: They really have 6 different purposes, don't they? 7 MR. GRIEF: Yes, sir, they do. The 8 Business Plan is truly focused internally to help us 9 stay on track with those important business 10 initiatives that we have within the agency. The 11 Strategic Plan is broken down into various components, 12 all of which are required by the Legislature to be 13 included. And some mean more to Kathy's shop, for 14 example, than they do to Mike Fernandez's shop. Some 15 mean more to Michael Anger's shop than others. It's 16 really two separate purposes as you say. One is 17 required; one is one that we've taken upon ourself to 18 help us keep focused on the business of the agency. 19 CHAIRMAN COX: Okay. And if I remember 20 right, in the Strategic Plan, the strategies are 21 numbered, and those numbers correspond to a number in 22 our LAR? 23 MR. GRIEF: That's correct. 24 CHAIRMAN COX: Okay. Anything further, 25 Commissioners? 0075 1 COMMISSIONER REYES: No questions. 2 COMMISSIONER SCHENCK: No questions. 3 CHAIRMAN COX: Gary, Robert, thank you 4 very much. 5 MR. GRIEF: Thank you. 6 MR. ELROD: Thank you. 7 AGENDA ITEM NO. XIII 8 CHAIRMAN COX: Okay. Item No. XIII, 9 consideration of and possible discussion and/or 10 action, including proposal, on amendments to Rule 16 11 TAC §401.362 relating to retailer's financial 12 responsibility for lottery tickets received and 13 subsequently damaged or rendered unsaleable, for 14 winning lottery tickets paid and for lottery-related 15 property. 16 Ms. Rienstra and Ed Rogers. 17 MS. RIENSTRA: Commissioners, Deanne 18 Rienstra, Assistant General Counsel. 19 Attached for your consideration are 20 proposed amendments to 16 Texas Administrative Code 21 401.362 which governs the financial responsibility for 22 lottery tickets that have been delivered to a 23 retailer. The proposed amendments would clarify what 24 costs, if any, would be borne by a retailer for 25 tickets that are damaged or destroyed. 0076 1 The proposed amendment set out 2 procedures retailers would be required to follow in 3 various circumstances in order to obtain credit for 4 tickets damaged or destroyed at a licensed retailer 5 location. Ed Rogers is here to give you some 6 background information on this rule. 7 MR. ROGERS: Good morning, 8 Commissioners. For the record, Ed Rogers, Retailer 9 Services Manager for the Lottery Commission. 10 I would like to start by providing some 11 background on how the Texas Lottery has managed 12 instant tickets that were damaged or stolen after 13 being received at a retailer, how we managed those 14 issues over time. 15 Up until 2004, these issues were 16 addressed in a single administrative rule, Rule 17 401.362. This rule covered these instant ticket 18 issues, some general retailer financial 19 responsibilities issues for tickets and responsibility 20 for lottery property at their businesses. 21 Stolen tickets were the most prevalent 22 and most sensitive issue addressed by this rule, with 23 damaged ticket issues being less prevalent. Prior to 24 2004, retailers were charged a $25 fee for tickets 25 that were stolen from their stores while they were in 0077 1 confirmed status, and confirmed status is the status 2 used to document physical receipt of the tickets at 3 the location. And they were charged full face value 4 for tickets that were stolen while they were in active 5 or settled status, active status being the status used 6 when tickets are put out for sale to the public and 7 settled status being the status when we charge a 8 retailer for the tickets that they've been selling. 9 The Texas Lottery did not pay any 10 prizes on tickets that were reported stolen. And this 11 situation was perceived as being very one-sided and 12 very unfair by the retailers, in that the Lottery did 13 not pay any prizes on these tickets, but retailers 14 were responsible for paying the full face value for a 15 pack of tickets. 16 In 2004 the issues covered by Rule 17 401.362 were separated out into two separate rules, 18 general retailer financial responsibility for tickets. 19 Lottery property and damaged tickets were retained in 20 Rule 401.362, and issues related to stolen tickets 21 were addressed in a new rule, Rule 401.370. 22 With the passage of 401.370 in 2004, 23 the Lottery continued to charge retailers $25 for a 24 pack of tickets stolen while in confirmed status. And 25 the significant change was that the lottery would not 0078 1 charge retailers at all for tickets in active or 2 settled status that were reported as stolen, as long 3 as there were no validations on the range of tickets 4 being reported. 5 In short, the retailers were charged 6 for tickets that they sold and for which prizes had 7 been paid, but retailers were not charged for tickets 8 that were stolen and on which prizes had not been 9 paid. These charges required substantial procedural 10 changes and also significant software modifications to 11 our automated systems. 12 At that time, Rule 401.362 retained 13 provisions related to damaged tickets, and these 14 provisions were ones that the Lottery has operated 15 under since 1992. Retailers have been allowed to 16 return damaged tickets in confirmed status, and they 17 were charged $25 per pack. But retailers have not 18 been allowed to return tickets in active or settled 19 status that are damaged. There is one exception to 20 that, and that being tickets damaged by an Act of God, 21 that being floods, storms and the like. When those 22 issues occur, the Lottery sometimes puts into place a 23 program to provide some relief based on the impact of 24 the businesses by acts of God. 25 The current proposed changes to Rule 0079 1 401.362 will bring the Lottery's damaged ticket 2 practices in line with those related to tickets that 3 are stolen; and that is, retailers will continue to be 4 charged $25 for tickets in confirmed status that are 5 damaged and returned to the Lottery, and retailers 6 will be allowed to report tickets in active and 7 settled status. And they may not be charged for those 8 tickets that they report when there are no prize 9 validations on the range of tickets being reported. 10 We will require retailers to provides 11 documented evidence of an event in their store, 12 something outside of their reasonable control, that 13 caused the damage. This evidence can take various 14 forms, and retailers will be limited to two reports in 15 a 12-month period. 16 Staff believes that bringing our 17 practices for damaged tickets into line with those in 18 place for stolen tickets will be a very positive 19 change for both the lottery and its retailers. It is 20 expected that these changes will result in retailers 21 being willing to carry a wider range of inventory as 22 they see their financial liabilities for carrying 23 inventory reduced. 24 As you might imagine, a fire at a 25 retailer where tickets are destroyed can be a 0080 1 devastating event. Even when the overall store damage 2 is limited, if lottery tickets are damaged, the 3 financial cost can be very high. Currently the 4 average value of instant ticket inventory held by a 5 retailer overall was $19,000, and the average active 6 inventory at retailers typically exceeds $6,000, while 7 many retailers have inventory levels in the multiples 8 of thousands of dollars and some top-selling retailers 9 having hundreds of thousands of dollars in inventory 10 at their stores. 11 By modifying the lottery rules related 12 to damaged tickets, we are relieving these retailers 13 of potentially significant financial liabilities while 14 still effectively managing the financial liabilities 15 for the State of Texas. Since prizes will not be paid 16 on tickets that are damaged, the liabilities for the 17 lottery are limed to the cost of printing tickets, 18 some staff time to manage the issues and indirect 19 costs associated with the lottery operator contract. 20 And I would be glad to answer any 21 questions you may have about this proposed rule. 22 CHAIRMAN COX: Commissioner? 23 COMMISSIONER SCHENCK: I have a few 24 questions. Why is it that we're treating fire 25 separately from other loss causes? 0081 1 MR. ROGERS: A couple of reasons, sir. 2 One of the reasons is, is that often when there is a 3 fire, the tickets are completely destroyed. There's 4 really no physical evidence other than, you know, of 5 what is damaged. We do have some resources to look 6 into our automated systems to make some evaluation of 7 what the retailer's inventory levels were. But quite 8 often in those situations, there's actually nothing to 9 return to the lottery; whereas, with other damaged 10 situations, where maybe pipes break and flood a 11 storage room or something like that, we actually have 12 some physical tickets that we can pick up and evaluate 13 and actually have physically returned to our instant 14 warehouse. 15 One other issue is that, is that with 16 fires, we do have the opportunity to get a report from 17 local fire officials relating to the cause of the fire 18 and the fact that it did happen, when it happened and 19 the like, which we don't necessarily have those kinds 20 of official records for certain other kinds of damage 21 that may occur. 22 COMMISSIONER SCHENCK: But there are 23 going to be other causes of loss that -- it doesn't 24 seem that there is a perfect symmetry between -- we 25 have the Act of God as a defining event in Paragraph 0082 1 (5) where we're just discussing the administrative 2 fee. And then we're talking about fire in one 3 paragraph. Then we talk about, as I understand it, 4 every other cause of loss or damage to the ticket in 5 another paragraph. Are we limiting the losses here to 6 acts of God? 7 MR. ROGERS: No, sir. We do have the 8 fire scenario, as you noted. 9 COMMISSIONER SCHENCK: Right. 10 MR. ROGERS: But there are other 11 situations outside of the Act of God where tickets may 12 be damaged -- a roof leaks, pipes break, things like 13 that where, you know, an event occurs in the store -- 14 that causes damage to some of the inventory in the 15 store but outside of an Act of God and not associated 16 with the fire. 17 COMMISSIONER SCHENCK: Does it define 18 "Act of God" in the statute anywhere, because I 19 know -- 20 MR. ROGERS: Yes, sir. 21 COMMISSIONER SCHENCK: -- I could argue 22 that a roof leak is an Act of God, if it were my 23 client. 24 MR. ROGERS: Right. And so, no, I'm 25 not sure where Act of God might be defined in statute. 0083 1 As far as the lotteries go, we've traditionally looked 2 at the Act of God as being associated with, you know, 3 tornadoes, storms, hurricanes, floods, those kinds of 4 things. One of the things that we do look to is when 5 the Governor's office, in their Center For Emergency 6 Management, declares disaster areas in the state 7 associated with these events. We will look at the 8 areas covered by those determinations and apply that 9 to the Act of God provisions that we might want to 10 implement. 11 In the past, because we did charge 12 retailers -- and then we also look at other state 13 agencies. For example, if the Controller of Public 14 Accounts is giving some relief on the filing of tax 15 payments and the like for retailers in that sort of 16 area, we'll look to what they're doing in the area 17 that's covered. 18 COMMISSIONER SCHENCK: Isn't it really 19 natural disasters, then, that we're talking about? 20 MR. ROGERS: Typically, yes, sir. 21 COMMISSIONER SCHENCK: Wouldn't it be 22 better maybe to say "natural disaster" rather than 23 "Act of God"? I guess this is a pretty small point, 24 because we're talking about -- 25 MR. ROGERS: True. 0084 1 COMMISSIONER SCHENCK: -- $25 2 administrative fee, which is discretionary in any 3 event. 4 MR. ROGERS: We would be glad to look 5 into that as far as the posting of this rule. I'm not 6 really sure what the term, as far as the Act of God, 7 how that might be a term of art that's used outside of 8 the scope of this rule and what it might mean, but we 9 can certainly look at the appropriateness of using 10 natural disasters in place of that. 11 COMMISSIONER SCHENCK: Then with 12 respect to the losses for any cause other than fire 13 in -- and this is Subparagraph (4)(B), we say, "The 14 director may credit" -- discretionary -- "a retailer's 15 account for a range of activated tickets in a pack 16 reported as damaged or destroyed by a means other than 17 fire" -- 18 MR. ROGERS: Yes, sir. 19 COMMISSIONER SCHENCK: -- which is 20 everything other than fire. Do we define elsewhere in 21 the statute -- and, Kim, maybe you can answer this as 22 well. 23 MS. KIPLIN: We'll see. 24 COMMISSIONER SCHENCK: -- what we mean 25 by "damaged" or "destroyed"? I mean, there is an old 0085 1 yarn about the lawyer who files an insurance claim for 2 fire for cigars that he smoked. Scratch-off tickets 3 are damaged when somebody removes and scratches off 4 the face of it. Obviously, we're not saying that 5 we're going to allow someone to replace tickets that 6 they've scratched off and decided are all losers. I 7 mean, that -- 8 MS. KIPLIN: And I'm going to say, off 9 the top of my head, I don't think we do. I don't 10 think we have a -- 11 COMMISSIONER SCHENCK: Okay. Well -- 12 MS. KIPLIN: -- definition of 13 "damaged." And it may be that what we need to do is 14 work on these issues and any others that you've got 15 and, you know, bring it back. 16 COMMISSIONER SCHENCK: Well, I think we 17 need to at least limit this to unsold, unmanipulated 18 tickets. 19 MS. KIPLIN: And then perhaps, instead 20 of "Act of God," "natural causes," and then define 21 what we mean by "natural causes"? 22 COMMISSIONER SCHENCK: Yes, I would 23 suggest that we look at those things. 24 MS. KIPLIN: Sure. 25 COMMISSIONER SCHENCK: But am I wrong 0086 1 in looking at this, Kim, and reading that without a 2 definition of "damaged or destroyed," we could be 3 looking at a literal application that would allow 4 someone to -- 5 MS. KIPLIN: Yes, I think that would be 6 room on both sides to make that determination on what 7 is meant by "damaged or destroyed." 8 COMMISSIONER SCHENCK: I mean, these 9 are fairly small points. And, obviously, just the -- 10 MS. KIPLIN: Sure. 11 COMMISSIONER SCHENCK: -- fact that 12 we're saying the director may credit is going to 13 hopefully deal with any extreme applications somebody 14 may have. 15 MS. KIPLIN: Well, I think what we're 16 relying on, obviously, is the discretion of the 17 director in applying reasonable discretion under the 18 facts and circumstances of each situation that arises 19 in terms of: What is damage? What is destruction? 20 And my sense is -- and y'all can stop me -- is that 21 you're fairly liberal in looking at those and trying 22 to give the retailer the benefit of the doubt. 23 MR. ROGERS: Yes. I will tell you 24 that, you know, typically, the typical scenario would 25 be a retailer would talk with their sales rep about 0087 1 the tickets. They would physically, you know, look at 2 the tickets, so there would be an evaluation there 3 on-site at the retailer's store. We wouldn't be 4 crediting tickets that were sold as non-winners. One 5 of the things we do look at when we're taking these 6 reports is the validations that have occurred in the 7 system, with the expectation is that -- and we have, 8 you know, date and time stamps on that information -- 9 and the expectation is, is that, you know, if we see 10 validation activity on certain ranges and then a 11 report is filed, that those tickets were sold to the 12 public and prior to the event that's being reported. 13 And we do separate those out. 14 But we don't have, you know, it clear, 15 distinct from other damage. 16 COMMISSIONER SCHENCK: So if a pack 17 were put into a retail location and one ticket was 18 sold and it was turned in somewhere else as a winner, 19 let's say, and the rest of the pack is destroyed, 20 we're not going to give any credit back to the -- 21 MR. ROGERS: If that first ticket -- 22 there's a lot of different scenarios that can play out 23 in relation to what's sold and what's destroyed versus 24 our validations. But typically, you know, we could 25 possibly give credit for the rest of that pack. And 0088 1 in the course of giving that credit for the rest of 2 that pack that was destroyed, we would also prevent, 3 through our systems, any tickets from that range being 4 able to be presented at a retail location for the 5 claiming of a prize. 6 COMMISSIONER SCHENCK: But I'm just -- 7 there are all kinds of scenarios where these things 8 come up. Let's say one of the employees working 9 behind the desk is pin-pricking the pack. We have a 10 problem there, I mean, that can come up from time to 11 time. 12 MR. ROGERS: Yes, sir. 13 COMMISSIONER SCHENCK: I think it might 14 be good -- (A) we are as fire. (B) is something other 15 than fire. Then there is Act of God or natural cause. 16 And you're telling me there's some category of losses 17 that we would consider giving credit for that aren't 18 acts of God. But basically are those all situations 19 where the vendor is not negligent or corrupt or -- 20 MR. ROGERS: They are typically 21 situations, sir, where we're going to look at the 22 retailer -- and this is where some of the other 23 evidence comes in. For example, if somebody says, 24 "You know, the pipes burst at my store. I had water 25 damage for these tickets," again, those tickets are 0089 1 going to physically be reviewed. They're going to be 2 physically returned to our warehouse. But one of the 3 things we're going to be asking the retailer for is 4 some documentation that this event occurred in their 5 store. And it could take the form of possibly repair 6 bills or an insurance claim or some documentation that 7 the event occurred in their stores, not just that 8 there are some tickets that got wet. So that's going 9 to be the general damage concept. 10 For the Act of God, it is separate. We 11 do look for other evidence, whether it's news reports 12 or whether it's some information from the Governor's 13 Center For Emergency Management at the DPS, or what 14 other state agencies are doing, to say, you know, "Is 15 there a documented event out there that's impacting 16 taxpayers where they may need some relief from 17 government agencies"? 18 And typically with this new rule -- in 19 the past, that we did have some dispensation on 20 reporting requirements. We did typically forgive the 21 $25 administrative fee in those Act of God situations. 22 With this new rule, if it's passed and adopted, then 23 really the Act of God for the most part would be 24 limited to consideration of not applying the $25 25 administrative fee, because the rule would already 0090 1 address not charging retailers for tickets that they 2 weren't able to sell and on which the Lottery 3 Commission had not paid prizes. 4 COMMISSIONER SCHENCK: Okay. Thank 5 you. 6 COMMISSIONER REYES: Just a point of 7 clarification for my purposes. Is "natural causes" 8 and "natural disasters" the same thing? 9 MS. KIPLIN: Yes, I think -- 10 COMMISSIONER REYES: I've heard both 11 terms used. 12 MS. KIPLIN: I think for the most part 13 they are synonymous. You know, people can start to 14 nit-pick on it, but I think natural causes that are 15 like Act of God. And that's what we're looking at. 16 But we can obviously get a little more specific. 17 COMMISSIONER REYES: Yes, because I 18 heard both terms used, and I wasn't sure -- 19 MS. KIPLIN: Sure. 20 COMMISSIONER REYES: -- whether that 21 disasters and causes are the same. And then if you're 22 saying a natural disaster, does that have to be 23 designated like by the Governor or an area, a mayor or 24 county judge or -- you know, what is the -- 25 COMMISSIONER SCHENCK: Well, isn't the 0091 1 point here that we're trying to get at loss of tickets 2 without fault on the part of the vendor? 3 MR. ROGERS: Yes, sir. 4 COMMISSIONER SCHENCK: Why don't we 5 just say that? 6 MS. KIPLIN: And then have some kind of 7 documentary evidence to support that, so that we are 8 avoiding situations where people may want to be taking 9 advantage of a good thing that the Lottery Commission 10 is trying to do? 11 COMMISSIONER REYES: Yes. I agree. 12 CHAIRMAN COX: Deanne, would you like 13 to try to work on this and get it back to us before we 14 adjourn today or would you rather bring it back next 15 month? 16 MS. RIENSTRA: I would prefer to bring 17 it back next month. 18 CHAIRMAN COX: Is that okay with you? 19 COMMISSIONER SCHENCK: That would be 20 fine by me. 21 COMMISSIONER REYES: That's good. 22 CHAIRMAN COX: Okay. That's what we'll 23 do. 24 MS. RIENSTRA: Thank you. 25 COMMISSIONER REYES: Thank you. 0092 1 CHAIRMAN COX: Ed, a couple of 2 questions before you go -- 3 MR. ROGERS: Yes, sir. 4 CHAIRMAN COX: -- from a business 5 standpoint. How often does this happen? 6 MR. ROGERS: I can't really say. And 7 one of the reasons for that is that we have -- because 8 we never take these tickets back, we don't really know 9 the universe of incidents where this occurs. There 10 are times when retailers call in where they have had 11 some significant damage, and we've charged them for 12 these tickets, and so we know about those. 13 But other retailers know about the 14 practice and don't bother contacting us. In some 15 cases, the sales rep has worked with the retailer to 16 explain the lottery's rules on this issue. So it's 17 very difficult to say at this point how frequently 18 this happens and what the scope of the issue is for 19 the retailers. 20 We do know that on an individual basis 21 when it occurs, it's very important to the retailers 22 in that it does have this, you know, significant 23 financial impact on them. We do charge them for the 24 tickets. And quite often, either because they're 25 destroyed or because of the physical damage to the 0093 1 tickets, they're not able to sell them. 2 CHAIRMAN COX: Thank you. 3 COMMISSIONER SCHENCK: I'm sorry to add 4 yet more confusion to this. But in both the fire and 5 the other causes-for-loss paragraphs, I think we've 6 told the retailers they have to contact us within 24 7 hours in order to take advantage of this rule. Well, 8 if we have phone lines down from a hurricane or 9 something else like that and if I walked into my store 10 and saw it burned to the ground, I think the first 11 thought on my mind might not be the scratch-off 12 tickets. 13 CHAIRMAN COX: Those quick triggers 14 tend to be very irritating and sometimes very costly. 15 I think that's an excellent point. I don't know what 16 would be reasonable, but I think 24 hours is a little 17 short. 18 COMMISSIONER SCHENCK: I fear that it 19 might be under -- it's the catastrophic circumstances 20 we might be dealing with here. 21 MS. KIPLIN: And it's not date of the 22 disaster; it's date of discovery of the loss. 23 COMMISSIONER SCHENCK: Again -- 24 MS. KIPLIN: I under- -- 25 COMMISSIONER SCHENCK: -- the whole -- 0094 1 MS. KIPLIN: Sure. 2 COMMISSIONER SCHENCK: If it's a gas 3 station that's just blown up -- 4 MS. KIPLIN: We'll work on that. 5 COMMISSIONER SCHENCK: He's going to 6 have a lot of things on his mind other than the 7 scratch-off tickets. 8 MS. KIPLIN: And maybe what we can do 9 is take a look at thresholds that are used by other 10 business operations -- for example, insurance 11 companies and the like -- and see. But Mr. Anger -- 12 CHAIRMAN COX: Well, insurance 13 companies I know are all over the lot. 14 MS. KIPLIN: Okay. 15 CHAIRMAN COX: I've got several 16 policies, and I recently found one very irritating, 17 although I was able to stay within it. It had a 18 five-day trigger. That's unreasonable. 19 COMMISSIONER SCHENCK: Yes. Well, even 20 with insurance policies, usually there has to be a 21 showing of prejudice as a result of a lack of notice. 22 I don't think we're building that into this rule, nor 23 am I suggesting that we should. 24 MS. KIPLIN: Sure. 25 COMMISSIONER SCHENCK: But my point is, 0095 1 is that maybe allowing some kind of discretion for the 2 director, notwithstanding the 24 hours' problem, might 3 be something we should consider. 4 MR. ANGER: For the record, my name is 5 Michael Anger, the Lottery Operations Director. 6 And the only point I was going to make 7 is the one that Kim alluded to, in that we put 8 specifically in the language that not 24 hours of the 9 event but 24 hours of the discovery of the loss 10 specific to the lottery tickets, which can certainly 11 vary, you know. In the situation, Commissioner, that 12 you raise, I agree. While I will say that the lottery 13 tickets sometimes are the most significant level of 14 inventory in some of these businesses so they may 15 raise to a higher level of attention on the part of 16 the retailer, the fact is, is that may not be the 17 primary thing that someone is thinking about when they 18 see that their building is burned and on some -- 19 COMMISSIONER SCHENCK: Well, let me 20 just ask this question: How often is GTECH visiting 21 each one of these retail locations? 22 MR. ANGER: They visit twice a month in 23 most instances. 24 COMMISSIONER SCHENCK: So there is no 25 way someone could go beyond three weeks without 0096 1 realizing that they're got a lottery problem, when the 2 GTECH representative shows up and sees a burned slab 3 on the ground? 4 MR. ANGER: That's correct. 5 COMMISSIONER SCHENCK: So that would be 6 the outside, two weeks would be the extreme case where 7 someone should have known they had a lottery specific 8 problem? 9 MR. ANGER: That's correct. We 10 wouldn't get an independent report. It wouldn't be 11 longer than three weeks, because we would get an 12 independent report from GTECH with regard to that 13 retail location -- I mean, outside of the business 14 owner themself. 15 COMMISSIONER SCHENCK: The 16 representative shows up and sees a burned slab, I 17 mean, he knows he's got to go find the guy who used to 18 own the Fina store or whatever -- the Fina location, 19 whatever it is -- 20 MR. ANGER: That's right. 21 COMMISSIONER SCHENCK: -- where they 22 used to sell lottery tickets. So I'm just saying two 23 weeks would be the outside period we would ever be 24 talking about. I'm again not suggesting we use two 25 weeks as a time period but maybe some sort of 0097 1 discretionary -- 2 MS. KIPLIN: Yes. Well, we need -- my 3 inclination is, we need to build a bright line that 4 will be a general rule but, obviously, have built-in 5 discretion. 6 COMMISSIONER SCHENCK: I was under the 7 presumption that -- 8 MS. KIPLIN: Yes, exactly. And what 9 we'll do is, we'll take this back and we'll work on 10 it. And if we need more time than the next Commission 11 meeting, I would like to think that the Commission 12 would look on that favorably. I don't believe that 13 there is an interest group that's driving this -- I 14 could be wrong -- but this is just to try to 15 conform -- it came out of the rule review, and it's to 16 try to conform this particular rule to an existing 17 rule, and maybe this is a good time to take a look at 18 that. 19 COMMISSIONER SCHENCK: Well, it's 20 obviously a good effort. But it's a problem -- 21 MS. KIPLIN: Sure. 22 COMMISSIONER SCHENCK: -- by its 23 nature, that you're dealing with a lot of exigencies 24 and people under a lot of stress. So I think we ought 25 to be respectful of our vendor community, and I 0098 1 appreciate that you're taking the effort to do that. 2 MR. ANGER: Very good. We'll come back 3 with the revised work. 4 CHAIRMAN COX: Okay. Thank you. 5 MR. ANGER: Thank you. 6 COMMISSIONER SCHENCK: Thank you. 7 AGENDA ITEM NO. XV 8 CHAIRMAN COX: Okay. Item No. XV, is 9 there any public comment? 10 I see no public comment. 11 AGENDA ITEM NO. XVI 12 CHAIRMAN COX: With your permission, 13 Commissioners, at this time I move that the Texas 14 Lottery go into executive session to deliberate the 15 duties and evaluation of the Executive Director, the 16 Deputy Executive Director, Internal Audit Director and 17 Charitable Bingo Operations Director and to deliberate 18 the duties of the General Counsel, pursuant to 19 Section 551.074 of the Texas Government Code; 20 B. To receive legal advice regarding 21 pending or contemplated litigation pursuant to 22 Section 551.071(1)(A) and/or to receive legal advice 23 regarding settlement offers pursuant to 24 Section 551.071(1)(B) of the Texas Government Code 25 and/or to receive legal advice pursuant to 0099 1 Section 551.071(2) of the Texas Government Code, 2 including but not limited to: 3 Shelton Charles vs. Texas Lottery and 4 Gary Grief; 5 First State Bank of DeQueen, et al., 6 vs. Texas Lottery Commission; 7 James T. Jongebloed vs. Texas Lottery 8 Commission; 9 The Lotter Ltd; 10 Employment law, personnel law, 11 procurement and contract law, evidentiary and 12 procedural law and general government law; 13 Lottery Operations and Services 14 contract; 15 Mega Millions game and/or contract. 16 Is there a second? 17 COMMISSIONER SCHENCK: I second the 18 motion. 19 CHAIRMAN COX: All in favor, say "Aye." 20 COMMISSIONER REYES: Aye. 21 COMMISSIONER SCHENCK: Aye. 22 CHAIRMAN COX: Aye. 23 The vote is 3-0. The Commission will 24 go into executive session. The time is 11:09 a.m. 25 Today is May 28, 2008. 0100 1 (Recess: 11:09 a.m. to 1:09 p.m.) 2 AGENDA ITEM NO. XVII 3 CHAIRMAN COX: Let's come back to 4 order. The Texas Lottery Commission is out of 5 executive session. The time is 1:09 p.m. 6 Is there any action to be taken as a 7 result of executive session? 8 AGENDA ITEM NO. XIV 9 CHAIRMAN COX: If not, let's move on to 10 item XIV of the agenda. 11 Ms. Kiplin. 12 MS. KIPLIN: Commissioners, these are 13 the enforcement orders. I would like to, if I could, 14 just take up the first letter, A. This is -- 15 CHAIRMAN COX: Excuse me. 16 MS. KIPLIN: Yes, sir. 17 CHAIRMAN COX: For the record, 18 Commissioner Schenck has had to leave to catch a plane 19 to get back to Dallas and will not be here for this 20 remaining portion of the session. 21 MS. KIPLIN: The Commission still has a 22 quorum. 23 I would like to take up Letter A. This 24 is a case against a lottery retailer. There was an 25 appearance by the retailer, was not represented by 0101 1 counsel. It turned on -- well, the allegations in 2 this case are that the retailer took a ticket from a 3 claimant who asked him if this ticket was a winning 4 ticket, and he said no. And the claimant went away, 5 and then he cashed this ticket for $500 at another 6 retail location. 7 And it was at, I believe, a Tom Thumb 8 and there was video. The complaint who was the 9 claimant had a copy of the ticket, and it was a 10 complaint that was filed with this agency in an 11 investigation that occurred out of our Enforcement 12 Division. 13 The retailer did have different 14 rationale about how that all happened. His 15 credibility was attacked by the -- or was attacked by 16 the Enforcement attorney. And the Administrative Law 17 Judge in this case found that the retailer's testimony 18 in that regard was not credible, and it has 19 recommended revocation of this retailer's license, 20 based on the fact that he violated the State Lottery 21 Act. 22 Staff believes this goes to the heart 23 of the integrity of the lottery, that you have a 24 player who comes in, presents a ticket, is told it's 25 not a winning ticket, and the retailer then takes it, 0102 1 pockets it and goes and cashes it for himself. 2 With that, staff would recommend that 3 you vote to adopt the ALJ's findings and conclusions 4 and revoke this retailer's license. 5 CHAIRMAN COX: And this is Docket 6 No. A? 7 MS. KIPLIN: Yes, it is. 8 CHAIRMAN COX: Any questions, 9 Commissioner? 10 COMMISSIONER REYES: No questions. 11 CHAIRMAN COX: I move approval of the 12 staff recommendation. 13 MS. KIPLIN: If I could present that. 14 CHAIRMAN COX: Okay. 15 COMMISSIONER REYES: Do I need to 16 second? 17 CHAIRMAN COX: Yes. 18 COMMISSIONER REYES: Okay. I'll 19 second. 20 MS. KIPLIN: I'll keep talking if -- 21 CHAIRMAN COX: All in favor, say "Aye." 22 COMMISSIONER REYES: Aye. 23 CHAIRMAN COX: Aye. 24 Motion carries 2-0. 25 MS. KIPLIN: And I'll keep talking, if 0103 1 it's the pleasure of the Commission. 2 CHAIRMAN COX: Sure. 3 MS. KIPLIN: Letters B and C are 4 insufficient fund cases on the lottery side of the 5 house, or insufficient funds available at the time the 6 Lottery swept the accounts. And it is in the rule, 7 either three strikes and you're out or the one time 8 you didn't pay. Staff recommends that you vote to 9 adopt the findings and conclusions entered by the 10 Administrative Law Judge and revoke both of these 11 entities' licenses. 12 CHAIRMAN COX: Any questions, 13 Commissioner? 14 COMMISSIONER REYES: No questions. 15 CHAIRMAN COX: Move approval of the 16 staff' recommendation. 17 COMMISSIONER REYES: Second. 18 CHAIRMAN COX: All in favor, say "Aye." 19 COMMISSIONER REYES: Aye. 20 CHAIRMAN COX: Aye. 21 Motion carries 2-0. 22 MS. KIPLIN: And on Letter D, that is a 23 bingo worker case. It's a refusal to add this worker 24 to the registry, due to the disqualifying criminal 25 conviction, went to hearing and the ALJ has found and 0104 1 concluded it is a disqualifying criminal conviction 2 and recommends that the Commission not add this 3 gentleman's name to the registry. Staff recommends 4 that the Commission vote to adopt. 5 CHAIRMAN COX: Any questions, 6 Commissioner? 7 COMMISSIONER REYES: No questions. 8 CHAIRMAN COX: Move approval of the 9 staff recommendation. 10 COMMISSIONER REYES: Second. 11 CHAIRMAN COX: All in favor, say "Aye." 12 COMMISSIONER REYES: Aye. 13 CHAIRMAN COX: Aye. 14 Motion carries 2-0. 15 MS. KIPLIN: Commissioners, the last 16 case is a consent order out of the Bingo Division. 17 It's a licensed conductor who played outside license 18 times. And in this case, Mr. Chairman -- I know in 19 the past we've had discussions on what does that mean, 20 if it's 10 minutes over, 10 minutes under. These are 21 outside license times and that they were the wrong 22 days. 23 CHAIRMAN COX: Okay. 24 MS. KIPLIN: And staff would recommend 25 that you enter into the consent agreement. The 0105 1 administrative penalty is $200. And we would like to 2 see this licensee get some training. 3 CHAIRMAN COX: $200 isn't very much 4 training. 5 MS. KIPLIN: Well, the $200 is the 6 penalty. The training I think is the operator 7 training. 8 CHAIRMAN COX: Oh, they're going to get 9 some more training? 10 MS. KIPLIN: You really do need to make 11 sure that your amendments, your license has been 12 approved and so forth before you go and play on the 13 wrong days. The staff will defer on making any 14 arguments on 10 minutes outside license time really is 15 outside license time for another case. 16 CHAIRMAN COX: Okay. Move approval of 17 the staff recommendation. 18 COMMISSIONER REYES: I'll second. 19 CHAIRMAN COX: All in favor, say "Aye." 20 COMMISSIONER REYES: Aye. 21 CHAIRMAN COX: Aye. 22 Motion carries 2-0. 23 Is there any more business to come 24 before the Commission? 25 0106 1 AGENDA ITEM NO. XVIII 2 CHAIRMAN COX: Meeting is adjourned at 3 1:14 p.m. 4 MS. KIPLIN: Thank you, Mr. Chairman, 5 Commissioner Reyes. 6 COMMISSIONER REYES: Thank you. 7 (Meeting adjourned: 1:14 p.m.) 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0107 1 C E R T I F I C A T E 2 STATE OF TEXAS ) 3 COUNTY OF TRAVIS ) 4 I, Aloma J. Kennedy, a Certified 5 Shorthand Reporter in and for the State of Texas, do 6 hereby certify that the above-mentioned matter 7 occurred as hereinbefore set out. 8 I FURTHER CERTIFY THAT the proceedings 9 of such were reported by me or under my supervision, 10 later reduced to typewritten form under my supervision 11 and control and that the foregoing pages are a full, 12 true and correct transcription of the original notes. 13 IN WITNESS WHEREOF, I have hereunto set 14 my hand and seal this 11th day of June 2008. 15 16 ________________________________ 17 Aloma J. Kennedy Certified Shorthand Reporter 18 CSR No. 494 - Expires 12/31/08 19 Firm Certification No. 276 Kennedy Reporting Service, Inc. 20 Cambridge Tower 1801 Lavaca Street, Suite 115 21 Austin, Texas 78701 512.474.2233 22 23 24 25