0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 6 WEDNESDAY, AUGUST 20, 2008 § 7 8 COMMISSION MEETING 9 WEDNESDAY, AUGUST 20, 2008 10 11 BE IT REMEMBERED THAT on Wednesday, 12 the 20th day of August 2008, the Texas Lottery 13 Commission meeting was held from 9:00 a.m. to 14 p.m., at the Offices of the Texas Lottery 15 Commission, 611 East 6th Street, Austin, Texas 78701, 16 before CHAIRMAN JAMES A. COX, JR., and COMMISSIONER 17 DAVID SCHENCK. The following proceedings were 18 reported via machine shorthand by Aloma J. Kennedy, a 19 Certified Shorthand Reporter of the State of Texas, 20 and the following proceedings were had: 21 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 August 6, 2008 Committee meeting.......................................... 8 7 AGENDA ITEM NO. III - Report, possible 8 discussion and/or action on the Bingo Advisory Committee FY '08 work plan.............. 14 9 AGENDA ITEM NO. IV - Consideration of and 10 possible discussion and/or action relating to the continuation of the Bingo Advisory 11 Committee........................................18/71 12 AGENDA ITEM NO. V - Consideration of and possible discussion and/or action on the 13 Bingo Advisory Committee FY '09 work plan........ 23 14 AGENDA ITEM NO. VI - Consideration of and possible discussion and/or action on 15 nominations and appointment to the Bingo Advisory Committee......................... 32 16 AGENDA ITEM NO. VII - Report, possible 17 discussion and/or action on the interpretation of the term “gambling 18 promoter” and/or “professional gambler” in connection with Bingo Enabling Act 19 licensing eligibility requirements for bingo manufacturers and distributors............. 34 20 AGENDA ITEM NO. VIII - Report by the 21 Charitable Bingo Operations Director and possible discussion and/or action on the 22 Charitable Bingo Operations Division's activities....................................... 72 23 24 25 0004 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. IX - Report, possible discussion and/or action on lottery sales 4 and revenue, game performance, new game opportunities, advertising, market 5 research, and trends............................. 74 6 AGENDA ITEM NO. X - Report, possible discussion and/or action on transfers 7 to the State................................... 92/178 8 AGENDA ITEM NO. XI - Report, possible discussion and/or action on the agency’s 9 FY 2009 budget................................... 114 10 AGENDA ITEM NO. XII - Consideration of and possible discussion and/or action on the 11 agency’s FY 2010-2011 legislative appropriations request........................... 117 12 AGENDA ITEM NO. XIII - Report, possible 13 discussion and/or action on the 80th Legislature................................. 180 14 AGENDA ITEM NO. XIV - Report, possible 15 discussion and/or action on the lottery operator procurement consultant contract......... 98 16 AGENDA ITEM NO. XV - Consideration of and 17 possible discussion and/or action on external and internal audits and/or reviews 18 relating to the Texas Lottery Commission and/or on the Internal Audit Department’s 19 activities....................................... 178 20 AGENDA ITEM NO. XVI - Report, possible discussion and/or action on the Mega 21 Millions game and/or contract.................... 182 22 AGENDA ITEM NO. XVII - Report, possible discussion and/or action on GTECH 23 Corporation...................................... 183 24 25 0005 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XVIII - Report by the Executive Director and/or possible 4 discussion and/or action on the agency’s operational status, agency procedures 5 and FTE status................................... 184 6 AGENDA ITEM NO. XIX - Consideration of the status and possible entry of orders in: 7 A. Docket No. 362-08-3184 – Nuway Store B. Docket No. 362-08-3182 – Jacob Food 8 Mart C. Docket No. 362-08-3183 – Evans 9 Grocery & More D. Docket No. 362-08-3345 – Sams 10 One Dollar E. Docket No. 362-08-2758 – Tienda 11 Food Store F. Case No. 2008-892 – Tommy’s Market 12 G. Case No. 2008-734 – High Noon Grocery................................... 187 13 AGENDA ITEM NO. XX - Public comment.............. 195 14 15 16 17 18 19 20 21 22 23 24 25 0006 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XXI - 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 deliberate the duties of the Human 14 Resources Director pursuant to Section 551.074 of the Texas Government Code. 15 G. To receive legal advice regarding pending or contemplated litigation 16 pursuant to Section 551.071(1)(A) and/or to receive legal advice regarding 17 settlement offers pursuant to Section 551.071(1)(B) of the Texas Government 18 Code and/or to receive legal advice pursuant to Section 551.071(2) of the 19 Texas Government Code, including but not limited to: 20 First State Bank of DeQueen et al. v. Texas Lottery Commission 21 James T. Jongebloed v. Texas Lottery Commission 22 Employment law, personnel law, procurement and contract law, 23 evidentiary and procedural law, and general government law 24 Lottery Operations and Services contract 25 Mega Millions game and/or 0007 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XXII - Return to open session for further deliberation and 4 possible action on any matter discussed in Executive Session............................. 196 5 AGENDA ITEM NO. XXIII - Adjournment.............. 197 6 7 REPORTER'S CERTIFICATE.......................... 198 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0008 1 P R O C E E D I N G S 2 WEDNESDAY, AUGUST 20, 2008 3 (9:00 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN COX: Good morning. It is 6 9 o'clock, August 20, 2008. Commissioner Schenck is 7 here. I'm Jim Cox. Let's call this meeting of the 8 Texas Lottery Commission to order. 9 AGENDA ITEM NO. II 10 CHAIRMAN COX: Agenda Item No. II, 11 report by the Bingo Advisory Committee Chairman. 12 Hello, Suzanne. 13 MS. TAYLOR: Good morning, 14 Commissioners. 15 CHAIRMAN COX: How are you? 16 MS. TAYLOR: Doing good. 17 Good morning. My name is Suzanne 18 Taylor. I chair the BAC. I was going to just talk 19 about some of the high points of our August 6, 2008 20 Bingo Advisory Committee meeting. 21 Item No. 6 on our agenda was about the 22 Nomination Workgroup. And Earl Silver did advise the 23 BAC members the Nomination Workgroup had used a set of 24 questions provided by the Bingo Division staff to 25 interview prospective nominees for the BAC, by phone, 0009 1 and recommend Markey Weaver and Rosie Lopez. It was 2 moved, seconded and unanimously passed to accept the 3 recommendations from the workgroup and pass these 4 recommendations on to the Commissioners at their next 5 meeting. 6 In our meeting, the workgroup also 7 reviewed the 2007-2008 Bingo Advisory Committee 8 accomplishments of work plan activities to the 9 committee. It was moved, seconded and unanimously 10 passed to adopt this report and present it to the 11 Commissioners at their next meeting. BAC members also 12 reviewed the 2007 Bingo Advisory Committee work plan 13 and found that it continued to meet the goals of the 14 committee and agreed to adopt it for the 2008-2009 15 work plan. 16 It was moved, seconded and unanimously 17 passed to present the 2008-2009 work plan to 18 Commissioners for their consideration and approval at 19 the next Commission meeting. 20 One of the other items that we had a 21 long discussion on was draft 16 TAC 402.512 relating 22 to bingo occasion records. There were many 23 recommendations for changes by committee members and 24 by those making public comment. Public comment was 25 received stating this rule is only beneficial to 0010 1 auditors and not for the charities, don't make the 2 bingo records too complex, make them user-friendly and 3 weed out the wrongdoers. 4 Public comment by Trace Smith included 5 recommendations that the Bingo Division needed to 6 concentrate on charities making more money, not more 7 rules, and not to curb the industry because of 8 problems with a few halls. 9 One other draft rule that we had a lot 10 of discussion on was 16 TAC 402.421 related to 11 affiliated organizations. Committee members and those 12 providing public comment agreed that on No. 7 13 operators, it should be deleted, since sharing the 14 same operators does not mean organizations are 15 affiliated. 16 Public comment was also received 17 stating that in many small towns, the same individuals 18 serve as operators and directors on multiple boards. 19 However, the organizations are not affiliated, and 20 this would be an undue hardship on those 21 organizations. 22 Public comment was also received asking 23 whether those organizations already participating in 24 bingo will be grandfathered if this rule proceeds as 25 currently written. 0011 1 Those were the high points. I don't 2 know if you wanted me to talk about the 3 accomplishments of the Bingo Advisory Committee and 4 the nomination workers at this time or if that's going 5 to be considered further down in your agenda. 6 CHAIRMAN COX: I believe that's the 7 next agenda item. Thank you, Suzanne. 8 Commissioner Schenck, I know you 9 attended much of that meeting electronically. Do you 10 have any thoughts you want to share? 11 COMMISSIONER SCHENCK: Well, I thought 12 it was a productive meeting. I do share the concern 13 with the volume of rulemaking. On the other hand, I 14 do think that the rulemaking efforts are to the 15 ultimate interest of the industry and the charitable 16 organization alike, and I know that Phil is sensitive 17 to those issues and is keeping in mind those things as 18 he moves forward. 19 MS. TAYLOR: And once again, 20 Commissioner, I would like to tell you how much the 21 BAC appreciates the fact that you took the time to 22 attend our meeting via television. But we really 23 appreciate that the Commission takes such an interest 24 in bingo and takes the time to come to our meetings. 25 It means more than you can ever realize. 0012 1 COMMISSIONER SCHENCK: It was my 2 pleasure. Thank you. 3 CHAIRMAN COX: Thank you for doing 4 that, Commissioner. 5 Suzanne, Phil and I, among others, had 6 a long discussion about this matter, Item 8. And for 7 the rest of you, that's the item related to rules and 8 how they can become so complex that they can cause 9 difficulties with operations. 10 And Phil and his folks are very 11 sensitive to that; and, yet, I know that you will 12 recall that they have gone through an extensive audit 13 by our internal auditors and got a pretty thick report 14 on things that perhaps they could improve in. 15 And what we're really trying to do is 16 improve our audit procedures such that they are 17 helpful and productive, while at the same time not 18 overly burdening the licensees. And to that end, Phil 19 is going to -- is considering a number of ways to take 20 this further and have further discussion with the 21 industry so that we can hopefully reach a happy medium 22 where our audits are useful to both the state and to 23 the licensee; and, yet, the recordkeeping isn't so 24 burdensome that it isn't worth being in business. 25 That's a tough balance, but we're very conscious of 0013 1 it. And Phil will be going further on that before 2 that rule is proposed. 3 MS. TAYLOR: I know the entire industry 4 appreciates how much the staff works with the 5 organizations and with the industry, trying to make it 6 so that you can do your job and we can do the job that 7 we're trying to do, and that's raising money, and we 8 do appreciate that, and we can see it. 9 But just sometimes when we look at 10 these rules and we, because we're in the day-to-day 11 operations and we can see the price we're going to 12 have to pay and the additional items that we're going 13 to have to be collecting all the time, it's 14 frustrating. I understand the need for some of them, 15 but it's frustrating being there and having to 16 actually carry this out on a day-to-day basis. 17 CHAIRMAN COX: Sure. I think sometimes 18 when we look at this kind of issue, we think about the 19 micro-picture without the macro. You know, I think if 20 you looked at the charities as the beneficiary of our 21 audits and not the employees of the charity, that you 22 would find that in many cases, our interests are 23 perfectly aligned, because our interests as auditors 24 are trying to assure that the charities receive the 25 maximum of the proceeds, the total of the proceeds 0014 1 from bingo. 2 You know, one of the examples that we 3 talked about were the different colored paper if you 4 want to offer discounts. Maybe there would be pink 5 paper if you were going to offer 75 percent off and 6 yellow paper if you're going to offer 50 percent off 7 and white paper if you're going to sell it full price. 8 Well, that seems like a lot of paper; 9 and, yet, the only way the charities and, in turn, the 10 auditors who come much later can be assured that all 11 of the proceeds are reported is counting various 12 colors of paper that have various prices. 13 So that's the kind of issue that you 14 and we both face in trying to both assure the 15 charities and yet make the workload such that we can 16 make a buck. So we're very conscious of that, not 17 only the individual issues but the general idea, and 18 we want to work with the industry to do the best we 19 can on that. 20 MS. TAYLOR: Thank you. 21 AGENDA ITEM NO. III 22 CHAIRMAN COX: Agenda Item No. III. 23 And this is your report on your '08 work plan, 24 Suzanne. 25 MS. TAYLOR: If you don't mind, I'm 0015 1 just going to go ahead and read you what was presented 2 by the workgroup to the rest of the BAC. 3 CHAIRMAN COX: Sure. 4 MS. TAYLOR: Let me get into the actual 5 work plan. Bear with me just a moment. Let me find 6 that in the book. I have to pass through all the 7 rules to get to the work plan here. 8 CHAIRMAN COX: And this is the one 9 called, "Accomplishments, work plan Activities." 10 MS. TAYLOR: Okay. The Item No. 1 was 11 to comment on the improvement and status of the bingo 12 industry. And in response to this, the committees of 13 the BAC has developed a detailed annual report to the 14 Commission which focused on the state gross receipts, 15 charitable distributions, expense and attendance. 16 Item 2 is to comment on the existing 17 and proposed rules. The BAC has been very involved in 18 providing input for numerous existing and proposed 19 rules. Some of these include house rules, 20 recordkeeping, licensing and others. The BAC 21 workgroups met with the Commission on additional 22 meeting days to accomplish the implementation of the 23 adopted rules. 24 Item 3 was to comment on the 25 administrative rules and regulations on bingo 0016 1 operations. The BAC has worked with the Commission by 2 providing input on the effective administrative rules 3 and regulations. The BAC workgroups have met with 4 members of the industry in efforts to provide concise 5 information to the Commission on the effects of the 6 rules and regulations for the bingo industry. 7 Item 4 was study of alternative styles 8 of bingo games not currently available in Texas. The 9 BAC has not focused on the study of alternative styles 10 of bingo games due to the fact that most of this past 11 year was focused on numerous changes, on new and 12 proposed administrative rules, changes to the 13 industry, especially in the areas of charity rules and 14 regulations. The BAC workgroups have focused more on 15 the work plan topic than any other year. 16 Item 5 was study of new legislation, 17 including utilization and impact study. There has 18 been no new legislation in the past year; however, BAC 19 members continue to examine the impact previous 20 legislation has had on bingo operations. 21 Item 6, review specific recommendations 22 for positive public awareness of charitable bingo. 23 The BAC has worked with the Commission to promote the 24 use of public awareness through individual markets, 25 utilizing the Texas bingo public service announcements 0017 1 at broadcast stations. 2 Item 7 was to review specific 3 recommendations for improvement of bingo operations. 4 As stated in our annual report, the BAC provided 5 suggestions for the improvements of bingo operations. 6 Increasing the gross revenue from card sales and 7 electronic sales through increased attendance would 8 allow more income to be available for charitable 9 distributions. Recommendations for improvement 10 include more charity involvement in promoting their 11 bingo operations and working to make bingo more 12 enticing to the bingo players in the local markets. 13 Improving attendance remains the key issue to the 14 success of charitable bingo in Texas. 15 Item 8 was to advise the Commission on 16 the needs of the industry for operator training. The 17 BAC has supported the Commission on its new on-line 18 bingo operator training. The BAC members have 19 incurred charity reps to take advantage of using the 20 on-line operator training. 21 And that is what was approved to 22 present to you at this meeting. 23 CHAIRMAN COX: Commissioner, do you 24 have anything? 25 COMMISSIONER SCHENCK: I have no 0018 1 questions. 2 CHAIRMAN COX: Suzanne, thank you. 3 That was an excellent report. 4 AGENDA ITEM NO. IV 5 CHAIRMAN COX: Item IV, consideration 6 of and possible discussion and/or action relating to 7 the continuation of the BAC. 8 Mr. Sanderson. 9 MR. SANDERSON: Good morning, 10 Commissioners. 11 CHAIRMAN COX: Suzanne, you can stay 12 right there if you like. I think you're next again. 13 MS. TAYLOR: Okay. 14 MR. SANDERSON: It's that time of year 15 again. According to our rule, the Bingo Advisory 16 Committee, each year by August 31st, the Commission 17 shall make a decision whether or not to continue the 18 activities of the Bingo Advisory Committee. In your 19 notebook are the rules that guide advisory committees, 20 both our rule on the Bingo Advisory Committee, the 21 Texas Register rule on committees in general as they 22 relate to other agencies. 23 Based on their activities of this past 24 year, and I think also with the support of the 25 Commissioners that attend the meetings, staff's 0019 1 recommendation is to continue the BAC for an 2 additional year. 3 CHAIRMAN COX: Commissioner? 4 COMMISSIONER SCHENCK: Phil, I have a 5 question. What is the cost of having the BAC? 6 MR. SANDERSON: We have a schedule that 7 we place in the LAR or one of the other documents that 8 provide them what the cost to have the BAC is. There 9 is no travel cost; they travel at their own expense. 10 So the only cost for the agency is staff time, which I 11 want to say is around $3,000 a year, roughly for that, 12 plus publications, the copiers for the notebooks that 13 they have. 14 COMMISSIONER SCHENCK: I'm curious. 15 When we propose new rules -- let's say I've heard a 16 lot about new rules today -- and we publish them for 17 public comment, how much written public comment do we 18 typically get back as opposed to the direct feedback 19 that you're getting from the members of the committee? 20 MR. SANDERSON: I will have to look to 21 Sandy Joseph on the amount of written comment. My 22 recollection is, the majority of written comment is 23 very minimal. Since we hold a public hearing for all 24 of our rulemakings, that's where we get the majority 25 of our public comment, is from the public hearing. 0020 1 COMMISSIONER SCHENCK: So would you say 2 it's fair to conclude that the feedback that you're 3 going to get, if any, from the charitable industry -- 4 or I'm sorry -- from the charitable groups, the 5 industry, from lessors, is more direct and more likely 6 to come through the committee than it is through any 7 other form that you've been able to explore so far? 8 MR. SANDERSON: I believe so, yes, sir. 9 COMMISSIONER SCHENCK: Thank you. 10 CHAIRMAN COX: Did you want Ms. Joseph 11 to comment on that, Commissioner? 12 COMMISSIONER SCHENCK: I'm curious what 13 the answer is to that, Sandy. 14 MS. JOSEPH: Sandy Joseph, Special 15 Counsel, Legal Services Division. 16 And I agree with what Mr. Sanderson 17 said. We get very minimal written comment. We do get 18 much of our comment from the BAC and also from public 19 hearings. We generally have a couple of people; 20 namely, Stephen Fenoglio, Steven Bresnen and others 21 that appear at the public hearings. But seldom, you 22 know, is there much written comment. 23 COMMISSIONER SCHENCK: Well, I have not 24 seen much in the way of what I would call public 25 comment by the charitable organizations on their own 0021 1 in these settings, though they're obviously free and 2 welcome to come, and we would encourage them to do it. 3 It seems to me that to the extent we're able to get 4 feedback -- I mean, I've seen it at these meetings. 5 Not necessarily that you always adhere to the 6 particular concern. But having heard it, at least you 7 can make an informed decision about where we're going. 8 And it sounds to me like we just don't get much in the 9 way of volume participation through the more formal 10 avenues for participation from the public. 11 MS. JOSEPH: That's correct. Of 12 course, Mr. Fenoglio represents a number of 13 organizations. So generally when he makes comments, 14 he is speaking for perhaps hundreds of organizations. 15 COMMISSIONER SCHENCK: Yes, I 16 understand. Thank you. 17 MS. JOSEPH: Okay. 18 MR. SANDERSON: I would like to also 19 add that over the last probably three to four years, 20 we've started working with the industry on the 21 development of the rules in the beginning. So by the 22 time they get to the point of your proposing them for 23 public comment, we've received quite a bit of informal 24 comment; thus, it reduces the amount of actual public 25 comment that we receive. 0022 1 COMMISSIONER SCHENCK: Thank you, Phil. 2 Thank you, Sandy. 3 CHAIRMAN COX: Commissioner, for your 4 information, I would say that when I came here in 5 2002, the Bingo Advisory Committee was far less 6 effective than it is today. And I believe that the 7 principal reason that it has become more effective is 8 one, we have -- two reasons. One, we have some very 9 dedicated members that have served for quite a while, 10 such as Suzanne, while we've had turnover that brought 11 new members. 12 And, secondly, Chairman Clowe put a 13 great emphasis on trying to improve our relationships 14 with the committee and the committee's effectiveness. 15 He helped them obtain a facilitator to help them 16 improve the quality of their meetings. And he 17 attended; he encouraged me to attend and, in turn, 18 encouraged you to attend. And I think that all of 19 these things have made the BAC much more productive 20 than it was in previous years. 21 And I would move approval of the staff 22 recommendation that we continue it for another year. 23 COMMISSIONER SCHENCK: I second the 24 motion. 25 CHAIRMAN COX: All in favor, say "Aye." 0023 1 COMMISSIONER SCHENCK: Aye. 2 CHAIRMAN COX: Aye. 3 Motion carries 2-0. 4 AGENDA ITEM NO. V 5 CHAIRMAN COX: Agenda Item No. V, 6 consideration of and possible discussion and/or action 7 on the Bingo Advisory Committee FY '09 work plan. 8 MS. TAYLOR: The work plan mentions 9 just -- Items 1 through 8 that we just reviewed over 10 for our 2007 work plan are the exact same items that 11 the committee is recommending that we continue on. We 12 talked about it at the meeting. We feel that this is 13 pretty broad. We still have work that we're going to 14 be continuing to do on these and feel that this work 15 plan would serve to move into the next year with, 16 unless the Commissioners wanted to add some additional 17 items to it. 18 CHAIRMAN COX: Commissioner? 19 COMMISSIONER SCHENCK: The only thought 20 I have is, I don't see on the work plan -- and maybe 21 I've missed it -- any effective consideration of 22 advertising or anything of that nature, which seems to 23 me to be a sort of perennial issue in terms of 24 promoting attendance, and which I see is always 25 falling off; occasions are falling off. I don't know 0024 1 if there is a solution to it, but it could be that it 2 would take legislation or something else. But I 3 wonder if it would be worth adding to the mission 4 statement here. 5 CHAIRMAN COX: That's an issue that we 6 have talked about a lot in the past. And I'm going to 7 ask either Phil or Kim to summarize the history of 8 that for us and maybe explain why it is there or 9 perhaps why it should be there. 10 MR. SANDERSON: I'll take the first 11 stab at that. While the statute does authorize the 12 Commission to advertise bingo -- 13 CHAIRMAN COX: Does not. 14 MR. SANDERSON: No. The statute does, 15 but we don't -- 16 CHAIRMAN COX: Does authorize it. 17 MR. SANDERSON: -- get the funding. We 18 do not receive any funding for that, that effort. 19 COMMISSIONER SCHENCK: So we could 20 spray paint on the side of the building, I guess, but 21 we can't acquire air time? 22 MR. SANDERSON: And then, secondly, 23 from my understanding and conversations, the role of 24 the division in bingo is more of a regulatory function 25 as opposed to where the lottery is more of a 0025 1 promotional and advertising to the games themselves. 2 And so I think there has been in discussions in the 3 past about that balance between us promoting and game 4 and then regulating it also. 5 We do offer a public service 6 announcement that we put together each year -- it's up 7 on our website -- that the charities can download and 8 take to their TV affiliates. And I know Rosie Lopez 9 has used it to a great extent in the Odessa and 10 Midland area. And, of course, we, you know, try to 11 put things up on our website to promote, you know, the 12 game this -- newspaper articles that we see for good 13 charity activities and so forth. 14 And I'll let Kim continue. 15 MS. KIPLIN: Actually, I think that's a 16 good summary. I think the -- there was a statutory 17 change to authorize, expressly authorize. The real 18 issue I think is a funding issue. Then it comes down 19 to as a matter of policy, the role of a regulatory 20 agency as opposed to the role of an agency in terms of 21 promoting an activity and then that balance, and that 22 part is a policy aspect of the rule. 23 COMMISSIONER SCHENCK: Well, why do you 24 see the fact of the statute explicitly authorizes us 25 to advertise to promote the industry? Doesn't that in 0026 1 some ways indicate not a direct mandate but, by 2 implication, a suggestion that we have something more 3 than just the neutral regulatory function to carry out 4 here? 5 MS. KIPLIN: I think it can certainly 6 take -- you can certainly make that argument or take 7 that position in terms of the express authorization. 8 The critical crux is funding. 9 COMMISSIONER SCHENCK: There is not a 10 way for us to, by fees or otherwise, generate the 11 revenues that would be required to fund any -- 12 MS. KIPLIN: We do have the 13 authority -- there are certain license fees, for 14 example, from manufacturers and distributors -- and 15 I'm saying this off the top of my head -- that are 16 set, they are set fees -- so there is no minimum -- 17 and then set in an amount to offset administrative 18 costs. 19 For conductors in particular, the 20 license fee, authority to collect license fees, sets a 21 minimum. The agency can by rule set other amounts. 22 Then the issue would be, well, the whole point of that 23 is cost recovery, for whatever the administrative 24 costs are in terms of administering bingo. It could 25 be as broad as administering bingo; it could be as 0027 1 narrow as issuing the licenses and keeping up with 2 that. And that's something that the agency has not 3 done by rule, and the rulemaking authority does exist 4 in the statute in terms of going from a minimum to 5 setting another amount. 6 Is that responsive? 7 COMMISSIONER SCHENCK: Yes. Thank you. 8 Kim. 9 There is nothing -- well, maybe there 10 is something I need to take up with Kathy later. But 11 I don't recall whether, in our budget request, we are 12 seeking any of the -- I don't think we are -- seeking 13 funds to -- 14 MR. SANDERSON: We're not seeking 15 specifically funds for -- a line item for advertising, 16 no, sir. 17 COMMISSIONER SCHENCK: Suzanne, would 18 you agree that this is a major challenge for the 19 industry, the lack of advertising to promote -- 20 MS. TAYLOR: Absolutely is. As bingo 21 has become less productive for the charities and 22 they've cut costs, one of the items that they have cut 23 is advertising. You don't see the advertising. 24 Fifteen years ago, I saw advertising all over for 25 bingo, and I don't anymore, because you've got to pay 0028 1 your payroll, you've got to pay for your paper, your 2 electronics, the electricity. It's one of the few 3 items, in addition to the costs that are required to 4 run a business that the charities had, and they've cut 5 their advertising expenses, because that's the only 6 place there was to cut. I would love to see the 7 Commission get involved with that. 8 COMMISSIONER SCHENCK: I can say, 9 though -- the challenge, of course -- I mean, this is 10 to -- I'm thinking here. But asking the taxpayers to 11 subsidize charitable activities is something the 12 Legislature seems to have contemplated at the outset 13 by suggesting that there would be the ability for the 14 Commission to advertise. But, of course, you know, we 15 have a lot of obligations at the state level. We've 16 got roads, we've got prisons, we've got hospitals. So 17 to the extent we could obtain the ability to, by user 18 fees or some combination of user fees in budget to 19 promote the industry, I'm certainly open to listening 20 to it. 21 And maybe, Phil, if you can give some 22 thought to whether that's worthy of deeper 23 consideration. And off the top of my head here, I 24 would appreciate it. 25 CHAIRMAN COX: And I think that's a 0029 1 good solution. There is certainly the breadth within 2 the proposed work plan to do that kind of thing. 3 MS. TAYLOR: I would imagine under 4 No. 6 -- 5 CHAIRMAN COX: I think so. 6 MS. TAYLOR: -- the positive public 7 awareness would be able to entail any advertising of 8 bingo. 9 CHAIRMAN COX: In the past with this 10 same work plan, Commissioner, they have studied such 11 things as having a caller of the year that would be a 12 highly publicized kind of event. And so I think that 13 probably the two-pronged approach that you suggest, 14 that the BAC continue to pursue things that are within 15 its authority -- within this work plan, specifically 16 Item 6 -- and, Phil, that you look at the feasibility 17 of funding any of that statutory provision that you 18 and Ms. Kiplin just pointed out. 19 Does that work for you, Commissioner? 20 COMMISSIONER SCHENCK: It does. Thank 21 you very much, Commissioner. 22 MS. TAYLOR: I did have one question, 23 Commissioner. You made mention about the taxpayer 24 funding advertising for bingo. How much money from 25 bingo goes to the general account? 0030 1 MR. SANDERSON: The collections, I 2 believe last year, are somewhere around $29 million, 3 with about 13 of that going back to the local 4 jurisdictions. So somewhere close to about 5 $16 million a year goes in the general revenue. 6 COMMISSIONER SCHENCK: It certainly 7 makes everyone a partner at least, doesn't it? 8 MS. TAYLOR: So it seems to me that 9 bingo would be more than working to pay their own 10 advertising, if there were a budget approved for it. 11 CHAIRMAN COX: The Commissioner's point 12 was sort of an aside, but I think it's an excellent 13 one. It does make the state, the general fund, the 14 local jurisdictions partners with the industry. 15 COMMISSIONER SCHENCK: Yes. I mean, 16 it's in everyone's interest to increase the activity. 17 CHAIRMAN COX: Excellent point. 18 Phil, did you have any thoughts on this 19 work plan? Do you believe this is appropriate to 20 continue as it has been? 21 MR. SANDERSON: I do, Commissioner. I 22 believe, as Suzanne stated, it's broad enough to cover 23 some unexpected occurrences in the future, but it's 24 narrow enough to keep them focused on what their 25 agenda should be set by. 0031 1 CHAIRMAN COX: Okay. Suzanne, this is 2 your recommendation? 3 MS. TAYLOR: Yes, sir. 4 CHAIRMAN COX: I move approval of the 5 BAC recommendation. 6 COMMISSIONER SCHENCK: I second the 7 motion. 8 CHAIRMAN COX: All if favor, say "Aye." 9 COMMISSIONER SCHENCK: Aye. 10 CHAIRMAN COX: Aye. 11 Motion carries 2-0. 12 Thank you very much, Suzanne. 13 MS. TAYLOR: Thank you. 14 CHAIRMAN COX: We appreciate your 15 service. And as it's been stated here, you and the 16 other members of your committee receive no 17 compensation, you receive no reimbursement for your 18 expenses, and we really appreciate your service. 19 MS. TAYLOR: Thank you. We appreciate 20 all the help that we've receiving now from the Lottery 21 Commission. These last several years have been very 22 productive. 23 CHAIRMAN COX: I agree. 24 MS. TAYLOR: Thank you. 25 CHAIRMAN COX: Thank you. 0032 1 AGENDA ITEM NO. VI 2 CHAIRMAN COX: Okay. Consideration of 3 and possible discussion and/or action on nominations 4 and appointments to the Bingo Advisory Committee. 5 Mr. Sanderson. 6 MR. SANDERSON: Commissioners, in your 7 notebook are the nominations of nine individuals for 8 the Bingo Advisory Committee. One individual has 9 since decided not to continue with the nomination 10 process. That's Jose "PePe" Trujillo. 11 Staff has reviewed these individuals, 12 and the remaining eight are all qualified, based on 13 the statute and the rules. The Bingo Advisory 14 Committee has put together a nomination workgroup. 15 Earl Silver was the chair of that workgroup, and he's 16 here if you have any questions on their 17 recommendations. 18 There's three vacancies that end at the 19 end of August: Thomas Weekley, Rosie Lopez and Markey 20 Weaver. Staff's recommendations are to reappoint 21 Markey Weaver and Rosie Lopez. And our third 22 recommendation for the vacant charity spot would be 23 Francis Ciancarelli from Mission, Texas. 24 CHAIRMAN COX: Commissioner? 25 COMMISSIONER SCHENCK: Phil, I believe 0033 1 it's been the practice in the past for the 2 Commissioner to interview the new members? 3 MR. SANDERSON: That is definitely, you 4 know, at the desire of the Commission. There is not 5 an absolute need to nominate someone or appoint 6 someone at this meeting, because there is not a 7 meeting for the BAC before the September Commission 8 meeting. So you definitely have the option to take 9 staff's recommendations and appoint those individuals, 10 interview any of these individuals between now and the 11 next Commission meeting, or interview any other 12 individual, if you so desire, that's listed in one of 13 the other nominations. 14 COMMISSIONER SCHENCK: My inclination 15 would be to -- at least I have seen Markey and Rosie 16 work. I'm comfortable. I'm sure that Mr. Ciancarelli 17 will be a good addition, but I would like to talk to 18 him and make sure that he's up for going up to the 19 meetings and everything else that will be required. 20 So if we could, I would like to pass on the final 21 recommendation at least until the next meeting so I at 22 least have a chance to speak to him. 23 CHAIRMAN COX: That has been my 24 practice as well. I would like to do that, too. 25 MR. SANDERSON: Okay. We'll get with 0034 1 each of you on your schedules and Mr. Ciancarelli's 2 schedule and do a telephone interview. Is that okay? 3 COMMISSIONER SCHENCK: That would be 4 fine. Thank you. 5 MR. SANDERSON: All right. 6 CHAIRMAN COX: Yes. Thank you, 7 Commissioner. Thank you, Phil. 8 AGENDA ITEM NO. VII 9 CHAIRMAN COX: Okay. Item VII, report, 10 possible discussion and/or action on the 11 interpretation of the term "gambling promoter" and/or 12 the term "professional gambler" in connection with 13 Bingo Enabling Act licensing eligibility requirements 14 for bingo manufacturers and distributors. 15 Mr. Sanderson and Ms. Kiplin. 16 MR. SANDERSON: Commissioners, as you 17 are aware, the Bingo Enabling Act contains eligibility 18 requirements for each licensed class or type that we 19 render an application for a license to conduct bingo. 20 The Act says an individual or a person is ineligible 21 for a manufacturer or distributor's license if they 22 are or have been -- and I'll quote -- a professional 23 gambler or gambling promoter. 24 This issue and what is meant by the 25 terms "professional gambler" and "gambling promoter" 0035 1 has arisen in connection with the vetting of certain 2 licensees' eligibilities to hold a license. To date 3 these terms have not been defined in administrative 4 rules. 5 However, the state lottery 6 administrative rules does contain a definition for 7 professional gambler as a person whose profession is 8 or whose major source of income derives from playing 9 games of chance for profit. As is, a strict 10 interpretation of these terms is understandably 11 problematic, possibly effectively making these 12 licensees ineligible for the very license that we 13 issue. 14 I bring this item to your attention 15 now, only to inform you that we have recognized the 16 need to clarify these terms. And I have asked the 17 Legal Services Division to assist us in this regard. 18 It is my intention to bring you more information 19 regarding this issue at a future Commission meeting. 20 CHAIRMAN COX: Ms. Kiplin? 21 MS. KIPLIN: Commissioners, if I could 22 ask Sandy Joseph to come forward -- she is actually 23 undertaking the legal research and the analysis -- in 24 case you have comprehensive or detailed questions. 25 But really where we are is, we're 0036 1 trying to get our arms around this issue. We've done 2 legislative history up to date. It has not been 3 enlightening or on point, as best we can tell. And 4 what we would like to do is complete that legal 5 research and then bring this matter back to you-all at 6 a future Commission meeting, whether that's in 7 September or October. We would like to get this 8 wrapped up pretty quick. 9 I can tell you that in looking through 10 our agency records, it looks as though this issue 11 actually was brought to the attention of the 12 Commission back in 1996 in connection with a 13 particular licensed applicant. We're just now getting 14 that as we're going through the agency and researching 15 it. 16 But it is interesting on the side, and 17 particularly of gambling promoter, what does that 18 mean, and no interpretation and so forth? Really just 19 wanted to, as Mr. Sanderson indicated, let you know 20 that that's what we're doing, what our intentions are 21 to come forward, and provide you the analysis, the 22 legal analysis so that the Commission can take this up 23 and then give clearer guidance as to its 24 interpretation to not only the staff but obviously to 25 the industry. 0037 1 Ms. Joseph, if there is anything that 2 you think that you need to add, you know, please do. 3 And if there are any questions that 4 either of you have, be glad to answer those. 5 MS. JOSEPH: I don't believe there is 6 anything in particular I need to add at this time. We 7 have done legislative history research, haven't found 8 anything directly on point or helpful. We have 9 gathered cases and statutes from other jurisdictions, 10 other states, because there is not much in Texas, and 11 have not completed an analysis of those but have 12 compiled a big stack of things we want to look at more 13 carefully and see what guidance they might give us. 14 CHAIRMAN COX: Commissioner? 15 COMMISSIONER SCHENCK: This is a 16 problem we've obviously been studying for quite some 17 time. I think it would behoove us probably to pass a 18 rule here one way or the other. I think taking this 19 down the road is probably not in the long-term 20 interest here. And whether that's September or 21 October, it seems to me if we've survived from 1996 to 22 2008, scratching our heads on this, I think we can get 23 to October, but I don't think I would like to get much 24 further than that. 25 Do we anticipate having testimony on 0038 1 this issue today? 2 MS. KIPLIN: I think you do have one 3 witness affirmation. 4 CHAIRMAN COX: One. 5 COMMISSIONER SCHENCK: Okay. I would 6 like to reserve the rest of my questions. And, Sandy, 7 if you can remain, I think it's likely I'll have a few 8 thoughts, comments on this one. 9 MS. JOSEPH: Certainly. 10 CHAIRMAN COX: Okay. I think I'll take 11 the same approach. 12 Mr. Hieronymus, would you like to come 13 forward? 14 MR. HIERONYMUS: Yes. I have a 15 handout. 16 Good morning. My name is Steven 17 Hieronymus. I did want to comment on this to maybe 18 flesh this out just a little bit more. I handled you 19 something that was just something I put together, the 20 actual language from the statute that applies. I also 21 put the verbiage from the Texas Penal Code that gives 22 some additional definition as to gambling promotion 23 that I think is helpful. And I put some 24 constructive -- interpretation language, both from 25 some other legal sources I found and from some 0039 1 guidance from the Texas Attorney General as well. And 2 then I also just pulled some basic definitions of some 3 words, just to lay it all out there. 4 You know, I'm not aware of the 1995-96 5 issue. But I do know that this matter has come up as 6 recently and, in fact, was brought to the Commission's 7 attention in 2006, or actually staff addressed this 8 matter in 2006. And I became aware of it through open 9 records requests, et cetera, and I have become 10 concerned -- as you know, I have had some concerns 11 about the equal treatment of various licensees. And 12 in the course of some of the investigative work I've 13 done, I ran across some very troubling information in 14 this regard. 15 I went back and, similar to what 16 Mr. Joseph said, there's not a lot of tapes and 17 things, looking for legislative intent back to 1981. 18 But I did go back, I talked to Judge Hughes, which 19 some of you know, who was around back then, a former 20 member of the Legislature and served on the bench and 21 who was very involved in the early days of bingo and 22 the Enabling Act. 23 The intent of the language back in 24 1981, which this goes back to those days, was to keep 25 a very definitive separation between outside gaming 0040 1 interests or professional gaming interests and 2 charitable bingo. Part of that was to -- you know, 3 various different intent there, but it was to keep a 4 separation, and you had to make a choice whether you 5 wanted to be involved with charitable bingo or other 6 forms of gaming. 7 And, you know, the world has changed 8 but the language hasn't changed. There is a method 9 that we can -- if we don't like it, there is obviously 10 ways we can do so. Where I have become concerned is, 11 I think that within the confines of this organization, 12 there has been some editing of the statute that seems 13 to be going on. 14 I noted with one particular licensee, 15 without identifying any licensees, in a background 16 investigation of a chief executive officer in 2006, 17 the investigator properly noted that this person had 18 been the general manager of multiple casinos and had 19 been responsible for all the decisions, you know, that 20 would be appropriate for operating and managing a 21 casino and properly made the notation: "This may meet 22 the criteria of gambling promoter in that he 23 represented the business in marketing regulatory 24 activity and operations." 25 Now, somebody then, even with this 0041 1 notation, approved this individual to be named on, you 2 know, on the license of this particular entity. And I 3 made inquiry -- I've talked to multiple people, both 4 to Phil and to Ms. Joseph here. And, you know, the 5 only answer I get is, "Well, I didn't do it, but we're 6 looking into it." But somebody edited the statute. 7 And I have gone back -- and, as you know, I monitor 8 these proceedings pretty closely, either directly or 9 through the transcripts, and I've not found anything 10 where this has been brought to the Commissioner level 11 to address. 12 So within staff, they have -- somebody 13 somewhere has been editing what this meaning is and if 14 they weren't sure, it wasn't brought to the 15 Commission's attention. So I have great concerns 16 about that. 17 You know, it goes back to my overall 18 position that there has been some degree of the 19 appearance that not all licensees are equal, 20 particularly the larger commercial interests seem to 21 be able to do certain things, and I think that's 22 hurting the reputation of the Commission and invites 23 problems down the road. I don't think we need to wait 24 until there is a huge monster fire before we address 25 things early. 0042 1 And, you know, I would encourage you to 2 communicate to staff that this is something that needs 3 to be looked at and needs to be looked at 4 aggressively. And they're not to be in the position 5 of saying, "Well, here is what the law should be," or 6 "We're unwilling or unable to enforce it, so we'll 7 just ignore it." 8 This turns out, you know, we actually 9 have people that have admitted to being a professional 10 gambler, and there's various different things that's 11 currently out there. There's several matters that are 12 under investigation at the moment, so this is not 13 something that's going to go away. There is a great 14 deal of interest in it, and there's a lot of other 15 licensees. 16 I happen to be the one who is not 17 afraid to get up here and speak to you, sometimes 18 bluntly. But this is not going to go away, and it's 19 an important matter. And I hope that you will 20 communicate your level of concern that the statute is 21 to be enforced. And if the industry wants it changed, 22 then we have a method to do so. 23 And, you know, that is for the 24 Legislature and the Governor to approve it and not -- 25 it's not at this level to change. So I hope that 0043 1 we'll do that. There is a great deal of information 2 that will be coming out there, and I don't want to get 3 into any specifics of the various different licensees 4 that might be affected by it. But you're putting 5 those of us that are -- 6 COMMISSIONER SCHENCK: Well, do you 7 think -- 8 MR. HIERONYMUS: Let me finish one 9 thought -- those of us that are trying to comply with 10 the law, you know, we're out there having to compete 11 against people that either through their violations -- 12 or they're not even in some cases eligible -- and 13 we're having to be forced to compete against them, and 14 that's not right. We need to all be on that same 15 playing field. 16 COMMISSIONER SCHENCK: Well, let me 17 just ask you a question. I'm not asking you to name 18 any names, but do you think there are one or more than 19 one currently licensed individuals who could be 20 affected by inappropriate interpretation of the 21 statute? 22 MR. HIERONYMUS: Absolutely, clearly. 23 COMMISSIONER SCHENCK: Now, let me ask 24 you one more question. Do you think the intention of 25 the Legislature -- and you don't have to answer if you 0044 1 don't have an opinion -- but do you think the 2 intention of the Legislature was to promote 3 competition among industry participants or to assure 4 the playing public that people with appropriate 5 backgrounds would be participating? 6 MR. HIERONYMUS: I think in 1981, it 7 would have been the latter. I think they were -- 8 COMMISSIONER SCHENCK: I agree with 9 you. 10 I think we may have another witness on 11 this topic, maybe, before I get to -- 12 CHAIRMAN COX: Have you completed your 13 testimony, Steve? 14 MR. HIERONYMUS: I have. Thank you, 15 sir. 16 CHAIRMAN COX: Thank you very much. 17 Mr. Fenoglio. 18 MR. FENOGLIO: Good morning. For the 19 record, my name is Stephen Fenoglio. I'm an attorney 20 in Austin, and I filed an appearance slip. 21 It is an important issue, but it's a 22 very difficult issue to understand. I think -- it 23 depends on what your definition of "gambling 24 promotion" is. Read literally, every manufacturer and 25 distributor, you could take this as a -- which I don't 0045 1 think is a reasonable interpretation -- but you could 2 take the interpretation that they're all ineligible 3 for a license because they promote their product in 4 the State of Texas -- via website, via mailings, via 5 sales agents. 6 And the history is, bingo is a 7 legalized form of gambling. So if a manufacturer or 8 distributor or their employees or officers or 9 directors are doing their job and trying to encourage 10 the consumption of their product, arguably they're a 11 gambling promoter. I believe that's an entirely 12 absurd result. 13 The legislative history, I think -- and 14 I understand maybe the staff has completed it -- it's 15 not going to help you in trying to divine what the 16 intent of the Legislature was when they threw those 17 words bingo it. 18 If I had to guess, and being a 19 sometimes betting man, I would guess that Bob Hughes, 20 the gentleman that Mr. Hieronymus referred to, put 21 that language in one of the bills. He was very active 22 in the eighties in representing some of his clients, 23 including Mr. Hieronymus, in promoting different 24 legislative issues. And what I -- and I visited a 25 little bit with Phil Sanderson about it, and I think 0046 1 he's going to give you a common-sense approach to 2 getting your arms around, in the form of a rulemaking, 3 defining these terms. 4 It's a little easier if someone is a 5 professional gambler. If they've held themselves out 6 to be, quote, a professional gambler, then I think the 7 result is pretty easy to conclude in a rulemaking 8 provision or in an enforcement case, whether they're 9 eligible to be on the license of a manufacturer or a 10 distributor. 11 I intend, and my clients intend to 12 follow this issue closely, because every charity is 13 impacted by the fact that a very archaic 14 interpretation could lead to the result of no 15 manufacturers or distributors in the State of Texas, 16 which clearly would not be in the best interest of 17 charitable bingo. 18 I would be happy to answer any 19 questions. 20 COMMISSIONER SCHENCK: I have a few. 21 And, Mr. Hieronymus, you're welcome to participate 22 here if you want. 23 I see this as potentially the most 24 complex legal problem I've seen since I've been on 25 this Commission. And I say that because I think that 0047 1 we have two layers of problems here. We have first a 2 statutory construction problem, and we have some 3 rulemaking authority to fill in whatever might be the 4 gaps here. But at the same time, we have what are 5 going to prove to be constitutional problems with 6 whatever construction we might say is compelled by the 7 text or legislative purposes here. 8 I think I would like, Sandy, for us to 9 be considering this at three levels. There is the 10 possibility that the Legislature intended these 11 phrases to be directed to conduct that violates a law 12 where it occurs but not that it's legal where it 13 occurs. 14 And the reason I say that we need to 15 consider that possible distinction is that there will 16 be at least two constitutional problems that could be 17 created by a different construction, not that I think 18 that that compels a different construction, but we 19 need to look at the -- there is the doctrine of 20 constitutional avoidance that needs to be factored in 21 here as we do this analysis. 22 But it could be very well that the 23 Legislature intended that if a person is a 24 professional gambler in Monaco while he's living there 25 as an 18-year-old, then he moves to the United States, 0048 1 becomes a U.S. citizen and settles in Texas and wants 2 a license before this Commission, that the Legislature 3 intended him never to be able to get that license. 4 That one doesn't bother me quite as 5 much as the person who lives in Nevada or 6 Massachusetts. I think we have dormant commerce 7 clause issues to explore there. We have interstate 8 privileges and immunities clause issues to consider 9 there. 10 And there's the potential for conflict 11 preemption as well. We ought to look to see whether 12 the federal government and any misregulation of the 13 interstate gaming industry has attempted to cover this 14 issue in some way that would preclude either the 15 Commission or the State of Texas from adopting a 16 conflicting interpretation. 17 I don't mean to suggest that this is 18 going to compel any particular outcome, but a good 19 place to start will be the U.S. Supreme Court's 20 decision in the BMW vs. Gore, which looked at the 21 ability of a state to punish, through punitive 22 damages, conduct that was taken on by a manufacturer 23 of automobiles in other states which was legal where 24 it occurred but was being punished in South Carolina. 25 That again doesn't compel any particular conclusion, 0049 1 but I think it's something we need to be mindful of. 2 And then there is a third possible 3 category of people that could be affected here. We 4 could have people that are just subject to the primary 5 jurisdiction of Texas. If you're a Texas resident, 6 it's conceivable that you wouldn't have a job at all. 7 Maybe you were born under the right star and that you 8 don't work for a living. But what you do is, you fly 9 to Las Vegas and you play slot machines and you have a 10 career as a professional gambler. 11 I could see that that might be a 12 different circumstance, where your residency is 13 driving the ability to engage in a particular 14 activity. And I think you might find that that's a 15 different circumstance. Where Texas has the authority 16 over you by virtue of your citizenship, to deny you a 17 license based on your participation and lawful conduct 18 elsewhere, that's simply against state policy here. 19 And I know that the Fifth Circuit in 20 the last couple of years has upheld -- or the Texas 21 Supreme Court -- I'm sorry -- has upheld invalidation 22 of debts incurred outside the jurisdiction in 23 connection with gambling, which confirms to me -- and 24 I think it's consistent with the states power to do 25 that. 0050 1 But, you know, I'm a little concerned 2 that we be mindful of these problems as we march 3 forward with this, because you could see, and it's not 4 hard to envision circumstances where another state 5 might have a policy that's conflicting with our own. 6 For instance, Massachusetts might hate 7 legalized bingo and might make it illegal or make it 8 difficult to get a license to fish in Massachusetts if 9 you've ever been a promoter of bingo in Texas, which I 10 think we probably wouldn't appreciate very much but I 11 think they need to be mindful of. Same with if you've 12 ever had a hunting license in Texas, you can imagine 13 that maybe some people in Massachusetts Legislature 14 wouldn't look so favorably upon that. 15 So I think that there are some 16 interstate constitutional problems that need to be 17 factored in here. Now, if it's clear that the Texas 18 Legislature wanted a particular result, I'm inclined 19 to go in that direction and let the chips fall where 20 they may. But I think we need to be mindful of these 21 problems as we go forward. And there is a landmine I 22 think every couple of feet ahead of you as you go 23 through this analysis. 24 MS. KIPLIN: Commissioners, may I offer 25 one other observation with regard to this particular 0051 1 statutory provision as opposed to others that has to 2 do with eligibility issues? And that is that with 3 regard to this provision, it says "is or has been." 4 And with regard to, for example, 5 disqualifying criminal convictions, there is just a 6 10-year look-back. And so another issue that we've 7 addressed is, where does that land constitutionally on 8 the "is or has been"? Theoretically that could be 9 much longer than 10 years. 10 And does that mean that if somebody who 11 engaged in a particular conduct when they were 18, now 12 when they're in their fifties still is ineligible by 13 virtue of conduct that occurred 30-plus years ago? So 14 that's another aspect that we'll be looking at in 15 terms of this particular language, and I wanted to 16 just put that on the record. 17 COMMISSIONER SCHENCK: Well, there is 18 no time limit in this statute. There is no -- 19 MS. KIPLIN: Yes, sir. 20 COMMISSIONER SCHENCK: -- attenuation 21 on the basis of time. 22 MS. KIPLIN: No. 23 COMMISSIONER SCHENCK: So we would have 24 to be making one up. 25 MS. KIPLIN: The statute says "is or 0052 1 has been" as it relates to professional gambler or 2 gambling promoter in the eligibility issue. For 3 example, disqualifying criminal histories that are 4 also an eligibility issue, it's 10 years. 5 COMMISSIONER SCHENCK: So a guy who has 6 walked into a church and machine-gunned the 7 congregation, 10 years later we would let him have a 8 license. But a guy who was 18 and (laughter) and 9 betting on the horses at Saratoga, we would not? 10 MS. KIPLIN: Ten years from the date of 11 the last day of sentence. So one would hope and pray 12 that the man's -- 13 COMMISSIONER SCHENCK: Well, it would 14 be a -- 15 MS. KIPLIN: Let's take a misdemeanor 16 involving moral turpitude where it's a theft and you 17 pay a fine or you have a probated sentences of a year, 18 you know, that's a 10-year sit-out versus your example 19 of a person who is engaged in activity and it 20 triggers -- the definition of professional gambler, 21 it's forever, you know, if you look in -- as 22 Mr. Fenoglio said, if you looked and you applied a 23 literal reading to the language. 24 And so that's -- you know, I've got 25 issues in my mind. Spottiness is an issue that 0053 1 requires the research on the constitutionality of 2 that. Can the Commission, through rulemaking, impose 3 a time limitation? 4 MR. HIERONYMUS: Can I make one comment 5 that's pertinent to that? Because this language goes 6 back to 1981 when it says "is or has been," I mean, by 7 definition it took it outside, because there was no 8 Texas gaming activity, legalized gaming activity 9 before that. 10 So it was extending to things that were 11 happening in, you know, other places, other 12 jurisdictions, et cetera, kind of by definition when 13 it came in. You know, it gets also problematic as you 14 start making any arguments on time frames when you 15 have individuals who, you know, make sworn statements 16 that, you know, instead of saying, "Well, you know, 17 here is my situation. It happened 15 or 20 years 18 ago," just flat out denying it, without acknowledging 19 it, you know, that gets into another whole other 20 issue, you now, pertaining to those kind of questions. 21 If somebody had a concern, they should have at least 22 brought it to the attention or not denied involvement 23 in those things. 24 The other thing about a professional 25 gambler, it's not an ancillary activity, it's not a 0054 1 leisure activity. I was trying to find some research, 2 you know: What defines a professional gambler? 3 Amazingly, there is very little information out there, 4 because it's pretty much a self-described -- and 5 Ms. Joseph and I were having this conversation 6 yesterday -- it's pretty much a self-designation. 7 And the main advantage is to a player 8 who, when you suddenly go -- transition from being a 9 part-time leisure activity -- golf -- to being a 10 professional golfer, it's when you're looking as a 11 business activity, but you want to take that claim for 12 tax purposes. 13 And certainly Chairman Cox would 14 understand the significance. There could be thousands 15 of dollars of savings when you can put it on a 16 Schedule C versus, you know, just on your 1040. The 17 IRS doesn't really encourage that. They're not going 18 to designate somebody a professional gambler. It's 19 going to be a self-designation. There is no other 20 cardinal that does that. 21 COMMISSIONER SCHENCK: Let me ask you a 22 hypothetical question. 23 MR. HIERONYMUS: Sure. 24 COMMISSIONER SCHENCK: Let's say we 25 have a 19-year-old -- we could say he lives in Texas, 0055 1 but he doesn't have gainful employment of any kind, 2 because that's what they do. He goes to Las Vegas and 3 he walks through the lobby of a hotel, puts a dollar 4 in a slot machine and wins a million dollars. I think 5 the IRS is not going to let him leave the building 6 without reporting that income. 7 MR. HIERONYMUS: Right. 8 COMMISSIONER SCHENCK: Now, he's going 9 to have to file a return. At the end of the year 10 they're going to ask him at the bottom of the form 11 what his profession is. The only income he has for 12 the year is his slot machine winnings. 13 MR. HIERONYMUS: He would not. 14 COMMISSIONER SCHENCK: He would not be 15 a professional gambler? 16 MR. HIERONYMUS: No. You know, one, 17 I'm not going to say somebody wouldn't make that 18 effort to do so. I would tend to doubt it, but the 19 IRS wouldn't accept it. The difference is when it 20 becomes your income-producing activity. Slot machines 21 would be the worst way to do it, by the way. Most 22 professional gamblers would be a card player or 23 something of that nature, given that there is no 24 chance to win on slot machines. 25 COMMISSIONER SCHENCK: My point is, 0056 1 it's difficult? 2 MR. HIERONYMUS: It's a difficult 3 assessment for someone to make and then defend, which 4 I think I may have referenced in there. There was a 5 Supreme Court case here in the last few years that 6 dealt with that issue exactly. But -- 7 COMMISSIONER SCHENCK: That's in your 8 handouts? 9 MR. HIERONYMUS: Yes. I know 10 Ms. Joseph knows it. I'm not sure if I put the 11 reference to it in there or not. But it was in the 12 last few years. 13 You and I talked about it yesterday 14 (speaking to Ms. Joseph). 15 But it was in the last few years. 16 COMMISSIONER SCHENCK: Well, it's a 17 very interesting problem, and I can understand why 18 we've been a little slow in addressing it. But I 19 think it would be my preference that we come to a 20 final conclusion here one way or the other. 21 MR. FENOGLIO: And we would certainly 22 support that, and we'll work with the staff on that. 23 Mr. Sanderson has done an excellent job in the last 24 year of inviting industry and affected parties in, 25 sometimes kicking and screaming, but he's invited them 0057 1 in. It's been an open door. 2 And you raise a good point, 3 Commissioner Schenck, on the federal jurisprudence. 4 For example, I believe every manufacturer of bingo 5 equipment in the State of Texas has to register under 6 the Johnson Act, a federal statute that has to do with 7 transporting in interstate commerce gambling devices 8 and bingo equipment or under that regulatory regime 9 considered gambling devices. 10 So they would be registered as a 11 transporter, if you will, of gambling devices and 12 interstate commerce. Does that then mean that for 13 that designation, you can bootstrap that into they're 14 a gambling promoter? And again, there's also case law 15 in Texas, thankfully, that says that the Legislature 16 has never presumed to do a foolish act. And again, if 17 you -- 18 COMMISSIONER SCHENCK: Well, I think to 19 be clear -- I'm sorry to interrupt -- but my concern 20 would be the opposite, that if someone is registered 21 under the like Johnson Act, has the authority under 22 federal law to move equipment in interstate commerce, 23 why would it be that we would cut off -- we would have 24 the authority to cut off the State of Texas from that 25 authorization by virtue of the fact that they're doing 0058 1 it somewhere else? 2 MR. FENOGLIO: And we're arguing, if 3 you will, the same point from two different ends of 4 the spectrum. I agree with you. I mean, you've got a 5 federal regulatory regime which they must adhere to, 6 and it seems it would be pointless and counter- 7 productive to say, "Well, because you're mandated to 8 register under the federal law, we're going to now 9 conclude that you're a gambling promoter and you're 10 not eligible for a license." And again, the absurd 11 result would also be if they're promoting their 12 product within the State of Texas, they're promoting 13 gambling, literally legalized gambling. So I agree 14 with you. 15 COMMISSIONER SCHENCK: And I think I 16 need clarification from my General Counsel. My 17 understanding is that -- and if our task in 18 interpreting the statute and passing a rule is to 19 employ the cannons of construction and the policy 20 expertise that we have in developing and construction, 21 if we conclude that that would be unconstitutional but 22 that's what the Legislature intended, I think we don't 23 rule on validity of legislative actions, we just call 24 it like we see it. 25 So all I'm suggesting is, I think that 0059 1 this rule of constitutional avoidance is part of the 2 cannons of construction where we're given two 3 apparently equal alternatives. Our preference I would 4 think would be the one that would not cause the state 5 to be in violation. 6 MS. KIPLIN: Yes, I think we're in 7 agreement. Let me say it like this, and that is that 8 administrative agencies have the authority to adopt 9 rules, to interpret and to make policy consistent with 10 whatever their regulatory charge is, where they're 11 charging under organic law. 12 You can't adopt a rule or you can't 13 interpret a statute where that rule would exceed your 14 statutory authority or would be inconsistent with the 15 statute. And so if you have a statute that's subject 16 to two reasonable interpretations and one is 17 constitutional and one is not, then you go with 18 clearly the one that's constitutional, because the 19 other one would be inconsistent with law. 20 And once an agency is interpreting its 21 own statutes, so long as it's a reasonable 22 interpretation and conforms with statute and so forth, 23 that interpretation is given deference by the courts 24 as the interpretation of that statute. 25 MR. HIERONYMUS: I was going to make 0060 1 one other -- 2 CHAIRMAN COX: If I could, Steve -- 3 MR. HIERONYMUS: Sure. 4 CHAIRMAN COX: -- we seem to have drawn 5 a crowd on this issue. Pull up another chair for 6 someone. And Mr. Todd Smith and Mr. Bill -- pardon 7 me -- "Mus-coe" would like to join the panel. 8 COMMISSIONER SCHENCK: Mr. Hieronymus, 9 you had a point? 10 MR. HIERONYMUS: Yes. It's somewhat 11 different from Steve from the standpoint that in 12 looking at that Penal Code definition of gambling 13 promotion, it's talking about someone who operates or 14 participates in activity. There's a difference 15 between someone who actually manufacturers or 16 transports a device. I don't think that that -- I 17 don't think by nature of being a manufacturer of a 18 device; I think it's more of if you're operating the 19 game, if you're participating in a game, that takes it 20 to a different level. 21 COMMISSIONER SCHENCK: Well, I -- 22 MR. HIERONYMUS: I was also going to 23 point out that there are at least two other states 24 that have a similar statute on the professional 25 gamblers' language, meaning Mississippi and Louisiana 0061 1 have the identical prohibition. I believe Arizona has 2 not the professional gambler but they have promoter 3 language that's very, very strict language. 4 CHAIRMAN COX: Mr. Hieronymus, could I 5 ask you that if Commissioner Schenck would like to ask 6 a question, you let him do it. 7 MR. HIERONYMUS: I thought I did. 8 COMMISSIONER SCHENCK: I'm sorry. I 9 think I was speaking softly, Mr. Hieronymus, so I'm 10 sorry. 11 MR. HIERONYMUS: Oh, I didn't hear you. 12 COMMISSIONER SCHENCK: I find it a 13 little hard to follow your reasoning with respect to 14 manufacturers at the federal level, at the Johnson 15 Act, being treated as not being affected by this, when 16 the prohibition I'm looking at in our statute is 17 directed at manufacturers and manufacturers' licenses. 18 MR. HIERONYMUS: Well, the 19 prohibition -- and it's actually mimicked in both 20 distributors and manufacturers. It's the same 21 language; it's identical. And I was looking at then 22 the Penal Code definition of "gambling promotion" 23 where it, you know, references, which I have provided 24 you, operates and participates. So I was just 25 differentiating that just simply by somebody being a 0062 1 manufacturer or transporting a product that they have 2 manufactured, I don't think it would fall into this 3 prohibition. 4 COMMISSIONER SCHENCK: Yes. But it 5 seems to me if we wouldn't care at the federal level 6 that a manufacturer might be considered promoting 7 gambling by manufacturing gambling devices in other 8 states, that we shouldn't care. But then we would 9 care about them having a license in Texas to be a 10 manufacturer, based on that activity somewhere else. 11 MR. HIERONYMUS: But again, that's what 12 I'm saying, I agree with you, unless they are then an 13 operator of the game -- 14 COMMISSIONER SCHENCK: I see. 15 MR. HIERONYMUS: -- or participating in 16 the games. There is a difference between 17 manufacturing a device versus being an actual operator 18 of gaming and you're promoting the activity of gaming. 19 CHAIRMAN COX: Okay. Mr. smith, did 20 you want to make a statement? 21 MR. SMITH: You guys kept talking about 22 people living in Texas trying to get a license in 23 Texas. And I filled out an application several months 24 ago about being a distributor here in Texas, to start 25 representing different companies or manufacturers. 0063 1 And since all this came about, you 2 know, my licenses have kind of been put on hold in 3 order to make a living here, you know. So I'm saying, 4 you know, I'm all for a level playing field. But at 5 the same time, you do have these manufacturers, 6 distributors that do currently have a license in the 7 State of Texas, and I'm not able to, you know, get out 8 and do my job. So I'm basically going: Where are we 9 going to go with this, I mean, because I need some 10 resolution on this sooner than later, because I am an 11 unemployed person trying to get work. 12 CHAIRMAN COX: And, Mr. Smith, what is 13 your understanding of why your license application is 14 on hold? 15 MR. SMITH: Because of this particular 16 subject, gambling promoter or a professional gambler. 17 CHAIRMAN COX: So you're urging us to 18 be as expeditious as we can in resolving this issue? 19 MR. SMITH: Please. 20 CHAIRMAN COX: Thank you. 21 And, Bill -- how do you pronounce your 22 last name? 23 MR. MUCZKO: It's "Mus-coe." 24 CHAIRMAN COX: "Mus-coe." 25 MR. MUCZKO: I would just say this: As 0064 1 being a part of a licensed manufacturer in the State 2 of Texas since 2001, primarily all with bingo 3 companies, I think there is a definite -- you know, as 4 the Commissioner said, there is a difficult situation 5 here that needs to be looked at on several different 6 levels. I think that's very important. 7 That being said, I think it's also 8 important as a manufacturer that the Commission 9 understands that even your bingo manufacturers have 10 migrated into other businesses, specifically Class 3 11 gaming, Class 2 gaming which, you know, may not be 12 designated in Texas. But in the native Indian 13 country, it is. 14 The other thing I would say is that 15 it's important for there to be some time frame in 16 terms of defining this, but I don't think it's right 17 to penalize the people that are in the process or 18 started the process before this became -- in other 19 words, I don't see how you can hold up someone's 20 license on this technicality when you haven't ruled on 21 a definition. I think, yes, rule on a definition, 22 define it, and then the playing field becomes level, 23 but it must remain level until that definition is 24 decided. 25 COMMISSIONER SCHENCK: I agree with 0065 1 you. And I'm going to ask some questions here that I 2 don't know if we're going to get an answer or not. 3 It's fine if we don't. But would it be conceivable 4 that we could issue a license on a provisional basis, 5 that if affected by this interpretation would -- I 6 guess if we find that there are people who are 7 licensed now who are not eligible, we would have to 8 revoke the licenses? 9 MR. SANDERSON: We would have to go 10 through the process, yes, sir. 11 COMMISSIONER SCHENCK: So is it 12 possible that we could proceed with these license 13 applications that are currently pending and, if they 14 would otherwise be issued, go ahead and issue them, 15 with the understanding that if it ends up being 16 illegal, it's illegal, and there's not much we can do 17 about that, but it's not that we want to hold people 18 up because we haven't made a decision yet? 19 MR. SANDERSON: It's a definite option 20 we can look at. And I'll work with Ms. Kiplin on, you 21 know, reading the statutes. 22 CHAIRMAN COX: Let the support the 23 Commissioner's suggestion. I think that this is an 24 issue that's been dormant for a long time. And it's 25 probably, as Mr. Hieronymus said, been interpreted 0066 1 liberally by some people who answered "No" on their 2 applications. And until we have some kind of 3 resolution, I don't think we should be keeping people 4 from earning a living that would have been able to a 5 year ago or a month ago or three years ago, just 6 because this issue has been brought to our attention. 7 At the same time, we all know the other 8 side of that sword, and you have to be careful with 9 it. But that would be my wish as well the 10 Commissioner's, if we can do it. 11 MR. SANDERSON: Well, we can definitely 12 look at it. And if that is the only item that is 13 keeping this license from being issued, then we can 14 definitely look at that. 15 CHAIRMAN COX: Excellent. 16 COMMISSIONER SCHENCK: I would say, 17 Phil, particularly if the conduct that was at issue 18 there was legal in the places where it was occurring. 19 MR. MUCZKO: Yes, sir. 20 COMMISSIONER SCHENCK: If someone was 21 committing crimes someplace else, I'm not quite as 22 sympathetic. 23 MR. MUCZKO: Thank you. 24 CHAIRMAN COX: Any further questions at 25 this point? 0067 1 COMMISSIONER SCHENCK: No. This has 2 been very helpful, and I'm glad that everyone came and 3 participated. Obviously, this is a process. We don't 4 know where it's going to end. And, you know, we're 5 very grateful to our legal counsel and Mr. Hieronymus 6 and others for bringing the issues forward. 7 MS. KIPLIN: If I just might put this 8 on the record: I welcome -- and I know Sandy and Phil 9 do the same -- welcome any information that anybody 10 might want to provide, any kind of research. I'm 11 looking at Mr. Fenoglio. I know he was writing down 12 hurriedly matters. But it would be good to look at 13 this and make sure we're not missing any issues as we 14 go down this path. 15 CHAIRMAN COX: Anything further from 16 the witnesses? 17 MR. SANDERSON: Chairman? 18 CHAIRMAN COX: Yes? 19 MR. SANDERSON: Get Mr. Smith and Mr. 20 Muczko to state their name for the record, please. 21 CHAIRMAN COX: Oh, okay. Sorry about 22 that. 23 MR. SMITH: I'm sorry. I'm Todd Smith. 24 CHAIRMAN COX: Okay. 25 MR. SMITH: And I'm with Gaming 0068 1 Entertainment Solutions. 2 MR. MUCZKO: Bill Muczko. That's 3 M-u-c-z-k-o. And I'm with E-Cube International. 4 CHAIRMAN COX: Okay. Excellent. 5 Do y'all have anymore thoughts to share 6 with us? 7 MR. MUCZKO: Thank you. 8 MR. SMITH: Thank you. 9 CHAIRMAN COX: Thank you very much. 10 Ms. Kiplin? 11 MS. KIPLIN: Yes, sir? 12 CHAIRMAN COX: And, Commissioner, I'm 13 thankful that you're here, as always, and I appreciate 14 the issues that you have raised. 15 Do we have the in-house capability to 16 do the level of research that Commissioner Schenck has 17 suggested, given that we're three people down and he 18 would like to have this back by October? 19 MS. KIPLIN: Yes, sir, I think we do. 20 And the reason I say that is, we've got a new lawyer 21 starting on Monday that I think is going to be very, 22 very helpful. And we're targeting this as a 23 particular project to enlist that individual's help. 24 The person comes with great experience that's right up 25 this alley. 0069 1 CHAIRMAN COX: Okay. 2 MS. KIPLIN: I think we do. 3 CHAIRMAN COX: And so October, you 4 think we would be able to -- you and the Bingo staff 5 would be able to propose a rule for our consideration? 6 MS. KIPLIN: Yes, I think so. And I'm 7 hearing you, in October. We want to get the legal 8 research done, get the legal opinion tidied up and 9 then go forward and then have a draft proposed rule 10 for you-all. 11 CHAIRMAN COX: Yes. The Commissioner 12 pointed out that he would love September, but it's 13 probably not feasible. And so if we can lock in 14 October for that, let's do so. 15 MS. KIPLIN: Yes, sir, we will. 16 CHAIRMAN COX: The other thought I had 17 was that I would hope that there is a presumption that 18 the rule we have on the lottery side, or the 19 definition we have on the lottery side will stand. If 20 it doesn't, I don't want to think about what we would 21 have to do on that side to go re-investigate lots and 22 lots of people, because we've changed the rules on 23 that side. 24 Let the chips fall where they may, but 25 it would -- I think that's a good definition. You 0070 1 read it to me, and I agree with that definition. And 2 I would hope that we would start there and try to find 3 a way that that would remain the standard that we have 4 for professional gambler. 5 MS. KIPLIN: Yes, sir. We're -- 6 CHAIRMAN COX: Obviously, I'm not 7 trying to bias your report. 8 MS. KIPLIN: No. I understand. 9 CHAIRMAN COX: But I'm just pointing 10 out that we tread carefully on redefining that term, 11 given that we have used it for so many years. 12 MS. KIPLIN: Yes, sir. We are very 13 mindful of the fact that the -- at lease as it relates 14 to the interpretation of the State Lottery Act, same 15 language, professional gambler, that the agency has 16 already established what its interpretation of that 17 term is as it relates to the State Lottery Act. 18 My recall -- and I don't have it in 19 front of me -- is that that was an original rule that 20 has not been revised or amended since it was adopted 21 at the time that the lottery was a division of the 22 Comptroller of Public Accounts, and then those rules 23 administratively transferred to the Lottery 24 Commission. We're very mindful of that. 25 CHAIRMAN COX: Commissioner, anything 0071 1 further? 2 COMMISSIONER SCHENCK: No. Thank you 3 for your indulgence. 4 CHAIRMAN COX: Okay. Phil, Kim, I 5 think you have your marching orders. 6 MS. KIPLIN: Thank you. 7 MR. SANDERSON: Thank you. 8 CHAIRMAN COX: Why don't we take about 9 a 10-minute break. 10 (Recess: 10:12 a.m. to 10:25 a.m.) 11 CHAIRMAN COX: Okay. Let's come back 12 to order. 13 Item No. VIII, report by the Charitable 14 Bingo Operations Director. 15 AGENDA ITEM NO. IV (continued) 16 CHAIRMAN COX: And, Phil, I think you 17 had something that you wanted to -- that you said 18 before that you wanted to modify. 19 MR. SANDERSON: Yes, sir. On Agenda 20 Item No. IV, the consideration of continuation of the 21 BAC, Commissioner Schenck had asked what the cost was 22 for the BAC. I had stated $3,500. That is a per 23 meeting and not annual. It's actually about $14,000 24 per year, including the court reporter, legal, 25 participation and staff participation in not only the 0072 1 meeting but the preparation of the meeting and also 2 the conclusion of the meeting. 3 COMMISSIONER SCHENCK: Thank you, Phil. 4 You know, it occurred to me on the break that we ask a 5 lot of these people if they're traveling here at their 6 own expense. And I know we don't have the budget to 7 cover it, but it does seem to be a lot to be asking, 8 particularly when we're looking to diversify the 9 population that sits on that committee, to make sure 10 that we have people coming from places like Mission or 11 Alpine, God knows where, though every part of Texas is 12 perfect. So if there were money there, I would love 13 to try to reimburse those people. 14 MR. SANDERSON: Okay. Thank you. 15 AGENDA ITEM NO. VIII 16 CHAIRMAN COX: Your report, Phil. 17 MR. SANDERSON: Commissioners, in your 18 notebook is the report of the Charitable Bingo 19 Operations Division activities. We have posted all 20 the vacant positions, with the exception of two that 21 we're still holding at this time, pending further 22 review of job functions. One position has been 23 closed, and we've submitted to HR a recommendation for 24 that position. 25 The inspector positions are being -- 0073 1 applications are being screened and interviews will be 2 scheduled shortly for those positions, and the other 3 ones are still receiving applications on. 4 The bingo Advisory Committee meeting is 5 tentatively scheduled for November the 5th. 6 The allocations for the second quarter 7 prize fees were released I believe August the 15th, 8 last Friday. 9 And the annual report that I presented 10 to you at the last Commission meeting was published on 11 the website. 12 And our on-line operator training 13 program continues to be positive feedback. We now 14 have I believe a little over 50 individuals that have 15 taken that training. And I think the last -- either 16 the last individual or the one before that actually 17 scored a perfect score on the test, so that was the 18 first perfect score we had on the test that they have 19 to take for the certification. 20 And other than that, that's all I have 21 to add. 22 COMMISSIONER SCHENCK: Perfect score. 23 That's impressive. Maybe we need to make the test 24 harder. 25 I have no other questions. 0074 1 CHAIRMAN COX: Thank you, Phil. 2 AGENDA ITEM NO. IX 3 CHAIRMAN COX: Item IX, report, 4 possible discussion and/or action on lottery sales and 5 revenue, game performance, new game opportunities, 6 advertising, market research and trends. 7 Ms. Pyka and Mr. Tirloni. 8 MS. PYKA: Good morning, Commissioners. 9 My name is Kathy Pyka, Controller for the agency. 10 With me to my right is Robert Tirloni, our Products 11 Manager. 12 Our first chart for you this morning 13 reflects revenue from sales and net revenue to the 14 state through the week ending August 9th of 2008. 15 Total sales for this 50-week period amounted to 16 $3,464,000,000, a decline of $96.4 million or 17 2.7 percent as compared to Fiscal Year 2007 sales. 18 Prize expense through this period is $2.2 billion, a 19 $38.8 million decline from Fiscal Year 2007. And our 20 sales contribution is $1.26 billion. 21 Net revenue to the state reflects a 22 $60.1 million decline as compared to the 23 $954.3 million for the same period in Fiscal Year 24 2007. 25 The $2.2 billion amount reported as 0075 1 prize expense as a percentage of sales is 63.6 percent 2 for the current time period, as compared to 63 percent 3 for this same time period last year. 4 Our next slide summarizes the change in 5 sales by game for Fiscal Year 2007 to 2008. As noted 6 on the previous slide, the total decline from 2007 is 7 2.7 percent, or $96.4 million. The overall sales 8 decline includes a $13.8 million decline, a 9 1.6 percent in the on-line game area and an 10 $82.5 million decline, or 3 percent, in our instant 11 ticket product. 12 The jackpot games are portrayed with 13 the white font, reflecting $31.7 million year-over- 14 year decline. Daily games are presented with a green 15 font, reflecting a $17.9 million gain as compared to 16 2007. I wanted to note again that while Pick 3 17 reflects a decline of $25.8 million, the addition of 18 Pick 3-Sum it up, Daily 4 and Daily 4-Sum It Up 19 reflects a $28.2 million gain over Fiscal Year 2007 20 Pick 3 sales. 21 The next slide includes a -- 22 CHAIRMAN COX: Let's stay right there 23 for a second if we could, Kathy. 24 MS. PYKA: Yes. 25 CHAIRMAN COX: Okay. Now, Lotto Texas, 0076 1 how much of that do you think is fatigue and how much 2 of that do you think is the jackpots weren't as high 3 as last year? 4 MS. PYKA: I need go back and do an 5 update on the jackpot levels this year to last year. 6 I know that we have struggled in rolling with Lotto 7 Texas jackpot because of the interest factor. But I 8 definitely believe it will be the same update, that 9 the jackpots aren't as high at last year. 10 Robert, do you have that right there? 11 MR. TIRLONI: I don't. 12 MS. PYKA: I can certainly provide an 13 update on that. 14 CHAIRMAN COX: We're in the twenties 15 right now. Right? 16 MS. PYKA: We are. We're at 17 $28 million right now. 18 CHAIRMAN COX: Twenty-eight. And I 19 don't remember being in the twenties in recent 20 history. 21 MS. PYKA: There was one other large 22 roll earlier in the spring for Lotto Texas. 23 CHAIRMAN COX: Now, Cash 5 is down by 24 12.7 percent. Is there anything we can attribute that 25 to? Is that a tired game? Is that not jackpot, no 0077 1 jackpots? 2 MR. TIRLONI: For the record, my name 3 is Robert Tirloni. I'm the Products Manager for the 4 Commission. 5 Cash 5 would not be jackpot-related. 6 It's a completely parimutuel game except for one prize 7 tier. So that would not be jackpot-related. The 8 sales decline on that game. 9 CHAIRMAN COX: So that's just dying? 10 MR. TIRLONI: Yes. I think it's one of 11 the older games. We changed it back in 2002, changed 12 the matrix up, added draw days to make it a true daily 13 game for our purposes, Monday through Saturday, a true 14 daily game. And we've not made any changes to that 15 game since that time. 16 CHAIRMAN COX: And do you have any 17 sense that there is cannibalization of Cash 5 by 18 Daily 4, the new game? It appears we have some 19 cannibalization of Pick 3. 20 MR. TIRLONI: Yes, definitely some 21 cannibalization of Pick 3 due to the introduction of 22 Daily 4, possibly some cannibalization of Cash 5, 23 although I think more of the issue of Cash 5 is 24 maturity than cannibalization from Daily 4. 25 CHAIRMAN COX: Well, does Cash 5 need a 0078 1 facelift? 2 MR. TIRLONI: We've being looking into 3 that. We're going to be doing some focus group or 4 research for our whole on-line game suite, this coming 5 fall. We've got some concepts that we received from 6 GTECH that we're going to be looking at to hopefully 7 see if there is anything we can refresh or anything 8 new that we can introduce. There is not a lot of 9 brand-new on-line game options for us right now, 10 though. 11 CHAIRMAN COX: Okay. We have had 12 presentations from time to time by the vendors about 13 new on-line applications -- smaller games, instant 14 result kinds of games, et cetera. Are we looking at 15 doing any of those? Are they within our statutory 16 authority? How is that coming, Robert? 17 MR. TIRLONI: There have been some 18 on-line concepts that have worked well in some other 19 states, some add-on features that have worked well in 20 other states that we have some legal or statutory 21 issues with in running in Texas. 22 So what we are -- the box that we're 23 kind of in, kind of puts us in -- we have to stay with 24 the more traditional style which is our, you know, 3-, 25 4-, 5-digit games, jackpot style games. And so I 0079 1 think in that arena, the options for change or the 2 options for refresh of existing games I think is slim. 3 CHAIRMAN COX: So we're running into 4 statutory hurdles to going further beyond the game 5 portfolio that we have right now? 6 MR. TIRLONI: I believe that to be true 7 for us right now, yes. 8 CHAIRMAN COX: And let's see. I think 9 that we asked for an Attorney General's opinion on a 10 raffle that we were looking at doing. Several states 11 have successfully done raffles. 12 MR. TIRLONI: Yes. 13 CHAIRMAN COX: Was that a 14 constitutional issue that they -- 15 MS. KIPLIN: Yes. 16 CHAIRMAN COX: -- determined on that? 17 MS. KIPLIN: Yes. 18 CHAIRMAN COX: So some of these are 19 constitutional, I guess, and some of them are just 20 statutory -- "just" I say. 21 MS. KIPLIN: I would say generally 22 speaking, that may be the case. I would want to look 23 at one of the proposals or concepts. 24 CHAIRMAN COX: Okay. Have we had 25 any -- 0080 1 MS. KIPLIN: The one in particular with 2 raffle, the AG opinion concluded it was a 3 constitutional issue. 4 CHAIRMAN COX: Okay. Have we had any 5 requests from -- Nelda, I'm looking at you, and I 6 don't know if it's appropriate under this agenda item. 7 But have we had any requests from members of the 8 Legislature or other leadership about what kinds of 9 opportunities there might be if there was statutory 10 change? 11 MS. TREVINO: For the record, I'm Nelda 12 Trevino, the Director of Governmental Affairs. 13 Chairman Cox, we have had some requests 14 in the past for those kind of items. Not recently, 15 you know, we have not received any requests. But 16 again, in the past we have presented that kind of 17 information to various offices that have requested it. 18 CHAIRMAN COX: And I think that in 19 either our Strategic Plan or our Business Plan or 20 both, we enumerate some of these possibilities? 21 MS. TREVINO: We certainly do in the 22 Strategic Plan. 23 CHAIRMAN COX: Okay. 24 MS. TREVINO: And we do make some 25 references also in the Business Plan. 0081 1 CHAIRMAN COX: Okay. So at least 2 indirectly, we're letting folks over there know that 3 there are opportunities for additional lottery 4 revenues should they choose to revise the statutes? 5 MS. TREVINO: That's correct. 6 CHAIRMAN COX: Okay. And, obviously, 7 we walk a fine line there as far as lobbying versus 8 serving as a resource. But I have asked in the past 9 and I hope that we keep a document current, that 10 should someone over there request it, that we would be 11 able to tell them that here are other opportunities 12 that we would have and here are the kinds of revenue 13 that they might produce. Is that inappropriate? 14 MS. TREVINO: Not at all. And again, 15 we have been responsive to those kind of requests. 16 And to your point, not only maybe offering those kind 17 of games that might require some sort of statutory 18 change but also maybe providing some fiscal note 19 information if we have put that information together. 20 CHAIRMAN COX: Okay. Now, how many of 21 these constraints, if any, are self-imposed? Is there 22 a statute against having a drawing on Sunday? 23 MR. TIRLONI: I don't believe there is 24 anything in statute that prevents us from having 25 Sunday drawings. 0082 1 CHAIRMAN COX: So we may have three 2 kinds of constraints here: Legal, which would have 3 two subsets, constitution and statutory. And then we 4 have some that are self-imposed, perhaps because of 5 guidance that we've gotten from leadership in the 6 past? 7 MR. TIRLONI: Yes, I believe that's 8 correct. 9 CHAIRMAN COX: Okay. Well, I think 10 that as to A and B, we should be prepared, as Nelda 11 says that we are, to provide information should anyone 12 ask for it. As to C, if we are self-imposing any 13 limitations on our revenue, I think we should affirm 14 with whoever had that preference -- Anthony, I 15 probably should be looking at you on this one -- that 16 we should be sure that we're not over here laboring 17 under the misconception that whoever had that 18 preference at one time that we deferred to, continues 19 to have that preference, because I don't want us 20 assuming that we shouldn't be drawing on Sunday, 21 although I can see lots of reasons not to. 22 If we're doing it because of someone 23 who is no longer there preferred that or because 24 someone who was very vocal preferred it but perhaps 25 the majority of folks wouldn't. 0083 1 MS. PYKA: Chairman Cox, I would like 2 to go back and clarify. On Lotto Texas, there's been 3 three instances prior to the current roll cycle in 4 which we've been over $20 million. We reached 5 $26 million back in September, $30 million in December 6 and then $28 million in February. 7 CHAIRMAN COX: Okay. Well, we haven't 8 had $77 million or $100 million in a long, long time, 9 have we? 10 MS. PYKA: No, sir. 11 MR. TIRLONI: It's been quite a while 12 on -- 13 CHAIRMAN COX: When I came on this 14 board, we had $77 million sitting up there, and that 15 was pretty exciting. 16 COMMISSIONER SCHENCK: While we're on 17 this topic, if I can join in -- and, Nelda, while 18 you're here -- I think another issue that's probably 19 critical to generating these numbers that has 20 legislative implications that I think we're prepared 21 to address if asked is the relationship between our 22 advertising budget and the prize payouts, and I think 23 that probably is responsible for a significant part of 24 our challenges here. 25 And it has occurred to me that our 0084 1 experience would tend to suggest -- and maybe I should 2 ask it in the form of a question. Is it correct that 3 our experience has tended to suggest that given a 4 choice between advertising and prize payout, the 5 public is more responsive to prize payout than it is 6 to advertising? In other words, you would not suggest 7 reducing the prize payouts so that we could increase 8 our advertising expenditures? 9 CHAIRMAN COX: Commissioner, if I may, 10 I would like to ask Deputy Executive Director Gary 11 Grief to look at that. He has responsibility for both 12 the prize payout and the advertising under him and 13 various departments. 14 Gary, would you help us with that, 15 please. 16 MR. GRIEF: Good morning. For the 17 record, Deputy Executive Director Gary Grief. 18 Commissioners, that is an issue that is 19 critical to our success, and we are addressing that in 20 the form of a request in our legislative 21 appropriations request that you'll hear about later 22 today, to unhitch the prize payout percentage to the 23 advertising budget, and then going beyond that, ask 24 for additional funding for advertising in hopes that 25 that will also, if not increase sales, then slow the 0085 1 decline of what Robert has described -- and I would 2 certainly agree -- of a very limited portfolio of 3 games that we have been able to offer, some due to the 4 legal and statutory restrictions, some due to 5 Commission directives and some due to other 6 self-imposed forces. 7 CHAIRMAN COX: Gary, specific to the 8 Commissioner's question, our past conduct would seem 9 to indicate that higher prize payouts are worth it in 10 sacrificing advertising dollars. We've gone from 40, 11 I think, which was our initial allocation, down to 12 about 30 or 31 after it was tied to the prize payout 13 percentage. So would that support the idea that we 14 recognize that we need to pay out higher percentages 15 on scratch-off names and higher denomination 16 scratch-off games than we did on the on-line games -- 17 MR. GRIEF: I agree. 18 CHAIRMAN COX: -- even if it costs us 19 advertising money? 20 MR. GRIEF: I agree with that. The 21 shame in that is that we don't know, had we been able 22 to keep our advertising budget constant or even 23 increase it at the same time as we were effectively 24 managing our prize payout percentage, if we might be 25 at a much higher plateau of sales than we are today. 0086 1 CHAIRMAN COX: Yes. 2 COMMISSIONER SCHENCK: But it's very 3 telling that -- I mean, you can advertise however you 4 want. I mean, that's your best way of communication. 5 But it seems to suggest that there is a high level of 6 rationality among the playing public. And they're 7 looking beyond the advertising to what statisticians 8 would call the expectancy. I mean, the rate of payout 9 is something they're drilling down to figure out. 10 I mean, it's not -- and it suggests to 11 me that the message in the advertising might be much 12 more effective to communicate the payouts are up, if 13 people are more responsive to that than they are to, 14 you know, comedy in advertising, which I think we have 15 very clever ads. 16 But it seems to me if they're looking 17 past the advertising anyway to the raw math, 18 communicating the math to them might be a more 19 effective way of advertising. I mean, the payouts, 20 have they ever been higher than they are right now? 21 MR. GRIEF: No. 22 COMMISSIONER SCHENCK: And are we 23 communicating that to people? 24 MR. GRIEF: Well, we are insofar as the 25 most effective way of communicating that to our 0087 1 players is through our retailers. Our retailers are 2 the salespeople for our tickets, if you will, and they 3 have a very quick and complete understanding of the 4 payout percentages, because they see the winning 5 experiences that occur out in the field, and they 6 communicate those to the players. I think you have 7 probably been in a store when a player walks in and 8 they ask the retailer, "What game is hot? What game 9 is paying out?" And that determines a good proportion 10 of our sales. 11 The advertising and prize payout issue 12 is complex. And it's not a fair comparison to look at 13 when the lottery started, what our advertising budget 14 and what our prize payout percentage was compared to 15 today. For the first several years of the lottery, we 16 enjoyed it as a novelty product. We would have 17 jackpot winners who would win $5 million and every 18 major daily newspaper in Texas would pick up the 19 story. Now if it's anything less than $100 million, 20 we're lucky if their local small town paper picks the 21 story up. 22 We had one instant game when the 23 lottery started. We didn't have on-line games until 24 we were into it for about six months. Now we have a 25 full variety of games, and we're trying to advertise 0088 1 not only that the game is out there, we would like to 2 educate, how to play, which are jackpot games, which 3 are daily games, et cetera, et cetera, very difficult 4 to do that with a limited advertising budget. 5 Prize payout percentage, if we don't 6 continue to manage that appropriately, we start losing 7 the buy-in from our retailers. And again, I'll 8 repeat, our retailers are our top salespeople. They 9 are the ones who push or kill our sales in each 10 location, and so we need to do a good job of that as 11 well. 12 CHAIRMAN COX: Gary, the model I guess 13 for lottery sales, the poster child is Massachusetts. 14 They have almost $10.00 per capita sales, if I 15 remember correctly. 16 MR. GRIEF: Yes. 17 CHAIRMAN COX: They for many years did 18 no advertising, if I remember correctly, and now do 19 only $10 million, they have a $10 million budget? 20 MR. GRIEF: It's rather small. 21 CHAIRMAN COX: So there is a case of a 22 state that has been the most successful of all with 23 little or no advertising, because of their prize 24 payout percentage. The other side of that is that 25 their legislators and leadership consistently raises 0089 1 the question: Are we giving away free money? Are we 2 paying back more than we need to, to obtain the 3 revenue? Missouri was doing the same kind of thing, 4 and the state auditor was detailed to investigate that 5 very issue. So you've got a dilemma here as to 6 whether there is value of advertising. 7 And, Kathy, you're probably going to be 8 talking in your LAR presentation about the study that 9 we had done by Professors Huff and Jarrett and the 10 fact that the $40 million that we started with, as 11 Gary pointed out, for one simple game, is now 31 not- 12 price-adjusted dollars relating to an entire portfolio 13 and those kinds of things. Is that correct? 14 MS. PYKA: Correct. I'll make 15 reference to the study performed by the UT McCombs 16 School of Business when we talk about Exceptional Item 17 No. 3 related to the advertising increase that we're 18 proposing for your consideration. 19 CHAIRMAN COX: Okay. 20 And, Commissioner, that will be coming. 21 But do you have more questions that you would like to 22 ask at this point? 23 COMMISSIONER SCHENCK: No. Thank you 24 very much. 25 CHAIRMAN COX: Okay. Thank you very 0090 1 much, Gary. Please go ahead. 2 MR. GRIEF: Could I add one thing to 3 that? I know we'll be getting into the LAR. And, 4 Chairman Cox, you and I have had discussions about 5 this in the past. What we believe, what staff 6 believes is the optimum way to manage the lottery 7 games is to have an advertising budget that is not 8 tied to the prize payout percentage, have the 9 flexibility to utilize the prize payout percentage as 10 we see fit and then use that flexibility to implement 11 and try new types of games, different types of 12 payouts, without having the consequences of that tie 13 together. 14 We believe that our LAR request this 15 time is reasonable and will give us that flexibility. 16 And we look forward, if that is approved by the 17 Legislature, to implementing just that type of 18 philosophy, working closely -- as closely as the 19 Commissioners want to be involved -- in that process 20 as well. 21 CHAIRMAN COX: Thank you, Gary. 22 Okay. Kathy, now you can go to the 23 next slide. 24 MS. PYKA: Thank you. 25 This next slide includes Fiscal Year 0091 1 2008 year-to-date sales by game. As shown on this 2 slide, within the green area of the pie chart, 3 75.9 percent, or $2.6 billion, was from instant 4 tickets, with 7.8 percent of sales, or $270.6 million, 5 from Pick 3, followed by 5 and a half percent, or 6 $191.8 million, from Lotto Texas, and 4.7 percent and 7 $162.8 million from Mega Millions. 8 Sales to date for Daily 4 are 9 $39.9 million and $8 million for Daily 4-Sum It Up. 10 Pick 3-Sum It Up sales amount to $6.1 million through 11 this time period. 12 With that, Robert will now discuss 13 sales by price point. 14 MR. TIRLONI: Commissioners, this next 15 slide shows our year-to-date instant ticket sales 16 broken down by price point, and this is through the 17 week ending August 9th. Our instant sales through 18 August 9th total $2.6 billion. The best selling price 19 point continues to be the $5.00 price point, and we've 20 seen little change in the sequence of instant ticket 21 price point sales. The next best-selling price point 22 is the $2.00, followed by the $10, and then followed 23 by the $3.00. 24 And that concludes our report for 25 you-all this morning. We would be happy to answer any 0092 1 additional questions you might have. 2 CHAIRMAN COX: Commission? 3 COMMISSIONER SCHENCK: No. Thank you. 4 CHAIRMAN COX: Kathy, I guess in 5 another report, you'll get to where you expect we'll 6 end up for the year and what you think will transfer 7 to the state for the year? 8 MS. PYKA: Yes, sir. 9 CHAIRMAN COX: Thank you. 10 Thank you, Robert. 11 MR. TIRLONI: Thank you. 12 AGENDA ITEM NO. X 13 CHAIRMAN COX: Okay. Kathy, transfers 14 to the state. 15 MS. PYKA: For the record, my name is 16 Kathy Pyka, again Controller for the Lottery 17 Commission. 18 The first report in your notebook 19 reflects transfers and allocations to the Foundation 20 School Fund and the allocation of unclaimed prizes for 21 the period ending July 31, 2008. Total cash transfers 22 amounted to $929.9 million for the first 11 months of 23 Fiscal Year 2008. 24 The second page of your notebook 25 reflects the detailed information for the monthly 0093 1 transfers. Of the $929.9 million transfer to the 2 state, $882.7 million was the amount transferred to 3 the Foundation School Fund, with the balance of 4 $47.2 million transferred from unclaimed prizes to the 5 general revenue fund. 6 The amount transferred to the 7 Foundation School Fund represents a 5.7 percent 8 decrease, or $52.9 million, from the total amount 9 transferred in July of 2007. 10 And the final document in your notebook 11 provides you the cumulative report on lottery sales, 12 expenditures and transfers from Fiscal Year 1992 to 13 date. The total cumulative transfers to the 14 Foundation School Fund through July of this year total 15 $10.6 billion. 16 Commissioners, as a follow-up to your 17 inquiry, we're still looking at projected sales around 18 $3.64 billion. 19 CHAIRMAN COX: Which would be down 20 still about the 2.7 percent from last year, Kathy? 21 MS. PYKA: Yes, sir. And we're looking 22 at cash transfers still being below that billion 23 dollar figure. We just don't see a mechanism of 24 making it with our current sales level on instant 25 tickets. 0094 1 CHAIRMAN COX: With all the unspent 2 admin, it's still just not going to get there? 3 MS. PYKA: Well, the unspent admin will 4 take us over the billion dollar mark, but the unspent 5 admin will be treated as an accrued transfer, because 6 it will be transferred after fiscal year end as we 7 analyze the final books. 8 CHAIRMAN COX: Okay. 9 COMMISSIONER SCHENCK: And that's 10 according to GAAP principles or is -- 11 MS. PYKA: It will be according to 12 GAAP, and it's consistent with the policy that we've 13 had in place on how we handle unspent administrative 14 fund transfers for the agency. 15 COMMISSIONER SCHENCK: Have we examined 16 that policy to make sure that it is according to GAAP 17 as it's been recently amended? 18 MS. PYKA: I'm very comfortable with 19 that, and I'm happy to look at it again. 20 CHAIRMAN COX: Is there any way -- 21 forget GAAP for a moment now -- that we could just 22 make the cash transfer early, since we know what it's 23 going to be, make it in August? 24 MS. PYKA: I'm happy to look at that. 25 I mean, I'm very comfortable on what the unspent 0095 1 administrative funds will be for lottery operator 2 contract, because we recognize the appropriation for 3 that particular strategy was based on the 4 Comptroller's finding a revenues estimate of 5 $3.9 billion. So we know there's unspent 6 administrative funds there of $9 million. 7 The balance of the other unspent 8 administrative funds in the agency are based on actual 9 expended through August 31st as well as any 10 encumbrances on the books. That figure will be 11 finalized, obviously, as soon as we can wrap up the 12 reconciliation to the Comptroller of Public Accounts. 13 So I'm happy to revisit and make 14 certain that I am 100 percent correct on previous 15 practice and revisit GAAP on that measure. 16 CHAIRMAN COX: Okay. And, obviously, 17 we're not asking you to do anything inappropriate -- 18 MS. PYKA: Certainly. 19 CHAIRMAN COX: -- or anything that 20 you're not totally comfortable with. But the 21 questions about those transfers, clearly a billion 22 dollars is a benchmark. 23 MS. PYKA: I understand. 24 CHAIRMAN COX: And once we got over it, 25 probably there's lots of folks who would not like us 0096 1 going back. 2 MS. PYKA: And I think, too -- I mean, 3 as I mentioned last month, our other challenge in the 4 way the fiscal year end falls, with it falling on 5 Sunday. We'll do actual cash transfers on Friday. So 6 then we end up having sales of Friday, Saturday and 7 Sunday -- the 29th, 30th and 31st of the month -- that 8 become accrued transfers as well. And the State of 9 Texas actually closes its accounting books, so there 10 is not a mechanism for us to process a cash transfer. 11 You know, there would be more than willing staff to 12 come in that Sunday and process a cash transfer, but 13 there's not an opportunity to do that. 14 CHAIRMAN COX: Okay. 15 COMMISSIONER SCHENCK: What if we found 16 a mistake in one of our -- 17 MS. PYKA: A mistake is treated as a 18 bookkeeping error and it's treated as an accrual 19 adjustment after August 31. 20 COMMISSIONER SCHENCK: So there is a 21 process for amending after the state's books have 22 closed, and it would have to be on the basis of an 23 error and not inability of account? 24 MS. PYKA: Right. I'll be happy to 25 look into that further. I'm sure Ben is behind me 0097 1 shaking his head and just happy to explore it further. 2 CHAIRMAN COX: I think considering the 3 circumstances that we have been working under, the 4 economic conditions, the price of gasoline and other 5 things, it's certainly outstanding performance by the 6 Lottery. We would have loved for it to have been as 7 good as last year, but circumstances weren't such, I 8 don't think, that that was possible. 9 And, Director Sadberry, I want to 10 commend you on the performance of you and your staff 11 and under challenging circumstances this year. 12 MR. SADBERRY: Thank you. 13 COMMISSIONER SCHENCK: I think we 14 should also commend the support we've gotten out of 15 our lottery operator, our vendors, including 16 TracyLocke, who I think went the extra mile for us in 17 soliciting advertising that was not paid for, frankly, 18 but it going beyond trying to help us get to this 19 goal. 20 CHAIRMAN COX: Thank you. That's an 21 excellent addition. 22 Okay. Kathy, does that complete your 23 report on that item? 24 MS. PYKA: That does conclude my 25 presentation. 0098 1 CHAIRMAN COX: Okay. I'm going to ask 2 you to relax for a moment, if you will, and I would 3 like to call Mike's item now, because I know he has 4 the consultants with him. 5 MS. PYKA: Yes. 6 CHAIRMAN COX: And they would be 7 welcome to stay through our budget presentations, but 8 we might want to give them the opportunity to go on to 9 other things. 10 MS. PYKA: Thank you. 11 AGENDA ITEM NO. XIV 12 CHAIRMAN COX: So I'm going to call at 13 this point Item No. XIV, which is the lottery operator 14 procurement consultant contract. Mr. Fernandez. 15 MR. FERNANDEZ: Good morning, 16 Mr. Chairman, Commissioner Schenck. My name is Mike 17 Fernandez. I'm the Director of Administration. And 18 the principals with Gartner are here and they're 19 working, and I just sent them a quick message when you 20 said that, so I suspect that director will be here 21 very quickly. 22 CHAIRMAN COX: Thank you. 23 MR. FERNANDEZ: This particular item is 24 to introduce you to and to inform you that we have 25 engaged Gartner, Inc., on this particular consulting 0099 1 undertaking. What we've put in your notebooks today, 2 or what you have in your notebooks are two items on 3 this issue. One is the recommendation memo that we 4 have sent to our Executive Director, Mr. Sadberry, 5 which in essence outlines the process that the staff 6 went through in identifying your consultant and also a 7 list of meetings that were held in conjunction with 8 this undertaking. 9 What I would bring to your attention 10 is, you may recall we originally went out with the RFP 11 in August of '07. We did receive four bids, three of 12 which were disqualified, either because of financial 13 issues or due diligence, good-faith effort under the 14 HUB, leaving us with one bid, which the review team 15 chose not to recommend. We did reissue that RFP in 16 December of that year and again received four bids, 17 two of which were eliminated on the same -- under the 18 same grounds, either financial viability or HUB good- 19 faith effort. 20 The review committee did proceed 21 reviewing the two remaining proposals and ultimately 22 recommended one of the bidders. During contract 23 negotiations, the bidder did disclose to us a conflict 24 of interest. After extensive review with our legal 25 staff, our Executive Director and review committee, we 0100 1 chose to cancel the RFP and negotiations and look at 2 other contracting avenues. 3 What we recommended to the management 4 team was that we review statewide contracts. As you 5 may know, there are a number of vehicles to contract 6 through in the State of Texas, TXMAS being one of 7 them, the Department of Information being one of them, 8 which have been created under separate pieces of 9 legislation to allow agencies to move more quickly and 10 more cost effectively in terms of identifying 11 contractors. 12 We turned to those mechanisms and 13 reviewed the available contractors and companies that 14 were currently under state contract, ultimately 15 opening discussions with Gartner. And over a number 16 of months, we ultimately received a prospectus from 17 Gartner. We then pulled together the same review 18 team, although that's not a requirement under that 19 process, to review the prospectus and to ensure that 20 we had included and identified in the course of that 21 all of the same requirements and scope that we were 22 looking for in the original RFPs. 23 After a review by the committee, we 24 ultimately recommended to Director Sadberry that we 25 engage Gartner for the conduct of this particular 0101 1 effort. We did so, I believe signing a contract late 2 in July, with the start date of August the 1st. So we 3 do have their team on the ground right now working 4 with us. 5 One of the things that I would like to 6 bring to your attention, as you may recall, the staff 7 had the opportunity to meet with probably the three 8 primary providers of lottery operations services in 9 North America: GTECH, SciGames and Interlott. Those 10 meetings were conducted in order to identify what 11 those companies believe was the future in gaming 12 services and the provision of lottery services 13 worldwide. 14 This is Scott Klopfleisch. He's a 15 director with Gartner. And I have asked Scott to come 16 and speak to you just briefly in a moment about his 17 company and then answer any questions that you may 18 have. 19 During the course of those meetings, 20 one of the things that we did, we did offer and ask of 21 the three companies, or make the offer, was that if 22 they had any information or materials that they 23 thought might be of benefit to the agency as we moved 24 forward in the process, in reviewing and developing a 25 future proposal from the agency, that we would welcome 0102 1 that, and that we also welcome that from any company 2 or from any individual. 3 Subsequent to those meetings, we were 4 notified by GTECH that they had recently completed a 5 study which described the resources that they had 6 available and how those resources were being applied 7 in terms of the provision of services to the Texas 8 Lottery, and I do have that study. And although I 9 have not provided it to you -- to Gartner, to Scott -- 10 I'm reviewing it and intend to do so at the 11 appropriate time in the project. 12 I believe that sums up the process that 13 we've gone through and currently where we stand. 14 Again, Gartner, as you may know, is I believe a 15 worldwide company in the provision of sourcing and 16 consulting in terms of business case development, 17 contracts, contracts outsourcing, negotiations, 18 resource observations and that have been available to 19 the State of Texas I guess since -- for a number of 20 years. 21 MR. KLOPFLEISCH: Yes. We've done 22 business -- 23 MR. FERNANDEZ: Well, let me turn it 24 over to you, Scott. 25 CHAIRMAN COX: Mike -- 0103 1 MR. FERNANDEZ: Yes, sir? 2 CHAIRMAN COX: -- before you do that. 3 Commissioner, do you have any 4 observations or questions? 5 COMMISSIONER SCHENCK: Well, Mike, no. 6 I just appreciate that this was a very challenging 7 process, getting an appropriate and qualified bidder, 8 and I appreciate all your hard work and appreciate 9 your report. 10 It's clear to me that you left no stone 11 unturned in coming down the path that you did, and I 12 would like to hear more about what exactly Gartner is 13 going to be doing and how they intend to do it for us. 14 MR. FERNANDEZ: And I appreciate that. 15 And let me add one thing -- and thank you very much 16 for your comment, Commissioner. 17 For your information -- and I suspect 18 that you know this and have heard it in other 19 Commission meetings -- the team that worked on this 20 was comprised of Michael Anger, Kathy Pyka, Ed Rogers 21 and Toni Erickson. And as you may well imagine, there 22 were many, many meetings, and they did spend a lot of 23 time and a lot of energy, along with doing their 24 assigned duties of working on this effort, and I 25 appreciate all the help and the all time they put into 0104 1 this. 2 CHAIRMAN COX: And I might add, I think 3 that you chaired that committee. Right? 4 MR. FERNANDEZ: Yes, sir. 5 CHAIRMAN COX: So you were at all those 6 meetings, too? 7 MR. FERNANDEZ: I had the opportunity 8 to attend, along with Mr. Marker and Ms. Pina. 9 CHAIRMAN COX: Good. 10 MR. KLOPFLEISCH: Good morning, 11 Mr. Chairman, members of the Commission, Executive 12 Director. Actually, I'm happy to be here this 13 morning. I would like to give you just a few 14 statistics about Gartner and who we are. 15 We are the world's largest independent 16 information technology research firm in the world. We 17 have about 4,000 employees. We currently do business 18 with about 90 percent of the Fortune 1000 on the 19 commercial side. We also have a very large focused 20 practice that we call State and Local, in the United 21 States. 22 So we've actually done business with 23 the State of Texas for at least the 10 years that I've 24 been employed by Gartner. Our offerings, service 25 offerings, are really broken into different 0105 1 categories, but I think we're most known for our 2 independent research. We have no downstream ties or 3 commitments to any vendor, anyone that makes money in 4 this state, so we're truly independent. 5 I think what our clients value our 6 involvement and opinion for the most is our 7 objectivity. So our focus working with clients is to 8 give them the most valuable objective advice. 9 I am in the consulting practice. I am 10 a senior director out of our Dallas office. And what 11 we're going to be doing to assist the Lottery is going 12 through a process whereby we will actually evaluate 13 the business processes. We will document those. We 14 will develop, with our steering committee here at the 15 Lottery, what we think are reasonable alternatives for 16 subsequent procurement activities, and then we'll 17 assist the Lottery through that process. 18 So any questions or comments? 19 COMMISSIONER SCHENCK: You say you have 20 4,000 employees? 21 MR. KLOPFLEISCH: Yes. 22 COMMISSIONER SCHENCK: Worldwide? 23 MR. KLOPFLEISCH: Yes, that's correct. 24 COMMISSIONER SCHENCK: How many of 25 those are in Texas? 0106 1 MR. KLOPFLEISCH: Oh, good question. I 2 don't have the count. But I would guess, based on our 3 office in Dallas and the people I know around the 4 state, we probably have 35 or 40 employees in Texas. 5 COMMISSIONER SCHENCK: How many offices 6 do you have in Texas? 7 MR. KLOPFLEISCH: We have a main office 8 in, actually Irving, which is a suburb of Dallas. We 9 also have people based here in Austin, actually a 10 couple of individuals based here in Austin. We have 11 individuals in our research group that are based in 12 some other cities. 13 COMMISSIONER SCHENCK: How many people 14 do you think you'll be dedicating to this contract? 15 MR. KLOPFLEISCH: Right now I think 16 over the course of our involvement here, we'll have 17 eight Gartner employees and actually two individuals 18 that have specific lottery experience that we're going 19 to bring in from another firm. 20 COMMISSIONER SCHENCK: And will those 21 people all be operating out of your Texas offices or 22 will they -- 23 MR. KLOPFLEISCH: Yes. 24 COMMISSIONER SCHENCK: Okay. Thank 25 you. 0107 1 CHAIRMAN COX: You indicated that you 2 are the largest independent firm. So that says that 3 IBM doesn't count, Deloitte doesn't count. Is that 4 how you make that distinction? 5 MR. KLOPFLEISCH: That's correct. 6 CHAIRMAN COX: Okay. So who would be 7 your peers? 8 MR. KLOPFLEISCH: Well, insofar as our 9 focus on this, this is basically a sourcing-focused 10 engagement basically, you know, an evaluation of the 11 selection process. Some of the people that we would 12 compete with in this space would be Technology 13 Partners out of Woodland Hills, Texas. They do a lot 14 of transactions in this space. 15 We would occasionally, on the 16 procurement side for software, compete with, you know, 17 what's left of the CPA firms that still do that. 18 Accentra (phonetic) is a big player there, but they 19 also do the implementation work, and we don't. So our 20 focus is strategic. It's at the decision, not at 21 implementation. 22 CHAIRMAN COX: Okay. So you are true 23 advisers? 24 MR. KLOPFLEISCH: That's correct. 25 CHAIRMAN COX: You're not turnkey 0108 1 providers? 2 MR. KLOPFLEISCH: No, we are not. 3 CHAIRMAN COX: Which is an approach 4 that I admire. You know, that says that you're going 5 to be working with our people and using their skills 6 as best you possibly can -- 7 MR. KLOPFLEISCH: That's correct. 8 CHAIRMAN COX: -- so that they can take 9 the ball forward after you leave. 10 MR. KLOPFLEISCH: That's absolutely 11 correct. 12 CHAIRMAN COX: And I like that 13 approach. 14 MR. KLOPFLEISCH: Yes. 15 CHAIRMAN COX: One thing that I would 16 be remiss in not telling you, although you may have 17 read enough transcripts to know my views already, is 18 that whatever the outcome of your work, your 19 recommendations are, I hope they will include the 20 basic principle that to the maximum extent possible, 21 the providers should be either on a fixed compensation 22 or, if they're on a variable compensation, it should 23 be sharing with the school children of Texas and not 24 participating in sales, for instance, when the school 25 children only get the net proceeds. 0109 1 MR. KLOPFLEISCH: I understand. 2 CHAIRMAN COX: Excellent. 3 MR. FERNANDEZ: One last comment, 4 Commissioners. I did I think allude to what we have 5 included in your notebook and that there was a list of 6 meetings and communications that we had held with 7 leadership offices during the course of this, to 8 ensure that this undertaking wasn't done in a vacuum. 9 And if I didn't point that out, I wanted to make sure 10 that I did get it on the record. 11 CHAIRMAN COX: Commissioner? 12 COMMISSIONER SCHENCK: I think the 13 whole point of having you on board is an independent 14 view of this, and I want to make sure that your 15 viewpoints are taken by our staff, and that to the 16 extent we need to hear about it, we're hearing about 17 it as well. 18 MR. KLOPFLEISCH: Exactly. 19 COMMISSIONER SCHENCK: So I think the 20 lines of communication need to stay open here to the 21 Commission. 22 MR. FERNANDEZ: Absolutely. One of the 23 things that we will do is, we will have a governance 24 committee, if you will, like any large project and any 25 organization, that will meet with the team at least 0110 1 twice a month. I will meet with them. And Toni 2 Erickson, who is the day-to-day project manager, will 3 meet with them weekly. And we'll be meeting with them 4 as we have been probably almost daily through the 5 course of this. 6 But one of the things certainly that we 7 intend to do is to place this item on the Commission 8 agenda either bi-monthly or at some -- at least every 9 quarter, so that you are kept apprized of the progress 10 of any issues that may be being dealt with. 11 CHAIRMAN COX: Mike, there are a lot of 12 people who are interested in this procurement, and I'm 13 sure that there are folks out there who would like to 14 make suggestions to you, to us, as to how we might 15 best go about this. Do you have any such 16 communications yet or do you have a process to receive 17 communications like that and bring them into the 18 process? Not that we're going to be overly influenced 19 by anything that might come out, but we don't want to 20 overlook any good ideas or valuable input either? 21 MR. FERNANDEZ: Absolutely. One of the 22 things that we've been doing here in the past few days 23 is finalizing the project plan. And when we say 24 "finalizing," understanding that this is a 24-month, 25 and you're looking at a fairly lengthy process, so we 0111 1 know that some of those things will change. 2 But as we work through this, one of the 3 issues will be, how do we receive input? And one of 4 the things that we have thought about, Toni and I, is 5 that perhaps we put something on our website that 6 discusses this particular project. This is 7 transparent, if you will, in terms -- I mean, it's 8 public record that this undertaking is being looked at 9 and now is underway. But certainly that would give 10 individuals the opportunity to provide information to 11 us. And there may be others. 12 I think what's going to occur and what 13 will occur is that other state agencies and other 14 information professionals at the state government 15 level -- and, consequently, the private sector are 16 aware of this bid, or they were aware of the bid the 17 first time, and certainly they were aware of the bid 18 the second time -- those questions and conversations 19 and comments arise in a number of different gatherings 20 where information systems professionals go to 21 conferences. There was one here a week ago. 22 And I know that there were some 23 questions asked of staff: Has this been awarded? Has 24 it not been awarded? So it is I think very much on 25 the street, if you will, in that community. So I 0112 1 suspect we're going to -- we may very well receive 2 some input. 3 CHAIRMAN COX: Okay. Director 4 Sadberry, did you have anything you wanted to add? 5 MR. SADBERRY: Commissioners -- and for 6 the record, my name is Anthony Sadberry, Executive 7 Director. 8 I do not, except to say that I support 9 this process, given the specific history as it has 10 been outlined here today. It's important to me that 11 you have every opportunity, including the opportunity 12 to weigh in prior to awarding the contract, of input 13 should you wish. 14 And so I contacted each of you, as you 15 know, before I signed the contract, to indicate that I 16 had it and seek from you any input or concerns you 17 might have regarding it, prior to my signing it. We 18 put together the information that we thought would be 19 helpful to you, post-awarding the contract, which you 20 have before you today and which is subject to your 21 review. 22 And given the fact of the two previous 23 RFPs and the time elements involved and other 24 consideration, I think this form of contracting is 25 appropriate and necessary under the circumstances and 0113 1 justifiable under the circumstances. 2 And as I would illuminate even further, 3 the second part of the materials in your folder 4 indicate the extent of the outreach we've made as an 5 agency to state leaders and the Legislature at every 6 step of the process, including prior to its beginning. 7 I keep them fully informed of what the agency is doing 8 in this regard. 9 So all things considered, I'm 10 supportive of this and looking forward to a successful 11 and progressive result from this independent study. 12 CHAIRMAN COX: Commissioner? 13 COMMISSIONER SCHENCK: Thank you. 14 CHAIRMAN COX: Anything further, Mike? 15 MR. FERNANDEZ: No, sir. 16 CHAIRMAN COX: Okay. 17 MR. FERNANDEZ: Scott did bring some 18 information relative to Gartner, and I will provide it 19 to you at the break so you can look at it at your 20 leisure. 21 CHAIRMAN COX: Excellent. Fine. Mike, 22 thank you. 23 Scott, thank you very much for being 24 here. 25 MR. KLOPFLEISCH: Thank you very much. 0114 1 CHAIRMAN COX: Given what I expect will 2 be a fairly extensive and thorough presentation by 3 Ms. Pyka, why don't we take about a 10-minute break 4 now. 5 (Recess: 11:16 a m to 11:31 a.m.) 6 CHAIRMAN COX: Okay. Let's come back 7 to order, please. 8 AGENDA ITEM NO. XI 9 CHAIRMAN COX: Item No. XI, report, 10 possible discussion and/or action on the agency's FY 11 2009 budget. Ms. Pyka. 12 MS. PYKA: Good morning, Commissioners. 13 Again for the record, Kathy Pyka, Controller of the 14 agency. 15 Commissioners, this morning I'm seeking 16 your approval of the Fiscal Year 2009 operating budget 17 in the amount of $209,013,193 and 331.25 full time 18 equivalent positions. The budget was developed in 19 accordance with the appropriation amounts outlined in 20 House Bill 1, adjusted for the Article IX employee 21 salary increases and the Government Code, Section 22 466.015(d), advertising limitation. 23 The initial draft of the budget was 24 developed by the Office of the Controller and 25 delivered to division management for their direct 0115 1 input. The final draft was developed after receiving 2 feedback from the divisions and reviewed by executive 3 management. 4 Commissioners, this concludes my 5 presentation. I would be happy to answer any 6 questions that you might have. 7 COMMISSIONER SCHENCK: Well, Kathy, I 8 appreciate -- I think we've talked about this before. 9 We've heard of a couple of contingent matters, 10 depending on changes in legislation that we might be 11 talking about with the Legislature. Are we adequately 12 prepared for what that might mean in terms of 13 additional budget demands, should those things come 14 through? 15 MS. PYKA: And I want to clarify. Are 16 we talking about the legislative appropriation request 17 items? 18 COMMISSIONER SCHENCK: Yes. 19 MS. PYKA: Yes. And I will cover those 20 items in detail in the next item. We'll focus on the 21 '09 first. 22 COMMISSIONER SCHENCK: Thank you. 23 CHAIRMAN COX: Okay. So what would you 24 like, Kathy? 25 MS. PYKA: I'm seeking the approval of 0116 1 the Commission on the Fiscal Year 2009 operating 2 budget in the amount of $209,013,193 and 331.25 full 3 time equivalent positions. 4 CHAIRMAN COX: Okay. So that's the 5 information that you need approval on. 6 And for the record, I would like to 7 point out that I have received extensive briefings on 8 this subject, as has Commissioner Schenck, separately, 9 and this is our opportunity to deliberate any of those 10 things that we have discussed. 11 Commissioner, do you have any thoughts 12 you want to share? 13 COMMISSIONER SCHENCK: No. I think on 14 the next item, I'll probably have some questions that 15 I'll want to visit with you about. 16 CHAIRMAN COX: Okay. Well, I move 17 approval of the staff recommendation. 18 COMMISSIONER SCHENCK: I second the 19 motion. 20 CHAIRMAN COX: All in favor, say "Aye." 21 COMMISSIONER SCHENCK: Aye. 22 CHAIRMAN COX: Aye. 23 Motion carries 2-0. 24 MS. PYKA: Thank you, Commissioners. 25 CHAIRMAN COX: There is nothing that 0117 1 needs to be signed in that regard? 2 MS. PYKA: No, sir. The next item will 3 have two signature items. 4 CHAIRMAN COX: Okay. The next item. 5 Be what? 6 MS. PYKA: Two signature items in the 7 next item. 8 CHAIRMAN COX: Oh, okay. I thought 9 you -- okay. 10 AGENDA ITEM NO. XII 11 CHAIRMAN COX: Item XII. Now, this is 12 the 2010-2011 legislative appropriations request? 13 MS. PYKA: Yes. Again for the record, 14 Kathy Pyka, Controller for the Agency. 15 Commissioners, this morning I'm seeking 16 your approval of the Commission's legislative 17 appropriation request for Fiscal Years 2010 and 2011. 18 The Commission's legislative 19 appropriations request was developed in accordance 20 with guidelines from the leadership office, which 21 stated that each agency's baseline request for general 22 revenue-related funds may not exceed the amounts of 23 funds expended in Fiscal Year 2008, as well as the 24 amount budgeted in Fiscal Year 2009, plus an amount 25 equal to the general revenue-related allocation for 0118 1 the two percent, or $50 pay raise that will be granted 2 in 2009. Funding requests for other purposes which 3 exceed the baseline spending level may not be 4 submitted in the agency's LAR baseline request but are 5 to be submitted as exceptional items. 6 In accordance with these submission 7 guidelines, the Commission's Fiscal Year 2010-2011 8 legislative appropriations request includes a baseline 9 request of $383,300,473, and 318.5 full time 10 equivalent positions. In addition to the baseline 11 request, the Commission is seeking exceptional items 12 in the amount of $28,677,214, for an overall request 13 of $411,977,687. Even with the exceptional item 14 request, the Commission's overall request is still 15 $6,843,082 under the Commission's baseline Fiscal Year 16 2008-2009 budget level. 17 As noted, the Commission's legislative 18 appropriation request includes five exceptional item 19 requests amounting to $28.7 million. Each request has 20 been prioritized in accordance with the agency's goal 21 structure, to allow us to continue our regulatory and 22 revenue-generating functions, provide essential 23 services and allow for the potential growth in lottery 24 revenue. I will be providing a summary of each item 25 now. 0119 1 Exceptional Items 1 and 2, each in the 2 amount, biennial amounts of $2,945,426, relate to 3 bingo and administrative expenses. Presently bingo 4 indirect overhead and administrative expenses are 5 expensed lottery strategies and paid from the proceeds 6 of lottery sales or the GR dedicated lottery account 7 as opposed to being expensed to bingo strategies and 8 paid from the General Revenue Fund. This practice 9 dates back several years, following a requirement from 10 leadership to reduce general revenue funding requests. 11 To provide alternatives regarding the 12 funding of certain bingo indirect administrative and 13 overhead expenses in the Fiscal Year 2010-2011 14 legislative appropriation request, the Commission has 15 provided three funding options, as follows: 16 Exceptional Item 1 requests an increase 17 in general revenue appropriations supported by fees 18 currently collected by the Bingo Division. Current 19 collection of bingo fees, rental taxes and prize fees 20 exceed bingo expenditures by $13.3 million a year, 21 leaving sufficient funds on deposit in the general 22 revenue unappropriated account to cover the bingo 23 indirect and administrative expenses currently being 24 funded by the GR dedicated lottery account. This item 25 would also result in a decrease in the GR dedicated 0120 1 lottery expenditures by the same amount of the bingo 2 indirect overhead and administrative expenditures 3 being moved to general revenue. 4 As an alternative to Exceptional Item 1 5 supported by fees, Exceptional Item 2 requested 6 general revenue appropriation to fund bingo indirect 7 and administrative expenses. Again, this item would 8 result in a decrease in the GR lottery dedicated 9 account by the same amount that is funded by general 10 revenue. 11 The third proposed option includes a 12 revision to Rider 3, operating lottery to reflect the 13 current practive of funding bingo indirect and 14 administrative expenses through the sale of lottery 15 tickets. This rider revision request will be 16 contingent upon passage of legislation, specifically 17 an amendment to the State Lottery Act, Chapter 466 of 18 the Texas Governments Code, which would clarify the 19 authority for money in the state lottery account to 20 pay for costs incurred in the administration of the 21 Commission, including certain bingo administrative and 22 overhead expenses. 23 Moving on to Exceptional Item 3, mass 24 media advertising contract. This exceptional item 25 would provide for $20 million in additional funding 0121 1 over the biennium for lottery advertising expenditures 2 which would include radio, television, print and other 3 forms of advertising. 4 The advertising contract allows the 5 Commission to enhance the marketing effectiveness of 6 Texas Lottery, effectively reaching and educating the 7 public to increase sales and enhance the awareness of 8 Texas Lottery games. 9 Commissioners, as we visited earlier, 10 we discussed the fact that in Fiscal Year 1993, the 11 Commission was appropriated $40 million to reach and 12 education adult Texans regarding its products. 13 Advertising appropriation limitations tied to prize 14 payout percentage have further reduced the Fiscal Year 15 2009 advertising budget to $30 million as a result of 16 the Section 466.015(d), advertising limitation in the 17 Government Code. 18 The agency has consulted with 19 professionals in the field of advertising and business 20 in an effort to measure advertising's contribution to 21 lottery sales. Specifically, the Commission requested 22 research to estimate the impact of changes in ad 23 expenditures on future lottery sales in the State of 24 Texas, with an increase from $32 million to 25 $42 million per year in advertising expenditures. 0122 1 The August 2006 study prepared by the 2 McCombs School of Business at the University of Texas 3 concluded an increase in $1.00 in advertising is 4 accompanied by an additional $12 in sales. The report 5 estimated that increased advertising expenditures to 6 $42 million would result in an increase of 50 to 7 $250 million in sales and 15 to $17 million (sic) in 8 increased transfers to the state. The report 9 referenced similar results from a study performed for 10 the State of Florida by the Battelle Institute. 11 Commissioners, it is expected that 12 increased funding for advertising will provide an 13 increase and/or further limit the decline in lottery 14 sales and transfers to the Foundation School Fund. 15 This advertising exceptional item will be contingent 16 upon the passage of legislation, specifically an 17 amendment to the State Lottery Act, Chapter 466 of the 18 Texas Government Code, which would repeal Section 19 466.015(d) and eliminate the limitation that the Texas 20 Lottery Commission has on advertising expenses, which 21 is based on the lottery prize payout percentage. 22 Moving on to Exceptional -- 23 CHAIRMAN COX: Kathy -- 24 MS. PYKA: Yes, sir. 25 CHAIRMAN COX: -- let's stop at this 0123 1 point for just a second. 2 Commissioner, do you have any questions 3 or observations on the advertising proposal? 4 COMMISSIONER SCHENCK: Well, yes. Are 5 we including cost of -- well, an inflation adjustment 6 in that, as a going-forward proposal? 7 MS. PYKA: We have not, Commissioner. 8 We have previously looked at the cost of inflation, 9 and we have looked at the $40 million budget that we 10 had in 1993 and looked at the cost of inflation and 11 determined: What would that value of budget be 12 currently? And that value is $56.7 million. So we're 13 not asking for the $56.7 million budget; we're asking 14 for an increase from 30 to 40. 15 COMMISSIONER SCHENCK: And our theory, 16 though, is that a 30 to 40 won't necessarily produce a 17 gain but it will reduce the rate of decline? 18 MS. PYKA: We're hoping that it will 19 produce a gain but, more importantly, as you noted, 20 further the decline or reduce the decline. 21 COMMISSIONER SCHENCK: What is our 22 thinking in not asking for the $56 million, or going 23 back to the original number and just including a cost- 24 of-living adjustment or inflation if escalated? 25 MS. PYKA: We discussed that at length. 0124 1 And I think our challenge is that to ask for an 2 increase, which is almost doubling the current budget, 3 our difficulty is providing some form of measure, like 4 return on investment measure, to the leadership. 5 We feel like it's going to be difficult 6 to get the increase and the delinking of the 7 advertising prize payout limitation, and so we felt 8 like we had to have a basis to support an increase and 9 some documentation of what increase would generate in 10 the terms of transfers or sales and went back to the 11 UT study that was performed when they had looked at 12 that increase between $32 million and $42 million. 13 So, you know, we're back to that policy. 14 In addition to the cost of inflation 15 that we looked at and that increase of $56.7 million, 16 was also the awareness that today we're advertising 17 many more products than we were in 1993, the different 18 forms of media that are used for advertising. You 19 know, it's the white paper or the one-page document 20 covered, there's many factors going into that 21 advertising issue. 22 But as we get to the bottom line, what 23 can we get support from the leadership on with some 24 form of documented expected return on investment? And 25 I think that that is our biggest challenge, is how 0125 1 we'll measure a return on investment. 2 COMMISSIONER SCHENCK: And our thinking 3 is, giving them two options is one too many? 4 MS. PYKA: I'm not certain that it 5 would be one too many. It's what are we willing to go 6 over and try to get support for? I don't think that 7 there is anything wrong with looking at more than one 8 option. 9 CHAIRMAN COX: Commissioner, if I may? 10 I've spent years with this issue. 11 Advertising was one of my "on" buttons when I first 12 got here, because I couldn't tell how we could defend 13 not only asking for a price-adjusted $40 million but 14 how we could even defend the dollars we were spending, 15 because at that time we were doing very little work to 16 look at the cost and the benefit of advertising. 17 Since then we've asked the folks from 18 McCombs and the matrix consulting organization from 19 TracyLocke to look at that with us, and we know a lot 20 more about getting bang for our buck in advertising. 21 At the same time, that is never an exact science. 22 That is far more of an art than it is a science. 23 And we looked at the possibility of 24 going for the inflation-adjusted $40 million. And 25 what I discerned was that we were going to be on very 0126 1 thin ice trying to defend that, given that the range 2 of the cost-benefit analysis we had from McCombs was 3 only in the 30 to $40 million or so range. If we got 4 above $40 million, I felt that we would need to go 5 back to McCombs and say, "Okay. Now, you told us the 6 cost-benefit within this range. But, obviously, 7 there's diminishing return if you go higher. And 8 where does that come in?" So I thought this would be 9 a good first step -- and the staff I believe agreed -- 10 that this would be a good first step, but it's not the 11 last step. 12 COMMISSIONER SCHENCK: Well, my only 13 concern is that the next step might be harder to take 14 if we've gotten an increase, which the only one I 15 think we've ever gotten in our history, and we show up 16 with a continuing decline in sales and try to explain 17 what the graph would have looked like if we had not 18 had the increase that we had. And we can try to 19 defend the negative, but I defer to those who have 20 gone through this process before. But -- 21 CHAIRMAN COX: I think in a growing 22 economy, I think that we would be able to be more 23 positive about, "This is likely to provide the 24 increment at the bottom line," the $17 million over 25 and above the expenditure, I think you said, Kathy. 0127 1 Was that correct? 2 MS. PYKA: What we're looking at was on 3 transfers, we're saying 15 to $17 million (sic) 4 increase in transfers per year. 5 CHAIRMAN COX: So we'll cover the 6 incremental spending and have that much more. And 7 given this environment and -- you know, we've all 8 watched television and read the Wall Street Journal, 9 that 2009 is not looked at to be a growth year, it's 10 looked at to be more of '08, and maybe 2010 will be a 11 growth year, that we need to be careful saying that we 12 will provide the increase when, in fact, all we may 13 ultimately find is that it stays further decreased. 14 COMMISSIONER SCHENCK: I totally agree 15 with that. And I think it's critical to be 16 communicating in that way so that when we spend more 17 money and don't end up enjoying an increase that we're 18 in a defensive posture. But, you know, it seems to me 19 there is a potential multiplier effect here in terms 20 of what we're spending, and I'm not sure that the 21 McCombs study would support that. 22 And your conclusion, as I understand 23 it, is that's not true, that there's a diminishing 24 return? 25 CHAIRMAN COX: Well, I think that there 0128 1 is certainly a multiplier within the range that they 2 spoke of, approximately 30 to $40 million. If you 3 increase from 30 to $40 million, each dollar of 4 advertising expenditure will provide $12 in additional 5 sales, and the total expenditure will provide 15 to 6 $17 million additional of transfers to the state. 7 Now, as I said, in a growing 8 environment, economic environment, we would hope that 9 those numbers would be realized as absolutes. They 10 may in this case be realized as a combination of 11 increase and decline, or maybe even just staying 12 declined. 13 And I recognize that that's harder to 14 sell; and, yet, I think candor with the Legislature is 15 very important. We are doing what we can to get 16 revenue, to hold revenue and increase it, but that may 17 be Mission Impossible in this environment. 18 COMMISSIONER SCHENCK: I think I agree. 19 And I think, as I understand it, there's two parts to 20 this. One is, we're not necessarily pitching or 21 suggesting that the increase to the advertising budget 22 and/or the dealing of the advertising budget to the 23 payout is going to return an increase, and I think 24 that's very important. 25 MS. PYKA: Right. 0129 1 COMMISSIONER SCHENCK: And also that 2 the level of increased advertising expenditure we're 3 proposing is conservative, in that we believe that the 4 data we have will support that increase, which 5 suggests, by implication if not directly, that two 6 years from now we may need -- and suggest that further 7 study would indicate -- 8 MS. PYKA: Right. 9 COMMISSIONER SCHENCK: -- that 10 additional funds will be necessary. But we're moving 11 slowly and deliberately, and it's clear that some 12 increase of expenditure is going to return basically 13 net profit to the state, and that's the objective. 14 CHAIRMAN COX: Yes. Well said. 15 MS. PYKA: And, Commissioners, I 16 misspoke on a number, as I heard you repeat the 17 $17 million. It's 15 to $75 million of the potential 18 increase in transfers to the state. I apologize. I 19 must have -- 20 COMMISSIONER SCHENCK: Fifteen to 75? 21 MS. PYKA: To $75 million in 22 transfers -- 23 COMMISSIONER SCHENCK: On how much more 24 spent? 25 MS. PYKA: $10 million in increased 0130 1 advertising. The study states that the change in 2 transfers to the state has a potential for 15 to 3 $75 million -- 4 COMMISSIONER SCHENCK: That's a huge 5 range. 6 MS. PYKA: Right. And so I apologize 7 that I misspoke. 8 COMMISSIONER SCHENCK: No, that's fine. 9 But it's -- 10 MS. PYKA: I heard the 17 repeated, and 11 it was like, "That's not it." 12 CHAIRMAN COX: Okay. And you may have 13 said 75, and I may have misunderstood you, Kathy. But 14 knowing a bit about how McCombs does these studies, 15 that probably says their midpoint was somewhere around 16 30 to 40 -- 17 MS. PYKA: Correct. 18 CHAIRMAN COX: -- and they disclosed 19 the entire range, not because anybody would have 20 attach credibility to a range that large but because 21 that's the range that their statistical analysis 22 indicates. 23 MS. PYKA: Right. And the midpoint 24 that they noted was $35.9 million. 25 COMMISSIONER SCHENCK: Let's imagine, 0131 1 instead of going to the Legislature, we were going to 2 put a shareholders meeting together and we were going 3 to put a chart up on the wall to show the shareholders 4 what we expected the gross revenues to be, in the 5 absence of a change to this line item. Do we have 6 that data where we could say, "Here is where we expect 7 the transfers" -- or let's say the gross -- "to look 8 like over the next two fiscal years without any 9 change," so that when we go back two years from now, 10 if we have somewhere in between, we can attribute that 11 increase to something other -- 12 MS. PYKA: Right. 13 COMMISSIONER SCHENCK: -- than the 14 electric hybrid, gas prices coming down, you know -- I 15 don't know. There's some (inaudible) case change that 16 no one -- I really shouldn't be saying that or she'll 17 never type this -- some other general change. Do we 18 have the baseline that we can return to in a couple of 19 years? 20 MS. PYKA: That is correct. The 21 baseline is actually reflected in the legislative 22 appropriation request within the estimated revenue and 23 expenditure schedule which provides current actual 24 data for Fiscal Year 2007, as well as our estimated 25 for '08, '09, '10 and '11. So that schedule includes 0132 1 what we believe projected sales will be under the 2 current baseline without that increase, as well as the 3 transfers to the state. So we will always be able to 4 go back to that document as a comparison to what our 5 original estimates were for those two variables. 6 COMMISSIONER SCHENCK: People like 7 charts. I think that chart is going to be helpful for 8 us to be tracking as time goes by. But this is, as 9 you've said, more art than science perhaps. And, you 10 know, we ask now what's happening to sales and we 11 hear, you know, different things. We hear it's gas 12 prices are up. We hear it's -- and the other 13 concern -- maybe this is not the time to be asking it, 14 since we're addressing advertising issues. 15 CHAIRMAN COX: Kim will stop us if it 16 isn't. 17 COMMISSIONER SCHENCK: Well, I have 18 had -- I think this will be fine. I'm just saying 19 from a practical standpoint. This is the first time 20 I've been through this process, so I don't know how 21 this works going forward entirely. But I saw I think 22 yesterday that wholesale inflation is at the highest 23 it's been in 27 years. And we're trying to put a 24 budget together here for two years looking forward. 25 And I don't know how many of our contracts have cost 0133 1 escalators in them or things of that nature. And what 2 do we do if, in Fiscal Year 2011, what if we just 3 don't have enough money? Do we make an exceptional 4 request at that point? What do we do? 5 MS. PYKA: The first thing that we look 6 at -- let me answer the first question. Many of our 7 contracts, especially the leases, do include a CPI 8 clause within the document. So the base document that 9 I have presented to you for 2010 and '11 does include 10 those increased factors of rent that we're very well 11 aware of. 12 CHAIRMAN COX: And what kind of CPI 13 escalation did you assume? 14 MS. PYKA: Well, the actual documents 15 vary, Chairman. In general it's about three percent, 16 from looking at the overall document. And I just 17 basically backed into what that increase equated to 18 for all the different leases and found that it was a 19 little bit over three percent. 20 CHAIRMAN COX: Okay. Now, that then is 21 a fixed escalation and not one tied to CPI? 22 MS. PYKA: Correct -- well, and -- 23 that's correct. The contracts -- 24 COMMISSIONER SCHENCK: So if the 25 assumption is off, we'll fall short? 0134 1 MS. PYKA: Right. But the contract -- 2 CHAIRMAN COX: Let's be sure we're 3 straight here. Is it CPI or is it fixed? 4 MS. PYKA: It is fixed within the lease 5 agreement, but it's referred to as a CPI clause. So I 6 apologize -- 7 COMMISSIONER SCHENCK: It's fixed with 8 a cap. Is that right? 9 MS. PYKA: Right, a fixed amount in the 10 agreement. 11 CHAIRMAN COX: Okay. So it's called a 12 cost-of-living increase, but it is a fixed amount of 13 escalation? 14 MS. PYKA: Correct. 15 COMMISSIONER SCHENCK: So they end up 16 being a loser? If we have 15 percent of inflation -- 17 MS. PYKA: Yes. 18 COMMISSIONER SCHENCK: -- and there's 19 three percent in the contract, they come back, they 20 cry, they say bankruptcy, they say lots of things, and 21 that's the way it goes? 22 MS. PYKA: That's a long-term lease on 23 our books, with a fixed amount. 24 With regard to our other contracts, we 25 did analyze those contracts and reflected as many of 0135 1 those increases as we could project within the base 2 document for '10 and '11, and that's how we came up 3 with a base level with the balance of these other 4 items becoming exceptional items, so that's the first 5 response. 6 Now, with regard to if we've missed any 7 of those estimates, as we reach Fiscal Year 2010, the 8 appropriation bill allows for a 12 and a half percent 9 transferability between strategies, with the exception 10 of the advertising strategy; we can't transfer into 11 it. We cannot transfer out of the lottery operator 12 strategy, and we cannot transfer out of the bingo tax 13 allocation strategy. So if we miss any of the costs 14 and we have an overage in one of the other areas of 15 excess funds, we can make a transfer between 16 strategies to address that. 17 And then finally, if we truly have an 18 overall budget shortfall, we would go back and ask for 19 budget -- 20 21 COMMISSIONER SCHENCK: And to be clear, 22 the reason I ask this is, is sort of at a macro level. 23 I see our budget from '09 of $194 million, and that's 24 in current dollars. And as I understand it, we're 25 looking at $20 million less two years from now in 0136 1 current dollars, which means we're anticipating -- 2 we're asking for less. We're anticipating spending 3 less in an environment where the U.S. dollar buys 4 less? 5 MS. PYKA: And the basis for that 6 decline is attributed to the reduced level of sales 7 that we're projected for the Commission in '10 and 8 '11. And as a basis for that reduced level of sales, 9 we recalculated what the value of the lottery operator 10 contract will be and have reduced that contract in our 11 appropriation request. 12 COMMISSIONER SCHENCK: I assume we've 13 account- -- that now raises an issue, because we were 14 just talking about advertising. Let's assume that the 15 McCombs estimate at the high end is right. Now all of 16 a sudden that lottery contract is going to be a lot 17 more expensive. 18 MS. PYKA: Correct. 19 COMMISSIONER SCHENCK: So we've 20 adjusted, we've offset for that range. 21 MS. PYKA: We're offset for what we 22 believe to be the sales decline in the baseline, but 23 we're protected in the appropriation bill, because we 24 have a rider specific to the lottery operator contract 25 that states that that strategy is estimated. And if 0137 1 sales exceed the biennial revenue estimate, we will be 2 able to increase our appropriation by the rate of 3 2.6999 percent of excess sales, so we've covered there 4 on that item. 5 COMMISSIONER SCHENCK: It's good that 6 we have accountants to -- 7 CHAIRMAN COX: Okay. Now, you said on 8 the biennial revenue estimate. 9 MS. PYKA: Yes. 10 CHAIRMAN COX: We'll call that the BER. 11 MS. PYKA: BRE. 12 CHAIRMAN COX: BRE. Yes, thank you. 13 I'm dyslexic. 14 That is not our revenue estimate, nor 15 is it the same as our revenue estimate, nor is it 16 similar to our revenue estimate. Now, the lottery 17 operator expense that you have in this LAR, is it 18 related to the BRE or to our revenue? 19 MS. PYKA: The lottery operator 20 estimate that's included in the LAR is based on our 21 estimated forecast of sales. The next step in the 22 process will be that the leadership offices of the 23 Legislative Budget Board and the Governor's budget 24 office will develop their recommended budget 25 documents. Before they complete those recommended 0138 1 budget documents, the Comptroller of Public Accounts 2 will actually develop the biennial revenue estimate 3 for the State of Texas, with one of those components 4 being lottery sales and transfers. 5 So the final document that's produced 6 for the Legislature to vote on will be based on the 7 Comptroller's BRE and not our estimated sales. They 8 have our data, and we communicate to them on a weekly 9 basis for sales as well as a monthly basis for 10 transfers. This particular biennium that we're in 11 right now in Fiscal Year 2008 and 2009, their biennial 12 revenue estimate was higher than our estimate, by the 13 tune of about $200 million. 14 COMMISSIONER SCHENCK: And so I'm clear 15 again, our numbers -- and likely their numbers -- are 16 not assuming the Legislature is going to grant us any 17 changes to advertising? 18 MS. PYKA: That's correct. 19 COMMISSIONER SCHENCK: Okay. 20 CHAIRMAN COX: Okay. Now, Kathy, let's 21 talk about the rider for just a second. 22 MS. PYKA: Okay. 23 CHAIRMAN COX: Now, you said it gives 24 us authority to pay the lottery operator more if our 25 revenue exceeds the BRE? 0139 1 MS. PYKA: Correct. 2 CHAIRMAN COX: Yes. But I think you 3 also said that after this gets out of our hands, 4 they're going to adjust our revenue to the BRE? 5 MS. PYKA: That's correct. 6 CHAIRMAN COX: So what they approve 7 over there is not going to be what we submit, it's 8 going to be based on the revenue estimate of the State 9 Controller's Office rather than of our controller's 10 office? 11 MS. PYKA: That is correct. 12 CHAIRMAN COX: Now, is there a gap 13 there, then, between where the lottery operator goes 14 up and where we can escalate, because of the fact that 15 we're using different revenue estimates? 16 MS. PYKA: No. They'll sync up the 17 documents. Our current document includes our revenue 18 estimate and sales estimate and the baseline document 19 as well as the rider limitation. When the document is 20 then certified with the biennial revenue estimate, it 21 will reflect the Comptroller's estimate for sales. 22 And the LBB will adjust the lottery operator strategy 23 for that exact amount. It will be considered a 24 technical adjustment as we're going through the 25 hearing process. 0140 1 CHAIRMAN COX: Okay. So will that be 2 the only adjustment to expenses that they will make? 3 MS. PYKA: There will be an adjustment 4 on that particular strategy as well as on Strategy 5 B.1.5, the bingo tax allocation. Again, we have 6 estimated what we believe prize fees will be and how 7 much of that prize fee amount will be expended or 8 returned back to the cities and counties. 9 The Comptroller will do a like exercise 10 on that in their determination of what bingo prize 11 fees are expected to be for Fiscal Years '10 and '11. 12 So those will be the technical adjustments for revenue 13 and then, of course, any other adjustments that might 14 come about because of a change in our budget that 15 doesn't relate to the exceptional items that maybe 16 leadership wishes to incorporate. 17 CHAIRMAN COX: Okay. Now, let's talk 18 about, then, the process. What I hear you saying is 19 that the state budget is going to include more in 20 transfers from us to the Foundation School Fund than 21 we expect we will be able to generate, by some 22 significant amount? 23 MS. PYKA: For Fiscal Year 2008, that 24 is the case. In Fiscal Year 2009, I expect that to be 25 the case. At this present time, the biennial revenue 0141 1 estimate for '10 and '11 has not been produced. It is 2 not expected to be completed until October of this 3 year. 4 CHAIRMAN COX: So that is not a known? 5 MS. PYKA: Right. 6 CHAIRMAN COX: If they do it the way 7 they've done it in the past, they will probably 8 estimate more than we have, but we don't know? 9 MS. PYKA: We don't know that yet. 10 CHAIRMAN COX: Do we have any input 11 into that process whatever? 12 MS. PYKA: Based on my history here at 13 the agency thus far, the input that we have in the 14 process is providing them our actual data, but we do 15 not have a seat at the table as they develop that 16 estimate. 17 CHAIRMAN COX: Okay. And is that by 18 law or just by the Controller's office practice? 19 MS. PYKA: I'm not aware of any 20 specific law related to that. They are responsible 21 for producing the biennial revenue estimate, but I'm 22 not aware of any prohibition of them getting input 23 from the agencies related to their specific areas of 24 knowledge. 25 CHAIRMAN COX: Will you be offering 0142 1 that? 2 MS. PYKA: I certainly have, and I 3 already have. 4 CHAIRMAN COX: Great! Thank you. 5 MS. PYKA: Yes. 6 COMMISSIONER SCHENCK: I'm sorry to 7 whipsaw you in yet another direction. 8 CHAIRMAN COX: Please. 9 COMMISSIONER SCHENCK: But we were 10 talking earlier about the -- and I hate to go back to 11 bingo indirect, but I know you're addressing it in 12 this budget request. 13 MS. PYKA: Yes. 14 COMMISSIONER SCHENCK: And one of the 15 things -- one of the proposed -- three proposed 16 alternative solutions called for bingo -- or to amend 17 the Lottery Act to make clear that the funds out of 18 our account can be paid for other activities, 19 including bingo. 20 I would suggest that if someone is 21 asking us to give language suggestions, that we not 22 specifically target bingo, because we don't know what 23 additional charges or authorities we're going to have 24 in the future, and we don't want to be in the same 25 position again. I would just say all Commission's 0143 1 activities, whatever they might be, regardless of 2 whether they're lottery. 3 MS. PYKA: Certainly noted that. 4 CHAIRMAN COX: Okay. Kathy, I think 5 we're through interrupting for a minute. 6 MS. PYKA: That's okay; that's okay. 7 We'll move on to Exceptional Item 4, if that's okay. 8 This item relates to the acquisition of Information 9 Resources equipment. We're speaking of funding in the 10 amount of $286,362, which would allow us to procure a 11 studio surveillance system and replace the agency's 12 telephone system and hardware/software that has 13 reached the end of its life cycle, and maintenance 14 support. 15 Exceptional Item 5 -- 16 CHAIRMAN COX: Okay. Let me ask about 17 that. 18 MS. PYKA: Yes. 19 CHAIRMAN COX: Mr. Fernandez briefed us 20 last week on the lease/purchase/buy kind of decisions 21 that y'all are making and that the tendency might be 22 to go for leasing because while you might get capital 23 now, when it comes time to replace that item, you 24 don't know whether you would be able to get capital or 25 not, and you might be stuck with obsolete stuff. Now, 0144 1 if we don't get this request, we are stuck with 2 obsolete stuff. Is that correct? 3 MS. PYKA: If we don't get this 4 request -- 5 CHAIRMAN COX: And if Mike wants to 6 help or you want him to help, that would be great. 7 MS. PYKA: I'm more than happy for Mike 8 to join in. 9 CHAIRMAN COX: He looks like he wants 10 to. 11 MS. PYKA: Let's focus on the telephone 12 system first. 13 MR. FERNANDEZ: She's doing very good. 14 MS. PYKA: Focusing on the telephone 15 system first, we own the current telephone system. 16 And what we're doing is, we're looking for an upgrade 17 to the software of the PBX system, and then also we 18 are looking for a call management system and a call 19 recording system. 20 So we own the equipment today, and 21 we're simply looking for hardware/software upgrade on 22 that item, so it is the capital. And to go out and 23 lease a new phone system we believe is in the best 24 interest of the agency, to make this procurement of 25 capital outlay to do the upgrade. We believe it's 0145 1 insignificant in dollars with regard to the total. 2 On the studio surveillance equipment, 3 that we have analyzed looking at it from the angle of 4 a lease versus purchase. And we aren't sure where 5 this might go as a result of a current procurement 6 that is actually ongoing related to the security 7 system of the agency, or the security contract. 8 So it might be that in the end, we find 9 that these dollars might be used for lease by the time 10 we get to 2010, or they might be used for purchase of 11 capital outlay. We don't know. But at that point in 12 time, with any purchase we do, we are required to 13 analyze the value of lease versus purchase. 14 CHAIRMAN COX: Okay. Now, what if they 15 zero out all capital and stick with it? I know they 16 have zeroed out all capital in the past, and I don't 17 know whether they've given any of it back on hearing 18 or whether they haven't. But let's say that happens. 19 What are you stuck with, Mike? 20 MR. FERNANDEZ: For the record, my name 21 is Mike Fernandez. I'm the Administration Director. 22 What we'll do is that we'll try to -- 23 we'll go out and lease. We'll be forced into a lease. 24 But the point Kathy made is exactly the point. What 25 we have is that we have a phone system, which the 0146 1 current value at this time I believe is -- 2 MS. PYKA: 420. 3 MR. FERNANDEZ: -- $420,000. So what 4 we're doing is upgrading that phone system. We're not 5 actually replacing the phone system in its entirety; 6 we're upgrading the components that Kathy has 7 outlined. So our preference would be to buy that, 8 because we own that asset. But if for whatever reason 9 we're zeroed out, then what we'll do is that we'll go 10 out to the street and try to lease those components. 11 That is exactly what we'll do. 12 COMMISSIONER SCHENCK: This lease would 13 be how much, $400,000? 14 MR. FERNANDEZ: No. The current value 15 of the phone system itself. I don't know -- I haven't 16 gone through the lease exercise. 17 COMMISSIONER SCHENCK: What's wrong 18 with the phones? 19 MR. FERNANDEZ: What's wrong with the 20 phones? 21 COMMISSIONER SCHENCK: Yes. Why do 22 they need to be upgraded. 23 MR. FERNANDEZ: Well, it's not the 24 instrument on the desk top; it's the software in the 25 system. It's no longer supported. Some of those 0147 1 components are out of support. So if they break, 2 there is no replacement. There is no third world to 3 go to, to get them. The same way with the software. 4 If you have a problem and it goes down, that software 5 is out of support. You're done. That's the issue you 6 get into. It -- 7 COMMISSIONER SCHENCK: I'm sorry to ask 8 dumb questions. But what functions are we 9 anticipating would break in the phone system? 10 MR. FERNANDEZ: Well, there are 11 components in the phone system that break. I think 12 Kathy has alluded to the particular parts. But that's 13 not unlike any equipment and technology, be it 14 hardware or software. I mean, the fact is, is that 15 those engineers are down there right now improving 16 software and hardware. And what happens over a 17 three-year or five-year life cycle, they go out of 18 support. So if something happens to that component or 19 something happens in that software system, then you've 20 got it. That doesn't mean if you wrote the source 21 code, we could fix it. But -- 22 COMMISSIONER SCHENCK: But I don't 23 understand. And this is not directed at us even, 24 Mike. But for 30 years you got a black phone, you 25 know, from the phone company. It would survive a 0148 1 nuclear war. And then there's additional features 2 that get put on these phones, additional features that 3 get put in the word processing program that I don't 4 know how to use, I'll never learn how to use, I doubt 5 anyone in the agency will ever learn how to use, and 6 then that software doesn't get supported anymore, I 7 understand. And something basic and it breaks, like 8 call-forwarding, and it doesn't work. But do we need 9 the rest of this stuff? I mean, I get the 1-800 10 number has to be answered and we have to have these 11 functionalities. But what advances is somebody making 12 that we use? 13 MR. FERNANDEZ: Well, what I would say 14 to you, Commissioner, is that -- and I can't quote a 15 percentage -- but I would say to you -- because I'm 16 like you. I dial on it and I speak to people and they 17 speak to me, and that's the extent of my use of a 18 phone system. But there are staff and there are 19 functions that we perform in this agency that they 20 fully exploit the features on those phones and they 21 will fully exploit the technology. 22 COMMISSIONER SCHENCK: To do Commission 23 business? 24 MR. FERNANDEZ: To do Commission 25 business. 0149 1 COMMISSIONER SCHENCK: That's important 2 to us, like conferencing and things of that nature? 3 MR. FERNANDEZ: That's correct, the 4 folks on the phone banks. And I will say to you, 5 because of my age and experience -- and that goes for 6 new hand-held devices, BlackBerries. Again, you know, 7 they can page me and give me a number and I'm happy to 8 speak to them. But there are numerous staff in this 9 agency, and some at the very senior level, that fully 10 exploit that technology. And they use it to do 11 business daily. And here comes one of them now. 12 (Laughter) 13 CHAIRMAN COX: Mr. Anger. 14 MR. ANGER: For the record, my name is 15 Michael Anger, The Lottery Operations Director. 16 And I just wanted to add to what Mike 17 said because, quite frankly, a number of the upgrades 18 and the management of the higher level features that 19 are needed in the agency are used by the Lottery 20 Operations Division. And that's everything from our 21 1-800 number and the management in tracking those 22 calls and the tools that the folks who manage and 23 oversee those functions use to monitor our call 24 volume, monitor response times and things like that. 25 There's a lot of underlying software 0150 1 that supports our management in ensuring that we are 2 providing the best customer service to our customers, 3 in addition to staff that works on the communication 4 services lines, use some pretty advanced features in 5 networking calls back and forth between the GTECH 6 retailer hotline and other staff within the agency. 7 And then some of the more standard 8 features like the call-forwarding that was referenced 9 early and conferencing and things like that, we use 10 that pretty extensively, both in conducting conference 11 calls with vendors who may be housed either in the 12 state in other cities or out of state. 13 With the field claim centers, there are 14 frequent management calls that take place where 15 management of the claim centers conducts conference 16 calls that involve multiple offices. 17 For our staff meetings, we actually 18 video conference staff in to the agency to participate 19 remotely in the staff meetings of the agency. So we 20 are one of the biggest reasons why Mike's group is 21 asking for these services. But we certainly use them, 22 and they are directly related to agency business. And 23 I would say they're very valuable. 24 MR. FERNANDEZ: Well, they are the line 25 of business. 0151 1 COMMISSIONER SCHENCK: Well, you know 2 my preference, Mike. I've said it before. I believe 3 in buying equipment and using it till the tires fall 4 off, five times the depreciation cycle. And someone 5 needs to make a business case for why we need some 6 additional things now. You can be the judge of that. 7 But I'll tell you, when I was in law 8 school, we had a 200,000-volume library, and there was 9 criticism that there wasn't enough volumes, we needed 10 a million-volume library. And it was pointed out that 11 for the cost of adding those 800,000 additional books, 12 which one student every three years would probably 13 need, some, you know, House of Lords report from the 14 17th Century, we could staff a limousine idling out in 15 the parking to take people down to The University of 16 Texas and back. 17 So if we're using the functionalities 18 and are necessary to the business, I'm all for it. 19 But wherever there is an opportunity to buy something 20 that we can hold on to -- and I'm not the expert on 21 that -- I think it's in our interest to do it. 22 MR. FERNANDEZ: And we certainly 23 understand and appreciate it. 24 I think the other thing that you see in 25 technology, or in anything today, is built-in 0152 1 obsolescence. And I think that's -- you know, one of 2 the nuts of that issue is that what happens is that 3 you get out five years or you get out four years and 4 something happens to one of those components, then 5 you're dead in the water, and there is no support, 6 there is nowhere to turn to. 7 And many years ago -- and I've gone 8 through that on pieces of hardware, doing just what 9 you said, is that we -- you know, we would run it till 10 the paint chipped. But what we knew is, the day that 11 thing went down, is that we had a supplier to upgrade 12 and replace, and we knew we were going to have to do 13 that. And that was in the years before the rider 14 request issues and the caps and those things. But we 15 certainly -- we don't disagree with what you said, 16 Commissioner. 17 CHAIRMAN COX: Commissioner, that's an 18 excellent question, and I appreciate your raising it. 19 There was a time when in this agency 20 the directors like Michael could get just about 21 whatever they wanted. Right now it's not that way. 22 If Michael wants it, he's got to justify it to Mike, 23 and then they have to justify it to Kathy. There was 24 a time before Kathy came here where our financial 25 director basically accepted the capital request from 0153 1 the department heads and incorporated it with the 2 budget. Those days are past. 3 So when we look at something like this, 4 we know that Mike Fernandez has looked at it and found 5 it to be necessary. And Kathy and her staff have 6 looked at it and found it to be necessary. I'm very 7 comfortable with the whole -- 8 COMMISSIONER SCHENCK: Well, I 9 appreciate that. I appreciate that as well. 10 MS. PYKA: The next item is -- 11 CHAIRMAN COX: Thank you, Michael and 12 Mike. 13 MS. PYKA: The next item is Exceptional 14 Item 5. This relates to our Automated Charitable 15 Bingo System redesign. The project is in the amount 16 of $2.5 million over the biennium. It will redesign 17 the Automated Charitable Bingo System. Since 18 implementation of the original system, there's been 19 numerous changes to business processes, including 20 system application changes. 21 And the current toolset used to support 22 the ACBS system will no longer be supported by the 23 time we reach Year 2013. 24 Commissioners, if you have no questions 25 on that item, I'll move on to the rider revisions. 0154 1 CHAIRMAN COX: Well, I feel obligated 2 to show my age here. The system that we have now was 3 in development when I came on this board -- 4 MS. PYKA: That is true. 5 CHAIRMAN COX: -- in 2002, and I don't 6 think it was put in place until 2003 or 2004. I don't 7 recall precisely. But I'm having a hard time 8 understanding why a system that is that apparently new 9 needs two and a half million dollars' work over a 10 two-year period. 11 MR. FERNANDEZ: For the record, my name 12 is Mike Fernandez. I'm the Administration Director. 13 What I would -- I think that's a very 14 good question, Mr. Chairman. I can tell you, I can 15 only attest to what I know, or believe I know. 16 This system, from all my review -- and 17 Phil Sanderson can correct me if I'm wrong -- I 18 believe the design of this system probably was 19 initiated in early '01, maybe in 2000, that it had a 20 contractor that came in to develop the system, a 21 consulting firm, implementation firm, which is a 22 worldwide firm also, I might add. 23 So the design and the development of 24 that was led, if you will, by both the agency and the 25 consultant. From what I can tell, there were payments 0155 1 made to the consultant in the first -- in '01, and I 2 believe -- in the latter part of '01. I don't have 3 that data with me. It started in '01. And then -- 4 CHAIRMAN COX: Is there anything she 5 doesn't have in that book? 6 MR. FERNANDEZ: No. She's -- 7 MS. PYKA: Plenty. 8 MR. FERNANDEZ: She's very well 9 outfitted. 10 But then it appeared that there was a 11 problem with that development effort and that the 12 consultant left the agency. And I came, too. 13 CHAIRMAN COX: They just drug up, they 14 quit? 15 MR. FERNANDEZ: Well, I think that 16 there were -- you know, it was a systems development 17 effort, and I think it went south, so to speak. And 18 the consultant left the agency. When I came to the 19 agency -- I believe it was in July of '02 -- I was 20 involved in meetings with the principals from the firm 21 that had been involved in the development and with the 22 staff at the agency. And what we worked towards was 23 developing an agreement that would complete this 24 system to some degree. 25 Now, my understanding at that time, 0156 1 that contract was a $700,000 contract. And at that 2 time in July of '02, there was a balance remaining on 3 that of around $250,000, and there was no system 4 completed. 5 So what I did in conjunction with the 6 new development person that I had hired is that we sat 7 down with the Director of Development for that firm 8 and with Phil Sanderson and some other staff and 9 developed a list of applications that would be 10 required to get something rolled out for the remaining 11 $250,000, and that's what was undertaken. There was a 12 settlement agreement signed based on that and a 13 timeline attached to that. And then it was completed 14 and turned up as agreed to in the settlement 15 agreement. 16 What I would say to you, based on my 17 understanding, is to what degree that settlement 18 agreement answered and addressed every issue on the 19 system design and to what degree the systems design 20 included auditing controls or other issues, 21 Commissioner, Mr. Chairman, I can't attest to. 22 So what my understanding is are three 23 things basically. One is -- as Kathy mentioned, there 24 is going to be a change in the development tool that 25 that was built in. It was built in a certain 0157 1 development tool, and that particular development tool 2 will be gone by 2013. 3 CHAIRMAN COX: So it's just obsolete 4 and it's -- 5 MR. FERNANDEZ: Well, it's going to go 6 away, and that's life and that's -- 7 CHAIRMAN COX: It's obsolescent and it 8 going to be obsolete? 9 MR. FERNANDEZ: That's right. And that 10 happens. And they're going to do that, and that's 11 never going to change. So by 2013, and that seems 12 like a long time away. So that's one issue. The 13 other issue -- 14 CHAIRMAN COX: We're really not talking 15 about '04 to '09, we're talking about '01, when it was 16 designed, to '13, when we're going to find the need 17 for -- the absolute need for a new system? 18 MR. FERNANDEZ: That's correct. So 19 you're going to have to do that. But I think the 20 other things, you've got that, that's a built-in 21 issue. But the other issue that we've got to deal 22 with -- and this is in conversations I've had, you 23 know, with both Kathy Pyka and Catherine Melvin and 24 her IT auditors -- is that there are some issues that 25 they're concerned with, and they've raised some 0158 1 concerns about controls and that design. And, you 2 know, I've had that conversation numerous times with 3 Kathy and had that conversation with my boss, Gary 4 Grief. 5 CHAIRMAN COX: I've had it with 6 Ms. Melvin. I understand those issues. 7 MR. FERNANDEZ: So we believe that -- 8 and I've had it with Mr. Sanderson. And I think the 9 issue that we want to look at is that we want to look 10 at a design that will, you know, fully deal with those 11 controls. And what I would say to you -- and I'm 12 just -- you know, I'm a Johnny-come-lately on this 13 deal. 14 But what I would say to you, that in 15 systems developments in our past, whether they're UI 16 tax systems or benefit systems or accounting systems, 17 is that one of the things that we try to do and put on 18 the floor with us is an IT auditor, you now,out of IA 19 so that as we move through those development and 20 design processes, our design development processes 21 you've got someone there that ensures that those 22 control are built in. So those are the issues that 23 we're confronted with. 24 I had Ms. Kotal of my staff, who I 25 think I've told you, Mr. Chairman, led an effort to 0159 1 build a statewide system for workforce boards, and so 2 she's very competent in building estimates and has 3 done so for many, many years in both public and 4 private sector. And she worked with her staff in 5 developing the estimate for this, looking at the 6 number of forms and reports, the programs that would 7 go into that, how many databases, how many libraries, 8 how many storage procedures and if we had to add 9 tuning to some equipment and loading up to come to 10 that number. And so, you know, we're pretty 11 comfortable with that estimate. 12 COMMISSIONER SCHENCK: Mike, so I'm 13 understanding, at one point $2.5 million we're talking 14 about here is for professional consulting services? 15 MR. FERNANDEZ: That's correct. 16 COMMISSIONER SCHENCK: Are we going to 17 get a warranty from these people so that we don't have 18 the same problems we had last time? 19 MR. FERNANDEZ: Commissioner, it's been 20 my experience that there are little warranties in that 21 business. Yes, there are some. But I think the kind 22 of warranty of which you speak is the responsibility 23 of the two parties. 24 What I would say to you, that systems 25 don't fail because of one group; they fail because of 0160 1 two groups. And some things are harder to do than 2 others. But what that's based on, in my opinion, is 3 ensuring that you have a design that's been signed off 4 by the people that understand what it is that's trying 5 to be built. So if it's services to bingo, then 6 Mr. Sanderson or his staff have to sign off at each 7 phase of that, as does Ms. Pyka, as done Mike 8 Fernandez, as does Catherine Melvin. 9 COMMISSIONER SCHENCK: So, in other 10 words, it's going to be our internal competence in 11 judging what it is they're giving to us that makes 12 it -- 13 MR. FERNANDEZ: That's what I would 14 say. 15 COMMISSIONER SCHENCK: -- justify the 16 million and a quarter we would be spending with them? 17 MR. FERNANDEZ: Yes. You got to know 18 it when you see it. 19 COMMISSIONER SCHENCK: So we're not 20 getting confused by the bling of a really good horse 21 and dog and pony show from somebody who comes in. 22 Right? 23 MR. FERNANDEZ: Well, you've got to 24 have specs and you've got to have sign-off -- you've 25 got to have user acceptance testing and sign-off by 0161 1 those managers and the user community. If they can't 2 do that or they don't know that, or we don't do that, 3 that we have culpability. 4 COMMISSIONER SCHENCK: How wide a 5 community is it of vendors that we're looking at who 6 are capable of succeeding in something like this? 7 MR. FERNANDEZ: This one is very large. 8 COMMISSIONER SCHENCK: Okay. And so 9 there's -- presumably we'll have someone with an 10 established track record who is bidding on this? 11 MR. FERNANDEZ: Well, I think that 12 those are the kinds of considerations that are 13 reviewed by those committees when selecting. It is 14 proven -- 15 COMMISSIONER SCHENCK: Well, I would 16 just say that judging from past experience, this is 17 one of those contracts that when it goes out, low-cost 18 bidder is one factor, I think competence is another 19 one? 20 MR. FERNANDEZ: It's best value, 21 absolutely. 22 CHAIRMAN COX: Thank you, Mike. 23 MS. PYKA: Commissioners, if it's okay 24 with you, I would like to move on to rider revisions. 25 Rider revisions are reflected on Page 3.B of your 0162 1 legislative appropriation document, and they 2 incorporate revisions to the Commission's current 3 rider structure in the 2008-2009 General 4 Appropriations Act. In addition to routine revisions, 5 the Commission has also requested the following rider 6 revisions: 7 Rider No. 5, limitation on transfer 8 authority. The current rider prohibits the transfer 9 of funds into Strategy A.1.8, mass media advertising. 10 We requested a revision to delete the rider, 11 contingent upon the passage of legislation to remove 12 the linkage between prize payout limitation and the 13 limitation on advertising appropriation. 14 CHAIRMAN COX: Okay. Now, let me be 15 sure I understand. We're not only talking about 16 asking for $10 million more, we're asking them to take 17 the linkage between prize payout percentage and 18 advertising expenditure away, period? 19 MS. PYKA: That is correct. And then 20 also within the rider, we're also asking for the 21 ability to delete the current rider that says you 22 cannot transfer appropriation into the mass media 23 advertising rider -- or appropriation. This 24 appropriation then would be subject to the General 25 Appropriations Act limitation on transfers, which is 0163 1 12 and a half percent, as noted in all of our other 2 strategies, with the exception lottery operator and 3 prize fee allocations. 4 CHAIRMAN COX: Okay. So what we're 5 asking for here, and we're working toward it in steps, 6 because we're asking for only a $10 million increase 7 in appropriation, but what we're working toward is the 8 ability to run this like a business -- 9 MS. PYKA: That is correct. 10 CHAIRMAN COX: -- to expend more on 11 advertising if we find that it's badly needed or is 12 incredibly effective with the new kind of product that 13 we might put out? 14 MS. PYKA: That is correct. 15 CHAIRMAN COX: Good. 16 MS. PYKA: Rider 8 is our current 17 appropriations limited to revenue collections. And 18 we're simply asking for a clarification regarding the 19 use of rental taxes as a source of revenue to cover 20 the cost of appropriations. It is done today, but I 21 don't believe that it's clear in that rider, so we're 22 just seeking to clean up the rider a bit. 23 Rider 11, our retailer commission 24 rider. We're asking for a revision to it to reflect 25 an additional half percent allocation of gross sales 0164 1 for the incentivized sales performance allocation to 2 retailers. The amount that's currently authorized in 3 Rider 11 is 5 percent. And the appropriation of 4 additional funds is intended to be used to incentivize 5 growth in retailer sales performance. 6 In order to generate a higher level of 7 incremental sales in a mature lottery market, retailer 8 incentives can be structured to first compensate 9 retailers for the requirements of handling an 10 increased array of lottery products with complex 11 product features and, second, educate potential 12 consumers regarding these products, followed by 13 managing the cash flow required to pay prizes. The 14 additional incentive could be structured on a 15 performance-based criteria based on sales or other 16 lottery service requirements such as payment of 17 prizes. 18 We're seeking a revision to Rider 13. 19 CHAIRMAN COX: Kathy, on retailer 20 commissions, at this point we sense a need and we will 21 be developing a plan. The detailed plan for 22 implementing this is not yet in place? 23 MS. PYKA: That is correct. At this 24 point in time, we do not have a detailed plan for each 25 of the items as outlined here. It is expected, if we 0165 1 have consideration on this, we would certainly have 2 the ability to have that detailed plan in place by 3 Fiscal Year 2010, at the time that the LAR is adopted 4 and ready for use at that period. 5 And certainly it's subject -- it's not 6 a requirement that we provide the half percent, but it 7 would be a tool that we would have for use. 8 CHAIRMAN COX: Well, I would suggest 9 that we have a good idea of what that plan would be 10 before we go into the hearings. 11 MS. PYKA: Certainly. 12 CHAIRMAN COX: You know, I think they 13 could very well want more specificity than we've given 14 here. 15 MS. PYKA: Okay. 16 CHAIRMAN COX: I support it completely. 17 MS. PYKA: Very good. 18 Rider 13 is our appropriation of 19 increased revenue rider. We're seeking a revision to 20 have unexpended authority for unspent administrative 21 funds between fiscal years of the biennium. 22 And, Commissioner Schenck, this would 23 go to your point of the inflation factor. Should 24 something increase and we not have the current 25 authority in our budget in 2011, if we had the unspent 0166 1 administrative fund authority, we could carry forward 2 any of those unspent funds. 3 COMMISSIONER SCHENCK: And we need a 4 change in law to accomplish that. 5 MS. PYKA: A change in our rider. We 6 currently have a restriction that does not allow us to 7 do that. 8 COMMISSIONER SCHENCK: That makes 9 sense. 10 CHAIRMAN COX: Kathy, would that mean, 11 then, that -- let's just take this year, what we're 12 going to be returning, unspent administrative money of 13 a significant amount to them. Now we do it every 14 year. 15 MS. PYKA: Right. 16 CHAIRMAN COX: What you're saying is 17 that we would only be doing that every other year and 18 we would be rolling it over during the biennium? 19 MS. PYKA: Chairman, I think it would 20 be a judgment of ours. I think we could elect to 21 retain some of the unspent administrative funds for 22 contingency needs in Fiscal Year 2011, a portion of 23 it, and roll the balance as unspent admin like we do 24 today. 25 CHAIRMAN COX: Okay. Now, what would 0167 1 be the practice or the authority of other agencies? 2 Are we asking for something special here? 3 MS. PYKA: No. My familiarity with my 4 previous agencies that I've looked for, it is very 5 common for dedicated accounts to have unspent 6 authority of their dedicated account between fiscal 7 years of the biennium. It's also not uncommon for 8 dedicated accounts to have unspent authority between 9 the biennium. 10 So we're asking for a very modest 11 request here and asking for the unspent authority. We 12 received consideration on this particular rider 13 request last legislative session by the House, but we 14 did not get approval of it in the Senate. 15 CHAIRMAN COX: Thank you. 16 MS. PYKA: You're welcome. 17 We're also including new Rider 701 18 which is a rider to adjust our appropriated amounts. 19 It reflects a new rider providing a mechanism to 20 request adjusted appropriation authority if current 21 activities which previously have been outsourced to 22 the lottery operator contract were performed by the 23 agency in-house or by multiple vendors. 24 New Rider 702 -- 25 CHAIRMAN COX: Okay. Let's stop on 0168 1 that one for just a second. 2 MS. PYKA: Okay. 3 CHAIRMAN COX: That's, in effect, to 4 give us the authority that will enable Mr. Fernandez 5 and his consultants and his team to restructure the 6 lottery operator contract so that some of the features 7 that are there may be different, we may bring some 8 in-house, we may use multiple contractors, et cetera? 9 MS. PYKA: It would be the baseline 10 rider that we would need to a go-forward basis to 11 accomplish that. 12 CHAIRMAN COX: Okay. Now, is this the 13 absolute latest that we can get it if we don't get it 14 this time? 15 MS. PYKA: No. 16 CHAIRMAN COX: We can still get it next 17 time? 18 MS. PYKA: The contract expires 19 August 31, 2011. Of course, this is the LAR for '10 20 and '11. So if we don't get it this time, in order to 21 accomplish that, or if we were to elect to break up 22 some of those current business practices, we would 23 need the rider in 2012 at the latest. 24 CHAIRMAN COX: Okay. Now, you probably 25 answered this two years ago, but why are we asking for 0169 1 it in advance of apparent need? 2 MS. PYKA: Well, there could be a 3 situation that's determined through this RFP process 4 that we elect to modify the business practice prior to 5 the termination of the contract. 6 CHAIRMAN COX: Good answer. Thank you. 7 MS. PYKA: Commissioners, new Rider 702 8 is again the appropriations limited to revenue 9 collections that's already in the document. But it 10 would be the revised rider, contingent upon the 11 appropriate of Exceptional Item 1, providing that 12 bingo indirect and administrative expenses are funded 13 by general revenue, supported by all fees currently 14 collected in bingo. The revision there is certainly 15 including the bingo prize fee in that collection base. 16 CHAIRMAN COX: Okay. 17 MS. PYKA: New Rider 703 is the capital 18 budget rider that is required for exceptional items; 19 namely, exceptional Items 4 and 5. 20 Commissioners, that summarizes the 21 rider requests. And I wanted to note, in addition to 22 filing the hard copies of the document, we are 23 required to file the document electronically through 24 the Automated Budget and Evaluation System of Texas. 25 We call that ABEST. It's filed to the Legislative 0170 1 Budget Board through ABEST. 2 Upon completion of the budget document, 3 we are required to provide the LBB and the Governor's 4 budget office certification of the integrity of the 5 dual submission of the document, meaning that the 6 paper copy that we submit and the document that 7 resides in ABEST are one and the same. 8 Commissioners, as of right now, the 9 document that is before you is the exact document in 10 ABEST. It has been entered and has been reconciled. 11 We did find one proofing error that's in the 12 administrator's statement that Phil caught for us and 13 which the description of the bingo area stated 14 "taxpayer services and licensing services." We've 15 modified that to "taxpayer services and audit 16 services." That's on Page 1.B, Page 1 of 2. That is 17 the only modification we've made to the paper document 18 since you've received it. And I will certify to you 19 that they are one and the same. So I wanted to make 20 note of that. 21 And then I also wanted to note that we 22 have been notified by the joint -- that we have our 23 joint budget hearing scheduled for September 11th from 24 1:00 to 2:30 on the legislative appropriation request, 25 and that hearing will be before the staff of the 0171 1 Governor's budget office as well as the staff of the 2 Legislative Budget Board. It will be our first 3 opportunity to present the document to the staff of 4 those two offices, so I wanted to note that. 5 COMMISSIONER SCHENCK: Let me ask a 6 question right there. I assume, Mr. Chairman, your 7 intention is to attend -- 8 CHAIRMAN COX: Yes. 9 COMMISSIONER SCHENCK: -- the 10 September 11th meeting. 11 Kim, would it be inappropriate for me 12 to attend as well, given the quorum problem we have? 13 MS. KIPLIN: My understanding is, this 14 is a -- for a quorum to be attending, there was an 15 exception at a legislative committee or agency 16 meeting. 17 COMMISSIONER SCHENCK: Okay. 18 MS. KIPLIN: So the issue is, is this a 19 legislative committee hearing or a legislative agency 20 hearing? 21 COMMISSIONER SCHENCK: I believe it is. 22 MS. KIPLIN: Okay. Then if that's the 23 case, then it won't be considered to be a meeting, 24 because the quorum is there, so long as the 25 deliberations at the meeting by you two consist only 0172 1 of publicly testifying at the meeting, publicly 2 commenting at the meeting and publicly responding at 3 the meeting to a question asked by a member of the 4 legislative committee or agency. 5 CHAIRMAN COX: Okay. So we can hear 6 each other's testimony, should we be called. But we 7 cannot otherwise deliberate? 8 MS. KIPLIN: That's correct. 9 CHAIRMAN COX: We can't otherwise -- 10 and what we will do, of course, consistent with our 11 practice, is we'll sit on different sides of the room 12 and we will not be together outside or in the 13 restroom, et cetera. 14 MS. KIPLIN: That would be good, and 15 that would be consistent with this particular 16 provision. 17 COMMISSIONER SCHENCK: Well, if I can 18 attend, I would like to attend. 19 CHAIRMAN COX: I think that would be 20 excellent. 21 MS. PYKA: Commissioners, this 22 concludes my presentation of the legislative 23 appropriation request. Kim has the two signature 24 documents. And I would be happy to answer any other 25 questions before we close this item. 0173 1 COMMISSIONER SCHENCK: Would you 2 really? 3 (Laughter) 4 MS. PYKA: Certainly. 5 COMMISSIONER SCHENCK: Kathy, I really 6 appreciate it. You've shown a mastery of this 7 information that's really quite impressive. 8 MS. PYKA: You're so very welcome. 9 CHAIRMAN COX: I second that. It's an 10 excellent job. Your briefings have been excellent. 11 And I know you're going to say you have an excellent 12 team and you work with excellent directors -- 13 MS. PYKA: Directors. 14 CHAIRMAN COX: -- and I know that. But 15 all of you have done a great job. 16 MS. PYKA: We are extremely lucky in 17 this agency to have the team that we have, and I can't 18 say that enough. We made a lot of modifications to 19 the document as we started going through it, just as 20 part of the review process. The directors were very 21 responsive. And we talk about this notebook, but I 22 nit-pick those items to no end, and I ask a lot of 23 questions of them when they submit their exceptional 24 items. And they're all so responsive and so 25 professional in the work that they present. We're 0174 1 very lucky in that way, in addition to the great team 2 that I have within the Office of the Controller. 3 COMMISSIONER SCHENCK: Thank you. I 4 will make one request. Before the September 11 5 meeting, I would like -- I know we already have it in 6 a handy form, but I would like a list of all the 7 legislative items I think that we're going to be 8 looking for, for any special legislation, so that we 9 can have specific answers to question about what we've 10 done to consider them, before we get there. 11 MS. KIPLIN: Of course, this is where I 12 would need to put on the record the fact that we can't 13 use appropriated funds to either support the passage 14 or the defeat of legislation, and so we serve only as 15 a resource. Commissioners, you obviously aren't 16 funded by appropriated money, so that's not an issue 17 for you-all, but you can't ask your staff to do that. 18 But consistent with the law, we will 19 certainly -- 20 COMMISSIONER SCHENCK: I think I 21 already have it, frankly, so I'll -- 22 MS. KIPLIN: Okay. 23 CHAIRMAN COX: And certainly while I 24 recognize there is a distinction between the 25 restrictions on the Commissioners and the restrictions 0175 1 on the staff, I am suspecting that Commissioner 2 Schenck was asking for the ability to serve as a good 3 resource and not to go advocating any positions. 4 COMMISSIONER SCHENCK: Yes. 5 MS. KIPLIN: That's the way I took it, 6 but I need to always be mindful of the -- 7 CHAIRMAN COX: I understand. 8 COMMISSIONER SCHENCK: Thank you. 9 MS. KIPLIN: -- prohibition on 10 lobbying with -- 11 CHAIRMAN COX: We could just make a 12 recording of that. We could just -- 13 MS. KIPLIN: I would be glad to do 14 that, and then you can rewind and play rewind and 15 play, however you would like to do that. 16 Commissioners, I believe this is an 17 action item for you-all to approve the LAR. 18 CHAIRMAN COX: Okay. Kathy, what is 19 your recommendation? 20 MS. PYKA: Certainly. And before, I 21 didn't quite finish my "thank yous." I certainly 22 cannot overlook my executive leadership of 23 Mr. Sadberry and Mr. Grief. They got us through the 24 end of it, so I appreciate the work that they provided 25 to us. 0176 1 CHAIRMAN COX: Excellent. 2 MS. PYKA: I'm seeking your approval of 3 the Commission's legislative appropriation request for 4 Fiscal Years 2010-2011 in accordance with the 5 guidelines set forth by leadership. The request 6 includes a baseline request of $383,300,473, includes 7 five exceptional items in the amount of $28,677,214, 8 for an overall request of $411,977,687, and 318.5 full 9 time equivalent positions. 10 CHAIRMAN COX: Okay. Is it appropriate 11 to include -- well, let's -- move approval of the 12 staff recommendation. 13 COMMISSIONER SCHENCK: I second the 14 motion. 15 CHAIRMAN COX: All in favor, say "Aye." 16 COMMISSIONER SCHENCK: Aye. 17 CHAIRMAN COX: Aye. 18 Motion carries 2-0. 19 Now, Kim, is it appropriate for me to 20 ask the board for authority to sign this document on 21 behalf of the board, or did that motion give me that 22 authority? 23 MS. KIPLIN: It gave you that 24 authority. You're signing off in your representative 25 capacity, as the Chairman representing the Commission 0177 1 and approving the LAR, and then the certification, 2 based on the information that Ms. Pyka provided that 3 she, in fact, will certify that the document submitted 4 electronically is identical to the paper. 5 CHAIRMAN COX: Okay. So I will be 6 signing this and the certification that the two are 7 identical? 8 MS. KIPLIN: Yes, sir, that's correct. 9 CHAIRMAN COX: Do you want to read that 10 one, David? 11 COMMISSIONER SCHENCK: Now, Kathy, have 12 we made the change to the ABEST version to reflect 13 Phil's correction? 14 MS. PYKA: We certainly have. We made 15 that yesterday after Phil's phone call. 16 CHAIRMAN COX: Here is some of that 17 8 point type. 18 MS. PYKA: Mr. Chairman, that document 19 is generated out of a system that I can't modify. 20 CHAIRMAN COX: Okay. 21 MS. KIPLIN: Then it wouldn't be 22 identical. 23 COMMISSIONER SCHENCK: The certificate 24 would be in bigger font. I wonder if that's a state 25 jail felony. 0178 1 (Laughter) 2 AGENDA ITEM NO. X (continued) 3 MS. PYKA: Mr. Chairman, can we go back 4 to Item No. X, which is the report, possible 5 discussion and/or action on transfers to the state? 6 CHAIRMAN COX: Of course. 7 MS. PYKA: I want to make certain that, 8 as we go back to this item, that I'm clear on what our 9 plan is with regard to the transfers to the state. We 10 will certainly be reviewing the amount that we are 11 able to or the amount that we're authorized that we 12 can transfer as cash transfers by August 31st of 2008. 13 So I wanted to make sure that that record is very 14 clear that we'll be looking at that, we'll be looking 15 at the accounting policies, we'll be looking at past 16 practices, and we'll certainly be within any provision 17 that we're required to. 18 COMMISSIONER SCHENCK: Thank you. I 19 appreciate that. 20 CHAIRMAN COX: That was my 21 understanding. Thank you, Kathy. 22 MS. PYKA: Thank you. 23 AGENDA ITEM NO. XV 24 CHAIRMAN COX: Okay. Internal audit 25 matters. Susan Oballe I think is going to report or 0179 1 sit in here for Catherine Melvin. 2 MS. OBALLE: Good afternoon, 3 Commissioners. For the record, I'm Susan Oballe with 4 the Internal Audit Discussions. 5 Catherine asked that I provide you with 6 an update regarding external reviews of the agency. 7 And we have two reviews going on currently. The first 8 review is the annual financial audit. The firm 9 Maxwell Locke & Ritter has been engaged to conduct our 10 statutorily required annual audit. They will also be 11 conducting an annual agreed-upon procedures engagement 12 related to Mega Millions transactions, as required by 13 the Mega Millions agreement documents. The auditors 14 have been on-site this past month conducting some 15 interim work. We expect them to return later on in 16 the fall, and the report is due in December. 17 The second external review is the 18 biennial security audit. As required in the State 19 Lottery Act, the agency is required to undergo a 20 comprehensive study of all aspects of lottery security 21 at least once every two years, to be performed by an 22 independent firm. As a result of the competitive 23 request for proposals process, we have engaged the 24 firm Mir Fox & Rodriguez to conduct the study for the 25 agency. The auditors are on-site currently, 0180 1 conducting a risk assessment. Field work will 2 commence upon completion and acceptance of the risk 3 assessment. 4 The Act provides for the issuance of a 5 public general report and a more detailed confidential 6 report. The final report is required to be submitted 7 to the Governor and the Legislature before the 8 convening of each regular legislative session. 9 And finally, Commissioners, I have one 10 other item of update. As mentioned last month, 11 Internal Audit is still on track to provide y'all with 12 our Fiscal Year 2009 internal activity plan for your 13 approval. 14 And this concludes my report. 15 CHAIRMAN COX: Okay. 16 COMMISSIONER SCHENCK: Thank you. I 17 have no questions. I appreciate it. 18 MS. OBALLE: Thank you. 19 CHAIRMAN COX: Thank you, Susan. 20 AGENDA ITEM NO. XIII 21 CHAIRMAN COX: Item XIII, report, 22 possible discussion and/or action on the 80th 23 Legislature. 24 Ms. Trevino. 25 MS. TREVINO: Good afternoon, 0181 1 Commissioners. For the record, I'm Nelda Trevino, the 2 Director of Governmental Affairs. 3 Included in your Commission meeting 4 notebook is a copy of the August 27, 2008 notice for 5 the joint hearing of the Senate State Affairs 6 Committee and the Senate Finance Subcommittee on 7 general government issues, to consider the interim 8 charge to study the privatization of the state 9 lottery. At the request of the committee, the agency 10 will be in attendance to serve as a resource at the 11 hearing. 12 Additionally, while the hearing notice 13 is yet to be filed, the agency has been notified the 14 House Appropriations Subcommittee on General 15 Government will hold a hearing on September 10, 2008. 16 Subcommittee Chairman, Rep. Carl Isett, requested the 17 agency appear before the committee to discuss various 18 topics related to the agency. Agency staff is 19 preparing for this hearing, and we will continue to 20 keep you advised on any further developments. 21 And this concludes my report, and I'll 22 be glad to answer any questions that you might have. 23 COMMISSIONER SCHENCK: I don't have any 24 questions at this time. Thank you. 25 CHAIRMAN COX: Thank you, Nelda. 0182 1 AGENDA ITEM NO. XVI 2 CHAIRMAN COX: Item No. XVI -- am I 3 back on sync there, Kim? 4 MS. KIPLIN: Yes, sir, you are. 5 CHAIRMAN COX: Okay. Item XVI, report, 6 possible discussion and/or action on the Mega Millions 7 game and/or contract. 8 Director Sadberry. 9 MR. SADBERRY: Commissioners, for the 10 record, my name is Anthony Sadberry, Executive 11 Director. 12 There are no updates to provide to you. 13 I will inform you that the Mega Millions directors 14 continue to look at the issue of possible changes in 15 the games and will continue to review those matters. 16 And we have an in-house workgroup at 17 the Lottery Commission who will study in lockstep any 18 proposals made along those lines, and we'll continue 19 to keep you informed. 20 I would be happy to answer any 21 questions. 22 COMMISSIONER SCHENCK: No questions. 23 CHAIRMAN COX: Thank you, Director 24 Sadberry. 25 0183 1 AGENDA ITEM NO. XVII 2 CHAIRMAN COX: Item No. VII, report, 3 possible discussion and/or action on GTECH 4 Corporation. 5 Director Sadberry. 6 MR. SADBERRY: Commissioners, in your 7 folders you will find the GTECH report for the month 8 of August 2008 and the itemized table of contents to 9 guide you in your reading and review of these 10 materials. 11 That concludes my comments on this 12 item. I would be happy to answer any questions. 13 COMMISSIONER SCHENCK: I don't have any 14 questions. Thank you, Anthony. 15 CHAIRMAN COX: Okay. Commissioner, I 16 would report to you that I received a call last week 17 from Jaymin Patel who is the president and CEO of 18 GTECH Corporation. I returned that call last Monday 19 from the lottery offices. I spoke with him for a few 20 minutes. We talked about trends in the industry. 21 He acknowledged that we had a contract 22 coming up in 2011, of which he had great interest, and 23 offered to provide me whatever information that he 24 could on a personal basis. I thanked him for that, 25 told him that I would not be involved directly in that 0184 1 process and that I would pass his request -- his offer 2 along to Director Sadberry. And he also indicated to 3 me that he would be coming to Austin in September or 4 October for his regular visit. 5 COMMISSIONER SCHENCK: Excellent. 6 Thank you for the report. I appreciate it. 7 AGENDA ITEM NO. XVIII 8 CHAIRMAN COX: Item No. XVIII, report 9 by the Executive Director. 10 Director Sadberry. 11 MR. SADBERRY: Commissioners, in your 12 folders are the data regarding status of positions as 13 of August 8, 2008, for lottery and bingo. I would be 14 happy to answers any questions you might have. 15 COMMISSIONER SCHENCK: Anthony, we're 16 up to nine vacant positions now in lottery. I see 17 that we have three selection, acceptance pending. How 18 long do you think it will be before those slots are 19 filled? 20 MR. SADBERRY: The lottery positions 21 are Legal. I think one has been filled, Kim. 22 Correct? 23 MS. KIPLIN: That is correct. 24 MR. SADBERRY: And the others pending. 25 Can you give a projection on those? 0185 1 MS. KIPLIN: I would say within -- one 2 within the next two to three weeks, one -- I don't 3 know. We may need to re-post, but I'm not sure about 4 that. We're working through that process. 5 COMMISSIONER SCHENCK: All right. And 6 we still have not filled the positions on bingo. Are 7 we making any progress there? 8 MR. SANDERSON: The three vacancies for 9 the Inspector V position, which was the first posting 10 that we put out, we have received I believe like 39 11 applications, and we've screened those and beginning 12 to schedule interviews for those three vacancies. The 13 other postings have just recently been out, within the 14 last three or four weeks, and we're receiving 15 applications and screening those. 16 COMMISSIONER SCHENCK: How many 17 applications have you received on those last three? 18 Ballpark, Phil. You're getting activity? 19 MR. SANDERSON: I know we received two 20 for the audit manager, five for the operational, 21 planning and performance coordinator. And this is as 22 of last Friday, I believe. And then the other auditor 23 positions, I want to say five or six, and about four 24 or five for the Inspector VII position. 25 COMMISSIONER SCHENCK: Okay. 0186 1 CHAIRMAN COX: Is there a date on the 2 audit manager posting? Is it open until filled? 3 MR. SANDERSON: It's an open until 4 filled. 5 CHAIRMAN COX: Okay. 6 MR. SANDERSON: And as the applications 7 are coming in, my goal is to screen them and interview 8 those that meet the criteria. 9 CHAIRMAN COX: Okay. Phil, when your 10 position was filled, we interviewed -- Chairman Clowe 11 and I interviewed the applicants. Now, in the 12 auditor's case, this is a direct report to you, so you 13 will be interviewing the applicants? 14 MR. SANDERSON: Yes, sir. 15 CHAIRMAN COX: Do you have a committee 16 that's supporting you on that? 17 MR. SANDERSON: I have talked with 18 Ms. Melvin and also Ms. Pyka about the possibility of 19 serving on that committee also. 20 CHAIRMAN COX: Excellent. I hope that 21 you can formalize that and include them not only in 22 your screening process but in your stirring-the-pot 23 process. You know, they know who the people are that 24 we would want to apply. And I hope that you will 25 encourage them, as you will do yourself, and any 0187 1 others you can encourage, to help get qualified people 2 personally aware of this situation and an 3 understanding of how important this position is. 4 It's really hard to move forward with 5 hiring of auditors without an audit manager, and so 6 this is certainly the one that is most critical, 7 because we want that person to have as much say as 8 possible into who that person's staff will be. 9 MR. SANDERSON: I totally agree, yes, 10 sir. 11 CHAIRMAN COX: Okay. 12 AGENDA ITEM NO. XIX 13 CHAIRMAN COX: Item No. XIX. These are 14 the cases. Ms. Kiplin. 15 MS. KIPLIN: Yes, sir, Mr. Chairman, 16 Items A through E are NSF cases. In each of those 17 cases, if I could take those up together, with your 18 permission? 19 CHAIRMAN COX: You bet. 20 MS. KIPLIN: In each of those cases, 21 the retailer had insufficient funds available at the 22 time that we swept the account. They either met the 23 three-strikes-and-you're-out rule, and one in 24 particular -- if I recall, it was the one-time, "But 25 you didn't ever pay us what you owed us," so that's 0188 1 going to be a revoking of the rules. The ALJ did 2 recommend revocation of a license in each of these 3 cases. And the staff would request that you approve 4 the ALJ's recommendation and revoke the licenses. 5 CHAIRMAN COX: 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. KIPLIN: If I could submit those 14 orders to y'all for your signature. 15 Item F, with your permission we would 16 like to pass that matter. That's Tommy's Market. We 17 would like to pursue additional investigative work, 18 may bring that back in a form of an agreed order, or 19 may not. It depends on the outcome of the 20 investigative work. 21 CHAIRMAN COX: I commend that action. 22 I think that the alleged offense was egregious; and, 23 yet, the evidence was scanty. And I would hope that 24 more evidence can be gathered. 25 COMMISSIONER SCHENCK: I had the same 0189 1 feeling, and I'm glad that we're passing for now. 2 CHAIRMAN COX: Okay. 3 COMMISSIONER SCHENCK: This goes to the 4 integrity of the operation. 5 MS. KIPLIN: The last item is High Noon 6 Grocery. This is an agreed order. The recommendation 7 is a 30-day suspension. The conduct in question was 8 an employee taking requests for tickets over the phone 9 and printing those tickets and then collecting the 10 funds at the time of delivery, and that's a violation 11 of our rules. And the agreement is that he 12 recommended 30 days, and the staff recommends that you 13 approve that agreed order. 14 COMMISSIONER SCHENCK: Under our 15 current statutory authority, I think this was entirely 16 appropriate, this position. I will point out, as the 17 Chairman has pointed out in the past, that in a case 18 like this, which seems to be someone making a 19 mistake -- I don't think there was any ill intention 20 here -- that simply turning off the lottery's 21 operations and depriving Texas school children of 22 revenue is maybe not the best remedy, and some change 23 to the statutory authority that would move us more 24 towards some other remedy for this, would be useful in 25 the long-term. 0190 1 CHAIRMAN COX: And I would like to be 2 more specific on that. 3 Director Sadberry, have we found a way 4 that we can propose that, get that in front of folks 5 to let them know that all we've got is nuclear weapons 6 that hurt us, along with the other people, and we 7 would really like something more in our arsenal? 8 MR. SADBERRY: I follow the comments 9 made earlier by General Counsel Kiplin regarding the 10 role that we play in terms of any possible new 11 legislation or proposed legislation, and that is that 12 we serve as a resource and typically would respond to 13 requests made of us in terms as an agency in terms of 14 legislation that might be helpful in that regard. 15 I know that Director Sanderson sits on 16 a workgroup with Chairman Flores' office and some of 17 the other people who appear before you from time to 18 time, and it may well come up in the context of some 19 of those hearings or meetings or work sessions. 20 And also -- at least the last 21 legislative session, the agency received a request to 22 which we were responsive in regard to what legislation 23 may be helpful to the agency, and we did respond for 24 both lottery and bingo in that regard that. And so 25 should that occur this session, we would be I think 0191 1 appropriate in responding to include this particular 2 item in response to that request or to take advantage 3 of any other similar type of opportunity to lay this 4 out as a matter of relevant concern that may be 5 helpful for the agency if the Legislature were willing 6 to consider it. 7 COMMISSIONER SCHENCK: Is anticipation 8 of such a request, would it be useful for us to be 9 keeping track, in Nelda's office or somewhere else, of 10 the items that we might find needing response to such 11 a request, including this item -- and I know you're 12 heard me say it before -- the first five orders we 13 signed in this case are people that are likely 14 profiting from other licenses issued by the state, 15 including licenses to sell alcohol and cigarettes, 16 they're currently holding funds that belong to the 17 state, and we ought to consider whether they should 18 continue to enjoy the privilege of operating under 19 those other licenses. 20 Anthony, would that be appropriate, 21 just to keep track of these matters that we find from 22 time to time -- 23 MR. SADBERRY: It would seem so to me. 24 COMMISSIONER SCHENCK: -- could be 25 helpful to the Legislature, not having sent it over on 0192 1 our own but just have them available should the 2 request come? 3 CHAIRMAN COX: Well, you know, I'm 4 having -- I understand that as a general point, agency 5 employees are only able to act as a resource. But it 6 seems to me that if there's something -- if we think 7 something is wrong with our law, we shouldn't have to 8 wait for a request from them. We should be able to go 9 say, "This is wrong with our law. We can't be as 10 effective as we need to be under this provision, and 11 the other provision would serve the State of Texas 12 better." I think we're -- it seems like we're 13 derelict if we don't do that. 14 Counsel, help me with that. 15 MS. KIPLIN: Well, I think it's a 16 pretty broad provision that's in law. And -- 17 COMMISSIONER SCHENCK: Do you know what 18 the provision is, Kim? 19 MS. KIPLIN: It's in the Government 20 Code -- well, it's not in the State Lottery Act. The 21 State Lottery Act is part of the Government Code, and 22 I can get that for you. But it's basically considered 23 to be an anti-lobby law, and that stands for no 24 appropriate funds can be used to support lobbying. 25 COMMISSIONER SCHENCK: "Lobbying" is 0193 1 probably a defined term, isn't it? 2 MS. KIPLIN: It's advocating. It's 3 called the anti-lobbying, but it doesn't use that word 4 to the -- 5 CHAIRMAN COX: What I would really like 6 for you to do, Kim, is dig deeper on this. And work 7 with David and me separately as you do. I just have a 8 real hard time thinking that -- telling the 9 Legislature that the State of Texas would be better 10 served by a different law is the way the system was 11 intended to work. 12 MS. KIPLIN: And I certainly will do 13 that. Let me just say that right off the bat. But I 14 think that the provision in the Government Code is 15 written in such a way that it can be used and has been 16 against folks with this agency in terms of your 17 lobbying. 18 We certainly want to be responsive. I 19 think every member of this staff has always been 20 responsive to requests of the Legislature. We 21 certainly have taken initiative in the past of 22 identifying issues that we have with our enabling 23 statute, whether it's the Bingo Enabling Act or the 24 State Lottery Act, so I want to leave you with that 25 impression. 0194 1 But in terms of advocating a position 2 and stepping over that line and where that line is, 3 it's pretty gray. One could claim that that would be 4 lobbying in a particular fact situation and somebody 5 else would say, "No, they're acting as any responsible 6 state employee would in taking the initiative of being 7 active." 8 CHAIRMAN COX: That's where I want to 9 see if we can find a safe harbor of that nature 10 somewhere in there. You know, I hate to say that 11 we've come to the point where Commissioner Schenck and 12 I have to handwrite letters because we couldn't even 13 use the staff to type a letter to leadership to say, 14 "We need these laws." We can do that. But I think 15 it's much better if it's handled within the agency 16 rather than Commissioner Schenck and I doing it on an 17 ad hoc basis. 18 MS. KIPLIN: And I will do that. I 19 will work with each of you. 20 CHAIRMAN COX: Great! 21 Okay. On High Noon Grocery, you need 22 a -- 23 MS. KIPLIN: Yes, sir. 24 CHAIRMAN COX: Move approval of the 25 staff recommendation. 0195 1 COMMISSIONER SCHENCK: I second the 2 motion. 3 CHAIRMAN COX: All in favor, say "Aye." 4 COMMISSIONER SCHENCK: Aye. 5 CHAIRMAN COX: Aye. 6 Motion carries 2-0. 7 AGENDA ITEM NO. XX 8 CHAIRMAN COX: Item No. XX, public 9 comment. Is there any public comment? 10 AGENDA ITEM NO. XXI 11 CHAIRMAN COX: Okay. With your 12 permission, Commissioner, at this time I will move the 13 Texas Lottery go into executive session: 14 A. To deliberate the duties and 15 evaluation of the Executive Director, the Deputy 16 Executive Director, Internal Audit Director and 17 Charitable Bingo Operations Director and deliberate 18 the duties of the General Counsel and Human Resources 19 Director, pursuant to Section 551.074 of the Texas 20 Government Code; 21 B. To receive legal advice regarding 22 pending or contemplated litigation pursuant to Section 23 551.071(1)(A) and/or to receive legal advice regarding 24 settlement offers pursuant to Section 551.071(1)(B) of 25 the Texas Government Code and/or to receive legal 0196 1 advice pursuant to Section 551.071(2) of the Texas 2 Government Code, including but not limited to: 3 First State Bank of DeQueen, et al. 4 versus Texas Lottery Commission; 5 James T. Jongebloed versus Texas 6 Lottery Commission; 7 Employment law, personnel law, 8 procurement and contract law, evidentiary and 9 procedural law and general government law; 10 Lottery operations and services 11 contract; 12 Mega Millions game and/or contract. 13 Is there a second? 14 COMMISSIONER SCHENCK: I second the 15 motion. 16 CHAIRMAN COX: All in favor, say "Aye. 17 COMMISSIONER SCHENCK: Aye. 18 CHAIRMAN COX: Aye. 19 The vote is 2-0. The Texas Lottery 20 Commission will go into executive session. The time 21 is 1:02 p.m. Today is August 20, 2008. 22 (Recess: 1:02 p.m. to 2:59 p.m.) 23 AGENDA ITEM NO. XXII 24 CHAIRMAN COX: The Texas Lottery 25 Commission is out of executive session. The time is 0197 1 2:59 p.m. 2 Is there any action to be taken as a 3 result of executive session? 4 COMMISSIONER SCHENCK: No. 5 AGENDA ITEM NO. XXIII 6 CHAIRMAN COX: If not, the meeting is 7 adjourned. 8 COMMISSIONER SCHENCK: Thank you. 9 (Meeting adjourned: 3:00 p.m.) 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0198 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 3rd day of September 2008. 15 16 17 ________________________________ 18 Aloma J. Kennedy Certified Shorthand Reporter 19 CSR No. 494 - Expires 12/31/08 20 Firm Certification No. 276 Kennedy Reporting Service, Inc. 21 Cambridge Tower 1801 Lavaca Street, Suite 115 22 Austin, Texas 78701 512.474.2233 23 24 25