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, JUNE 25, 2008 § 8 9 COMMISSION MEETING 10 WEDNESDAY, JUNE 25, 2008 11 12 BE IT REMEMBERED THAT on Wednesday, 13 the 25th day of June 2008, the Texas Lottery 14 Commission meeting was held from 9:00 a.m. to 15 1:25 p.m., at the Offices of the Texas Lottery 16 Commission, 611 East 6th Street, Austin, Texas 78701, 17 before CHAIRMAN JAMES A. COX, JR., and COMMISSIONER 18 DAVID SCHENCK. The following proceedings were 19 reported via machine shorthand by Aloma J. Kennedy, a 20 Certified Shorthand Reporter of the State of Texas, 21 and the following proceedings were had: 22 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Mr. James A. Cox, Jr. 4 COMMISSIONER Mr. David Schenck 5 GENERAL COUNSEL: 6 Ms. Kimberly L. Kiplin 7 EXECUTIVE DIRECTOR: Mr. Anthony J. Sadberry 8 DIRECTOR, CHARITABLE BINGO OPERATIONS: 9 Mr. Philip D. Sanderson 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE 3 AGENDA ITEM NO. I - Meeting Called to Order..... 8 4 AGENDA ITEM NO. II - Report by the Bingo Advisory Committee Chairman, possible 5 discussion and/or action regarding the Bingo Advisory Committee’s activities, 6 including the May 14, 2008 Committee meeting......................................... 14 7 AGENDA ITEM NO. III - Report by the Bingo 8 Advisory Committee Chairman, possible discussion and/or action on the 2007 BAC 9 Annual Report................................... 32 10 AGENDA ITEM NO. IV - Report, possible discussion and/or action on House Rules 11 Guidelines for licensed authorized organizations................................... 40 12 AGENDA ITEM NO. V - Report by the Charitable 13 Bingo Operations Director and possible discussion and/or action on the Charitable 14 Bingo Operations Division’s activities.......... 41 15 AGENDA ITEM NO. VI - Report, possible discussion and/or action on lottery sales 16 and revenue, game performance, new game opportunities, advertising, market research, 17 and trends...................................... 43 18 AGENDA ITEM NO. VII - Report, possible discussion and/or action on transfers 19 to the State.................................... 69 20 AGENDA ITEM NO. VIII - Report, possible discussion and/or action on Bingo 21 indirect and administrative expenses............ 71 22 AGENDA ITEM NO. IX - Report, possible discussion and/or action on the 80th 23 Legislature..................................... 71 24 AGENDA ITEM NO. X - Report, possible discussion and/or action on the agency’s 25 contracts....................................... 74 0004 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XI - Consideration of and possible discussion and/or action 4 on external and internal audits and/or reviews relating to the Texas Lottery 5 Commission and/or on the Internal Audit Department’s activities......................... 92 6 AGENDA ITEM NO. XII - Report, possible 7 discussion and/or action on the Mega Millions game and/or contract................... 93 8 AGENDA ITEM NO. XIII - Report, possible 9 discussion and/or action on GTECH Corporation..................................... 96 10 AGENDA ITEM NO. XIV - Report, possible 11 discussion and/or action on Scientific Games.... 100 12 AGENDA ITEM NO. XV - Report by the Executive Director and/or possible discussion and/or 13 action on the agency’s operational status, agency procedures, and FTE status............... 103 14 AGENDA ITEM NO. XVI - Consideration and 15 possible discussion and/or action on Lotto Texas jackpot estimation procedure.............. 104 16 AGENDA ITEM NO. XVII - Report, possible 17 discussion and/or action on the agency's Strategic Plan for 2009-2013.................... 111 18 19 20 21 22 23 24 25 0005 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XVIII - Consideration of the status and possible entry of orders in: 4 A. Docket No. 362-08-2448 – King Food Market 5 B. Docket No. 362-08-990521.B-D – In the Matter of the Refusal to Add 6 Certain Names to the Texas Lottery Commission’s Registry of Approved 7 Bingo Workers: Ashley Acevedo, Larry Bruton, Adela De Los Angeles, John 8 Garcia, Roslyn James, Dennis Jennings, Windy Mahler, Tammy Murray, Francisca 9 Ortega, James Shelton, and Brenda Tarver 10 C. Docket No. 362-08-990424.B-R – In the Matter of the Removal of 11 Certain Respondents from the Texas Lottery Commission’s Registry of 12 Approved Bingo Workers: Judy Elliott, Steven Hardy, Beatriz Licea-Noria, 13 Michelle Perez, Wendy Walts, and Kristina Wright 14 D. Docket No. 362-08-9900424.B-D – In the Matter of the Refusal to Add 15 Certain Names to the Texas Lottery Commission’s Registry of Approved 16 Bingo Workers: Kelli Arrington, Rhonda Bowie, Isaac Espinoza, Joann 17 Guerrero, Danny New, Gustavo Porras, and Clarence Watson 18 E. Case No. 2007-1308 – In the Matter of Sherry Lynn Harvey, Bingo Registry 19 Worker................................... 113 20 AGENDA ITEM NO. XIX - Public comment............ 124 21 22 23 24 25 0006 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XX - 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 Operations 11 Director pursuant to Section 551.074 of the Texas Government Code 12 E. To deliberate the duties of the General Counsel pursuant to Section 551.074 of 13 the Texas Government Code F. To receive legal advice regarding pending 14 or contemplated litigation pursuant to Section 551.071(1)(A) and/or to receive 15 legal advice regarding settlement offers pursuant to Section 551.071 (1) (B) of 16 the Texas Government Code and/or to receive legal advice pursuant to Section 17 551.071(2) of the Texas Government Code, including but not limited to: 18 Shelton Charles v. Texas Lottery and Gary Grief 19 First State Bank of DeQueen, et al., v. Texas Lottery Commission 20 James T. Jongebloed v. Texas Lottery Commission 21 The Lotter Ltd Employment law, personnel law, 22 procurement and contract law, evidentiary and procedural law, 23 and general government law Lottery Operations and Services 24 contract Mega Millions game and/or 25 contract............................ 8/124 0007 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XXI - Return to open session for further deliberation and possible action 4 on any matter discussed in Executive Session.......................................10/11/126 5 AGENDA ITEM NO. XXII - Adjournment.............. 126 6 TRIBUTE TO FORMER SUPREME COURT 7 JUSTICE JAMES A. BAKER.......................... 10 8 REPORTER'S CERTIFICATE.......................... 127 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0008 1 P R O C E E D I N G S 2 WEDNESDAY, JUNE 25, 2008 3 (9:00 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN COX: Good morning. It's 6 9:00 a.m. September 25, 2008. Commissioner Schenck is 7 here. I'm Jim Cox. 8 AGENDA ITEM NO. XX 9 CHAIRMAN COX: At this time I move the 10 Texas Lottery go into executive session: 11 A. To deliberate the duties and evaluation of 12 the Executive Director, the Deputy Executive Director, 13 Internal Audit Director and Charitable Bingo 14 Operations Director and to deliberate the duties of 15 the General Counsel pursuant to Section 551.074 of 16 the Texas Government Code, to receive legal advice 17 regarding pending or contemplated litigation pursuant 18 to Section 551.071(1)(A) and/or to receive legal 19 advice regarding settlement offers pursuant to Section 20 551.071(1)(B) of the Texas Government Code and/or to 21 receive legal advice pursuant to Section 551.071(2) of 22 the Texas Government Code, including but not limited 23 to: 24 Shelton Charles v. Texas Lottery and 25 Gary Grief; 0009 1 First State Bank of DeQueen, et al., v. 2 Texas Lottery Commission; 3 James T. Jongebloed v. Texas Lottery 4 Commission; 5 The Lotter Ltd; 6 Employment law, personnel law, 7 procurement and contract law, evidentiary and 8 procedural law, and general government law; 9 Lottery Operations and Services 10 contract; 11 Mega Millions game and/or contract. 12 Is there a second? 13 COMMISSIONER SCHENCK: I second the 14 motion. 15 CHAIRMAN COX: All in favor say "Aye." 16 Aye. 17 COMMISSIONER SCHENCK: Aye. 18 CHAIRMAN COX: The vote is 2-0. The 19 Texas Lottery Commission will go into executive 20 session. The time is 9:03 a.m. Today is June 25, 21 2008. 22 (Recessed for executive session: 23 9:03 a.m to 9:44 a.m.) 24 25 0010 1 AGENDA ITEM NO. XXI 2 CHAIRMAN COX: The Texas Lottery 3 Commission is out of executive session. The time is 4 9:44 a m. 5 Is there any action to be taken as a 6 result of the executive session? 7 COMMISSIONER SCHENCK: No. 8 CHAIRMAN COX: Kim, how do we deal with 9 this? We're going to -- 10 MS. KIPLIN: I think you have an 11 Assistant Attorney General -- 12 CHAIRMAN COX: Yes. 13 MS. KIPLIN: -- that you might want to 14 call on. 15 CHAIRMAN COX: Mishell, would you like 16 to -- 17 TRIBUTE TO FORMER SUPREME COURT JUSTICE JAMES A. BAKER 18 COMMISSIONER SCHENCK: Mr. Chair, before 19 we get on to that, can I take a point of personal 20 privilege just for a second to recognize an important 21 event that occurred this week? We lost one of our 22 Supreme Court justices, James A. Baker, who served the 23 state as a Court of Appeals judge and then on the 24 Supreme Court. I had the privilege of serving with 25 him in private practice for several years as my law 0011 1 partner. Justice Baker died this weekend. His 2 services are today. I will not be able to be there, 3 but I would be remiss in not recognizing his service 4 to the state and the significance of the loss. 5 Appreciate your time. 6 CHAIRMAN COX: Thank you very much for 7 that, Commissioner. 8 AGENDA ITEM NO. XXI (continued) 9 CHAIRMAN COX: Okay. Kim, how do we go 10 forward with this? 11 MS. KIPLIN: I think you would like to 12 call Assistant Attorney General Mishell Kneeland to 13 come forward and to address the Commission on a 14 litigation matter and hear from her. 15 CHAIRMAN COX: Please. 16 MS. KNEELAND: Good morning, 17 Commissioners. I'm Mishell Kneeland. As Ms. Kiplin 18 noted, I am an Assistant Attorney General and I've 19 been assigned to work on the Shelton Charles versus 20 the Texas Lottery Commission and Gary Grief case. 21 I'm here today to recommend settlement 22 of this matter. Finally the parties have agreed to, 23 in principle, put this matter behind them and buy 24 peace. The terms of the settlement, if approved, 25 would be confidential, and we've discussed them in the 0012 1 executive session. I think that although the Texas 2 Lottery Commission and Mr. Grief did nothing wrong, 3 there were some risk factors to the agency, and so I 4 am recommending settlement of this matter. 5 COMMISSIONER SCHENCK: Mr. Chairman, I 6 recommend that we approve the settlement, subject to a 7 final approval by the Governor's office, of course. 8 CHAIRMAN COX: Okay. Is that a motion 9 that needs a second? 10 MS. KIPLIN: Yes. 11 CHAIRMAN COX: I second that motion. 12 All in favor, say "Aye." 13 COMMISSIONER SCHENCK: Aye. 14 CHAIRMAN COX: Aye. 15 Motion carries 2-0. 16 MS. KNEELAND: I would like to thank the 17 Commission for accommodating my schedule today and 18 taking things a little out of order. I appreciate it. 19 CHAIRMAN COX: We appreciate your 20 service very much. Thank you. 21 MS. KNEELAND: May I approach? 22 COMMISSIONER SCHENCK: Of course. 23 MS. KIPLIN: She has a couple of 24 documents that she needs to have signatures on, and if 25 we could just take a minute to have that accomplished. 0013 1 (Brief pause) 2 MS. KIPLIN: Today is the 25th. 3 I would just note for the record, 4 Commissioner Schenck is signing in a representative 5 capacity on behalf of the Commission on these 6 documents. 7 CHAIRMAN COX: Okay. And on behalf of 8 the agency, I would like to thank Commissioner Schenck 9 for his work on this matter. He's spent a lot of time 10 on this and was very helpful to the process. 11 COMMISSIONER SCHENCK: It was my 12 pleasure, of course. Thank you, sir. 13 MS. KNEELAND: May I be excused? 14 CHAIRMAN COX: Thank you. 15 Okay. Ms. Kiplin, you have another 16 matter? 17 MS. KIPLIN: Yes, I do. Commissioners, 18 you have before you a proposed settlement agreement 19 between the Lottery Commission and website The Lotter 20 Ltd. It's a foreign corporation with place of 21 business in London. This matter is a matter that had 22 to do with the Commission's position that there was an 23 infringement of the Commission's intellectual 24 property. And the Commission actually did file a 25 lawsuit here in the U. S. District Court, Western 0014 1 District. The attorneys have reached a settlement 2 agreement, and I do recommend that you approve the 3 settlement agreement in this lawsuit. 4 COMMISSIONER SCHENCK: I move that we 5 approve the recommendation and the settlement 6 agreement. 7 CHAIRMAN COX: Second. 8 All in favor, say "Aye." 9 COMMISSIONER SCHENCK: Aye. 10 CHAIRMAN COX: Aye. 11 Motion carriers 2-0. 12 MS. KIPLIN: With your permission, I 13 will sign off as counsel, both in substance and in 14 form, on the settlement agreement, and then forward it 15 to our outside counsel for intellectual property 16 matters, as well as the Office of the Attorney 17 General. 18 CHAIRMAN COX: Excellent. 19 AGENDA ITEM NO. II 20 CHAIRMAN COX: Okay, Suzanne, we finally 21 get to you. Item No. II, report by the Bingo Advisory 22 Committee Chairman, possible discussion and/or action 23 regarding the Bingo Advisory Committee activities, 24 including the May 14, 2008 committee meeting. 25 Ms. Taylor. 0015 1 MS. TAYLOR: Good morning, 2 Commissioners. My name is Suzanne Taylor. I chair 3 the BAC. I have the report from the May 14th meeting, 4 and I will just go ahead and read it to you if you 5 don't mind. 6 Item No. 1: Bingo Advisory Committee to 7 the Texas Lottery Commission met on May 14, 2008, in 8 Austin at 10:05 a.m. All members except Markey 9 Weaver, Kim Rogers and Tom Weekley were in attendance. 10 BAC members were advised Commissioner Schenck was on 11 the way. 12 Item 2: It was moved, seconded and 13 unanimously passed to approve the February 6, 2008, 14 Bingo Advisory Committee meeting minutes as posted 15 online with no changes. 16 Item 3: Colin Haza from the TLC 17 Governmental Affairs Division reviewed the action on 18 the 80th Legislature. He reported that the House 19 Licensing Committee hearing had been rescheduled for 20 tomorrow. The committee is working on Interim 21 Committee Charge No. 4 which calls for reviewing the 22 Bingo Enabling Act and recommending changes and to 23 study whether specific changes are needed to direct a 24 greater share of bingo revenue toward the charities. 25 Item 4: Phil Sanderson showed members 0016 1 the revised bingo PSA in English and in Spanish that 2 the TLC puts out each year. The PSA was met with a 3 very positive response from BAC members. 4 Item 5: Bruce Miner, TLC Manager of 5 Licensing Services, reviewed the fourth quarter 2007 6 bingo conductor information with BAC members. He 7 noted prize payouts for regular bingo in 2007 was 8 76.6 percent of gross receipts, and prize payout 9 percentages for instant bingo was 71.6 percent of 10 gross receipts. Instant bingo sales continue to 11 exceed regular bingo card sales and represented almost 12 42 percent of the total sales, while regular bingo 13 sales represented 34.7 percent and electronics were 14 23.5 percent. 15 Total net receipts increased one and a 16 half percent over 2006 and 6.3 percent over 2003. 17 Instant bingo increased 118 percent for the same 18 period, and regular bingo declined, at 26 percent from 19 2003. Average attendance has declined 13.4 percent 20 since 2003. However, there has been a 43.5 percent 21 increase in the average spend rate per player over the 22 same five years. Bruce also noted the charitable 23 distributions have consistently been two to three 24 times the required distribution amounts. 25 Item 6: Phil Sanderson viewed the 0017 1 guidelines on house rules with BAC members. He 2 reminded the BAC members the Commission adopted the 3 rule requiring house rules at the last Commission 4 meeting, with an effective date of May 21st. These 5 guidelines for house rules are going to be posted on 6 the website for organizations that might want guidance 7 on items they may want to include in the house rules. 8 Item 7: Phil Sanderson advised the BAC 9 members the staff was still working on getting the 10 draft rule finalized on 16 TAC 402.512 relating to 11 bingo occasion records. After the draft is finalized, 12 it was be submitted to the Books and Records workgroup 13 for their input. It should be ready to discuss at the 14 August BAC meeting. 15 Item 8: Phil Sanderson presented draft 16 16 TAC 402.200 relating to amendments to general 17 restrictions on the conduct of bingo. BAC members 18 have multiple concerns and recommendations for changes 19 and requested the rule be reworked to incorporate 20 these recommendations. Commissioner Schenck was 21 welcomed to the meeting. 22 Item 9: Phil Sanderson reviewed draft 23 16 TAC 402.208 relating to change to a license record. 24 Public comment was received requesting change to this 25 rule, including some of the required notifications. 0018 1 Item 10: Phil Sanderson reviewed 16 TAC 2 402.400 relating to changes to amendments to general 3 licensing provisions. Phil advised members this rule 4 is a current rule that is being enforced and active, 5 and these changes clarify requirements of the statute. 6 Public comment was received that a couple of items 7 still need work on this rule. 8 Item 11: Phil Sanderson reviewed 16 TAC 9 402.442 relating to changes to amendments to 10 commercial lessor licenses. This rule lays out the 11 guidelines and the information that is required to be 12 submitted for the amendment to a commercial lessor 13 license that requires a $10.00 amendment fee. Public 14 comment was received questioning why a name change 15 would require a statement of funds and questioning 16 some regulations required of associations. 17 Item 12: Phil Sanderson presented 18 16 TAC 402.443 relating to the transfer of a 19 commercial lessor license. This rule lays out the 20 steps and requirements to transfer a license to lease 21 bingo premises. Meagan Ahmad with the Charitable 22 Bingo Operations Division told members a commercial 23 lessor license can only be transferred to a 24 corporation that is owned or formed by the current 25 license holder; therefore, the receiving corporation 0019 1 has to be owned by the person that currently owns the 2 license. The receiving corporation's stock is then 3 sold between the individuals to transfer the license. 4 Phil told members additional clarification could be 5 performed on this rule. 6 Item 13: Phil Sanderson reviewed 16 TAC 7 402.205 relating to unit accounting agreements. This 8 rule explains and clarifies information that is 9 required from the organizations and is incorporated in 10 the unit agreement. Public comment was received 11 requesting several changes. BAC members requested 12 clarifying language regarding the bookkeeper of the 13 unit. 14 Item 14: David Heinlein advised BAC 15 members that the new Texas margin tax is going to 16 affect a lot of charities around the state. He 17 provided the committee with the information he has 18 been gathering from the State Comptroller's office. 19 This information included the fact that units set up 20 as "other organizations" and "partnerships" are 21 subject to the franchise tax. Only grantor trusts 22 where all the grantors and beneficiaries are 23 designated as 501(c)(3) organizations are non-taxable 24 entities. All other grantor trusts with a mix of 25 501(c) organizations are subject to the franchise tax. 0020 1 BAC members requested the Lottery Commission send out 2 notice to the units, notify them of the need to 3 consult with their CPA or attorney about these new 4 Comptroller requirements. 5 Item 15: Rosie, Markey and Thomas have 6 terms expiring September 1st. Nominations for these 7 positions ended April 30th with eight nominations 8 being received. A workgroup consisting of Earl, 9 Knowles and Larry was created to take all the 10 nomination forms for new BAC members into 11 consideration and bring recommendations to the next 12 BAC meeting. 13 Item 16: Suzanne, Kim and Rosie will 14 make up the workgroup that will develop the 2008 15 workplan and prepare a report to the Commissioners on 16 the progress and activities contained within the 17 workplan for approval by the BAC at their August 18 meeting. 19 Item 17: The Market Conduct workgroup 20 did not have a report at this time. 21 Item 18: The 2007 Bingo Advisory 22 Committee Annual Report was reviewed by BAC members. 23 It was moved, seconded and unanimously passed to 24 present the 2007 Bingo Advisory Committee Annual 25 Report to the Commissioners at their June meeting. 0021 1 Item 19: Phil Sanderson gave BAC 2 members a report on the activities of the Charitable 3 Bingo Operations Division. 4 Item 20: Public comment was received 5 from Carol Lauder, a representative from the 6 Comptroller's office, who serves as a consultant 7 facilitator for the BAC meetings. Carol told BAC 8 members this would be her last meeting and 9 congratulated the committee on the good work they had 10 done and the improvement they had shown through the 11 last several years. 12 Public comment was also received from 13 Jeff Minch, president of Littlefield Corporation, 14 advising BAC members Littlefield Corporation has 15 recently participated in the formation of a new 16 business association called the Texas Association for 17 the Advancement of Charitable Bingo, with membership 18 limited by invitation only to commercial lessors. 19 Commissioner Schenck addressed BAC 20 members, thanking them for their hard work and 21 advising them of his intention to be very active with 22 the bingo industry and available to the BAC when 23 needed. 24 Item 21: The next meeting is 25 tentatively scheduled for August 6, 2008 as 10 a.m. 0022 1 Agenda items will be due by July 21st. Documents for 2 the notebooks are due by July 29th. 3 Item 22: The meeting was adjourned at 4 12:58 p.m. 5 There is one item on here that I wanted 6 to provide additional comment. The notification that 7 we requested the Lottery Commission send to charities 8 about the need to possibly complete a franchise tax 9 return, I did receive some names and addresses from 10 the Lottery Commission, and I sent a mailing to the 11 individual, or each unit in the state, and letting 12 them know they need to contact their CPA. And I also 13 sent a copy of David Heinlein's information provided 14 to the committee. 15 So I don't know how many of our units at 16 this time had to send out or pay those franchise 17 taxes, but it's my understanding that an awful lot of 18 them, probably 80 of them were caught in this quandary 19 of having a mix between 501(c)(3)s and other 20 tax-exempt organizations within their units. 21 I received a call from VFW and also from 22 American Legion expressing their concern that they are 23 not tax-exempt because of the franchise tax. And my 24 personal CPA, when I contacted him, that does my 25 units, said that he had never heard of anything like 0023 1 that. And after his call to the State Comptroller's 2 office, he said amazingly, after all the classes he's 3 gone to on the new franchise tax laws, this is 4 something that they had never covered there either and 5 he didn't know about it. And he said David Heinlein 6 was absolutely right. So -- 7 COMMISSIONER SCHENCK: Maybe we should 8 send that letter over to the Board of Accountancy as 9 well so we can get that information out to them 10 before -- 11 MS. TAYLOR: The two gentlemen that have 12 contacted me said their CPAs had the same reaction and 13 talked to the state and found out that, once again, 14 David was right, but it's something that the CPAs are 15 unaware of. My CPA didn't know anything about it and, 16 when I first told him about it, was amazed that I 17 would think that we would have to file that report. 18 CHAIRMAN COX: And I think that there's 19 been enough confusion on this that the Controller's 20 office has extended the deadlines on these reports 21 because of that. 22 COMMISSIONER SCHENCK: Suzanne, do you 23 know what the penalty is for not filing? 24 MS. TAYLOR: I don't. 25 MR. BRESNEN: Mr. Chairman, may I 0024 1 comment on this? 2 CHAIRMAN COX: Sure. You bet, Steve. 3 MR. BRESNEN: I'm Steve Bresnen with the 4 Bingo Interest Group. I tried during the session to 5 get this fixed. If the underlying charities had not 6 formed a unit, they would not be taxable, regardless 7 of which 501(c) subsection they fell under. It's only 8 if they form a trust provided, obviously, in the unit 9 subchapter in the Occupations Code under the Bingo 10 Enabling Act and they're a mix of 501(c)(3)s and 11 something else, that the trust then becomes taxable. 12 We met with the Controller's office 13 before the session. We believed that was on their 14 agenda to have cleaned up during the session. I met 15 with members of the Legislature and thought it was on 16 their agenda, never got done, met with them after the 17 session. We're trying to provide them definitions 18 that are used in the gaming industry for what 19 constitutes gross receipts. 20 CHAIRMAN COX: Good. 21 MR. BRESNEN: I think you provided maybe 22 some information in that regard, Mr. Chairman, and we 23 appreciate that. But as of this date, we have not 24 been able to get that fixed. The only alternative, 25 some of us have talked about suing the state to 0025 1 invalidate the application of the margins tax to these 2 trusts, because they engage solely in bingo, and the 3 constitution says where the money from bingo is 4 supposed to go. 5 We're working on additional meetings 6 with the Controller to see if they can't see their way 7 clear not to be too hard on this until we can get it 8 fixed during the session. I suspect what you've seen 9 in the newspapers is, there's a lot of for-profit 10 businesses in the state that aren't too happy about 11 this tax, and I suspect there will be further change 12 during the session. 13 But it's been very difficult to try to 14 get it alleviated in the meantime. I think the 15 Legislature is concerned with, you know, everybody 16 coming down wanting their little fix on the thing. So 17 they kind of pulled up the drawbridge there and made 18 it hard to get across the moat during the session, but 19 we intend to keep after it. 20 Anything y'all can do to inform the 21 regulated community that it's a problem would 22 certainly be helpful. Thank you. 23 COMMISSIONER SCHENCK: Steve, I hope you 24 can find some way to get a stand-still agreement or 25 something in place, short of suing the state. I know 0026 1 that these entities don't have a whole lot of money 2 and they're charitable entities anyway. So spending 3 it on legal fees and tying up the state in litigation 4 is probably in no one's interest. So to the extent 5 you can negotiate, I know that everyone would 6 appreciate it. 7 MR. BRESNEN: Yes, sir. Well, we're 8 working on it. I even had an idea this morning about 9 how we might get around that. But it's a difficult 10 issue and a lot of people trying to get something 11 changed on their own behalf -- 12 COMMISSIONER SCHENCK: You're not the 13 only -- this is not the only industry that's concerned 14 about this. 15 MR. BRESNEN: Right. It's a real 16 problem. And, just frankly, it's just a mistake by 17 the Legislature. There is no principal reason to 18 distinguish between the activities that these trusts 19 are doing and the individual charities are doing. 20 It's really an absurd result, but it's what the words 21 in the statute say right now. 22 CHAIRMAN COX: Phil, is there anything 23 you have done or could do, perhaps with Steve's help, 24 to disseminate this information? I know we can't give 25 professional advice, but I wonder if you could work 0027 1 with the Legal Department and see if there is 2 something you could put on our website or the like 3 that would at least let people know that this 4 situation exists. 5 And, Steve, if you could help with that, 6 we would sure appreciate it. 7 MR. BRESNEN: I'll do anything I can to 8 help with it. It's an absurd result, and it's working 9 exactly against what we tried to achieve by the 10 creation of the units to begin with and certainly the 11 purposes bingo is supposed to serve. 12 CHAIRMAN COX: Yes. 13 MR. BRESNEN: We'll do it. Thanks. 14 CHAIRMAN COX: Thank you, Steve. 15 MS. KIPLIN: Mr. Bresnen, would you -- 16 MR. BRESNEN: And I've got a form there, 17 if we can just amend it to put this item on there, I 18 would appreciate. And I'll try not to do it again to 19 you. 20 MS. KIPLIN: No worries. Thank you. 21 MS. TAYLOR: If there are any other 22 questions? 23 COMMISSIONER SCHENCK: No. Again, thank 24 you for your hard work. 25 CHAIRMAN COX: Suzanne, I've got a 0028 1 couple of things I would like to talk about, and I've 2 talked about these several years. Average 3 attendance -- I'm looking on the first page of your 4 report -- has declined 13.4 percent since 2003. 5 However, there has been a 43.5 percent in the average 6 spend rate per player over the same five years. 7 So what have we got going on here? 8 We've lost 13.4 percent of our players. Are they 9 going on to other forms of gambling? Are they dying 10 off? You know, they've always said in Las Vegas that 11 when all the World War II veterans are dead, there 12 will be no more dice games. And I don't know whether 13 that's going to turn out to be true or not. But how 14 do you explain this phenomenon? 15 MS. TAYLOR: This is my personal opinion 16 only. 17 CHAIRMAN COX: Yes. 18 MS. TAYLOR: I think there are several 19 things. First, I think that our older bingo players 20 are dying off. I think we're not doing advertising to 21 get our new bingo players in there. We need to 22 advertise bingo across the state, and we need to 23 advertise it hard and get our new players in there. 24 Three, I think the people are spending 25 more money. The average spend has gone up. So if I 0029 1 used to play bingo five days a week and now I'm 2 spending 43 percent more, well, maybe I'm only going 3 to bingo two or three days a week. So maybe because 4 the event tabs have definitely increased our spend at 5 the hall, but perhaps our overall attendance is down 6 for the fact that they spend more money when they come 7 so they can come less days. 8 CHAIRMAN COX: So maybe there's not such 9 a decline in the customer base but maybe they're just 10 coming fewer times and spending more money on the few 11 times they do come? 12 MS. TAYLOR: I believe that that is a 13 big part of it, but I do believe that overall, we 14 don't have as many people playing bingo as we did 10 15 years ago. Ten years ago, the average attendance in 16 the hall was 280 people, in Corpus. The average 17 attendance was 280 people per session. And, I mean, 18 that was average, so that meant we have the sessions, 19 lots of sessions where we had 350 people in the halls. 20 Now if we have 350 people, I don't know that we could 21 handle it just because we don't have the employees 22 there to do that. 23 But I do believe that people have -- 24 more people now I believe have started doing some 25 on-line gaming. We have the bingo whatever on TV now 0030 1 where you go on-line and get your cards and play bingo 2 from the TV set. I don't know what channel that's on, 3 but I've caught it a couple of times, where they're 4 playing a bingo game on TV. I mean, it's pretty -- 5 there's a lot of active bingo. 6 We have the Internet now, and I think a 7 lot of people are also gambling on the Internet. And 8 one other thing, they're going to other states to 9 gamble and they're also playing the card games, the 10 Texas Hold 'Em and (inaudible) bingo players. And I 11 know that groups of players from my hall will leave 12 after one session, because they're all going to go 13 play cards at somebody's place or somewhere, doing the 14 Texas Hold 'Em and whatever else they play. 15 So I think it's a number of things 16 combined. But I really, really think that we need to 17 advertise bingo, every hall in the state. I know 18 we've got the PSAs and Rosie has been really good 19 about getting them on. And I wish every charity in 20 this state would talk to their local stations about 21 getting PSAs on talking about bingo. 22 You knew, we don't have to advertise a 23 particular hall. When the lottery is advertised, they 24 don't tell you where to buy your lottery tickets; they 25 tell you, "Go out and buy a lottery ticket." You 0031 1 know, go win some money from lottery. And we need to 2 be very active, I believe, in advertising bingo and 3 getting people excited about going back to bingo 4 halls. 5 CHAIRMAN COX: Thank you for that, 6 Suzanne, appreciate your service. 7 Thank you, Commissioner, for attending 8 that meeting and for your interest in the bingo 9 industry. 10 COMMISSIONER SCHENCK: And for the 11 record, it's fairly clear on my late arrival at the 12 BAC. That was one of our spring thunderstorms, and my 13 flight from Love Field at 6:50 a.m. was diverted to 14 San Antonio and eventually ended up getting back here. 15 But I apologize for not being on time. If I had been 16 at the helm, we would have been here on time. 17 (Laughter) 18 CHAIRMAN COX: Okay. Thank you. 19 Did you have something else, Suzanne? 20 MS. TAYLOR: Were you going on to Item 21 No. II? 22 CHAIRMAN COX: Item -- 23 MS. TAYLOR: Or Item III, rather? 24 25 0032 1 AGENDA ITEM NO. III 2 CHAIRMAN COX: Going to Item No. III, 3 which is yours as well, report by the Bingo Advisory 4 Committee Chairman, possible discussion and/or action 5 on the 2007 BAC Annual Report. 6 MS. TAYLOR: I believe -- I gave 7 Worlanda a copy of this, so I believe that you have 8 this particular item in your notebooks probably. 9 MR. SANDERSON: I believe it's in your 10 notebook, Commissioners. 11 CHAIRMAN COX: Oh, okay. Sure. Got it. 12 MS. TAYLOR: Rule 402.102(n)(2) states 13 that the BAC will report annually to the Commission on 14 the BAC's perspective on the state of the charitable 15 bingo industry in Texas, with specific comments on the 16 following: (1) gross receipts; (2) net receipts; (3) 17 charitable distributions; (4) expenses; (5) 18 attendance; and (6) any other area requested by the 19 Commission. 20 The Bingo Advisory Committee used data 21 in the Charitable Bingo Conduct Return Summaries from 22 the Statewide Financial Reports available on the Texas 23 Lottery Commission Charitable Bingo website. The 24 committee analyzed the data contained in the Conductor 25 Return Summaries and charted on the graphs contained 0033 1 in this report and has made the following observations 2 and come to the subsequent conclusions. 3 The first item, gross receipts, is shown 4 on the charts on Pages 4, 5 and 6. Gross receipts 5 have continued to improve because of increased instant 6 bingo sales due to event tabs and an increase in 7 electronic sales. Card sales entrance fees in 2007 8 deceased from 2006 by $21,812,729. Electronic sales 9 in 2007 showed a slight increase of $2,143,286 over 10 2006 electronic sales. And instant bingo sales 11 increased by $23,363,052, resulting in an increase in 12 instant bingo sales of approximately 9.25 percent from 13 2006 to 2007, thus creating an increase in overall 14 gross receipts of approximately .55 percent, or 15 $3,693,609. 16 Although instant bingo sales have 17 continued to increase due to the introduction of event 18 tabs, it should be noted more income would be derived 19 from an increase in card sales since the prize payouts 20 are limited to $2,500 per session. And with an 21 increase in instant bingo sales, there is an increase 22 in prizes paid out. 23 Item No. 2, net receipts, is shown on 24 the charts on Pages 7, 8, 9 and 10. Although gross 25 receipts have shown an increase of $98,664,035 from 0034 1 2001 to 2007, adjusted gross receipts have only 2 increased by $5,302,177, and net receipts have 3 increased by just $4,691,222 during the same time 4 period. This anomaly has occurred due to a decrease 5 in card sales that have a fixed prize payout and an 6 increase in instant bingo sales for the corresponding 7 increase in prize payouts. 8 3. Charitable distribution is shown on 9 the chart on Page 11. Charitable distributions have 10 continued to follow the trend begun in 2004. 11 Charitable distributions in '04 were $30,044,665. 12 They increased to $30,384,530 in 2005, increased to 13 $31,999,875 in 2006, and again to $32,073,589 in 2007. 14 This is the fourth year in a row to see 15 a slight increase in charitable distributions, even 16 though there has been a decrease in conductors and in 17 attendance during the same time period. Increasing 18 the gross revenue from card sales and electronic sales 19 through increased attendance would allow more income 20 to be available for charitable distribution. 21 Expenses is shown on the charts on Pages 22 12, 13, 14 and 15. Expenses decreased by $1,791,138 23 from 2006 to 2007 and have remained relatively stable 24 throughout the last six years, and we're only $610,955 25 more in 2007 than in 2001, confirming that conductors 0035 1 have been managing their expenses well. 2 Rent payments decreased by $277,841, and 3 lease payments to distributors decreased by $613,495 4 between 2006 and 2007. Because expenses have remained 5 relatively stable, conductors should be focused on 6 revenue enhancement. 7 Item No. 5 is attendance, and it's shown 8 on the charts on Pages 16 and 17. Attendance 9 decreased by 1,177,943 from 2006 to 2007, with a 10 decrease of approximately 25.38 percent from 2001 to 11 2007, 24,374,565 down to 18,187,580. One reason for 12 the continued decline in attendance is due to the 13 continuing decrease in the number of organizations 14 conducting bingo games from 2001 to 2007, 1,482 down 15 to 1,252. 16 This decrease may be due to the 17 increased competition for the gaming dollar, a lack of 18 advertising bingo in Texas, and because current prizes 19 and games are no longer exciting to the general 20 public, therefore making operations of bingo games 21 unproductive for non-profits conducting the games. 22 Recommendations for improvement include 23 more charity involvement in promoting their bingo 24 occasions and working to make bingo more enticing to 25 players in the local halls. Improving attendance 0036 1 remains the key issue to the success of charitable 2 bingo in Texas. 3 And no other items were requested by the 4 Commission at this time. If I could answer any 5 questions? 6 COMMISSIONER SCHENCK: Yes, I have a 7 question. I've raised this before, and I guess I'll 8 raise it again. I'm looking at the slide on Page 8 9 and Page 9. It strikes me as odd that we're ending up 10 with net revenue of 17 percent on an activity that 11 doesn't require manufacturing. The overhead here is 12 most of the -- consuming most of the revenue. Am I 13 right in that? 14 MS. TAYLOR: What you're looking at here 15 with this revenue, this has already taken the prizes 16 out, so we're talking kind of an adjusted net here. 17 And I'm sorry. Could you tell me the 18 question that you were asking? 19 COMMISSIONER SCHENCK: Well, my question 20 is, I think the biggest concern I have is the expenses 21 associated with the occasions in terms of rent, 22 mortgage payments and things of that nature. They 23 seem to be consuming a large portion of the total 24 income that's coming in from these activities. And I 25 believe, if I'm not mistaken, that that number has 0037 1 come down to some degree in recent years. But in 2 addition to encouraging advertising people to play, I 3 think controlling the expenses is also an important 4 part of this. And I'm wondering what, if anything, 5 are we doing on an organized basis to try to assist 6 these charities in reducing the rent payments and 7 things of that nature? 8 MS. TAYLOR: I really believe personally 9 that -- I don't know very many other businesses that 10 have had an increase in expenses as minuscule as the 11 charities have had. We've gone I think above and 12 beyond with trying to reduce expenses, which is one of 13 the reasons I believe so many charities in the state 14 don't advertise. 15 When I first became involved with bingo 16 with the JCs back in '88 or '89, we did a lot of 17 advertising. But as our attendance has decreased -- 18 this is pre-lottery so -- you know, we had a very good 19 attendance at that time and we had a great spend. 20 But when you start cutting costs, you 21 can't cut your wages. You have to pay your employees, 22 you have to pay the electronics, you've got to pay 23 your paper cost, you're going to have to pay rent. 24 And a lot of the rent that these organizations are 25 paying includes electricity and water and janitorial 0038 1 service. Some charities pay that outside of that, 2 which is really great, because now it shows up on the 3 quarterly reports. 4 A lot of other organizations, that's 5 included in the rental payments. So what you don't 6 see on here is how much of the rental payment includes 7 those other items? Are they paying a $500 rent but 8 that includes the janitorial and the water and, you 9 know, all the other expenses associated with it or is 10 that paid in addition to the $500 they're paying a 11 session? And that's something that you really -- I 12 can never tell when I look at the reports. 13 COMMISSIONER SCHENCK: How many of the 14 charities do you think are keeping track of what 15 they're really paying in terms of rent? 16 MS. TAYLOR: The Lottery Commission has 17 that information on the quarterly reports, because 18 there is a line item to put down -- Phil, you can tell 19 me. I know you've got this all memorized. There's 20 line items now that there didn't used to be. 21 MR. SANDERSON: There is a line item 22 strictly for lease payments or rent payments to the 23 commercial lessors, on the quarterly report. And 24 historically that number has been anywhere between 25 $250 and $275 per occasion on an average over the last 0039 1 five years. 2 COMMISSIONER SCHENCK: How long is a 3 typical occasion, Phil? 4 MR. SANDERSON: They are licensed up to 5 four hours. Now, they can go anywhere from one to 6 four. There's a lot of occasions that are just one 7 hour long and there's some that play the full four 8 hours. 9 COMMISSIONER SCHENCK: And do you have 10 any sense of what percentage of those rent payments 11 are covering additional items like utilities and 12 janitorial services and what percentage of them are 13 not, so that there is an extra cost for that? 14 MR. SANDERSON: We do not have that 15 information. 16 COMMISSIONER SCHENCK: Do you have a 17 sense of how many charities are keeping track of what 18 these overhead costs are, as opposed to just getting a 19 check in the mail and being glad they got a check? 20 MR. SANDERSON: We're conducting some 21 research on that particular situation right now, just 22 to see if the organizations understand how much their 23 expenses really are. Some of our rules that we're 24 recently adopting and still developing put a lot more 25 burden on the organization and the officers to oversee 0040 1 their operation more closely. 2 COMMISSIONER SCHENCK: Thank you. 3 CHAIRMAN COX: Thank you, Suzanne, for 4 that report. 5 MS. TAYLOR: Thank you. 6 AGENDA ITEM NO. IV 7 CHAIRMAN COX: Okay. Item No. IV, 8 report, possible discussion and/or action on House 9 Rules Guidelines for licensed authorized 10 organizations. 11 Mr. Sanderson. 12 MR. SANDERSON: Good morning, 13 Commissioners. In your notebook are guidelines that 14 we will be posting to the website as they relate to 15 house rules. At the April Commission meeting, the 16 Commission adopted a rule with an effective date of 17 May the 20th, that organizations are required to have 18 house rules and that they are required to follow their 19 house rules. 20 And since that, we've developed some 21 guidelines and information that organizations may want 22 to include in their house rules. By no means are they 23 required to include all of these items, but it's just 24 a document for them to review to see if there's any 25 items that they would like to include in their house 0041 1 rules. There is no action by the Commission on this 2 agenda item, but I would be welcome to entertain any 3 comments you may have. 4 COMMISSIONER SCHENCK: I have no 5 comments, Phil. Thank you. 6 CHAIRMAN COX: Mr. Bresnen, I think you 7 wanted to be indicated in favor of this but did not 8 wish to speak? 9 MR. BRESNEN: Correct. 10 CHAIRMAN COX: Thank you. That's 11 recorded. 12 AGENDA ITEM NO. V 13 CHAIRMAN COX: Item V, report by the 14 Charitable Bingo Operations Director and possible 15 discussion and/or action on the Charitable Bingo 16 Operation Division's activities. 17 Mr. Sanderson. 18 MR. SANDERSON: Commissioners, in your 19 notebook is the monthly report of bingo activities. I 20 would like to highlight a few items. The first item 21 is staffing, that we have posted for three inspectors. 22 The posting was on June the 17th, and so far we've 23 received two applications for that. 24 As Suzanne mentioned earlier, the next 25 BAC meeting is tentatively schedule for August the 0042 1 6th. And we'll be getting with the Commissioners 2 individually to see if anyone would like to attend the 3 BAC meeting. Quarterly reports are due today. 4 And then one other item I would like to 5 highlight is the Bingo Operator Training Program. We 6 have developed an on-line version which will be placed 7 on our website sometime today. All of the bingo staff 8 have attended this training. It consists of several 9 different modules, anywhere from 30 to 45 minutes. 10 It will not totally replace the current 11 training program that is conducted on-site, but it 12 will be a benefit for organizations that are unable to 13 attend the training. It's self-paced. They can take 14 the modules over a period of time. 15 I would like to recognize Rich Frysinger 16 of the Bingo Division for leading this project. We 17 developed this program in just a little under six 18 months from inception. And there are other staff 19 members that had a great deal of input: Meagan Ahmad, 20 Donna Rose, Randall Hare, Joy Bishop. And I would 21 also like to thank Mike Fernandez's Information 22 Resources staff, Mike Jones, for helping us develop 23 the software that we needed to put this on the 24 website. And hopefully I'll be able to bring you some 25 information at the next Commission meeting on if it's 0043 1 been utilized and what the impact is. 2 COMMISSIONER SCHENCK: Thank you, Phil. 3 I have no questions. 4 CHAIRMAN COX: Thank you, Phil. 5 AGENDA ITEM NO. VI 6 CHAIRMAN COX: Item No. VI, report, 7 possible discussion and/or action on lottery sales and 8 revenue, game performance, new game opportunities, 9 advertising, market research and trends. 10 Ms. Pyka, Mr. Tirloni. 11 MS. PYKA: Thank you, Mr. Chairman. 12 Again for the record, my name is Kathy Pyka, 13 Controller of the Lottery Commission. And with me to 14 my right is Robert Tirloni, the agency's Products 15 Manager. 16 Our first chart this morning reflects 17 revenue from sales, net revenue to the state through 18 the week ending June 14th of 2008. Total sales for 19 this 42-week period amounted to $2,092,000,000, a 20 decline of $72.6 million, or 2.4 percent as compared 21 to the same period in Fiscal Year 2007. 22 Prize expense through this period is 23 $1.9 billion, a $24.5 million decline from Fiscal Year 24 2007, and the sales contribution is $1.06 billion. 25 Net revenue to the state reflects a 0044 1 $55.9 million decrease as compared to the $781 million 2 figure for the same period in Fiscal Year 2007. And 3 the $1.9 billion amount recorded as prize expense as a 4 percentage of sales was 63.6 percent for the current 5 time period, as compared to 62.8 percent in Fiscal 6 Year 2007. 7 Our next slide summarizes the change in 8 sales by game from Fiscal Year 2007 to 2008. As noted 9 on the previous slide, the total decline from Fiscal 10 Year 2007 is 2.4 percent, or $72.6 million. The 11 overall decline includes a $14.5 million, or 2 percent 12 decline in on-line games and a $58.1 million decline, 13 or 2.5 percent in instant ticket sales. 14 The jackpot games are portrayed on this 15 slide with a white font, reflecting a $30.5 million 16 decline. Daily games are presented with the green 17 font, reflect an overall gain of $16 million as 18 compared to 2007. And while Pick 3 does note a 19 $20.8 million decline, the addition of Pick 3-Sum It 20 Up, Daily 4 and Daily 4-Sum It Up reflects an overall 21 $25 million gain over our Fiscal Year 2006 Pick 3 22 sales. 23 Our next slide for you this morning 24 includes -- 25 CHAIRMAN COX: Kathy? 0045 1 MS. PYKA: Yes, sir? 2 CHAIRMAN COX: There have been a number 3 of articles in the press regarding our sales, and one 4 of those indicated that the reason for our decline in 5 sales was the introduction of the Daily 4 game and the 6 change in the matrix to Lotto Texas. Do you have any 7 information that would support those ideas? 8 MS. PYKA: I do not. Our Daily 4 game, 9 as we had prepared an analysis and looking at the 10 introduction of the Daily 4 game, we had projected 11 that we would still have combined sales of the new 12 Daily 4 game with the Pick 3 game of an increase over 13 our Fiscal Year 2007 sales. And we have surpassed 14 that, as well as what we had looked at to be the 15 decline in Pick 3. We thought it would be around 16 15 percent, and it has not been that significant. 17 When we looked at the Daily 4-Sum It Up 18 feature, we believed that we would generate about five 19 percent of our Daily 4 sales with that particular 20 feature, and we have certainly surpassed that as well. 21 The only new feature that hasn't done as 22 well is the Pick 3-Sum It Up feature. We had expected 23 about five percent of Pick 3 sales with that feature, 24 and we've not generated five percent with that. It's 25 been more in the 2, 2.2, 2.3 percent range. So we 0046 1 projected a decline in Pick 3, with the introduction 2 of Daily 4. 3 CHAIRMAN COX: Right. 4 MS. PYKA: That has happened but not as 5 significant as we believed that it would happen. And 6 we have seen, as I said, an overall gain with the 7 introduction of the new products there. 8 With regard to Lotto Texas, we're going 9 to speak to that in a little bit in looking at our 10 overall Lotto Texas sales today as compared to the 11 previous days of pre-matrix change. And so if it's 12 okay with you, I would like to wait until we get to 13 that slide. 14 CHAIRMAN COX: Be perfect. 15 MS. PYKA: And I think we'll be able to 16 look at the actual sales data on that for you. 17 CHAIRMAN COX: Good. 18 MS. PYKA: The next slide includes our 19 Fiscal Year 2008 year-to-date sales by game. As noted 20 on this slide, 75.9 percent of sales, or $2.2 billion, 21 is from instant tickets, with 7.8 percent of sales, or 22 $226.9 million from Pick 3, followed by 5.5 percent of 23 sales, $161.4 million, from Lotto Texas, and 24 4.7 percent and $138.6 million from Mega Millions. 25 Sales to date for Daily 4 are 0047 1 $33.5 million and $7.1 million for Daily 4-Sum It Up. 2 Pick 3-Sum It Up sales amount to $5.1 million. 3 With that, Robert will now discuss sales 4 by price point. 5 MR. TIRLONI: Good morning. For the 6 record, my name is Robert Tirloni. I'm the Products 7 Manager for the Commission. 8 Commissioners, this next slide shows the 9 $2.2 billion we have realized in instant ticket sales 10 through the week ending June 14th. There has been no 11 change in the sequence of price points in terms of 12 sales. The five continues to be the best selling 13 price point, followed by the two and then the ten and 14 the three. 15 Commissioners, we have some new 16 information for you today. Chairman, this is some 17 information that you asked us to put together on 18 instant ticket sales by fiscal year, so I'll walk you 19 through the different information on this slide. I do 20 want to let you know I have a follow-up slide to this 21 that also overlaps revenue, which we're, as you-all 22 know, very focused on. 23 So the red line at the top is total 24 instant ticket sales, starting in Fiscal '93. And you 25 can see instant ticket sales, total sales grow all the 0048 1 way through Fiscal '97. The prize payout was reduced 2 due to legislative action. And we did see a decline 3 in instant ticket sales in Fiscal '98 and in Fiscal 4 '99. The payout cap was removed by the Legislature in 5 June of '99, and sales began to rebound in Fiscal 6 2000. 7 Now, I should note that even though the 8 prize payout cap was removed at that time by the 9 Legislature, there was a link established between 10 prize payout and our ad budget. And we've discussed 11 that in this meeting recently, probably a month or so 12 ago. But just as a reminder, the agency's ad budget 13 decreases one million dollars for each full percent by 14 which the total prize payout in the preceding fiscal 15 year exceeds 52 percent. 16 So in the earlier slide, Kathy showed 17 that through this fiscal year, we're slightly over 18 63 percent, so that would potentially be an 19 $11 million decrease in our ad budget in the next 20 fiscal year. 21 So after the sales start to rebound in 22 2000, you see that that growth continues all the way 23 through Fiscal 2006, which was our best instant 24 product sales year in the history of the lottery. In 25 Fiscal 2006, instant sales topped $2.86 billion. And 0049 1 then we did see a slight decline in Fiscal 2007. 2 Now, all of the lines that you see 3 plotted at the bottom are actually all of the 4 individual price points. So I know it's a little hard 5 to see in some spots. There is a lot of overlap. But 6 I think the big take-away that you get from the slide 7 is, as new price points were introduced, we may have 8 cannibalized existing price points. But overall, 9 instant sales did increase over the time period. 10 It's probably worth noting, this line 11 with the green squares, this is the five dollar price 12 point. That is and has been our leading price point 13 for some time. And you can see that price point 14 there, the pretty steady increase. 15 Another line to point out is this kind 16 of maroon-colored line. This is the $10 price point. 17 You can see good growth in that price point, a slight 18 decline in 2007 from 2006, but not very drastic. 19 It's the lime-colored green with the 20 triangles is the $3.00 price point. That's a niche 21 price point for us. That's typically extended play 22 games like Crossword, Cash Word. That price point has 23 done well. And we've been talking regularly about the 24 $2.00, which has been on the decline, and the $1.00 25 which has been on the decline as well. 0050 1 And so, Chairman, I think you had wanted 2 to see -- we look at the numbers regularly. I think 3 you had asked to see it on -- see it graphed out to 4 see what it looked like. 5 CHAIRMAN COX: Yes. So what do we know 6 when we know all of that, Robert? 7 MR. TIRLONI: Well, we know where we've 8 seen -- we know what price points we've seen success 9 at and we know which price points are certainly on the 10 decline, like we've talked about regularly. I think 11 right now what we're dealing with in this fiscal year 12 are some economic factors that are drastically 13 impacting our sales, from what we hear as we talk to 14 retailers and to sales staff. 15 CHAIRMAN COX: I'm having -- I can't 16 find the $50. 17 MR. TIRLONI: Well, it's right here. 18 It's really not a line, because it started in Fiscal 19 2007. So it's just this black diamond shape right 20 here. 21 CHAIRMAN COX: Thank you. 22 COMMISSIONER SCHENCK: It looks to me 23 like the only games that are consistently gaining are 24 the $10 and the -- 25 MR. TIRLONI: The $20 is doing what -- 0051 1 you're correct. The $10, the $20 and the $5.00. 2 COMMISSIONER SCHENCK: If that's true, 3 we would expect to see that $50, likewise, up and to 4 the right presumably cannibalizing perhaps the $20 and 5 the $10. 6 MR. TIRLONI: Well, and I think the $50 7 has had a big impact on the $30. The $30 has 8 definitely been cannibalized by the introduction of 9 the $50. What we hear anecdotally from the field is 10 that people that were playing the $30 have moved up to 11 the $50, but we've not necessarily brought in a new 12 player to play the $50. 13 COMMISSIONER SCHENCK: Have we done a 14 demographic study yet that includes the $50? I know 15 we've seen the demographics recently, but I can't 16 recall whether the $50 game was in play at the time. 17 MR. TIRLONI: Well, the $50 started in 18 May of 2007. So the demographic study that was just 19 completed should have included -- that game was out 20 and available when that demographic study was done. 21 COMMISSIONER SCHENCK: I just couldn't 22 remember what it showed in terms of who -- what income 23 bracket was playing the $50. 24 MR. TIRLONI: We can go back to that 25 study. 0052 1 COMMISSIONER SCHENCK: That's my bad 2 memory, not anyone else. 3 MR. TIRLONI: Well, I don't remember it, 4 sitting here either. So I can certainly pull that for 5 you. 6 COMMISSIONER SCHENCK: But I think we 7 should be sensitive as we move these prize payouts up, 8 just who it is that's playing them. 9 CHAIRMAN COX: Gary. 10 MR. GRIEF: Mr. Chairman, if I could add 11 a comment. You asked what do we know when we know 12 this. I see three things off this chart. One, it's 13 critically -- 14 CHAIRMAN COX: Gary, do you want to 15 introduce yourself. 16 MR. GRIEF: I'm sorry. Gary Grief, 17 Deputy Executive Director, for the record. 18 It's critically important that the 19 agency have the flexibility to maneuver the prize 20 payout percentage as we see fit, in order to maximize 21 sales and, thus, revenue. 22 Two, I think you see a continuing 23 appetite from our playing public for higher price 24 points, and it's also critically important for us to 25 be able to consider those and introduce those as we 0053 1 need to. 2 And then third, in our current state, 3 you see the impact that the economy does play when we 4 reach a point where we haven't introduced a new 5 product. We haven't changed our prize payouts in 6 approximately 18 months, and I think you see when 7 we're stagnant, our sales tend to be stagnant as well. 8 Thank you. 9 CHAIRMAN COX: Thank you. 10 MR. TIRLONI: So, Commissioners, this 11 next slide, what we've done is, we've removed all the 12 individual price points below, and so the two lines 13 you see are the total sales, which continues to be the 14 red line, and then the net revenue is the blue. 15 So the axis on the left is associated 16 with the total sales; the axis on the right is 17 associated with revenue. And so again you see the 18 total sales grow through '97, and you see revenue 19 increasing as well. 20 Again, the prize payout reduction 21 impacted total sales. And again, you see the revenue 22 decline during that same period. There's the rebound 23 in sales in 2000, and revenue continues -- once we get 24 into the rebound, revenue continues to increase all 25 the way through 2006. Again, we had a slight decrease 0054 1 in 2007. 2 Commissioner Schenck, are you looking at 3 this right here? 4 COMMISSIONER SCHENCK: Yes. I'm 5 thinking -- I'm trying -- you have a net in the blue 6 line, so it becomes a little confusing. I was 7 thinking that the larger the gap between the red and 8 the blue line, the bigger the net is, the greater the 9 percentage return to us. But that's not right, 10 because you're already netted out on the blue line. 11 I'm trying to think what the significance is of the 12 red line being below the blue line and the red line 13 being above the blue line. And I guess the answer is 14 not much, because you've already netted them out. 15 MR. GRIEF: Well, I think, if I could, 16 I'll point out something. So we have the restrictions 17 with the prize payout percentage. I think you saw 18 this intersect right here, and it would have been 19 taking off similar to this point here. What happened, 20 the prize payout percentage was reduced, sales were 21 reduced. However, the gap between revenue and sales 22 increased, because the prize payout percentage has 23 been -- 24 COMMISSIONER SCHENCK: But that would 25 suggest that our nets are much higher on a lower 0055 1 payout, expressed as a percentage. 2 MR. GRIEF: As a percentage only. 3 COMMISSIONER SCHENCK: But the total 4 number comes down, because you've netted in the blue 5 line. 6 MR. GRIEF: We would love to see the red 7 line be at $1.5 billion, for example, and we would 8 move the blue line up to $1.1 billion. The gap would 9 be greater, but the net revenue to the state would 10 still be increasing. 11 MS. PYKA: The other thing, as we 12 prepared this graph -- I want to be cautious with 13 it -- we plotted the net revenue on the right side, 14 using the million figure, and then plotted the sales 15 on the left side. So the plot, what we're trying to 16 portray is exactly what revenue is doing and what 17 sales is doing. And it may be a little difficult to 18 look at the intersects in that fashion. 19 COMMISSIONER SCHENCK: If we were 20 dealing with one-to-one ratios, it would make a lot 21 more sense. 22 MS. PYKA: Right. 23 COMMISSIONER SCHENCK: These gaps would 24 be expressive of something right now that I don't 25 think they are. 0056 1 CHAIRMAN COX: You know, the only way I 2 think that we could get them to really tell us 3 anything is to put this on long paper. 4 MR. TIRLONI: And, Commissioners, the 5 reason I asked if Commissioner Schenck was looking at 6 this, this is something that Kathy and some of her 7 staff and I looked at yesterday, because in 2000, we 8 started to see the increase in total sales on 9 instants, but we did continue to see the revenue 10 decline. And so I wanted to see what the cause of 11 that was, and that was a sales growth and increase in 12 prize expense not being in proportion. 13 MS. PYKA: Right. 14 MR. TIRLONI: So we saw sales increase, 15 but we also saw an increase in prize expense, and 16 that's the reason the revenue continued to decrease 17 that year. 18 COMMISSIONER SCHENCK: How many of you 19 were here in 2000? 20 MR. TIRLONI: I was here in 2000. 21 COMMISSIONER SCHENCK: Do you remember 22 criticism for that, because we increased the prize 23 expense? 24 MR. TIRLONI: I don't remember if there 25 was -- I don't remember if there was criticism for 0057 1 that. 2 MR. GRIEF: I do not. 3 MR. TIRLONI: The other thing that 4 happened and -- 5 COMMISSIONER SCHENCK: Well, the policy 6 change obviously worked, because the line goes up and 7 to the right from there. 8 MR. TIRLONI: And the other thing that 9 happened in that fiscal year was, it was the 10 introduction of the first $10 price point. We had 11 never had a $10 price point, and that was introduced 12 in that fiscal year. It was a holiday game that came 13 out and had a 70 percent payout, and it was very 14 successful. So that could also be contributing to 15 that increase in prize expense in that fiscal year. 16 So I wanted to point that out as well. 17 And, Commissioners, Kathy has follow-up 18 information for you on a discussion that took place 19 last month on Lotto Texas. 20 MS. PYKA: Last month we talked about 21 Lotto Texas breakeven quite a bit. And more 22 specifically, the question was asked at what point 23 Lotto Texas sales covered the Commission's expenses, 24 including prizes. Basically, are we losing money? 25 Before we get into the break-even discussion, I would 0058 1 like to provide some information on the Lotto Texas 2 sales history first. 3 So focusing on this slide, what is 4 included on the far left-hand side is a Lotto Texas -- 5 well, the entire slide includes the Lotto Texas sales 6 for the first six draws in a roll cycle, and we're 7 looking at the roll cycles before the April 2006 8 matrix change and following the April 2006 matrix 9 change. 10 Chairman, I think this is going to go to 11 the point that you asked about a bit earlier about 12 where Lotto Texas sales are. So the first column 13 includes total sales of $10.7 million. This is when 14 we were under the 2005 bonus ball game. Sales are 15 between September 28th and October 15th. The first 16 four jackpot rolls were advertised at $4 million, 17 followed by advertised jackpots of $5 million and 18 $6 million, with sales of $10.7 million. 19 The second column includes sales between 20 February 11th and March 1st of 2006. In this case, we 21 did not hold the jackpot at $4 million for the first 22 four rolls. The jackpots were advertised at 23 $4 million, $5 million, $6 million, $7 million, 24 $8 million and $9 million, sales of $12.7 million. 25 And then the next column, beginning with 0059 1 May the 3rd, is following the matrix change. The 2 May 3rd through May 20, 2006 column notes sales of 3 $12.5 million. Again, jackpots were advertised here: 4 $4 million, $5 million, $6 million, $7 million, 5 $8 million and $9 million. 6 So as you can see, between the period 7 following the matrix change, we have had sales between 8 $10.2 million to $12.5 million. I looked at the 9 last -- the current roll cycle that we're on right now 10 today, we just finished up the first six rolls 11 Saturday. So we don't have it included, but I wanted 12 to just give that data as well. That reflects 13 $10.3 million in total sales. So this is the flat 14 sales comparison for the first six rolls. 15 COMMISSIONER SCHENCK: This is just the 16 prize expense, though? 17 MS. PYKA: This is actually just the 18 sales, sales for the first six rolls. 19 COMMISSIONER SCHENCK: And a jackpot 20 amount? 21 MS. PYKA: The jackpots that are 22 advertised, we began with an advertised jackpot of 23 four. 24 COMMISSIONER SCHENCK: Right. 25 MS. PYKA: And so at the point that 0060 1 we've reached the $9 million advertised jackpot, what 2 are total sales through that jackpot. 3 CHAIRMAN COX: Okay. So what we see is 4 that either there is random variation or there is 5 seasonal variation? 6 MS. PYKA: I think it's probably both. 7 And also, too, as you look at the factor -- for 8 example, I looked at Mega Millions when we were at 9 $330 million, was August 31st of 2007. Notice, sales 10 are in the $11.2 million range there. Again, when 11 Mega reached $270 million this past February, we go 12 back up to $10.9 million. So is there a relationship 13 between when these other jackpots increase? Is it 14 seasonal when you look at the months of holiday time 15 periods? 16 CHAIRMAN COX: So I don't see a 17 disturbing trend. 18 MS. PYKA: I don't either. I mean, we 19 have a flat range between, again, $10.2 million to 20 $11 million. 21 CHAIRMAN COX: It would be great if it 22 were going up and to the right, but we know that this 23 is an old tired game. And it's not just in the State 24 of Texas; it's all over the country. 25 MS. PYKA: I would like to move to the 0061 1 next slide and add another factor to the slide. Now 2 we're going to look at jackpot level upon coverage and 3 the number of draws to cover the jackpot amount. 4 The column shaded orange and blue are 5 those jackpot rolls in which the advertised jackpot 6 amount was covered by sales when the jackpot ticket 7 was sold. The column shaded aqua and green are the 8 jackpot rolls when the advertised jackpot was not 9 covered when the jackpot ticket was sold. 10 The other relevant information, of 11 course, on the chart is the interest factor for the 12 roll cycles. We've included that in the green font 13 below. Robert has got his cursor on it now. And, of 14 course, we began back in 2006 with an interest factor 15 of 1.647. 16 And the factor that we've included here 17 is the actual factor at the point in time when the 18 jackpot ticket was sold, because that's what we're 19 basing the calculation on for the payment. The lower 20 the interest factor, the advertised jackpot requires 21 higher sales in order to fund the jackpot. 22 So as you can see, the earlier jackpots 23 in which sales supported the jackpot at the 24 $10 million, the $11 million range, we had fairly high 25 interest factors. And then we get into the 0062 1 $15 million range. That interest factor has dropped 2 down to 1.67, 1.64. 3 We get hit early the next two rolls. 4 The interest factor goes up to 1.68 -- 1.7182, and 5 we're supporting it at 14. Eleven rolls, it goes down 6 just a bit. I have looked at that. That was truly 7 where our sales had gone up just a bit. We funded it 8 at $13 million, and then the interest factor goes down 9 again. We got to $15 million. The interest factor 10 goes significantly down, at 1.57, which was earlier 11 this year. And we go all the way up to $18 million. 12 Again, we get hit three times before we've actually 13 funded with some very low interest factors. 14 I want to note on the last one where we 15 show $17 million, we were short $181,000 when the 16 jackpot ticket was sold. And I wanted to also note, 17 the factor at 1.6305, that interest factor at that 18 high rate was only on the very last advertised roll. 19 We had been dealing with a very low interest factor 20 prior to that. 21 CHAIRMAN COX: So at $17 million right 22 now, we're almost breaking even? 23 MS. PYKA: Correct. 24 CHAIRMAN COX: Then go back and make a 25 similar observation early on. 0063 1 MS. PYKA: Early on -- 2 CHAIRMAN COX: -- $11 million, we were 3 making money back in 2006. 4 MS. PYKA: 2006, with the 1.73 factor. 5 CHAIRMAN COX: So how much of this is 6 sales and how much of it is interest rate factor? 7 MS. PYKA: It is my belief that based on 8 the previous slide as we looked at the first six 9 rolls, that the majority of this is interest factor, 10 because there's not a great fluctuation in sales and 11 looking at the historical roll cycles of Lotto Texas. 12 We picked the first six rolls because we had a lot of 13 data in looking at the first six rolls. 14 CHAIRMAN COX: Okay. Now, let's just 15 look at -- I'm having a little bit of difficulty 16 reading it. But there's one there where you have a 17 1.608 -- 6808 where we didn't cover -- 18 MS. PYKA: Yes, sir. 19 CHAIRMAN COX: -- and the one next to it 20 where we had 1.69. 21 MS. PYKA: Yes -- 22 CHAIRMAN COX: And then you go over and 23 we've good a 1.63 on the far right, but you said that 24 was only on the last day. 25 MS. PYKA: Yes. We had some fairly low 0064 1 interest factors right up to that. And again, we 2 almost covered at that point -- 3 CHAIRMAN COX: Yes. 4 MS. PYKA: -- almost. 5 COMMISSIONER SCHENCK: Am I 6 understanding it correctly that we haven't covered 7 since January 30th of '08? 8 MS. PYKA: Sales have not supported the 9 advertised in that case, correct. The last three 10 jackpot tickets that were sold, sales did not support 11 the advertised jackpot. 12 COMMISSIONER SCHENCK: And we've net 13 lost -- or no? 14 MS. PYKA: We didn't net lose. We still 15 provided a contribution. And we'll talk about that 16 slide next. 17 COMMISSIONER SCHENCK: But we would 18 have. 19 CHAIRMAN COX: We didn't get our full x 20 percent. 21 MS. PYKA: Right. And I have some very 22 detailed slides that we will cover next that -- and I 23 apologize in advance -- where we talk about just that. 24 CHAIRMAN COX: Well, I asked for it, 25 so -- 0065 1 MS. PYKA: You did. Commissioner 2 Schenck, remember that when we get to this next slide. 3 Okay. 4 CHAIRMAN COX: I didn't ask for that. 5 (Laughter) 6 MS. PYKA: I knew I was in trouble. 7 What we've done with the next three 8 slides is, we've included the break-even analysis in 9 the jackpot coverage calculations for our last three 10 large roll cycles. For this analysis, we've defined 11 "breakeven" to be the point that Lotto Texas sales 12 cover the Commission's expenses, including prizes, and 13 the variable costs associated with retailer 14 commissions and our lottery operator contract -- 15 CHAIRMAN COX: Which we accountants 16 would call the break-even point? 17 MS. PYKA: Yes. So the very first -- 18 oh, the roll cycles that we examined included the roll 19 cycle beginning September 19th of '07 that had an 20 advertised jackpot in the end of $30 million, the roll 21 cycle beginning December 12th of '07, with a jackpot 22 of $28 million, and then April 16th of '08 that ended 23 up with an advertised jackpot of $17 million. 24 As we look at the slide, the columns at 25 the top include our actual draw sales for each roll, 0066 1 as well as the cumulative sales, the 40.47 percent 2 associated with the jackpot share and then the 3 cumulative jackpot share, what the jackpot was 4 advertised at. And then we've got our other prizes 5 for the second, third and fourth tiers, which totals 6 9.53 percent, the variable costs, which includes the 7 5 percent retailer commissions and the 7.6999 percent 8 of GTECH, the total cost. 9 So in this case, as we define 10 "breakeven" to mean covering costs, including prizes 11 and variable costs here, we broke even at $7 million. 12 When the jackpot was advertised at $7 million, we had 13 a surplus of $27,000. 14 CHAIRMAN COX: And this was in December 15 of '07? 16 MS. PYKA: Correct. And then -- 17 CHAIRMAN COX: Okay. And breaking even 18 at $7.3 million in December of '07? 19 COMMISSIONER SCHENCK: September. 20 MS. PYKA: September. 21 COMMISSIONER SCHENCK: September 29th. 22 MS. PYKA: September of '07. 23 MR. TIRLONI: The roll cycle -- the 24 jackpot was hit in December. The roll cycle started 25 in September. 0067 1 CHAIRMAN COX: Thank you. 2 MS. PYKA: Thank you, Robert. 3 CHAIRMAN COX: Thank you. 4 COMMISSIONER SCHENCK: But if it had hit 5 at any time before that, we would have lost 900,000 6 1.6 or $2.6 million? 7 MS. PYKA: That is correct. So in this 8 scenario, when we were advertised at $15 million, 9 sales supported the jackpot, and breakeven was at 10 $7 million. 11 So our next slide includes the roll 12 cycle beginning December 12th of '07. And in this 13 case, we broke even when the advertised jackpot was 14 $8 million. So it's gone from seven to eight. And 15 sales supports the advertised jackpot at $17 million 16 as opposed to the previous slide, which is 17 $15 million. Again, interest factor, huge key here. 18 And then our most recent is the 19 advertised jackpot that began with a roll cycle on 20 April 16th of '08. Again, we broke even at 21 $8 million. And this was that last example that we 22 had looked at in which sales did not support the 23 advertised jackpot at $17 million when the winning 24 ticket was sold. And this is a perfect example. 25 Again, when you look at that interest factor, we had 0068 1 started with an interest factor of 1.57, and then it 2 had grown all the way to 1.63 at the point in time 3 that the advertised -- or the ticket was sold. 4 COMMISSIONER SCHENCK: We're now losing 5 money up to the fifth roll? 6 MS. PYKA: That's correct. We've gone 7 from seven to $8 million. 8 COMMISSIONER SCHENCK: What is the 9 average number of rolls we have before we hit on 10 Lotto? 11 MS. PYKA: Before we get hit? I'll need 12 to go back and look at that. Certainly it's 13 fluctuated over the years. And Robert may have more 14 of an historical perspective. 15 MR. TIRLONI: We would have to go back 16 and actually get an accurate number for you. 17 COMMISSIONER SCHENCK: Well, an 18 inaccurate number will be more than five or six. 19 Right? 20 MR. TIRLONI: Yes. 21 MS. PYKA: Yes. I mean, just going back 22 to the -- yes. 23 Commissioners, this concludes my 24 presentation. And I apologize again for the tedious 25 slides, but we wanted to get into the details of that 0069 1 breakeven point. 2 CHAIRMAN COX: It's an excellent 3 analysis. 4 MS. PYKA: Thank you, sir. 5 CHAIRMAN COX: Tells me just what I 6 wanted to know. Thank you very much. 7 Any questions? 8 COMMISSIONER SCHENCK: No. Thank you. 9 AGENDA ITEM NO. VII 10 CHAIRMAN COX: Item VII, report, 11 possible discussion and/or action on transfers to the 12 state. 13 Ms. Pyka. 14 MS. PYKA: Again for the record, Kathy 15 Pyka. 16 The first report in your notebook 17 reflects our transfers and allocations to the 18 Foundation School Fund and the allocation of unclaimed 19 prizes for the period ending May 31st of 2008. Total 20 cash transfer to the state amounted to $746.1 million 21 for the first nine years of the fiscal year. 22 The second page in your notebook 23 includes the detailed information for the monthly 24 transfers. Of the $746.1 million transfer to the 25 state, $698.9 million was the amount transferred to 0070 1 the Foundation School Fund, with the balance of 2 $47.2 million transferred from unclaimed lottery 3 prizes. The amount transferred to the Foundation 4 School Fund represented a 6.6 percent decline from the 5 total amount transferred in May 2007, and this is 6 $47.8 million. 7 And the final document in your 8 notebooks, Commissioners, includes our cumulative 9 transfers from Fiscal Year 1992 to date, which 10 represents $10.4 billion. 11 This concludes my presentation. I would 12 be happy to answer any questions. 13 COMMISSIONER SCHENCK: I had asked at 14 the last meeting and the meeting before about trying 15 to get more advertising, but particularly at the end 16 of this year, and I understand there is some progress 17 on that. Are we addressing that on another issue? 18 MS. PYKA: If I may, Commissioner, I may 19 defer to either Gary or Michael on that. I know that 20 there has been work on that, but I don't know the 21 specifics of the work on that. 22 COMMISSIONER SCHENCK: That's fine. 23 Thanks. 24 MS. PYKA: Okay. You're welcome. 25 CHAIRMAN COX: Okay. Ms. Kiplin, where 0071 1 could we cover that, if not on this item? 2 MS. KIPLIN: Well, I certainly think you 3 can take it up under the lottery sales revenue game 4 performance and game opportunities advertising as it 5 relates to your contract. I think that's where you 6 raised the question the last time insofar as it 7 related to the agency's contracts, particularly the 8 advertising contract. 9 CHAIRMAN COX: So you want to do it 10 in -- 11 MS. KIPLIN: I think either one or both 12 can cover the discussion. 13 CHAIRMAN COX: Okay. We'll do it on 14 Item X, then. 15 Thank you, Ms. Pyka. 16 MS. PYKA: You're welcome. 17 AGENDA ITEM NO. VIII 18 CHAIRMAN COX: Item VIII we're going to 19 pass. 20 AGENDA ITEM NO. IX 21 CHAIRMAN COX: Item IX, report, possible 22 discussion and/or action on the 80th Legislature. 23 Ms. Trevino. 24 MS. TREVINO: Good morning, 25 Commissioners. For the record, I'm Nelda Trevino. 0072 1 I'm the Director of Governmental Affairs. 2 A joint Senate Committee hearing of the 3 Senate State Affairs Committee and the Senate Finance 4 Subcommittee on General Government Issues is scheduled 5 for Wednesday, August the 27th at 9:00 a.m., at the 6 State Capitol at Room E1.036. The committees will 7 consider the joint Senate interim charge to study the 8 privatization of the state lottery. 9 In response to requests from staff of 10 the Senate State Affairs Committee and the Senate 11 Finance Subcommittee, we have provided them an 12 informational packet that provides them some 13 background and an overview on the Texas Lottery. 14 Agency staff has been advised the 15 committee will want the agency to serve as a resource 16 at the hearing. We will continue to keep you advised 17 on any developments related to this committee hearing. 18 And lastly, there's no other updates to 19 provide related to other House or Senate committee 20 hearings. This concludes my report, and I'll be glad 21 to answer any questions. 22 COMMISSIONER SCHENCK: I don't have any 23 questions. Thank you, Nelda -- 24 CHAIRMAN COX: Nelda, are we running 25 into any problems with the rider that limited the work 0073 1 that we could do with respect to a sale of the 2 lottery -- 3 COMMISSIONER SCHENCK: -- piece? 4 MS. TREVINO: I don't believe we've run 5 into any problems with regard to the rider language 6 that you referenced, Chairman Cox. In our 7 conversation with the staff of the Senate State 8 Affairs Committee, we did have some discussion with 9 regard to the language in the rider. 10 But there hasn't been any further 11 request of the agency in regards to helping the 12 committees prepare for their hearing. Again, I 13 believe the staff is aware of that rider; the agency 14 is certainly aware of the rider. And I haven't 15 foreseen any problems at this point with regard to the 16 rider language. 17 CHAIRMAN COX: That's an excellent 18 report. Thank you. 19 MS. TREVINO: You bet. 20 Why don't we take about a 10-minute 21 break. 22 (Recess: 11:00 a.m. to 11:13 a.m.) 23 CHAIRMAN COX: Let's come back to order. 24 25 0074 1 AGENDA ITEM NO. X 2 CHAIRMAN COX: Item No. X, report, 3 possible discussion and/or action on the agency's 4 contracts. 5 Mr. Jackson. And then I think Mr. Anger 6 has something he wants to report in response to 7 Commissioner Schenck's question. And we have 8 Mr. Fernandez as well. 9 MR. ANGER: Good morning, Commissioners. 10 For the record, my name is Michael Anger, and I'm the 11 Lottery Operations Director. And the gentlemen beside 12 me were kind enough to allow me to go first to respond 13 to Commissioner Schenck's issue that he raised in the 14 earlier agenda item. 15 Following our discussion at the last 16 Commission meeting with regard to the advertising 17 contract and seeking additional value for the agency 18 as we proceed through this fourth quarter, related to 19 the sales struggles that we're experiencing right now, 20 Mike Fernandez and I reached out to Ashley Fick, who 21 is the Account Director for Tracey Locke, the 22 oversight advertising agency for the advertising 23 services that the agency receives and that oversees 24 the work that's performed both by Tracey Locke and 25 LatinWorks, who does our ethnic market advertising, 0075 1 and asked that they look closely as we proceed with 2 the fourth quarter purchases for media expenditures 3 and placements and optimize that and seek added value 4 for the agency. 5 We received a report from Tracey Locke 6 that summarizes their efforts related to the fourth 7 quarter, and they have identified an additional 8 1.5-plus million dollars in added value that they have 9 been able to negotiate through the workgroup, the 10 media buying service that both of the advertising 11 agencies use, with regard to our expenditures here in 12 the fourth quarter. 13 Those cover additional bonus spots on TV 14 and television, billboarding, free radio promotions 15 that they negotiated as a portion of the radio 16 purchases and commercial spots that we buy, some 17 additional free bonus radio spots and then also some 18 tagable television snippets that advertise that are 19 tag-ons to commercials that add on and advertise our 20 jackpots and other communications messages that we 21 want to have. So that summarizes some of the areas 22 where they were able to get added value for us. 23 We provided this information also to you 24 in writing and also the report that they provided. 25 And I would be happy to answer any other questions 0076 1 that you might have. 2 COMMISSIONER SCHENCK: Well, I very much 3 appreciate this hard work. I appreciate Tracey 4 Locke's efforts. I'm very glad to hear this outcome. 5 When will we be seeing this advertising, essentially 6 immediately? 7 MR. ANGER: Yes. 8 COMMISSIONER SCHENCK: Okay. I don't 9 know if we'll get to the billion mark this year, but 10 hopefully this will get us a little bit closer, and I 11 really appreciate the work. 12 CHAIRMAN COX: Absolutely. Now, 13 Michael, is this a one-time deal where Tracey Locke 14 called in all their favors and they'll never be able 15 to do it again? 16 MR. ANGER: No. 17 CHAIRMAN COX: Is there any ongoing 18 benefit from this? 19 MR. ANGER: It is an ongoing effort. It 20 is something that we engage with them. They reached 21 out subsequent to our meeting and worked very closely 22 with their advertising agency to try to do the best 23 they could to find additional opportunities for the 24 agency. 25 But as a part of the ongoing business, 0077 1 they do negotiate added value. They look for ways to 2 optimize our purchases. As we look to FY09, one of 3 the things that we're looking to do is buying blocks 4 of advertising time that extend through the fiscal 5 year right up front. And by purchasing all of your 6 time up front, you have greater buying power, which 7 gives you greater negotiability with regard to 8 additional opportunities. And as part of their 9 proposed FY09 media plan, they've laid out some 10 additional areas where we hope to get some additional 11 added value for the agency. 12 CHAIRMAN COX: Excellent. Anything we 13 can do in that area would certainly be helpful. You 14 know, we have a limitation on our advertising budget 15 that makes it tough for us to get our message out 16 there as we need to. And the good deal of that is 17 fixed, and we can't relate it to new products or the 18 like. So that kind of work is very productive for the 19 agency, and we thank you for that. 20 MR. ANGER: Thank you. 21 MR. JACKSON: Commissioners, for the 22 record, my name is Tom Jackson. I'm the Purchasing 23 and Contracts Manager for the Commission. 24 Commissioners, in your notebooks is a 25 report on prime contracts that have been updated for 0078 1 your review. In addition, at the last Commission 2 meeting, you requested information on other contracts 3 we're administering. 4 The second report in your notebooks 5 contains information on all other contracts of 6 $500,000 or greater that are currently in effect. 7 If you have any questions, I would be 8 happy to respond to those questions. 9 COMMISSIONER SCHENCK: It looks to me 10 like they've only added one or two to this list, if 11 memory is serving me. And I assume that's the -- 12 MR. JACKSON: The first report, 13 Commissioner, is the prime contracts. The second 14 report is all other contracts. The prime contracts 15 are not included in that second report. 16 COMMISSIONER SCHENCK: I see. 17 CHAIRMAN COX: And, Commissioner, what I 18 have learned is that nobody here seems to recall why 19 these are prime contracts on the first page and why 20 these on the second page aren't. That's one of those 21 we've-always-done-it-that-way kind of deals. So what 22 I promised the staff we would do is look at these and 23 decide what we would like to have reported to us and 24 how regularly. 25 COMMISSIONER SCHENCK: I'm curious what 0079 1 the City of Austin Convention Center parking lease is 2 for. What are we getting for that? 3 MR. FERNANDEZ: We're getting 45 -- I 4 believe it's 45 parking -- for the record, my name is 5 Mike Fernandez. I'm the Director of Administration. 6 What that is, is the parking lot 7 immediately adjacent to our building. We get 145 8 parking spaces for staff. We had previously leased 9 parking spaces from Waller Creek Hotel behind us. But 10 once the city built the new convention center, they 11 added this parking, and we had the opportunity to 12 lease parking spaces. 13 CHAIRMAN COX: And, Commissioner, I 14 should add that that's a five-year contract. 15 COMMISSIONER SCHENCK: Okay. 16 MR. FERNANDEZ: That's the fine print; 17 that's the fine print. 18 COMMISSIONER SCHENCK: That's a pretty 19 good parking rate. 20 MR. FERNANDEZ: No. It's $120 a year 21 per space is what it is. And what you see in this, 22 Commissioners, is you see the value of the contract 23 based on its current term. 24 COMMISSIONER SCHENCK: Okay. 25 CHAIRMAN COX: Mike, have you had any 0080 1 thoughts about what you would suggest we receive? 2 MR. FERNANDEZ: Commissioners, I 3 guess -- you know, it's hard for me to, in this 4 particular instance, anticipate what you might want to 5 see. I guess for myself, my primary interest would be 6 those contracts that if something were to occur with 7 them, adverse occurrence, if you will, would have some 8 significant impact on my business. And because of 9 that, it doesn't necessarily mean that the value of 10 the contract is a half a million or more. It could be 11 certainly something significantly less than that, yet 12 still have an impact. 13 CHAIRMAN COX: Like we might have a 14 relatively small but crucial contract and a fly-by- 15 night contractor, and that's something that we would 16 want to know. 17 MR. FERNANDEZ: That's correct. So one 18 of the things that I guess I would say is, 19 historically what I've seen in government from the 20 Council on Competitive Government, others, is that 21 they generally would look at a value threshold and say 22 a contract of a value of a million dollars or more, we 23 would like to have presented to us or DIR or someone 24 like that. But also there may be others that have 25 other weights and factors like what you've just said, 0081 1 that it could be a very crucial contract; yet, the 2 value could be $150,000. 3 CHAIRMAN COX: Yes. 4 MR. FERNANDEZ: So that may be something 5 you want to consider. 6 CHAIRMAN COX: Well, I think it's clear, 7 that looking at the prime contracts list, that we've 8 got a $65,000 item on there. And, you know, I would 9 say the audit is important. 10 MR. FERNANDEZ: Absolutely. 11 CHAIRMAN COX: But Catherine watches 12 that carefully, the State Auditor is involved in that. 13 So, you know, I don't have any concern about risk on 14 that particular item, as an example. 15 MR. FERNANDEZ: That's correct. 16 CHAIRMAN COX: Commissioner, do you have 17 any thoughts on how you would like to see this? 18 COMMISSIONER SCHENCK: I do think that 19 the total dollar threshold is important. I think also 20 a subjective valuation on the risks assessed to -- 21 well, the website hosting, for instance, I would think 22 would be one that if we had -- I wouldn't want to 23 suggest we have a fly-by-night company doing it at 24 all, but if we were to have such a company, that would 25 be one that would be strategically important and I 0082 1 would like to see something like that on there. 2 MR. FERNANDEZ: One of the things that 3 we could do, with your permission, is that we could 4 develop a list and bring this back in front of you for 5 your perusal and identify the reasons that we would 6 include them on the list. And then if those meet with 7 your -- you know, if that meets with your 8 satisfaction, certainly we could bring that forward. 9 The other question -- the other thought 10 I had, I think, in discussions is, do you want to see 11 it every month? You know, many times you're seeing 12 the same piece of paper every month, nothing has 13 changed. Unless we take some action on that contract 14 under the guise of a prime contract or however we 15 define that -- I mean, we can bring it in front of 16 you, but you're seeing virtually the same piece of 17 paper month after month. 18 Any time we amend any of these 19 contracts, the prime contracts, we bring that in front 20 of the Commission and we tell you what the staff 21 intends to amend and what effect that amendment will 22 have on the contract. So any time we take action, 23 we're advising you that we're taking the action. 24 CHAIRMAN COX: Well, you know about how 25 often these things change. So why don't you do what 0083 1 you suggested, suggest the list that you think would 2 be the appropriate one. And why don't you suggest to 3 us a frequency as well. 4 MR. FERNANDEZ: Very good. 5 COMMISSIONER SCHENCK: I found this list 6 helpful. And I appreciated your asking for it, 7 Mr. Chairman. 8 Mike, tell me about the building lease. 9 I think we talked about that once, but I -- 10 MR. FERNANDEZ: The headquarters -- the 11 headquarters lease? 12 COMMISSIONER SCHENCK: The rent 13 building, this is a private company we're leasing 14 from? 15 MR. FERNANDEZ: Right. What you're 16 seeing is, the contract award date was in '97, and 17 that lease runs through 2010. 18 COMMISSIONER SCHENCK: Yes. 19 MR. FERNANDEZ: And what you're seeing 20 is -- we're paying currently $2.51 a square foot. 21 COMMISSIONER SCHENCK: We've had this 22 conversation before. What is a piece of real estate 23 like this in downtown Austin worth? I mean, 24 $24 million can buy a lot of space. I guess we don't 25 consider buying -- 0084 1 MR. FERNANDEZ: Well, you know, that's 2 what's in a 13-year lease, I guess is what you're 3 looking at, and that's for this entire campus facility 4 you're seeing here, which -- 5 COMMISSIONER SCHENCK: What do you think 6 the value of it would be if it were -- 7 MR. FERNANDEZ: You know, that's very 8 difficult for me to say. But what occurs, what's 9 going on in the background on the majority of leases, 10 because we work through the Building and -- 11 MR. JACKSON: Texas Facilities 12 Commission. 13 MR. FERNANDEZ: Texas Facilities 14 Commission. I want to say TBPC. Texas Facilities 15 Commission, what they do is, they do rent surveys. 16 And when we work with them -- not that we don't have 17 the ability to go out and do that ourselves. We can. 18 But we work through the Texas Facilities Commission. 19 And what these folks do is, they do routine rent 20 surveys in the City of Austin or, say, in the 21 metropolitan statistical areas. So they see what rent 22 space costs. 23 When our facilities staff began to work 24 on this, whether it's in Dallas or whether it's in 25 Austin, Texas or wherever it may be, we began to work 0085 1 with the Facilities Commission. What they do is, they 2 look at their rent surveys, and they go out. And we 3 tell them -- we set the parameters, the footprint, if 4 you will. And then they will go out in turn and look 5 for facilities that will accommodate that. 6 What we also do is that anywhere we can, 7 if we can co-locate, we co-locate, because that takes 8 the pressure off very quickly. But what they have to 9 do -- long story, Commissioner -- but what they have 10 to do is, ultimately they take that in front of their 11 board. So whatever that cost is, they're going to 12 present that lease case. 13 COMMISSIONER SCHENCK: And we pay it. 14 MR. FERNANDEZ: And we pay it; we pay 15 it. But the point I guess I'm trying to make is, is 16 that historically it's been my experience -- and I 17 wasn't involved -- obviously, wasn't here back in '97. 18 But generally what's going on in rents is that they're 19 looking at what the rent space is valued at at that 20 time, what you're going to pay per square foot, what 21 kind of amenities you may get or what kind of things 22 are put into that lease -- build-outs, changes in the 23 facility itself, and then that's examined by the 24 Facilities Commission's board. 25 COMMISSIONER SCHENCK: Well, the reason 0086 1 I'm asking this is, because having worked in law firms 2 for a long time paying for what we call "A" space in 3 downtown highrises, these leases are a big chunk of 4 your operating expenses, and they're expensive. And I 5 see more and more the fee purchases of land. I've 6 talked to you about this before. I know this is not 7 up to you. But if it were up to me -- you know, it's 8 good that this is a very long -- well, yes, it's a 9 very long-term lease. Right? 10 MR. FERNANDEZ: Comes up in 2010. 11 COMMISSIONER SCHENCK: Yes, that's a 12 good thing. But, you know, for $24 million you can 13 buy a lot of real estate. 14 MR. FERNANDEZ: A lot of property. I 15 think your point is a very good point, and certainly I 16 have no argument to the point. The issues that you 17 begin to get into -- I came from an agency in which I 18 had this same responsibility in terms of facilities 19 that had over 186 offices in the State of Texas. It 20 was federally funded. 21 And we built, we bought land and we 22 built buildings because of that. As it was turned 23 over to local workforce boards, we began to sell all 24 of those buildings and get out of there. But 25 generally -- or not generally -- what occurs is, is 0087 1 that you have to take that request through the 2 Facilities Commission. And, in turn, that has to go 3 through the legislative session. You have to get 4 appropriations, whether they're federal dollars that 5 flow through the appropriations process or whether 6 they're general revenue. 7 And sometimes on the front end, it can 8 look very good, because of the things you have said. 9 The downside that I've seen -- and I happened to see 10 it in higher education -- was the cost of maintenance 11 on those buildings because, again, you're going back 12 every two years through the appropriations process to 13 get appropriated monies to maintain. And unless you 14 have outside funding like some of the universities do, 15 sometimes it can be very difficult. And I've seen 16 cases also where agencies find themselves with issues 17 in their buildings and don't have appropriated dollars 18 to do it. So -- 19 COMMISSIONER SCHENCK: But other 20 agencies do own their buildings? 21 MR. FERNANDEZ: There are some that do. 22 The move about eight years, maybe 10 years ago, was 23 really to move away from that and move to co-located 24 facilities across the State of Texas, with the primary 25 exception of Austin, because of the state 0088 1 headquarters. 2 But like San Angelo, Texas, is a very 3 good example. What they did in San Angelo is, all of 4 those local offices, I think, with perhaps -- and I 5 don't think DPS has an office out there -- but what 6 they did is, that there was a building out there that 7 was acquired by the state and they renovated that 8 building, and every agency that I'm aware of today in 9 San Angelo, Texas, moved into that building. 10 So there was a concerted effort on the 11 part of the Legislature, or it appeared to the 12 agencies, to co-locate agencies in a single facility 13 as opposed to having leases and buys across the board 14 in all of the -- 15 COMMISSIONER SCHENCK: I understand. 16 Just to be clear, my preference is not to be a tenant. 17 I doubt you are living in an apartment. Most of us 18 probably aren't. 19 MR. FERNANDEZ: I'm not. 20 COMMISSIONER SCHENCK: If it makes sense 21 for us, it makes sense for everyone else. It's better 22 to be a fee owner than to be a tenant. 23 MR. FERNANDEZ: Well, it is not 24 something that we can't explore. I mean, if that's 25 y'all's wish, we certainly can look -- 0089 1 COMMISSIONER SCHENCK: I'm speaking just 2 for myself, I mean, just something I would be thinking 3 about. 4 MR. FERNANDEZ: We can certainly explore 5 that with the Facilities Commission. But as I 6 recall -- and I have my comptroller with us -- is that 7 we would have to take that through the legislative 8 process also. 9 COMMISSIONER SCHENCK: The fact -- I 10 mean, it's inescapable. $24 million over 10 years is 11 money that we've spent into the private sector, which 12 is great for the local Austin economy, I suppose. 13 Would we pay property taxes? 14 MR. GRIEF: If I could comment, I was 15 the negotiator on this lease many years ago, and I 16 think Mr. Sadberry was the lone commissioner who at 17 that time was the only one not recused from approving 18 that lease. 19 COMMISSIONER SCHENCK: And it's a good 20 lease. I'm not being in the least bit critical. 21 MR. GRIEF: It's a very good lease, but 22 it's also important to understand it's a full-service 23 lease. So we are outside of taxes, utilities and 24 insurance on this. It's a fixed rate for us, 25 regardless of what occurs. 0090 1 COMMISSIONER SCHENCK: Yes, but let's 2 talk about that. If there is a slip and fall in the 3 lobby, we're immune. Right? 4 MR. GRIEF: Correct. 5 COMMISSIONER SCHENCK: I mean, you can't 6 sue the state for this stuff. So I get the insurance 7 part. The maintenance stuff, we would have to get a 8 part of our legislative appropriation request to 9 include those things. But these principles are true 10 everywhere. I mean, it's dirt and a box on top of it, 11 and there's a lot of things that go with that. But 12 you pay one way or you pay another, and the question 13 is whether you want to pay up front or continue 14 paying. 15 And if this building is worth 16 $200 million, then I'll pull away my suggestion right 17 here and now. But if it's worth 50, the idea of 18 paying two or $300 million for it over the course of a 19 hundred years, it would seem to make sense to me just 20 to buy it. 21 MR. GRIEF: We'll certainly explore 22 that. 23 COMMISSIONER SCHENCK: But I may be 24 totally off the mark. 25 CHAIRMAN COX: Well, let me just say 0091 1 that this is old information. But I served for 2 several years on the General Services Commission 3 board, which is now the Texas Facilities Commission. 4 And the two hardest things to get were capital money 5 to buy buildings and any kind of lease with an option 6 to buy. Even though leases with an option to buy make 7 total sense to me, for some reason at that time at 8 least, they didn't make any sense to state government. 9 COMMISSIONER SCHENCK: Well, it's public 10 money. And, you know, the less you spend it seems to 11 me the better. But -- 12 MR. FERNANDEZ: Well, we certainly can 13 look into it. 14 MR. GRIEF: Be glad to. 15 COMMISSIONER SCHENCK: I would just be 16 curious, frankly, to know what the market, the 17 estimated market value of the building is. 18 MR. FERNANDEZ: Yes. We can go back to 19 the Facilities Commission and see what their latest 20 rent survey looks loke, property survey looks like. 21 COMMISSIONER SCHENCK: This seems to be 22 a good time to be a buyer. And maybe by 2010, that 23 will still be true. I hope it's not, but it may be. 24 MR. FERNANDEZ: We will look at it and 25 bring it back to you. 0092 1 COMMISSIONER SCHENCK: Thank you. 2 CHAIRMAN COX: Okay, Mike. Then if 3 y'all will bring us back a suggested list and a 4 suggested frequency of this report, we would 5 appreciate it. 6 MR. FERNANDEZ: Will do. Thank you. 7 CHAIRMAN COX: Thank you. 8 AGENDA ITEM NO. XI 9 CHAIRMAN COX: Item No. XI, 10 consideration of and possible discussion and/or action 11 on external and internal audits and/or reviews 12 relating to the Texas Lottery Commission and/or on the 13 Internal Audit Department's activities. 14 Mr. Melvin. 15 MS. MELVIN: Thank you. For the record, 16 Catherine Melvin, Director of the Internal Audit 17 Division. 18 Commissioners, this month I have no 19 items of update, but I'm happy to answer any questions 20 you might have. 21 COMMISSIONER SCHENCK: No questions. 22 Thank you. 23 CHAIRMAN COX: Thank you, Catherine. 24 MS. MELVIN: Thank you. 25 0093 1 AGENDA ITEM NO. XII 2 CHAIRMAN COX: Okay. Item XII, report, 3 possible discussion and/or action on the Mega Millions 4 game and/or contract. 5 Director Sadberry. 6 MR. SADBERRY: Commissioners, for the 7 record, my name is Anthony Sadberry, Executive 8 Director. 9 The Mega Millions directors held a 10 meeting in conjunction with the NASPL spring directors 11 meeting in Napa, California on Tuesday, June 17, 2008. 12 Several directors, including myself, participated by 13 telephone. 14 Included among the various items 15 discussed were considerations which are in the 16 exploratory stage regarding possible modifications to 17 the Mega Millions game. These would include a 18 possible increase in ticket costs, increase in 19 structure in the second tier prize and increase in 20 initial starting jackpot after a winner has been 21 declared. 22 Again, these discussions are in the 23 exploratory stage, and I will keep you informed if 24 there is any movement to replacing this matter as an 25 agenda action item for a future Mega Millions meeting. 0094 1 I would be happy to answer any 2 questions. 3 COMMISSIONER SCHENCK: I have none. 4 Thank you. 5 CHAIRMAN COX: Anthony, if I remember 6 the Mega Millions agreement right, it requires 7 unanimous approval for any changes of those nature? 8 MR. SADBERRY: I would defer to Legal on 9 the exact construction of what items would require 10 unanimous approval -- and there are some -- and which 11 items might not require unanimous approval. My sense 12 is -- and I did talk briefly with the General Counsel 13 on this. In fact, she listened to some of the meeting 14 with me. As to whether this would be of the nature 15 that would require the unanimous approval -- and I can 16 assure you that before we would go into a meeting to 17 discuss a matter like this, we would have that pretty 18 well established in our own minds at least. 19 CHAIRMAN COX: Sure. 20 Kim, do you happen to know? 21 MS. KIPLIN: I would say a game change 22 that's being contemplated would require unanimous 23 approval. 24 CHAIRMAN COX: And I don't think we have 25 unanimous agreement on what unanimous approval is 0095 1 really required, so we've got that, too. 2 MS. KIPLIN: I think Texas' position has 3 been pretty consistent and pretty clear, that any 4 change to the agreement would require unanimous 5 consent. 6 CHAIRMAN COX: Exactly. I'm not sure -- 7 what I was saying is, I'm not sure everybody agrees 8 with us. But I think they agree it says that, but 9 they don't seem to want to follow that course of 10 action. 11 MR. SADBERRY: There have been 12 discussions at at least two meetings, one of which I 13 know Gary attended before I was with the agency and 14 one in which I attended, in which that cause or that 15 concept became the subject of fairly extensive 16 discussion as to what it really meant. 17 So I would just advise that while the 18 language is there, I would think it would be subject 19 to discussion as to what the meaning and intent might 20 be and how it might be applied in a situation like 21 this. But we'll be mindful of that provision, which 22 my understanding is, is one of the requirements for 23 Texas, upon its decision to join Mega Millions, was to 24 have such a provision of that nature to protect its 25 interests. 0096 1 CHAIRMAN COX: Exactly. Thank you, 2 Director Sadberry. 3 AGENDA ITEM NO. XIII 4 CHAIRMAN COX: Item No. XIII, report, 5 possible discussion and/or action on GTECH 6 Corporation. 7 Director Sadberry. 8 MR. SADBERRY: Commissioners, you have 9 in your folders the usual background information 10 accumulated over the month meeting-to-meeting 11 regarding GTECH, to which I refer you to your reading. 12 And I would be happy to answer any 13 questions. I don't have any additional information to 14 provide at this time. 15 CHAIRMAN COX: Okay. Director Sadberry, 16 I believe that you were informed Friday and I was 17 informed Monday of a change in the senior management 18 structure, or the senior corporate structure of GTECH. 19 And I understand that Alan Eland is here and would be 20 pleased to report on that change. 21 MR. SADBERRY: There is a press release 22 that I received this morning speaking of the naming of 23 Mr. Sweitzer to the position of Chairman of the GTECH 24 Corporation Board of Directors. I also received this 25 morning a telephone message from Deputy Director, Gary 0097 1 Grief, regarding a meeting he has had with Mr. Eland 2 concerning the exact role that Mr. Sweitzer will play 3 in this new position. And I received a call from 4 Mr. Patel last week in which Mr. Sweitzer was on the 5 line and participated as well. 6 I agree with you, I would be happy, to 7 the extent Mr. Eland is here and wishes to speak to 8 this, he may provide additional information to the 9 Commission. 10 MR. ELAND: My name is Alan Eland. I'm 11 Senior Vice President of the Americans for GTECH. 12 Chairman Cox, Commissioner Schenck, 13 Director Sadberry, that's correct. Last week 14 Mr. Sweitzer was given the title of Chairman of GTECH 15 corporation. He's currently the Senior Vice President 16 of Government Relations for GTECH, a position that 17 he's held for more than 10 years. He retains that 18 title, Senior Vice President of GTECH Corporation, 19 until December 31st of this year, at which time he 20 will relinquish that title. He will also relinquish 21 his responsibilities as an officer of the company. He 22 will retain only the title of Chairman. The title of 23 Chairman is non-executive Chairman. Nobody reports to 24 Mr. Sweitzer in his capacity at Chairman. In fact, he 25 retains reporting lines to Mr. Patel as CEO and 0098 1 Mr. Pellicioli as CEO of the combined companies. 2 The move to give the title of Chairman 3 to Don, to Mr. Sweitzer, is part of a transition that 4 he wants to get out of the busy day-to-day 5 responsibilities that a company, him with Senior Vice 6 President of Government Relations. And he gets closer 7 to retirement, but he still wants to be involved in 8 the company. And we look at this as a way that he 9 will still represent the Company all over the world, 10 as he does today, in sort of a senior statesman type 11 role. 12 So I would be happy to address any 13 questions on that. 14 COMMISSIONER SCHENCK: So if I'm 15 understanding correctly, he will report to Mr. Patel 16 and not the other way around? 17 MR. ELAND: That's correct; that's 18 correct. 19 COMMISSIONER SCHENCK: That was my one 20 question. 21 CHAIRMAN COX: Okay. I appreciate your 22 report, Alan. Thank you for being here. 23 MR. ELAND: Thank you. 24 MS. KIPLIN: Mr. Eland, can you complete 25 a witness form for me, please? 0099 1 MR. ELAND: I will, yes. 2 COMMISSIONER SCHENCK: Anthony, in the 3 written report you gave us, there is a report from the 4 Washington Post about a contract controversy that 5 involves a company known as Lottery Technology 6 Enterprises, indicating it's new start-up. Is this 7 another potential competitor for the GTECH contract? 8 MR. SADBERRY: For the State of Texas? 9 COMMISSIONER SCHENCK: Yes. 10 MR. SADBERRY: I don't read it as such. 11 I think, in fact, that GTECH has an interest in the 12 company -- 13 COMMISSIONER SCHENCK: Okay. 14 MR. SADBERRY: -- that's part of this 15 process in Washington, D.C., makes it relevant to us. 16 But my sense in reading that and the news accounts 17 I've read of it, is that company is more local to 18 Washington, D.C. I think there is a local investor 19 who has had D.C. experience and a long-term 20 relationship with the D.C. lottery. That particular 21 company I'm not aware of having any express interest 22 or potential for being a competitor. 23 COMMISSIONER SCHENCK: So am I 24 understanding, it's a subsidiary or it's partly owned 25 by GTECH? 0100 1 MR. SADBERRY: GTECH has an interest in 2 the company, as I understand it. I'm not sure what 3 the structure is, whether it's a venture, a corporate 4 structure, but GTECH is a participant in that company 5 structure that has run the D.C. lottery. 6 COMMISSIONER SCHENCK: Thank you, sir. 7 MR. SADBERRY: What has happened is, I 8 think at some point along the way, some judicial 9 action appeared to place a lot of the documents under 10 seal, so we're not really sure exactly where that 11 matter stands now, what the relationships might be. 12 But, obviously, one of the things that has happened 13 is, that entity has received a challenge by another 14 competitor in that area, which brings about the 15 controversy that we're advising you of. But I'm not 16 informed in any way how either of those groups plays 17 out into a potential competitor for the Texas 18 business. 19 COMMISSIONER SCHENCK: Thank you. 20 AGENDA ITEM NO. XIV 21 CHAIRMAN COX: Item No. XIV, report, 22 possible discussion and/or action on Scientific Games. 23 On June the 4th, I believe it was, Gary 24 Grief, Michael Anger, Mike Fernandez and Kathy Pyka 25 and I met with Scientific Games at their headquarters 0101 1 in Alpharetta, Georgia. The meeting was very similar 2 to a meeting that we had in GTECH headquarters a 3 couple of months ago. We spent a lot of the time in a 4 discussion with the senior officers of Scientific 5 Games, including Lorne Weil, the Chairman and CEO, 6 Mike Chambrello, the Chief Operating Officer, Jim 7 Kennedy, the Marketing Vice President, and various 8 members of the staff of Scientific Games. 9 The meeting was a very positive meeting. 10 We, as I say, spent more time talking than we did 11 looking at slides, which is what we did at GTECH as 12 well, and I think the meeting was very productive for 13 both of us. As you know, Scientific Games is an 14 important contractor to us. I would certainly say 15 they are a prime contractor, Mr. Fernandez. 16 And they have the doggonedest collection 17 of great big old printing presses you have ever seen 18 in your life. I think they have six -- there are 19 seven of them -- help me, Mike, or somebody -- they 20 have seven in the world but six of them are at 21 Alpharetta, including a brand-new one that just blows 22 your mind. They took us through their quality control 23 procedures. It's a very impressive operation and one 24 that I think any of you would be pleased to see the 25 quality of work that is being done for us there. 0102 1 There was one discussion that I would 2 like to point out. Mr. Chambrello appeared before 3 this board several months ago and, in response to a 4 direct question from Chairman Clowe, was not 5 positively responsive as to whether Scientific Games 6 would be bidding on the lottery operator contract to 7 take place 2011. Mr. Weil discussed that in some 8 detail. He said that in the event that the RFP is 9 such that they can make a fair profit on a bid, thus 10 justifying the 700 to $800,000 cost of a proposal, 11 that they will be an enthusiastic bidder. 12 So that is a positive report, I think, 13 in that we will have provided, of course, that the RFP 14 looks to them like something they could make a buck 15 on, that we will have competition in 2010 if we 16 receive those. 17 Gary, Mike, Kathy, Michael, anything to 18 add to that? 19 MR. GRIEF: No, sir. 20 CHAIRMAN COX: Any questions, 21 Commissioner, on the meeting or what took place there? 22 COMMISSIONER SCHENCK: No. I think that 23 was a very good report, and I appreciated your having 24 that trip as well as the trip to Rhode Island. It 25 sounds like a very productive exercise. 0103 1 CHAIRMAN COX: Thank you. 2 AGENDA ITEM NO. XV 3 CHAIRMAN COX: Item No. XV, report by 4 the Executive Director and possible discussion and/or 5 action on the agency's operational status, agency 6 procedures and FTE status. 7 Director Sadberry. 8 MR. SADBERRY: Good morning. Anthony 9 Sadberry, Executive Director, again for the record. 10 In your folders, Commissioners, there is 11 a report on the FTE status of the agency provided to 12 you on a monthly basis. And other than this, I have 13 no additional report to make to you, but I would be 14 happy to answer any questions you might have. 15 COMMISSIONER SCHENCK: I have a question 16 about how soon we are likely to see these three posted 17 positions filled in the Lottery Division? 18 MR. SANDERSON: The three inspector 19 positions for bingo? 20 COMMISSIONER SCHENCK: Yes. 21 MR. SANDERSON: The posting was -- 22 COMMISSIONER SCHENCK: Did I said 23 lottery? I'm sorry. I meant bingo. 24 MR. SANDERSON: The posting was 25 published on June the 17th, and we have two -- right 0104 1 now just two applications. It's an open till filled. 2 And normally what we'll do is, after about two weeks 3 of the posting, we'll review the applications. And as 4 they continue to come in, we'll call people in for 5 interviews. 6 COMMISSIONER SCHENCK: Excellent. 7 AGENDA ITEM NO. XVI 8 CHAIRMAN COX: Okay. Item No. XVI, 9 consideration and possible discussion and/or action on 10 Lotto Texas jackpot estimation procedure. 11 Ms. Pyka. 12 MS. PYKA: Thank you, Mr. Chairman. 13 Again, for the record, my name is Kathy Pyka, 14 Controller for the Lottery Commission. 15 Commissioners, in accordance with Agency 16 Directive MD-001 and Procedure AD-SS-PP-OO1, Lotto 17 Texas -- 18 CHAIRMAN COX: That's a lot of letters. 19 MS. PYKA: It is. Lotto Texas Jackpot 20 Estimation Procedure OC-JE-002 is attached for your 21 consideration and approval to post the proposed 22 procedure in the Texas Register and on the agency's 23 website in order to receive public comment. 24 Prior to placing the proposed procedure 25 in the Texas Register and on the agency's website, the 0105 1 sections of the procedure that are confidential by law 2 will be redacted. 3 And for background purposes, 4 commissioners, the follow-up audit report on the 5 workforce management, procurement and Lotto activities 6 of the Texas Lottery Commission performed by the State 7 Auditor's office included a recommendation related to 8 the approval process for policies, directives and 9 procedures that affect Lotto Texas players. 10 And I'll just note the recommendation 11 included in this February 2008 report stated the 12 agency should publish proposed policies and procedures 13 that affect Lotto Texas players in the Texas Register 14 and on its website. It should then present these 15 proposed policies and procedures to the Texas Lottery 16 Commission at public commission meetings and request 17 that the Commission publicly approve the procedures 18 after making these policies and -- after these 19 policies and procedures are approved, the agency 20 should make them available to the public by publishing 21 them on the agency's website and in the Texas 22 Register. 23 So the procedures and the policy 24 directive that I referenced at the opening of my 25 comments have been developed to incorporate all of the 0106 1 steps as outlined in the audit report. I wanted to 2 share that the Lotto Texas jackpot estimation 3 procedure has been routed through the Commission's 4 formal review process, and staff has agreed as to the 5 form and substance of the procedure. 6 The previous version of this procedure 7 was adopted on February 13th of 2007, and we have made 8 modifications to it, in Section 1 of the procedure to 9 reflect various timelines for the jackpot estimation 10 process, and we've also included new language that 11 outlines the specific process that should be used if 12 an authorized signature of jackpot estimation is not 13 available for signature and we cannot obtain temporary 14 signature authority. And the remaining edits to the 15 procedure are just minor in nature. 16 So with that, I would like to recommend 17 that the procedure be approved for publication in the 18 Texas Register and on the agency's website. If 19 approved and in compliance with the remaining 20 provisions of Directive MD-001 and Procedure 21 AD-SS-PP-001, the procedure will be published in the 22 Texas Register and on the agency's website for a 23 minimum of 30 days prior to receiving public comment 24 on the procedures. 25 This concludes my presentation. I would 0107 1 be happy to answer any questions. 2 COMMISSIONER SCHENCK: I have one 3 question. 4 MS. PYKA: Yes. 5 COMMISSIONER SCHENCK: This has been 6 through Legal? 7 MS. PYKA: It has. The review process 8 on a procedure such as this that includes more than 9 one operating division includes a comprehensive 10 review. And in this case, that included the Office of 11 the Controller as well as Lottery Operations Division. 12 Because we had a number of modifications 13 as it relates to signature authority, Legal as well as 14 the Internal Auditor were part of a group that had 15 opportunity to see the procedure as it was being 16 developed. And then following our review in the 17 Office of the Controller and Lottery Operations, it 18 was routed to Legal for their review as to form and 19 content, the Deputy Executive Director and the 20 Executive Director. 21 COMMISSIONER SCHENCK: And they've all 22 approved at this point? 23 MS. PYKA: As to form and content, yes. 24 CHAIRMAN COX: Kathy, is everything in 25 here in total compliance with the recommendations of 0108 1 the State Auditor? 2 MS. PYKA: Yes, it is in total 3 compliance in my belief to the recommendations with 4 the State Auditor's office. 5 CHAIRMAN COX: I move approval of the 6 staff recommendation. 7 COMMISSIONER SCHENCK: I second the 8 motion. 9 CHAIRMAN COX: All in favor, say "Aye." 10 COMMISSIONER SCHENCK: Aye. 11 CHAIRMAN COX: Aye. 12 Motion carries 2-0. 13 MS. PYKA: Thank you, Commissioners. 14 CHAIRMAN COX: Thank you. 15 MS. KIPLIN: Commissioners, before we 16 move on, there is one point I do want to make sure 17 that is on the record. Part of the recommendation by 18 the State Auditor's office was to convene a public 19 hearing to receive comment. Through a letter that 20 Executive Director Sadberry sent to the State 21 Auditor's office seeking clarification on that 22 particular aspect, and particularly it wasn't intended 23 that it be the three-member commission that convene 24 and preside over that hearing, a public comment 25 hearing, or could it be delegated to staff. 0109 1 As you know, you-all do delegate that 2 action to the staff as it relates to rulemaking 3 comment hearings. This is the first time that we will 4 be undergoing this process for receiving public 5 comment on the Lotto Texas jackpot procedure. And so 6 we thought that it would be a good opportunity to be 7 very clear about how the Commission wanted to proceed 8 with regard to that comment hearing. Would you like 9 to have that delegated to your staff? Of course, we 10 would have a court reporter and so you could read 11 verbatim a transcript. Or would you like to preside 12 over that comment hearing yourselves? 13 CHAIRMAN COX: Commissioner? 14 COMMISSIONER SCHENCK: My preference 15 would be to delegate that to staff. I believe before 16 we do the final approval for publication, we'll have 17 another open meeting in which the issue will be 18 noticed, and the public is welcome to attend and 19 comment. 20 MS. PYKA: That is correct. 21 COMMISSIONER SCHENCK: So I see no 22 reason to do that twice. 23 CHAIRMAN COX: Now, let me ask a 24 question. You said welcome to attend and comment. I 25 don't think you will like comment at that meeting. 0110 1 MS. KIPLIN: That has a -- 2 COMMISSIONER SCHENCK: A different -- 3 not the term-of-art comment. They could derail us 4 from finally approving for final publication if they 5 have some concern that came up during the comment that 6 wasn't appropriately to address. 7 MS. KIPLIN: And my concern with regard 8 to the comment received after a comment period has 9 expired as it relates to a rulemaking being conducted 10 under the Administrative Procedures Act is that it 11 creates an opportunity for error, procedural error on 12 the process, and gives somebody who would like to 13 challenge an opportunity to file a lawsuit claiming 14 that the Administrative Procedures Act had not been 15 complied with. 16 CHAIRMAN COX: I understand Commissioner 17 Schenck's point now. 18 MS. KIPLIN: Okay. 19 CHAIRMAN COX: Thank you. 20 MS. PYKA: Thank you. 21 MS. KIPLIN: And so I'm understanding 22 there is no issue in your mind in -- 23 CHAIRMAN COX: Do you want action? Is 24 the fact that we tell you, "Go ahead and do it" good 25 enough? 0111 1 MS. KIPLIN: The fact that you tell me, 2 "Go ahead and do it" is good enough. 3 CHAIRMAN COX: Good enough. 4 AGENDA ITEM NO. XVII 5 CHAIRMAN COX: Okay. Item XVII, report, 6 possible discussion and/or action on the agency's 7 Strategic Plan for 2009 to 2013. 8 Deputy Director Grief. 9 MR. GRIEF: Good morning again, 10 Commissioners. For the record, my name is Gary Grief. 11 I'm a Deputy Executive Director. 12 And this morning I would like to bring 13 before you as an action item the agency's Strategic 14 Plan for Fiscal Years 2009 to 2013. In the May 15 Commission meeting, I provided you with background on 16 the development of the document as well as the purpose 17 that it serves. 18 I would note that Kathy Pyka presented 19 to you in a previous Commission meeting our agency's 20 proposed goals, objectives and measures along with our 21 performance measure definitions, and those items will 22 eventually be incorporated into the Strategic Plan, 23 pending concurrence on those items from both the LBB 24 and the Governor's office. 25 And with that, I would be happy to 0112 1 answer any questions you might have. Or if there are 2 no questions, I would ask that you consider approval 3 of the document. 4 COMMISSIONER SCHENCK: Gary, thank you. 5 I've had a chance to review this before. And, 6 obviously, it took a lot of work and it's very well 7 done in my opinion. And I appreciated your doing it, 8 and I don't have any questions at this time. 9 CHAIRMAN COX: And I certainly echo 10 those remarks. It's an excellent piece of work. And 11 I recommend that we approve this for publication. 12 COMMISSIONER SCHENCK: I second that 13 motion. 14 CHAIRMAN COX: All in favor, say "Aye. 15 COMMISSIONER SCHENCK: Aye. 16 CHAIRMAN COX: Aye. 17 Motion carries 2-0. 18 MR. GRIEF: Thank you. 19 CHAIRMAN COX: Okay. Ms. Kiplin, we 20 have the completion of the executive session and we 21 have the cases. It is now 12 o'clock. I would like 22 to cover the cases before we go back into executive 23 session. Is that going to be a time-consuming 24 process? 25 MS. KIPLIN: No, I don't think so. 0113 1 AGENDA ITEM NO. XVIII 2 CHAIRMAN COX: Okay. Item XVIII, 3 consideration of the status and possible entry of 4 orders. 5 MS. KIPLIN: Commissioners, the first 6 item, Item A, is a proposal for a decision against a 7 lottery retailer for insufficient funds. The 8 Administrative Law Judge has recommended revocation of 9 the license. Staff supports that and would ask that 10 you approve the proposal for decision in the order 11 revoking the license. 12 COMMISSIONER SCHENCK: Kim, this is not 13 one of our retailers who three times wasn't covering 14 sales and is someone who is basically taking money 15 from the school children of Texas through the lottery 16 and not making good. 17 Nelda, for the record -- I'll say it 18 again -- I'll bet you that they're selling beer and 19 cigarettes at King Food Market No. 144103. And I sure 20 don't think that people who are taking money from the 21 school children of Texas should be enjoying state 22 licenses to sell alcohol and beer, until they've made 23 us whole. So when the Legislature gets back in 24 session, that's an idea I would like us all to 25 consider. 0114 1 Kim, there's no controversies relating 2 to this? This is uncontested at this point? 3 MS. KIPLIN: It was a default, no 4 controversies. 5 COMMISSIONER SCHENCK: I recommend that 6 we adopt the proposed order. 7 CHAIRMAN COX: I'll second that motion. 8 All in favor, say "Aye." 9 COMMISSIONER SCHENCK: Aye. 10 CHAIRMAN COX: Aye. 11 Motion carries 2-0. 12 MS. KIPLIN: Commissioners, Items B, C 13 and D -- 14 CHAIRMAN COX: Just a second on this 15 one. 16 MS. KIPLIN: Yes, sir. 17 CHAIRMAN COX: Michael Anger, do we 18 ultimately collect this money or -- you know, I see 19 here $10,000, maybe, that they NSF'd us on. Do we 20 ultimately get that money usually? 21 MR. ANGER: We make every effort to 22 collect on delinquent accounts for the agency. Now -- 23 and I don't have the specific facts in front of me 24 with regard to this particular retailer. But this 25 retailer became subject to this because of what we 0115 1 call internally and it goes to our administrative 2 rule, but our forced rights rule. 3 This retailer, we took action to revoke 4 their license, because they for a fourth time in a 5 one-year period of time were not -- they didn't have 6 funds available when we swept their account, to make 7 payment to us. So in the case of the list of charges 8 you see there where they owed us monies when we went 9 to sweep, we would not have continued to engage that 10 retailer and keep them on as a licensee the first 11 three times, had they not made good on the monies that 12 they owed to the lottery. They just didn't have the 13 monies available at the sweep time. 14 This happened for a fourth time, and so 15 we sought action to cancel their license. So we would 16 have collected on the first three that you see listed 17 there. The outstanding balance would be the fourth 18 non-sufficient fund sweep. And I don't have that 19 information with me now. 20 But we do continue to seek action to 21 collect on all of those, including putting them on 22 hold with the Comptroller of Public Accounts, which is 23 kind of a global database of state-owed monies. We 24 place liens where we can. We seek to seize monies 25 from officers' accounts in those situations where we 0116 1 can and engage in other enforcement-related 2 activities. 3 COMMISSIONER SCHENCK: That all takes 4 time and energy of our staff and the Comptroller's 5 staff, and these people are consuming resources and 6 just making us chase after them. And we can go after 7 their principals, as I recall, the owners of the 8 company? 9 MS. KIPLIN: For monies unpaid, yes. 10 COMMISSIONER SCHENCK: Yes, which is all 11 good, and I'm glad that we have those tools. But I'm 12 for augmenting the hammer we have in our hands when we 13 go after them. 14 CHAIRMAN COX: And I'm in complete 15 agreement with you, and I want to talk about how big 16 the hammer might be. Commissioner Schenck has 17 mentioned alcoholic beverage license. These people 18 have lots of licenses. They have a license to collect 19 sales taxes, for instance. When we put them on hold 20 with the Controller's office, does the Controller's 21 office suspend their sales tax permit? 22 MR. ANGER: No. Other state agencies, 23 to my knowledge, do not take action with regard to 24 other licenses that have been issued. However, if the 25 state comes into possession of monies that they may be 0117 1 passing back out to taxpayers, you know, one of the 2 things that we all do collectively is, we research and 3 ensure that there are no monies that are outstanding 4 that are owed to the state. 5 So if by chance there was an overpayment 6 made to the Comptroller's office and they were going 7 to proceed with a refund back to this taxpayer, they 8 might come up and identify that there is a hold for 9 them here with the lottery, in which case those funds 10 would flow through to us. 11 CHAIRMAN COX: And some of those 12 operators, I believe, have licenses to operate 13 amusement devices? 14 MR. ANGER: Yes, those are also issued 15 through the Comptroller's office. 16 CHAIRMAN COX: Another possibility of 17 something that could be revoked in the event that they 18 stiff us. 19 So, counsel, I would just ask that we 20 look at -- expand Commissioner Schenck's idea to 21 whatever other possibilities there might be and look 22 at its feasibility. 23 MS. KIPLIN: And, Commissioners, if I 24 could just follow up on that. You asked that question 25 some time ago. Steve White has been working on a 0118 1 legal opinion that I understand would be issued by the 2 end of this week; if not, early next week. We've done 3 an exhaustive search of other state agencies' enabling 4 authority to determine whether there was any kind of 5 hold, foothold, any way that we could notify them of 6 the issues here and monies owed at the lottery. There 7 is no state enabling law as it relates to any of the 8 licensing that would require a mandate, authorize the 9 other state agencies to be able to revoke those 10 licenses due to a delinquency owed here. 11 There is one aspect that would require a 12 rulemaking and exploration -- I don't hold much hope 13 out there -- and that has to do with those agencies 14 that have a character and fitness aspect to the 15 eligibility for those licenses. So I didn't want you 16 to think we hadn't done the work. 17 COMMISSIONER SCHENCK: What you're 18 saying is that we would need the legislative 19 assistance on this. There is not existing law in 20 place? 21 MS. KIPLIN: I think so, I really do. I 22 think to look to another agency to explore the ability 23 of revoking a license based on character and fitness 24 of that person would require them to exercise that 25 matter or policy at those particular agencies, versus 0119 1 just going in and looking at a change in enabling law. 2 COMMISSIONER SCHENCK: Well, it would 3 probably be simpler to have that changed in our 4 enabling act anyway. But I know in this state, if 5 you're substantially delinquent in child support -- 6 MS. KIPLIN: That's correct. 7 COMMISSIONER SCHENCK: -- you cannot get 8 a hunting license, you don't get a fishing license. 9 It didn't require a whole lot of words in the 10 statutes. But I think if we could do something like 11 that, it would be in the interest of certainly the 12 school children to get this money collected from 13 people who have sold our product and aren't paying us 14 for it. 15 So anyway, that's just an idea. 16 CHAIRMAN COX: Thank you, Commissioner. 17 Okay. Ms. Kiplin, do you want to take 18 Item B or how do you want to take these? 19 MS. KIPLIN: Well, with your permission, 20 I would like to take B, C and D all together. 21 CHAIRMAN COX: Okay. 22 MS. KIPLIN: These are orders relating 23 to either folks that are trying to get on the 24 registry, bingo registry workers, or those that are on 25 that the agency, the staff, the division is trying to 0120 1 remove. All four the same reason of disqualifying 2 criminal conviction. 3 In each of these cases, the 4 Administrative Law Judge did issue a proposal for a 5 decision recommending either -- as applicable, either 6 removal from the registry or refusal to add the name, 7 all for disqualifying criminal convictions. The Staff 8 recommends that you vote to approve these orders. 9 CHAIRMAN COX: Move approval of staff 10 recommendation. 11 COMMISSIONER SCHENCK: I second the 12 motion. 13 CHAIRMAN COX: All in favor, say "Aye." 14 COMMISSIONER SCHENCK: Aye. 15 CHAIRMAN COX: Aye. 16 Motion carries 2-0. 17 Okay. Item E. 18 MS. KIPLIN: Item E, Commissioners, is a 19 proposed agreement and consent order between the Bingo 20 Division and a worker Sherry Lynn Harvey. The outcome 21 of the order is the removal of this person from the 22 registry of workers. And the underlying conduct that 23 caused the staff to pursue removal of this particular 24 individual from the registry has to do with the 25 respondent opening pull-tabs before they were sold to 0121 1 players, to determine where the winning pull-tabs were 2 and then to hold those back for the final game. 3 We think it goes to the heart of the 4 integrity of the game and move forward -- after 5 noticing up the hearing to go to a contested case 6 proceeding, and I believe it was on the eve of that 7 hearing, we did work an agreement where we achieved 8 the same result, removal of the worker. 9 Staff would recommend that the 10 Commission enter into the consent order that upholds 11 the removal. 12 COMMISSIONER SCHENCK: I move that we 13 adopt staff recommendation. 14 CHAIRMAN COX: Second the motion. 15 All in favor, say "Aye." 16 COMMISSIONER SCHENCK: Aye. 17 CHAIRMAN COX: Aye. 18 Motion carries 2-0. 19 Mr. Sanderson, that brings up an 20 interesting question. 21 MR. SANDERSON: Yes, sir. 22 CHAIRMAN COX: Do we have a defective 23 product out there that allows people to look under the 24 tab and find out whether it's a winner or not and then 25 close it back up and sell it? 0122 1 MR. SANDERSON: Of course, anything 2 could be possible out there. As far as I'm aware, we 3 do not have a defective product. This case was -- I 4 believe a little over two years ago is when it was 5 observed that she was peeking the pull-tab tickets. 6 And since that time, we have adopted some standards in 7 our rule that require the printing under the tab to be 8 a certain distance from the perforation. 9 These tickets were approved I believe 10 initially back in 2003. So I've got staff looking at 11 the approval of the artwork at that point in time to 12 see if it meets the current standards of the five- 13 32nds inch deviation from the perforation. If we 14 determine that there is a ticket that is easily 15 peeked, then we can recall it, yes. 16 CHAIRMAN COX: Okay. So what you've 17 done is test these and find out how far you have to 18 turn it to tear a perforation. And you've made sure 19 that the symbol or number underneath that is far 20 enough away that you can't see it without tearing a 21 perforation? 22 MR. SANDERSON: Yes, sir. 23 CHAIRMAN COX: Okay. Which would make 24 it hard to detect, impossible to detect, easy to 25 detect? 0123 1 MR. SANDERSON: It makes it harder to 2 detect. 3 CHAIRMAN COX: Okay. So still, probably 4 if somebody is good enough, they can rub that back in 5 there and sell it to the unsuspecting patron? 6 MR. SANDERSON: Yes, sir. 7 CHAIRMAN COX: I think we ought to be 8 looking at what the industry standard is in these 9 things. 10 MR. SANDERSON: Our rule is drafted 11 after the NAGRA standards on pull-tabs. 12 CHAIRMAN COX: Okay. Then if the 13 industry standards don't look good enough to you, 14 maybe we ought to get them improved. 15 MR. SANDERSON: Yes, sir. 16 CHAIRMAN COX: Excellent. 17 COMMISSIONER SCHENCK: I have one 18 question, Philip. Do you have people regularly trying 19 to cheat, just getting these pull-tabs here in the 20 office, I mean in the spare time when you're bored, 21 pick the one that hasn't been broken? 22 MR. SANDERSON: Presently we haven't had 23 the time to, the spare time to play with the 24 pull-tabs, so to speak. It is something that we could 25 definitely look at. I know some of the investigators 0124 1 have come over. And we keep a sample of the 2 pull-tab -- 3 COMMISSIONER SCHENCK: So you have 4 enough in the building right now? I'm going to be 5 here for the next 24 hours. I'll have some spare 6 time. I'll try to crack some and just see what I can 7 do. 8 MR. SANDERSON: I'll be glad to give you 9 a stack of pull-tabs. 10 CHAIRMAN COX: You going to wear a 11 disguise or anything? 12 COMMISSIONER SCHENCK: I need a pin 13 also. 14 CHAIRMAN COX: Okay. Let's see. Did we 15 sign all the orders, Kim? 16 MS. KIPLIN: Yes, you did. Can I have 17 them back, please? 18 CHAIRMAN COX: Yes. 19 AGENDA ITEM NO. XIX 20 CHAIRMAN COX: All right. Item No. XIX. 21 Is there any public comment? 22 AGENDA ITEM NO. XX (continued) 23 CHAIRMAN COX: At this time I move the 24 Texas Lottery go into executive session: 25 A. To deliberate the duties and evaluation of 0125 1 the Executive Director, the Deputy Executive Director, 2 Internal Audit Director, Charitable Bingo Operations 3 Director and to deliberate the duties of the General 4 Counsel pursuant to Section 551.074 of the Texas 5 Government Code; 6 B. To receive legal advice regarding pending 7 or contemplated litigation pursuant to Section 8 551.071(1)(A) or to receive legal advice regarding 9 settlement offers pursuant to Section 551.071(1)(B) of 10 the Texas Government Code and to receive legal advice 11 pursuant to Section 551.071(2) of the Texas Government 12 Code, including but not limited to: 13 First State Bank of DeQueen, et al., v. 14 Texas Lottery Commission; 15 James T. Jongebloed v. Texas Lottery 16 Commission; 17 Employment law, personnel law, 18 procurement and contract law, evidentiary and 19 procedural law, and general government law. 20 Is there a second? 21 COMMISSIONER SCHENCK: I second the 22 motion. 23 CHAIRMAN COX: All in favor, say "Aye." 24 COMMISSIONER SCHENCK: Aye. 25 CHAIRMAN COX: Aye. 0126 1 The vote is 2-0. The Texas Lottery 2 Commission will go into executive session. The time 3 is 12:12 p.m. Today is June 25, 2008. 4 (Recessed for executive session: 5 12:12 p.m. to 1:26 p.m.) 6 AGENDA ITEM NO. XXI (continued) 7 CHAIRMAN COX: The Texas Lottery 8 Commission is out of executive session. The time is 9 1:26 p.m. 10 Is there any action to be taken as a 11 result of executive session? 12 COMMISSIONER SCHENCK: No, I believe 13 not. 14 AGENDA ITEM NO. XXII 15 CHAIRMAN COX: If not, the meeting is 16 adjourned. 17 (Meeting adjourned: 1:26 p.m.) 18 19 20 21 22 23 24 25 0127 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 9th day of July 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