0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 6 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 7 WEDNESDAY, OCTOBER 18, 2006 § 8 9 10 COMMISSION MEETING 11 WEDNESDAY, OCTOBER 18, 2006 12 13 BE IT REMEMBERED THAT on Wednesday, 14 the 18th day of October 2006, the Texas Lottery 15 Commission meeting was held from 9:00 a.m. to 16 12:49 p.m., at the Offices of the Texas Lottery 17 Commission, 611 East 6th Street, Austin, Texas 78701, 18 before CHAIRMAN C. TOM CLOWE, JR., and COMMISSIONER 19 JAMES A. COX, JR. The following proceedings were 20 reported via machine shorthand by Aloma J. Kennedy, a 21 Certified Shorthand Reporter of the State of Texas, 22 and the following proceedings were had: 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Mr. C. Tom Clowe, Jr. 4 COMMISSIONER: Mr. James A. Cox, Jr. 5 GENERAL COUNSEL: 6 Ms. Kimberly L. Kiplin 7 EXECUTIVE DIRECTOR: Mr. Anthony J. Sadberry 8 CHARITABLE BINGO EXECUTIVE DIRECTOR: 9 Mr. Billy Atkins 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE NO. 3 AGENDA ITEM NO. I - Meeting Called to Order...... 6 4 AGENDA ITEM NO. II - Report, possible discussion and/or action on lottery sales 5 and revenue, game performance, new game opportunities, market research and trends........ 6 6 AGENDA ITEM NO. III - Report, possible 7 discussion and/or action on transfer to the State..................................... 41 8 AGENDA ITEM NO. IV - Report, possible 9 discussion and/or action on the advertising and dissemination of prize and game 10 information.................................... 42/113 11 AGENDA ITEM NO. V - Consideration of and possible discussion and/or action, 12 including approval of the FY07 Internal Audit Activity Plan, on external and internal 13 audits and/or reviews relating to the Texas Lottery Commission and/or on the internal 14 Audit Department's activities.................... 82 15 AGENDA ITEM NO. VI - Report, possible discussion and/or action on the 16 agency's contracts............................... 88 17 AGENDA ITEM NO. VII - Report, possible discussion and/or action on the 79th and 18 80th Legislature................................. 90 19 AGENDA ITEM NO. VIII - Commission may meet in Executive Session: 20 A. To deliberate the duties and evaluation of the Executive Director 21 and/or Deputy Executive Director pursuant to Section 551.074 of the 22 Texas Government Code. B. To deliberate the duties and 23 evaluation of the Internal Audit Director pursuant to Section 24 551.074 of the Texas Government Code. 25 0004 1 TABLE OF CONTENTS (continued) 2 PAGE NO. C. To deliberate the duties and 3 evaluation of the Charitable Bingo Operations Director pursuant to 4 Section 551.074 of the Texas Government Code. 5 D. To deliberate the duties of the General Counsel pursuant to Section 6 551.074 of the Texas Government Code. E. To receive legal advice regarding 7 pending or contemplated litigation and/or to receive legal advice 8 pursuant to Section 551.071(1)(A) or (B) of the Texas Government Code 9 and/or to receive legal advice pursuant to Section 551.071(2) of the 10 Texas Government Code, including but not limited to: 11 Cynthia Suarez v. Texas Lottery Commission 12 Shelton Charles v. Texas Lottery and Gary Grief 13 Stephen Martin vs. Texas Lottery Commission 14 Employment law, personnel law, procurement and contract law, 15 evidentiary and procedural law, and general government 16 law Mega Millions game and/or 17 contract F. Return to open session for further 18 deliberation and possible action on any matter discussed in 19 Executive Session....................... 117 20 AGENDA ITEM NO. IX - Report by the Executive Director and/or possible discussion and/or 21 action on the agency's operational status and FTE status..................................... 92/115 22 AGENDA ITEM NO. X - Report by the 23 Charitable Bingo Operations Director and possible discussion and/or action on the 24 Charitable Bingo Operations Division's activities...................................... 94 25 0005 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. XI - Public Comment............. 95 4 AGENDA ITEM NO. XII - Adjournment............... 119 5 REPORTER'S CERTIFICATE.......................... 120 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0006 1 P R O C E E D I N G S 2 WEDNESDAY, OCTOBER 18, 2006 3 (9:00 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN CLOWE: Good morning. We'll 6 call this meeting to order. Today is October the 7 18th, 2006. It's 9:00 a.m. Commissioner Cox is here, 8 and my name is Tom Clowe. 9 AGENDA ITEM NO. II 10 CHAIRMAN CLOWE: We'll call this meeting 11 of the Texas Lottery Commission to order and begin 12 with Item No. II on the agenda: Report, possible 13 discussion and/or action on lottery sales and revenue, 14 game performance, new game opportunities, market 15 research and trends. 16 Ms. Pyka. 17 MS. PYKA: Good morning, Commissioners. 18 My name is Kathy Pyka, Controller of the Texas Lottery 19 Commission. With me to my right this morning is 20 Robert Tirloni, our Products Manager, and David 21 Sizemore, our research coordinator. 22 Our first chart this morning reflects 23 revenue from sales, the net revenue to the state for 24 the week ending October 7, 2006. Total sales through 25 this six-week period amount to $355.3 million, while 0007 1 estimated net revenue to the state for this period was 2 $91.1 million. 3 Our fiscal year 2007 sales to date 4 reflect a $5 million increase over fiscal year 2006 5 sales. The net revenue to the state reflects a 6 2.1 percent increase as compared to the $89.2 million 7 figure for the same period in fiscal year 2006. 8 Prize expenses of percentage of sales is 9 reflected at 52.4 percent for the current time period, 10 just a slight decrease from the same period in fiscal 11 year 2005. 12 The next slide includes fiscal year 2007 13 year-to-date sales by game. As stated on this slide, 14 75.2 percent of sales, or $267 million, was from 15 instant tickets, with 8.5 percent of sales, or 16 $30.3 million, from Pick 3, followed by 5.7 percent of 17 sales and $20.4 million from Lotto Texas. Mega 18 Millions is 4.8 percent of sales or $17.1 million. 19 And our next slide includes a graphical 20 representation of the $355.3 million year-to-date 21 sales by game. 22 With that, Robert will now cover the 23 prize point information. 24 MR. TIRLONI: Good morning, 25 Commissioners. For the record, my name is Robert 0008 1 Tirloni. I am the Products Manager for the 2 Commission. 3 As Kathy said, this is the graphical 4 representation of our instant ticket sales, year to 5 date, totaling $267.1 million, broken down by all of 6 our different prize points. We've not seen any change 7 in the beginning of fiscal year '07 from the end of 8 fiscal year '06. Our $5.00 prize point is still our 9 leading prize point, followed by the $2.00 and then 10 the $10.00. 11 We're going to do a recap of fiscal year 12 2006 for you. Kathy is going to start, and then I've 13 got some '05 to '06 comparisons for you of some slides 14 into this segment. 15 CHAIRMAN CLOWE: Good. 16 MS. PYKA: Commissioners, as Robert 17 noted, we're going to cover our overall sales and 18 transfers to the Foundation School Fund for fiscal 19 year 2006. Total sales for fiscal year 2006 amounted 20 to $3.78 billion, marking the highest level of sales 21 in the 14-plus history of the Commission. This is 22 $112.2 million increase, or 3.1 percent, over fiscal 23 year 2005 sales. 24 Our cash transfers to the state for 25 fiscal year 2006 were just over one billion. 0009 1 And, Robert, if you can go to the next 2 slide, we have for you the final accrued sales for 3 fiscal year 2006, which are -- excuse me -- final 4 accrued transfers to the state for fiscal year 2006 -- 5 which were $1.36 billion. And this marks the fifth 6 consecutive year that transfers to the Foundation 7 School Fund have increased. 8 The slide also provides you our prize 9 expenses and percentage of sales. And you'll note 10 that fiscal year 2006 did have a slight increase, up 11 to 61.2 percent, as compared to 60.8 percent in fiscal 12 year 2005. 13 Our next slide includes fiscal year 2006 14 sales by game. 75.8 percent of sales, or 15 $2.9 billion, through instant ticket sales was 16 7.8 percent of sales, or $295.4 million from Pick 3, 17 followed by 6.4 percent or $241.7 million from Lotto 18 Texas, and Mega Millions total was $191.9 million and 19 5.1 percent of the total. 20 And then again, we provide you the 21 graphical slide of the $3.8 million in sales by gain. 22 Now Robert will cover the side-by-side 23 sales comparison. 24 MR. TIRLONI: Commissioners, as I said, 25 we wanted to give you an overview of how 2006 actually 0010 1 compared to the previous fiscal year, 2005. As we 2 have just seen and as Kathy has just talked about, a 3 record sales year was achieved during our 2006 fiscal 4 year. Four of our six on-line games realized sales 5 increases in 2006, when compared to 2005, as did our 6 instant product category. So we see that instants saw 7 a 5.8 percent increase in '06. I'll get back to Lotto 8 Texas and Cash Five in one moment. 9 Pick 3, Texas Two Step and Mega 10 Millions -- and I'm sorry, and Megaplier as well -- 11 all realized sales increases as illustrated on this 12 slide. Pick 3 continued its 12th consecutive year of 13 growth. I know we've discussed Pick 3 recently in 14 Commission meetings. Pick 3 is the on-line game that 15 most closely resembles a scratch-off game, due to its 16 two drawings a day and frequency of play. 17 Mega Millions and Texas Two Step 18 realized growth as a result of large jackpot rolls. 19 If you recall, Texas Two Step reached a record 20 $2.9 million jackpot. That was in April of 2006. And 21 Mega Millions started fiscal year 2006 very strong. 22 We actually had four jackpots above $250 million in 23 the first seven months of the fiscal year. The last 24 half of the fiscal year was not as strong in terms of 25 jackpot rolls. 0011 1 Lotto Texas did realize a 21 percent 2 sales decrease in '06. Lotto was converted from the 3 bonus ball matrix back to the six-digit game in late 4 April, and our goal behind that change was to slow 5 down the decline that we were experiencing. 6 Cash Five realized a 12 percent 7 decrease. It's the only other game besides Lotto 8 realizing a decrease. In an effort to support the 9 Cash Five game, we're currently running a game 10 promotion statewide. The attempt is to refresh the 11 game in the minds of retailers and players. There are 12 clerk promotions being run. New point of sale has 13 been printed and distributed. 14 The point of sale focuses on two of the 15 most popular features of the game, the very positive 16 overall odds of winning, which are one in eight, and 17 the rolldown feature of the game. In addition, we're 18 running radio promotions statewide, and our radio 19 reads during traffic reports are also focused on the 20 Cash Five game as well. 21 And we continue to work on new 22 initiatives on the on-line side as well as on the 23 instant side, and we'll be bringing you some of those 24 initiatives in the coming months. 25 COMM. COX: Robert -- 0012 1 MR. TIRLONI: Yes, sir. 2 COMM. COX: -- what do we know, if 3 anything, about where the 21.2 percent of Lotto Texas 4 went? Did those people go away? Did they bet less? 5 Did they migrate to Mega Millions because of the big 6 jackpot? Do we know any of those things? 7 MR. TIRLONI: I don't know that we've 8 studied that in detail. 9 COMM. COX: If we did, what could we 10 learn after the fact? 11 MR. TIRLONI: We can certainly look into 12 it and see if we can actually pinpoint where they 13 went. I don't know how successful we'll be at doing 14 that, but we can certainly try to -- we can try to 15 look at different time periods and see if we can 16 gather that for you. 17 COMM. COX: Well, I don't think we're 18 going to be able to do it that way, or at least I 19 don't think I would have a lot of comfort, although it 20 might be -- well, maybe you could -- why don't you try 21 doing it analytically -- 22 MR. TIRLONI: Okay. 23 COMM. COX: -- to see what you can come 24 up with. If the decline in Lotto Texas was all in 25 periods of time when Mega Millions had a big jackpot, 0013 1 then we would know something, wouldn't we? 2 MR. TIRLONI: Yes, we would. 3 COMM. COX: Why don't we look for those 4 things and see what we can -- snoop and see what the 5 numbers tell us. 6 MR. TIRLONI: We'll do that. We'll work 7 with Kathy and her group on that and see what we can 8 put together for you. 9 CHAIRMAN CLOWE: Thank you-all very 10 much. 11 Kathy, under Item III, report, possible 12 discussion and/or action on transfers to the state, 13 had you already covered that? 14 MS. PYKA: Mr. Chairman, we have one 15 more slide, and then we also have an update from -- 16 CHAIRMAN CLOWE: Oh, okay. I thought 17 you had completed. Go ahead. 18 MS. PYKA: Certainly. 19 MR. TIRLONI: I have one more and 20 then -- 21 MS. PYKA: I'm sorry. 22 MR. TIRLONI: I have one more. This 23 next slide also just shows a sales compari- -- a 24 percentage of sales comparison -- I'm sorry -- between 25 '05 and '06 as well. And it just shows the percentage 0014 1 of sales each game is making up. 2 Instants in '06 made up 75.8 percent of 3 the total sales. That was an increase of 1.9 percent 4 over '05. Just as the sales increased on Pick 3, Two 5 Step, Mega Millions and Megaplier, so did their 6 percentage of the total. And Lotto and Cash Five are 7 the other two games that realized a decrease in the 8 percentage of sales that they make up. 9 And again, this is just the instant 10 sales by prize points for all of fiscal year 2006. 11 And again, as I said earlier, very little difference. 12 The $5.00 prize point was the strongest prize point 13 for the year as a whole, again followed by the two and 14 then by the ten. And our instant sales totaled 15 $2.9 billion for the fiscal year. 16 MS. PYKA: And our final slide. 17 Commissioner Cox, at the last Commission meeting, we 18 talked about if the GTECH contract amendment had been 19 in place for fiscal year 2006, what would our rebate 20 have been? So we have provided this information for 21 you. 22 And you'll note that our rebate would 23 have been a credit of $1.45 million for fiscal year 24 2006. Kind of providing a review of that contract 25 section again, the Section 10.3.3 provides an annual 0015 1 credit to the Commission equal to 12 percent of 2 GTECH's annual incremental revenue from sales over the 3 previous fiscal year for every .1 percent of increase 4 in overall prize payout percentage. So we had a .4 5 percent increase in prize payout percentage, which 6 would have generated a revenue credit of 48 percent, 7 in comparison to the revenue of the vendor for fiscal 8 year 2006, which is an increase of $3 million. 9 COMM. COX: Excellent. Thank you. 10 MS. PYKA: You're welcome. 11 MR. TIRLONI: And, Commissioners, 12 Dr. Sizemore has a research update for you as well. 13 MR. SIZEMORE: Good morning, 14 Commissioner, Chairman. I am David Sizemore, Research 15 Coordinator for the Texas Lottery. And I have the 16 pleasure of presenting the opinion material that we've 17 shown to you in previous months, as well as follow-up 18 to some of the concerns and questions that you've 19 raised in the past. 20 The first two slides that I will present 21 are what you've seen typically each month, as 22 presented by Mr. Sadberry. And here we see that from 23 August to September of 2006, there was an increase in 24 the positive sentiments expressed by respondents 25 regarding their overall opinion of the Texas Lottery, 0016 1 from 44 to 48 percent; a slight increase in a neutral 2 or do-not-know position, from 17 to 21 percent; and a 3 larger decline in negative positions from August to 4 September, from 39 to 31 percent. 5 CHAIRMAN CLOWE: So what did you do in 6 September? 7 MR. SIZEMORE: What did I do? 8 CHAIRMAN CLOWE: To make it change. 9 MR. SIZEMORE: Robert? 10 MR. TIRLONI: Well, the only thing I 11 could think about that was going on that may have been 12 realized during the September data collection was the 13 beneficiary campaign that ran from late July in to 14 August. There may have been carry-over in the 15 public's mind about that campaign and about the 16 $8 billion contributed to the Foundation School Fund, 17 and that may have had an impact on the positive 18 results. 19 CHAIRMAN CLOWE: Well, my question goes 20 exactly where Commissioner Cox did on the Lotto Texas. 21 You know, what caused the change? Where did those 22 players go? What happened in September? And to see 23 these numbers doesn't really have an impact on me if I 24 don't know what is driving the numbers. And every 25 month to look at this and say, "Okay. Those are the 0017 1 numbers," is one thing. But the question in my mind 2 is: What's driving them? 3 MR. SIZEMORE: Well, Chairman, we do 4 actually have some material that could at least start 5 at getting at those concerns, particularly with 6 reference to the education campaign that we carried 7 out from -- July to August? We did see a spike in 8 awareness of where the profits go, so there could be a 9 relationship between that public perception and a more 10 positive or, more importantly perhaps, a less negative 11 perception of the lottery overall. 12 CHAIRMAN CLOWE: What do you think about 13 media coverage? What's the impart of that? 14 MR. SIZEMORE: Speculatively, it could 15 be positive, assuming that the -- 16 CHAIRMAN CLOWE: Or negative? 17 MR. SIZEMORE: Or negative, sure. I've 18 seen accounts in San Antonio, for example, that try to 19 weigh the two or balance the two positions, that it's 20 a good thing that we're providing money to the 21 educational system. But there is always a twist to it 22 that could be perceived negatively. 23 And we do have some material with 24 reference to where people are obtaining their 25 information about the lottery. We've tracked that 0018 1 based on previous questions you've presented as well. 2 Typically it's television and newspapers. 3 CHAIRMAN CLOWE: Didn't you ask sometime 4 ago for more in-depth and detail behind these numbers? 5 COMM. COX: I believe that's what he's 6 preparing to respond to. 7 MR. SIZEMORE: Yes, sir. 8 CHAIRMAN CLOWE: Okay. 9 COMM. COX: Let me throw one in before 10 we get to that. What's the margin of error in this? 11 MR. SIZEMORE: For a sample size of 400, 12 it's about five percent. 13 COMM. COX: So 48 percent could be 53, 14 it could be 43? 15 MR. SIZEMORE: Correct. 16 COMM. COX: So there is significance 17 between 37 percent and 48 percent? 18 MR. SIZEMORE: 37 and 48? You know, I 19 don't have the test for significance for this for 20 September, but there was a significant difference 21 between August and the previous months. 22 COMM. COX: Well, it looks like 23 something good is going on. But as the Chairman says, 24 it sure would be good to know what it was so we could 25 replicate it. 0019 1 MR. SIZEMORE: Yes. And again, we do 2 have some material further along. I have quite a few 3 items at the end of this presentation that deal 4 specifically with the concerns you presented 5 previously. 6 COMM. COX: Okay. 7 CHAIRMAN CLOWE: Great! 8 MR. SIZEMORE: Unfortunately, there's a 9 lot in between, which I'll actually bypass for the 10 sake of brevity here. 11 COMM. COX: However you want to do it. 12 MR. SIZEMORE: Okay. The next slide, of 13 course, is the fair and honest opinion. And from 14 August to September, we see a slight decline, from 56 15 to 52 percent of people agreeing that the Texas 16 Lottery is operated fairly and honestly, a slight 17 increase in the neutral or don't-know position and, 18 again, a slight in the disagree position, from 26 to 19 28 percent. 20 COMM. COX: How can that be? 21 MR. SIZEMORE: I -- pardon me? 22 COMM. COX: What was the first question? 23 MR. SIZEMORE: Overall opinion. 24 COMM. COX: Overall opinion goes up and 25 the fairly and honesty goes down? 0020 1 MR. SIZEMORE: Yes. 2 COMM. COX: That's not rational. 3 MR. SIZEMORE: Arguably so. 4 COMM. COX: Okay. 5 MR. SIZEMORE: In terms of what comes 6 next in this presentation, perhaps a brief background 7 with reference to what has been asked and in the past 8 is necessary. Originally these requests were 9 introduced after a request from Commissioner Clowe in 10 October of last year. And this was in reference to 11 his concern, quote, to reestablish a perception of 12 integrity and honesty at the Lottery. 13 Commissioner Cox explicitly referenced 14 this work on opinion and fair and honest and 15 presenting it at the time of the Deputy Executive 16 Director's monthly presentation, so the materials have 17 been presented to you for roughly one year. 18 The most recent request emerged in April 19 of '06, first request, dealing with the source of 20 information responded to use to arrive at this 21 perception, which is getting at what you just 22 mentioned. And then in August of this year, 23 Commissioner Cox requested a short history of the 24 questions and how they've changed as well as the 25 response rates before and after the questions of the 0021 1 changed. And he also wanted to know what we know with 2 reference to the data for the period of time that the 3 questions have actually been asked. 4 So that's quite a bit to present to you. 5 And what I would like to do is begin with a brief 6 history of where this question has been and what we 7 have been doing with it. 8 The overall opinion question has been 9 asked of Texans originally from '96 to 2002. And it 10 simply stated, "How would you describe your overall 11 opinion of the Texas Lottery Commission on a scale of 12 1 to 7, where 1 is very negative, 4 is neutral, 7 is 13 very positive?" This was asked in the segmentation 14 study, the annual segmentation study only. 15 The response categories changed in 16 October of 2002, whereby a neutral position was, in 17 fact, removed from the responses, and only a 1 through 18 7 point scale remained. So now there's no more 19 opportunity for people to simply pick a "4" position, 20 which is neutral. A "do not know" and "not sure" 21 response position remained as a separate category. 22 Finally, the question was also tagged 23 onto the monthly tracking studies of the segmentation. 24 And in March 2005, the term "Commission" was dropped 25 from the question itself. So this is the overall 0022 1 opinion question, two separate items. 2 The fair and honest question has been 3 asked monthly of Texans. And verbatim it asks, "How 4 much do you agree that the statement of the Texas 5 Lottery is operated fairly and honestly?" The scale 6 was strongly disagree, somewhat disagree, somewhat 7 agree, strongly agree, do not know and uncertain -- do 8 not know and uncertain were combined. Since 1994, the 9 question was asked in the same fashion. 10 In 2002, a seven-point scale was 11 introduced akin to the questions that are used in the 12 rest of the survey: 1, strongly disagree; 7, strongly 13 agree. Sorry. That moved away pretty quick. Did you 14 have any questions? 15 CHAIRMAN CLOWE: No. 16 COMM. COX: Are you going to comment on 17 whether you, looking back, saw changes, significant 18 changes in the rankings when you had those changes in 19 the questions? 20 MR. SIZEMORE: In terms of the response 21 rates? Well, some of the data might actually reflect 22 that, once we look at it. 23 COMM. COX: Okay. 24 MR. SIZEMORE: So ultimately it will be 25 sort of a judgment call on the viewers' part, to see 0023 1 whether it's interesting. Statistical tests, however, 2 will not be illustrated here. The first question was 3 an overall opinion, and I'll show you some of the data 4 from 2004 to 2006. 5 And I should note that each month 6 tracking studies, the sample size is roughly 400, with 7 the exception of October, when we performed the 8 segmentation study and 1,200 respondents were 9 surveyed. And this is the overall opinion question, 10 comparing data all the way back to March of 2004, on 11 the top. The red is negative. Neutral is gray. 12 Positive is blue. 13 And here you see a fairly large leap 14 from February to March. And again, in March the 15 Commission -- the term "Commission" was dropped. And 16 since then, the survey has been relatively stable. 17 And, of course, previously you could see that it was 18 relatively stable as well, running anywhere from -- 19 since March '05, anywhere from 37 percent to almost 20 50 percent. Of course, you should take note of the 21 October points here, here, and you've yet to introduce 22 the October '06, but that is the largest sample size, 23 of 1,200. 24 With reference to the fair and honest 25 question, we have similar data from August '02 to 0024 1 August '06, showing you a trend line over time, 2 beginning October 2002, through I believe September 3 '04. See, it's relatively stable, with a slight 4 decline, very slight. 5 And I can show you the actual numerical 6 figures, the data behind all of this, if you would 7 like to see it. That's on a separate slide. But for 8 the sake of clarity, it's just the lines. 9 The blue, of course, is agreement that 10 the TLC is operated fairly and honestly. The red is 11 disagree. And for comparison's sake, I overlapped the 12 remaining pieces of data. Here in the light blue is 13 the positive marker and, in the gold, the negative 14 marker. And you can see in -- and it looks better in 15 the ext slide -- you can see in July roughly of '05, 16 there is a rather large drop and a consistent drop in 17 positive opinion of the lottery. 18 CHAIRMAN CLOWE: What happened then? 19 MR. SIZEMORE: I believe that was when 20 we were going through the struggles with the Executive 21 Director. 22 Can you confirm that? Do you remember 23 that? 24 MR. TIRLONI: July of 2005 was the 25 jackpot estimation and advertising issue. 0025 1 CHAIRMAN CLOWE: Impact -- 2 MR. SIZEMORE: Again, if you would like 3 to see this a little more clearly, the next slides 4 give you a better picture. 2002 to 2004, and here you 5 see the data at the bottom, running at about -- the 6 positive perception is running at about 55 percent and 7 above. Again, you can see, the trend, fortunately I 8 suppose, is upward in recent months. And in August of 9 '06, about 56 percent of people responded favorably. 10 Do you have any questions to this point? 11 COMM. COX: I thought we saw a down 12 trend on fairly and honestly in the second slide. 13 MR. SIZEMORE: Well, I changed the trend 14 lines from a linear line to a polynomial. 15 COMM. COX: No, I mean it's a point. 16 The second slide where I commented that how can it 17 fairly and honestly go down when overall opinion goes 18 up, are we seeing the same data here? 19 MR. SIZEMORE: Well, that was September. 20 So it moved from 56 -- 21 COMM. COX: Oh, okay. This is -- 22 MR. SIZEMORE: -- to 53 again. 23 COMM. COX: Or two maybe. 24 MR. SIZEMORE: Yes. 25 COMM. COX: Okay. 0026 1 MR. SIZEMORE: This does not include 2 September. I'm sorry. 3 COMM. COX: Different scale -- okay -- 4 or different data points. 5 MR. SIZEMORE: Right. There is one more 6 point added in with that initial slide. Those are the 7 most recent. 8 COMM. COX: Yes. 9 MR. SIZEMORE: This is through August. 10 I'm actually going to skip some of this 11 material. Bear with me, please. 12 Initially one of the concerns that was 13 raised had to do with explaining why people actually 14 disagree that the Texas Lottery is operated fairly and 15 honestly. So we started to track this data in June, 16 and we have three months' worth of material here. 17 And you can see -- and we've talked 18 about this in the past -- that people simply parroted 19 the question: Why do you think the lottery is un- -- 20 do you disagree that the Lottery is fair and honest? 21 And people say, "Because I think it's dishonest and 22 unfair." So, strangely enough, that's one of the 23 largest categories. Now, this is an open-ended 24 question, so respondents had the opportunity to say 25 whatever they pleased. 0027 1 Other high response rates include, "Lack 2 of information, haven't heard enough about the 3 lottery, gambling is wrong." And this is sort of 4 getting at the things that we can deal with, the 5 controlled or uncontrolled issues that we have talked 6 about in the past. 7 Some of these items we can address more 8 specifically; others, we simply can't. For example, 9 the moral position that gambling is wrong, I don't 10 know how much we can do anything about that. "Revenue 11 could go to better places, scandal involving Lottery 12 officials." Strangely, people reference Ben Barnes 13 which is before my time. "Don't know where the money 14 is going, money did not go to schools," and so on. 15 Now, in an effort to stall that 16 parroting issue about, "I don't think the lottery is 17 fair because I think it's unfair," we provided a 18 series of questions where there were only closed 19 answers or closed-ended responses permitted. Based on 20 previous survey results and material we've already 21 seen, we provided people with certain categories that 22 they could respond to. 23 "Don't know enough about the lottery 24 operations in recent months" has been the most 25 referenced -- 72 percent of the sample in August -- 0028 1 the most referenced item. But again, we can see that, 2 "Don't know where the lottery profits go, lottery 3 profits not going to education as publicized" and so 4 on also rank fairly highly. "The odds of winning are 5 unfair, there aren't enough winners," we've seen these 6 issues somewhat recurrently over time. 7 And you can see the bottom one. "I 8 heard or read a story in the news media that led me to 9 believe that the Texas Lottery is not operated fairly 10 and honestly." And in August, this jumped up quite a 11 bit. Now, I should note that the sample sizes are 12 relatively small, which it was interesting because it 13 gives -- these are only the people who said that they 14 disagreed with the statement that the Texas Lottery is 15 operated fairly and honestly. 16 COMM. COX: So you've got the number of 17 people who don't know enough going up significantly, 18 and you've got the people who read a story going up? 19 MR. SIZEMORE: Correct. 20 COMM. COX: Okay. 21 MR. SIZEMORE: Now, are these the same 22 people? I don't know. 23 COMM. COX: Yes. 24 MR. SIZEMORE: There is no way to tell 25 that, at least not from this data. 0029 1 We also asked whether people recall 2 seeing or hearing anything about the Texas Lottery 3 operations in the news media. About 30 percent of 4 people said that they do recall something in the past 5 six months; and again, June, July and August. And 6 based on that data, we broke it out by specifically 7 remembering these items or something about them. 8 And this is where we get at the issue 9 that deals with the educational campaign. There was 10 rather a large leap -- tripling, in fact -- of 11 responses regarding remembering a story about 12 education funding or money going to the education, 13 educational system in Texas, from 11 percent in July 14 to 34 percent in August. This is a large leap. And I 15 again do not have statistical tests on significance 16 for this at this point, but that's obviously one of 17 the more noticeable items. 18 COMM. COX: So this blue, is that August 19 or September? 20 MR. SIZEMORE: Blue on the right is 21 August 2006. 22 COMM. COX: Okay. And that's when we 23 had that seven-point jump in the overall opinion? 24 MR. SIZEMORE: Correct. 25 COMM. COX: But we didn't have that big 0030 1 a jump in fairly and honestly, and knowing about 2 education wouldn't affect their opinion of fairly and 3 honestly probably. So that looks like the culprit, 4 huh? 5 CHAIRMAN CLOWE: It would be an overall 6 impression but not specific. 7 COMM. COX: Yes, sir, I believe that's 8 correct. Okay? 9 CHAIRMAN CLOWE: That's a -- that is -- 10 MR. SIZEMORE: And then finally we asked 11 what respondent's source of information regarding 12 lottery-related news items -- and I referenced this 13 already -- typically television and newspaper, but 14 there was a slight jump in radio ads. 15 That's all I have for you today, with 16 the exception of one final comment. And that is, 17 since we have been presenting this to you for roughly 18 one year now, it is our recommendations that we scale 19 these presentations back to quarterly or even biannual 20 presentations. 21 And if you have any questions, please 22 let me know. 23 CHAIRMAN CLOWE: First, let me say, 24 while Commissioner Cox is thinking that question over, 25 thank you. This background in helpful and it is the 0031 1 kind of detail that I was looking for when I initially 2 asked you what happened. 3 MR. SIZEMORE: Very good. 4 CHAIRMAN CLOWE: I think this is very, 5 very helpful. 6 MR. SIZEMORE: Thank you. 7 CHAIRMAN CLOWE: And, Commissioner Cox, 8 do you need a minute more to mull that over or -- 9 COMM. COX: If you've got something 10 more, I will listen. 11 CHAIRMAN CLOWE: I would like to ask for 12 Director Sadberry's comment on this information. I 13 think it would be helpful to hear from him. 14 MR. SADBERRY: Chairman, Commissioner, 15 thank you. This is at my request that you have the 16 presentation made this morning. We have met 17 previously to determine what the recommendation to you 18 would be and the basis for that. 19 And I think the concern we have is 20 reflected in the earlier question by the Chairman of 21 what do you discern, what benefit do you gain from the 22 presentation of the two slides, which is typically 23 what is presented to you in the monthly meetings, 24 usually the second meeting of the month, without the 25 corresponding analysis that can take advantage of a 0032 1 reasonable amount of data over a period of time from 2 which conclusions may be drawn that you might find 3 helpful or meaningful to you? And rather than do 4 that, perhaps look at presenting it to you perhaps on 5 a quarterly basis and, with that presentation, include 6 the analysis, conclusions and possible recommendations 7 to you that you might find beneficial and we all might 8 find beneficial on a going-forward basis and helping 9 us understand what we do, where we might target in 10 terms of our approaches, how we might improve our 11 methodologies, et cetera. So the idea is to gain 12 efficiency and provide to you effective and meaningful 13 data and analyses as opposed to providing routine data 14 without analysis. 15 With that, I would say -- I would 16 recommend that you consider having a quarterly 17 presentation but, with that presentation, have the 18 analysis and the approach and be proactive in 19 providing that analysis to you as part of the report. 20 COMM. COX: Do you plan to continue to 21 do it monthly for management use? 22 MR. SADBERRY: Yes. And that is the 23 other point. In fact, we talked about that yesterday. 24 That was not mentioned in the presentation. But this 25 data is used in more ways that the presentation at the 0033 1 Commission meetings. It is used from an operational 2 standpoint within the agency. It is conducted and is 3 assembled and analyzed on a monthly basis. That would 4 continue; that would not change at all. It's the 5 presentation of the Commission. And, of course, we 6 could continue to do it on a monthly basis as well, 7 because we will continue that practice within the 8 agency. 9 CHAIRMAN CLOWE: Director Sadberry, I 10 think you and I had a conversation earlier this 11 morning that touches on some of the things that we're 12 trying to measure here. My sense is that this is 13 based on the work that Dr. Sizemore has done, and I 14 think it's a good piece of work, a reflexion on what 15 public opinion is on matters of interest to this 16 agency. 17 And I think I can say that I'm of the 18 opinion that when we receive bad publicity in the 19 paper -- and you pointed out -- and when I say "the 20 paper," I should include the media of all types: 21 Television, radio, printed, et cetera -- such as the 22 conflict relative to the estimation of the jackpots 23 and the resignation of the Executive Director, my 24 recollection is, this board and agency was appearing 25 before the House Licensing Committee simultaneously, 0034 1 if not right at the same time, about wrongful 2 discharge issues. And there were audits being 3 conducted. 4 My sense is, that's going to drive down 5 the public perception of issues relating to this 6 agency, and that's media coverage of events that are 7 ongoing. I think when you have a program like the 8 beneficiary program -- and to me, that is media 9 coverage as well -- those are ad campaigns that this 10 agency is paying for and conducting, but they're on 11 television and they're on radio. That's media 12 coverage. They have a beneficial result. 13 And that sort of thing is part of the 14 controversial nature of what we do here, which is 15 conduct a legalized gaming operation. And there will 16 always be that segment of the population that is 17 opposed to it and those who are in favor of it and a 18 large group of people that are in the middle that are 19 influenced one way or another daily. 20 Now, my sense is that we are not 21 mandated by the Legislature to get out there and try 22 to influence that body of people. We are mandated to 23 operate by the statute, but it is reasonable for us to 24 attempt to answer questions that the people of the 25 State of Texas have about this operation. For 0035 1 example, where does the money go? That's the No. 1 2 question that is always asked. That was a big part of 3 your sample. And the beneficiary program answered 4 that question in great part. 5 There were those who took issue with, if 6 I remember the media coverage, and said it was only 7 one billion out of approximately 33 or $35 billion, 8 and that wasn't significant. Well, there are a lot of 9 different opinions about whether a billion is 10 significant or not. But the fact is, it's a billion 11 dollars. And so we were answering that question, and 12 we were justified in that effort. 13 But I think it goes back to those 14 hearings, Director Sadberry, in regard to the image of 15 this agency and the testimony you gave about your work 16 to change the culture of this agency and the 17 discussion that you had with the State Auditor's 18 office in relation to that. 19 For a time, it was sort of my way or the 20 highway. We were seen as an agency, I think by a 21 large segment of people who did business with us, that 22 we were either going to do it our way or it just 23 wasn't going to get done. And I think you have 24 changed that and you are in that process of change. 25 And there is a spirit in my mind of openness and of 0036 1 objectivity -- 2 MR. SADBERRY: Yes, sir. 3 CHAIRMAN CLOWE: -- and that's the 4 conversation that you and I had earlier today. And I 5 want to highlight that in this discussion, that I 6 think goes to the very thing we're talking about here. 7 This is a not a short-term, one program or one news 8 article kind of fix; it's a long-term cultural process 9 of change that we're aspiring to achieve, not to make 10 everybody happy every day, but to overall be fair, be 11 honest, have integrity and be consistent. The issues 12 that Commissioner Cox has made so forcefully and 13 correctly in the work that he and others have done in 14 the Bingo Division and the audits that have been 15 conducted and are being conducted. That's the thing 16 that we want. 17 So I agree with your recommendation 18 about seeing this material quarterly. And I think 19 it's important that he asked the question that you go 20 on, on a monthly basis. But I want to add emphasis 21 that it is a long-term process. It's not a quick fix. 22 It's something that you and the team of people here 23 working together will achieve and improve. 24 And, Commissioner Cox, I invite you to 25 make any comments you like on this. 0037 1 COMM. COX: Well, I certainly agree with 2 all of that. 3 Director Sadberry, I serve on another 4 board that has a concept that might be useful for us. 5 We have what we call a consent agenda, and that is a 6 series of reports that is included in the board 7 material which can be adopted as a whole, if no one 8 has any particular concerns about any of them, or any 9 individual item can be removed from the consent agenda 10 to the active agenda if a board member at the meeting 11 chooses to do so 12 I wonder whether our board book might 13 include financial statements, some of those kinds of 14 things, so that we could see them every month and ask 15 about them if we chose to, or just let them stay in 16 the book if not? 17 MR. SADBERRY: Commissioner Cox, again, 18 that's consistent with the conversation that you and I 19 as well had this morning. And as I shared with you, 20 that's the sense of the direction that we're moving as 21 we provide these materials to you and prepare for the 22 meetings of the Commission, of which we know many 23 constituencies have an interest -- the agency itself, 24 the public we serve, the players -- all are entitled 25 to the maximum efficiency that we can provide. And I 0038 1 believe very strongly and firmly in components of that 2 being preparation and anticipation. And this concept 3 of the consent agenda seems to be consistent with 4 that; that is, I, for example, as I mentioned to you 5 about the process, now moves to the internal meetings 6 that occur within the agency, having materials and 7 agenda provided in advance and the opportunity to have 8 thought in process and research prior to the meeting 9 so that the meeting is, in fact, an action on prepared 10 items as opposed to the items evolving in the course 11 of the process. 12 That seems consistent with what you are 13 saying. And that is, if you could be presented with 14 the substance, as much as can be anticipated properly, 15 of what you might be presented with on the agenda and 16 have the opportunity to research that within the 17 confines that you operate under the open meetings law, 18 interact with agency staff, et cetera, be prepared to 19 act on a consent basis, I think that has an overall 20 benefit to it and it would be something that I would 21 be very pleased to approach and develop and see what 22 positive results we can achieve from that process. 23 COMM. COX: But as far as the general 24 idea of looking at these quarterly, I'm good with 25 that, with the comfort that Director Sadberry and his 0039 1 staff are looking at them monthly. 2 CHAIRMAN CLOWE: And while we're on the 3 subject, Counselor, it comes under the agenda -- and 4 perhaps it's under the duties of the Executive 5 Director -- Commissioner Cox has brought up the 6 conversation of agendas. I think we've been at this 7 two meetings per month schedule now long enough to get 8 some experience with it. 9 I would like to raise the issue -- and, 10 Commissioner Sadberry, whatever Commissioner Cox would 11 give you in the way of guidance on this, I would 12 appreciate. I think it's time that you evaluate 13 whether or not this is a good program. With the idea 14 now that he has introduced of a varied agenda, we 15 ought to look at whether we want to meet two times a 16 month or once a month and review that. 17 The meetings now have become more 18 orderly, in my opinion, and shorter, and that may be 19 due do your group's organizational skills or it may be 20 due to the fact that we don't have some of the lengthy 21 issues that we have dealt with in the past. But I 22 think it's a good time to evaluate this and see what 23 you want in the future. 24 COMM. COX: Absolutely. 25 MR. SADBERRY: Commissioners, that's 0040 1 very well. It's certainly consistent with what we are 2 currently reviewing. And subject to your pleasure, I 3 would like to present that recommendation to you as 4 soon as it's possible to get that on the agenda for an 5 action item or discussion purposes. It is not noticed 6 today, as I understand it, but we certainly can take 7 it as a direction under my duties to cause it to be 8 so, and we will be prepared to present that to you, 9 that recommendation. 10 CHAIRMAN CLOWE: Thank you. 11 Anything further, Commissioner? 12 COMM. COX: No, sir. 13 CHAIRMAN CLOWE: Dr. Sizemore, your 14 presentation are always fascinating. Thank you. 15 MR. SIZEMORE: My pleasure. 16 CHAIRMAN CLOWE: Very deep and detailed 17 and informative. 18 Now, I didn't mean, Kathy, to try to 19 move on. Anything further on Item No. II? 20 MS. PYKA: No, sir. That is all that we 21 have under Item No. II. 22 CHAIRMAN CLOWE: Very good. 23 24 25 0041 1 AGENDA ITEM NO. III 2 CHAIRMAN CLOWE: And then I'll ask you 3 about Item III. 4 MS. PYKA: Certainly. For the record 5 again, my name is Kathy Pyka, Controller of the 6 Lottery Commission. Tab III includes information on 7 the agency's financial status. The first report in 8 your notebook includes transfers and allocations to 9 the Foundation School Fund and the allocation of 10 unclaimed prizes for fiscal year 2007. 11 Total transfers to the state for the 12 first month of the fiscal year amounted to 13 $79.3 million. And that will take you to the final 14 document in your notebook under this tab, and it 15 includes a report of lottery sales, expenditures and 16 transfers from fiscal year 1992 to the present. And 17 total cash transfers to the Foundation School Fund, 18 again for fiscal year 2007, are $79.3 million, with a 19 cumulative transfer to the Foundation School Fund of 20 $8.74 billion. 21 Commissioners, this concludes my 22 presentation. I would be happy to answer any 23 questions. 24 COMM. COX: No, sir. 25 CHAIRMAN CLOWE: Thank you, ma'am. 0042 1 AGENDA ITEM NO. IV 2 CHAIRMAN CLOWE: Item IV, report, 3 possible discussion and/or action on the advertising 4 and dissemination of prize and game information. 5 Mr. Anger. 6 MR. ANGER: Good morning, Mr. Chairman, 7 Commissioner. For the record, my name is Michael 8 anger, and I'm the Lottery Operations Director. 9 Commissioners, you may recall that there 10 was public comment at the June 28th Commission meeting 11 offered by Prof. Gerald Busald related to the 12 Commission's advertising and dissemination of prize 13 odds and game information. Staff has reviewed Prof. 14 Busald's testimony and identified eight suggestions 15 from that testimony. The staff has evaluated each of 16 the suggestions and has made recommendations regarding 17 how to proceed on each of them. I would like to share 18 with you the staff's recommendations this morning. 19 The first suggestion, Suggestion 1, was 20 to change the Texas Lottery's billboard language to 21 include the word annuitized, similar to the Virginia 22 lottery. Virginia's billboards read, "Estimated 23 Annuitized Jackpot," where Texas' billboards read 24 "Estimated Jackpot." 25 And, Commissioners, the first slide here 0043 1 is an example of one of our lottery billboards. And 2 you'll see up here at the top where it says "Estimated 3 Jackpot" up there, that's the language that we 4 currently have. 5 And then here on the next slide is an 6 example of the Virginia board that was referenced by 7 Prof. Busald. And you'll see down here at the bottom, 8 they have used the language "Estimated Annuitized 9 Jackpot." 10 Staff believes that adding this language 11 to our outdoor billboards would be more likely to 12 confuse the public than clarify their understanding. 13 We have talked to our Communication Services phone 14 bank staff regarding the number of inquiries that we 15 receive about this issue, and staff feels that most 16 people know that the jackpot amount on the board is 17 the amount paid for the 25-year annuity for Lotto 18 Texas and, respectively, for Mega Millions. 19 We have advertised the Lotto Texas 20 jackpot the same way since 1992. And consistent with 21 this approach, we have advertised Mega Millions in the 22 same manner since its introduction. Staff believes 23 that the introduction of the word "annuitized" to its 24 billboard advertising is more likely to introduce 25 player confusion and raise questions regarding whether 0044 1 something has changed related to the estimated jackpot 2 that the public has become familiar with over the 3 years. 4 The outdoor jackpot billboards are 5 mainly located on high traffic interstates and 6 thoroughfares and are designed to quickly communicate 7 the current jackpot amount to the public. More 8 detailed information about the games and their 9 operation is available through other sources, 10 including the lottery website, the how-to-play 11 brochures which are available in the retail sale 12 locations and also through our Communication Services 13 staff which communicate with the public both by phone 14 and via e-mail communications that the agency 15 receives. 16 Each of these avenues are available to 17 the public to further explain the payment options for 18 Lotto Texas and Mega Millions. In a few moments, I 19 will also discuss how we plan to place the cash value 20 option amount on the agency's Internet home page 21 which, when implemented, will communicate both the 25 22 annual payment estimated jackpot amount and the 23 calculation for the cash value option amount to our 24 players. Staff does not recommend the implementation 25 of this particular suggestion. 0045 1 Suggestion No. 2 was to include the top 2 prize odds for jackpot games in our advertising. The 3 Texas Lottery currently provides the overall odds for 4 each of the on-line games in the printed language on 5 the back of the ticket. 6 Commissioners, this slide shows the 7 language currently on the back of our on-line tickets. 8 And I'll point you to the section down here toward the 9 bottom of the paragraph where it identifies the 10 overall odds for each of our games that have a jackpot 11 prize associated with them. And I know this is small 12 and very difficult to read. You have samples of the 13 roll stock there in front of you if you would like to 14 reference that language 15 COMM. COX: It's also small and 16 difficult to read. 17 (Laughter) 18 MR. ANGER: Yes, sir, that's correct. 19 CHAIRMAN CLOWE: Thank you. 20 MR. ANGER: We are challenged with 21 regard to space -- 22 COMM. COX: Yes. 23 MR. ANGER: -- yes. Products Department 24 staff has worked with Legal Service and reviewed the 25 current language and made revisions that will provide 0046 1 additional space and allow us to add the odds of 2 winning the top prize or jackpot prize for all of the 3 on-line games to the back of the on-line game roll 4 stock. 5 And as you'll see here on this next 6 slide, the language in yellow is the additional 7 language. We have made some modifications to the base 8 language in the primary paragraph so that we would 9 have space on the back of the ticket to add this 10 language that talks to the top prize odds for each of 11 the jackpot-based games. 12 We will begin to print this new version 13 of the on-line roll stock in the next few weeks, and 14 it will take us approximately 10 to 12 weeks to 15 completely deplete the current inventory of roll stock 16 that has already been printed and distributed 17 statewide, so we're moving forward with implementing 18 this right away. 19 COMM. COX: So that's a "Yes"? 20 MR. ANGER: Yes, sir. 21 CHAIRMAN CLOWE: Within the confines of 22 the size of the print? 23 MR. ANGER: Yes, sir. And essentially 24 we had to -- space is at a premium, both on the roll 25 stock and also on our instant tickets, as I'll talk to 0047 1 a little bit later on. And so we had to work closely 2 with Legal Services and other staff to remove some 3 language in order to fit this in, but we've made 4 appropriate adjustments in order to do this. 5 CHAIRMAN CLOWE: Is this information on 6 the website, Michael? 7 MR. ANGER: Yes, it is. 8 CHAIRMAN CLOWE: Any place else? 9 MR. ANGER: Yes. It's also available i 10 our how-to-play brochures there at the retail 11 locations. And then in our communications with the 12 public when they call in or e-mail us, we also make 13 that information available. 14 CHAIRMAN CLOWE: So your recommendation 15 will include all of those venues? 16 MR. ANGER: Absolutely. It continues to 17 include those. And Prof. Busald is in the audience 18 this morning. And as we have talked about, that 19 information is also available on our play slips that 20 the players use to fill out to purchase the tickets in 21 the first place. 22 CHAIRMAN CLOWE: So that's a universal 23 adoption? 24 MR. ANGER: Yes, sir. 25 COMM. COX: What is this? 0048 1 MR. ANGER: That is blank on-line roll 2 stock which is used that we generate the tickets on. 3 COMM. COX: This would have something 4 printed on it, if I bought a ticket, on this side -- 5 MR. ANGER: Yes, sir. 6 COMM. COX: -- and that would have my 7 numbers on it, and that would be what I would use to 8 see whether I won or not and what I would turn in if I 9 won something? 10 MR. ANGER: That's correct. 11 CHAIRMAN CLOWE: That's your ticket. 12 COMM. COX: So what would you guess the 13 point measurement on this type is? 14 MR. ANGER: I'm looking at Mr. Tirloni. 15 He has worked closely on the printing of the roll 16 stock over the years. He may have a better guess than 17 I do. 18 COMM. COX: I don't think I can do it on 19 my printer. 20 MR. TIRLONI: I don't think I could do 21 it on mine in my office either. This is printed, 22 obviously, by a commercial printer for GTECH. I would 23 say it's probably -- I don't know -- 6, 4. 24 COMM. COX: Two? 25 (Laughter) 0049 1 Is there -- have we carefully gone 2 through -- I agree that what you've added is 3 important. A lot of things are important. You know, 4 it might be important to say there won't be a winner 5 every time. It might be important to say there could 6 be multiple winners. It might be important to say you 7 have to pay income tax on it. 8 Have we gone through this and determined 9 that all of this is absolutely necessary and we can't 10 make this type any bigger? Or can we make this play 11 slip bigger? Or can something -- 12 MR. ANGER: We do go through and every 13 time we do a game change for the on-line games, 14 whether it's a matrix change or the introduction of a 15 new game, we go back and revise this language. And so 16 there is a thorough review that's done each time that 17 we do this. 18 We also, in the process of this exercise 19 and through an analysis we were wanting to do to 20 shrink the amount of language on the back of the 21 on-line roll stock, we did go through this process as 22 far as this information is concerned. 23 And, Commissioner, you're absolutely 24 right. It's a balancing act. There is information 25 here that we could certainly remove from the back, and 0050 1 we could make the type bigger for some of the 2 information. But it is a tradeoff. 3 And I'll give you an anecdotal example 4 of my own experience. One of the employees here at 5 the agency took a trip to Massachusetts and purchased 6 some instant lottery tickets and was kind enough to 7 give me one, and I had an opportunity to play the game 8 and I won. And in winning, I turned to the back of 9 the ticket, expecting to find the process I would need 10 to go through to claim my prize in the State of 11 Massachusetts, and that information wasn't available 12 on the back of the ticket. 13 And so where their type face may be a 14 little larger on the back of their ticket, the steps 15 that I needed to go through in order to claim my prize 16 weren't available to me, so I had to go to their 17 website and find a phone number and contact someone 18 and get that information. Of course, they are very 19 helpful when I did that, but that information wasn't 20 available. 21 So we have chosen to put a lot of that 22 information on the back of our ticket about the prize 23 levels and where you can go to claim your prizes and 24 things like that. It does take up space. It does 25 cause us to have smaller type. But that information 0051 1 is readily available to every player who receives a 2 ticket. So we tried to balance that out, and we do 3 continue to look at it. I mean, we do want to be more 4 efficient with the language that we place on the 5 tickets. 6 COMM. COX: Does Massachusetts have a 7 higher percentage of unclaimed prizes than we do? 8 MR. ANGER: I'm not aware of the 9 percentage of unclaimed prizes that Massachusetts has. 10 COMM. COX: Okay. So the answer to my 11 question is, you've scrubbed this and scrubbed it and 12 scrubbed it, and either the lawyers or the Operations 13 people believe that every word on there is necessary? 14 MR. ANGER: Yes, sir, I believe that's 15 correct. 16 COMM. COX: Okay. Thank you. 17 CHAIRMAN CLOWE: I want to give you a 18 dissident opinion. I don't think it matters what you 19 print on the back of the ticket if you can't read it. 20 COMM. COX: Well, that's kind of where I 21 was. But -- 22 CHAIRMAN CLOWE: And I think it may give 23 somebody some comfort to say, "We've got it on the 24 back of the ticket." But I think, Michael, 25 probably -- and this is just an opinion on my part -- 0052 1 more people in Texas who are winners say to the clerk, 2 "I've got a winning ticket. What do I do?" And I 3 think it's word of mouth or the website, just like you 4 went to with Massachusetts, or the player's play slip 5 or some piece of information that's more readable than 6 this. 7 I can't read this with my reading 8 glasses. And I think in my mind, it's a sense of 9 fairness about saying what the odds are. And I'm not 10 sure the players care what the odds are, and that's 11 why I'm going to disagree with you when the time comes 12 about your first recommendation and putting up 13 "Estimated Annuitized Jackpot." I don't think that's 14 going to confuse the players because I don't think 15 they care. 16 But I think the sense of it is what I'm 17 focused on. You know, if that's perceived to be the 18 fair and honest thing to do, let's do it. And so I 19 don't think the back of the ticket is all that 20 important. I think it is important to get the 21 information out there on the website, the play slip 22 and other vehicles, but I think the word of mouth is 23 more important than anything else. And I don't think 24 the players care about the odds. I think they care 25 more about the jackpot, the number. 0053 1 COMM. COX: And I would say, to throw in 2 my unsupported opinion, that I don't think they care 3 about one in 40 and one in 71 and one in 8, but that's 4 just my opinion, because I don't care about that. 5 MR. ANGER: The overall odds? 6 COMM. COX: Yes, the odds of winning a 7 dollar, who cares about that? 8 MR. ANGER: That is one thing that is 9 talked about specifically in our statute, is the 10 overall odds of the game. 11 COMM. COX: That's required to be there, 12 by statute. 13 MR. ANGER: That's the language that we 14 previously had. And I think to go to the point, we 15 have that, but we want to take it a step further and 16 provide the top prize odds as well. 17 COMM. COX: Okay. So the reason we've 18 been putting on there "1 in 40," which has been 19 characterized as to mislead the players, was not that 20 at all, it was to comply with the statute? 21 MR. ANGER: That's correct. 22 COMM. COX: Thank you. 23 MR. ANGER: Commissioners, I'll go ahead 24 and move on to Suggestion No. 3, with a commitment 25 that we will go back and revisit this language on the 0054 1 back of the on-line roll stock and see what other 2 adjustments we might be able to make to make it easier 3 to read and relay the critical information. 4 CHAIRMAN CLOWE: Let me just clarify 5 where I think we are on this. You're just presenting 6 this to us for the first time, and you're getting some 7 feedback from us. And we're going to look to Director 8 Sadberry on this to come forward with his 9 recommendations. We're not decisionmaking today, are 10 we, Commissioner Cox? 11 COMM. COX: I don't know, Mr. Chairman. 12 CHAIRMAN CLOWE: Where do you sense you 13 are, Michael, in this process? 14 MR. ANGER: We wanted to come and report 15 to you and let you know the direction that staff was 16 heading on this and receive any feedback that you 17 have, but we weren't bringing it forward as an action 18 item for the Commission. 19 COMM. COX: So this is a report? 20 CHAIRMAN CLOWE: And I see this, 21 Commissioner, under Director Sadberry's authority to 22 take this feedback, in the sense of responses on our 23 part, in the public meeting, which is the only forum 24 we can discuss this in together. 25 And then you're the decisionmaker, 0055 1 Director, as I see it, to come to us with what you 2 think is the right thing, and then we can discuss and 3 debate that with you. 4 MR. SADBERRY: Great, Commissioners. 5 CHAIRMAN CLOWE: I just want to get a 6 focus on where we are. 7 MR. ANGER: Yes, sir. Going on to 8 Suggestion No. 3, this suggestion was to communicate 9 the estimated cash value option for jackpot games on 10 the website. Commissioners, the agency's website is 11 currently being redesigned, and we plan to add the 12 cash value option amount for both Lotto Texas and Mega 13 Millions to the home page as part of that redesign. 14 Staff will begin to address the 15 necessary programming requirements that will allow the 16 cash value option amount to automatically update on 17 the website, just as the jackpot roll amount is 18 automatically updated together. This redesign rollout 19 is planned for the end of the calendar year, and we 20 plan to have that program completed and in place so 21 all phases of this project can be implemented 22 simultaneously with the new website rollout. 23 Until that time, the cash value option 24 amount is currently available on the website as part 25 of the Lotto Texas jackpot calculation information 0056 1 that we have posted on the website, that we have been 2 conducting for approximately 15 months. 3 Suggestion No. 4 is to communicate the 4 estimated cash value option for the Mega Millions game 5 on the Mega Millions website as well as the Texas 6 Lottery website. 7 Commissioners, as you're aware, we are 8 just one of 12 member states governed by certain 9 contractual and operating agreements related to Mega 10 Millions. However, Executive Director Sadberry 11 intends to take this matter up with other executive 12 directors in the Mega Millions states for 13 consideration and possible implementation on the Mega 14 Millions website. 15 Commissioners, Suggestion No. 5 is print 16 the estimated cash value of the jackpot prize on every 17 ticket. As we discussed a few moments ago, staff has 18 agreed to place the cash value option amount of the 19 jackpot prize for both Lotto Texas and Mega Millions 20 on the agency's website. We believe that the website 21 is an appropriate means to communicate the cash value 22 option amount to those players who are interested. 23 And the slide up here on the screen is 24 an example. And I was fortunate enough -- Prof. 25 Busald shared with me the presentation documents that 0057 1 he brought with him when he gave his public testimony 2 back in June, and I've scanned these in and they're 3 here on the slide. And what we're really talking 4 about here is, is this is currently the way the ticket 5 generates. It either says "Cash Value Option" here or 6 "25 annual payments." 7 The example here is one that Prof. 8 Busald has written up where the cash value option 9 appears and then the estimated calculation for the 10 cash value option on the game would print and generate 11 electronically below that. So this is what we're 12 talking about. I will highlight for you here that we 13 print the estimated jackpot amount at the top of the 14 tickets, which is based on the 25 annual payments, 15 which is our standard form of advertising for the 16 Lotto Texas game and then Mega Millions, respectively 17 Staff believes that a significant 18 majority of the playing public has an understanding 19 that the jackpot is advertised and is the amount paid 20 over the annuity period. Staff is concerned that 21 attempts to communicate two amounts, the annuity 22 amount and the amount a player would receive if they 23 chose the cash value option, could actually lead to 24 player confusion about the current jackpot amount that 25 is being offered for a particular drawing. 0058 1 There's also the concern that players 2 could mistake the cash value option amount for the 3 annuity amount and think that the jackpot being 4 offered is less than what it truly is. Staff does not 5 recommend the implementation of this suggestion 6 COMM. COX: Okay. What is the default? 7 If I go hand one of these in -- 8 MR. ANGER: Twenty-five annual 9 payments -- 10 COMM. COX: Okay. So -- 11 MR. ANGER: -- for -- I'll use Lotto 12 Texas. Mega Millions is a different annuity time 13 frame. 14 COMM. COX: Okay. But the default is 15 the annuity? 16 MR. ANGER: Yes, it is. 17 COMM. COX: If I just hand this in, does 18 the clerk then ask me -- do I check a box or -- 19 MR. ANGER: On the play slip, you check 20 a box. 21 COMM. COX: Okay. 22 MR. ANGER: The default option is the 23 annuity option. 24 COMM. COX: So if I don't check a box, I 25 get an annuity ticket? 0059 1 MR. ANGER: Yes, sir. And if you go in 2 and you request a Quick Pick, if you don't complete a 3 play slip, the default option is annuity, and the 4 clerk generally prompts the player and offers them the 5 option of -- annuity or cash value option. But the 6 default is annuity. 7 CHAIRMAN CLOWE: And I think it's 8 important to tell you, Commissioner Cox, that I stood 9 by the counter and observed some of these 10 transactions. I think over 50 percent now are Quick 11 Picks, aren't they, Michael? 12 MR. ANGER: Yes, sir. 13 CHAIRMAN CLOWE: And in almost every 14 case where a client asks for a ticket, says "Quick 15 Pick." The clerk will say, "Do you want cash value?" 16 They seem to tend -- not in every case -- but they 17 tend to say, "You want cash value?" And I think that 18 prompts them in that direction. 19 And people have asked me, "Why are you 20 lurking around here? Why don't you buy something?" 21 But, you know, it's informative to watch this process. 22 Now, did you have another question? 23 COMM. COX: Well, I guess I'm just not 24 clear on how confusing that would be. It's going to 25 be on its -- I mean, on the one hand, I don't really 0060 1 see the value of putting it there. But, on the other, 2 it doesn't seem that confusing is a good reason to not 3 do it. You're only going to put it on the ones where 4 they took the cash value option, and they're only 5 going to get it after the fact, it's not part of 6 anything being advertised, so how can it be confusing? 7 MR. ANGER: Commissioner, what I would 8 say is, is that generally speaking, across all of our 9 advertising, we do focus on the annuity value of the 10 estimated jackpot and that's what we advertise, that's 11 what we put out there in a number of different ways, 12 including, up at the top of these tickets, by way of 13 example, you know, that's posted on there, and that's 14 what the players look to. You know, that's 15 information that we typically provide on those lines 16 and make available to them. 17 And I will tell you from my personal 18 experience in interacting with players, that there is 19 an opportunity, I believe, for confusion when you 20 start putting two different jackpot prize amounts on 21 the ticket. 22 COMM. COX: Now, Michael, let me tell 23 you where I agree with you and where I continue to 24 disagree with you. 25 MR. ANGER: Yes, sir. 0061 1 COMM. COX: I agree with you that if we 2 started putting $23 million and $12.9 million on the 3 billboards, that that would be confusing. 4 MR. ANGER: Yes, sir. 5 COMM. COX: But I can't see how telling 6 someone who has bought a cash value option ticket how 7 much he might win is going to confuse him, and that's 8 all this seems to be asking for. 9 MR. ANGER: We can certainly go back and 10 look at this option further. I think what comes to 11 mind for me at this point is working through any 12 programming activity that we need to -- 13 COMM. COX: That's a different answer. 14 MR. ANGER: So I would like to go back 15 and maybe take a look at that and gather some further 16 information and see what our capabilities are in that 17 regard. 18 COMM. COX: As far as it being confusing 19 when the only guy who's getting it is the guy who 20 chose cash value, to me, if you're going to put a 21 number on the cash value ticket, the $23 million is 22 the one that's irrelevant. Take it off the put the 23 cash value, because the guy who holds that ticket 24 doesn't have anything to do with $23 million. 25 MR. ANGER: Thank you. 0062 1 CHAIRMAN CLOWE: In line with those 2 comments, do you have a picture of the annuitized 3 ticket? 4 MR. ANGER: I don't, sir. 5 CHAIRMAN CLOWE: And would it be blank 6 right there where it says "Cash value option"? 7 MR. ANGER: It would say -- 8 MR. TIRLONI: It would say "25 Annual 9 Payments." 10 CHAIRMAN CLOWE: So that goes to 11 Commissioner Cox's question. You know, let's just 12 have an either/or. 13 MR. TIRLONI: Well, the only thing I 14 would say about that is, the message that's at the top 15 of the ticket is static. So going to what Michael 16 said a few minutes ago, we'll have to look at -- we'll 17 have to look at the programming to be able to make 18 that happen. 19 CHAIRMAN CLOWE: But that's a mechanical 20 question -- 21 MR. ANGER: Yes, sir. 22 CHAIRMAN CLOWE: -- which is altogether 23 different from I think the feedback we're giving. We 24 like the idea of identifying on the ticket what the 25 purchaser is entitled to if they win the first prize. 0063 1 MR. ANGER: Yes, sir. We'll pursue that 2 further. 3 CHAIRMAN CLOWE: Okay. 4 MR. ANGER: Suggestion No. 6, print the 5 overall odds of winning the top prize on every instant 6 ticket, along with the overall odds of winning a prize 7 in the game. So this recommendation is very similar 8 to what we just talked about with the back of the 9 on-line roll stock, but for the instant product. 10 Commissioners, space is at a premium on 11 the back of our instant tickets. And, obviously, 12 we've determined that it's also at a premium on the 13 back of the on-line tickets. But particularly for our 14 low dollar prize points, the one dollar ticket is very 15 small, and so we have very limited space on the back 16 of that ticket as well. And so one of the challenges 17 was working through the language issues that we might 18 face if we were to pursue this recommendation. 19 Products Department staff is working 20 with Legal Services, our instant game manufacturers 21 and Dr. Eubank, the Commission's contracted 22 statistical consultant, to review our current language 23 and make revisions that will provide additional space 24 that would allow us to add the odds of winning the top 25 prize on the back of our scratch-off tickets. 0064 1 There are additional challenges with 2 adding odds related to the top prize that we are 3 working through, and I wanted to give you some 4 background on that. Specifically, the odds have to be 5 calculated prior to the printing of the game, based on 6 the ordered quantity identified in your working 7 papers. However, the actual quantity printed may vary 8 from the ordered amount by plus or minus three 9 percent, based on contract. This means that the 10 actual odds related to the top prize could only be 11 determined after printing when it is too late to add 12 them to the back of the ticket. 13 COMM. COX: You mean we don't -- we 14 order a game and we don't know what the odds on it 15 are going to be until it's printed? Is that what you 16 just said? 17 MR. ANGER: Well, we know, based on the 18 ordered quantities. So, for instance, if we had a one 19 dollar ticket and we had a print run of -- in the 20 working papers, a print run of 12 million tickets, 21 then we can calculate the overall odds for the top 22 prize, based on the number of overall top prizes that 23 have been identified for production in that game. 24 So say it's six. So we know that 25 there's odds of approximately one in two million, 0065 1 based on what we ordered. But what happens is, is 2 that in the production of these tickets -- and the 3 tickets are printed on a press line and they're 4 generated at a high speed that's moving thousands of 5 feet per second. 6 And so what happens is, is that we never 7 get an exact 12 million print quantity. We get some 8 variation from that number, plus or minus. We define 9 in our contractual relationship with our instant 10 tickets manufacturer's an acceptable range or 11 tolerance that they can print within, because the line 12 can't be stopped at exactly 12 million tickets. 13 So they print within that range. And as 14 long as it's within that range, then we accept the 15 game. So it prints plus or minus 3 percent of the 12 16 million that we order in the working papers. So 17 there's a little bit of variance in the actual odds 18 that we calculate, going in, versus what may actually 19 exist after the game is produced, because the print 20 quantity -- 21 COMM. COX: What you're describing to me 22 gets lost in the rounding. If you use whole numbers, 23 that's going to get lost. 24 MR. ANGER: It's very small. But to be 25 precise -- 0066 1 COMM. COX: Well, there is no reason to 2 be precise if you can't be accurate. 3 MR. ANGER: So to your point, that's 4 exactly the challenge we face with identifying the 5 actual top prize odds for the instant tickets. And so 6 we're working through language that would give the 7 player a fairly accurate representation of what those 8 overall odds are related to that top prize on any 9 given instant game, and work through making it clear 10 when we put that language on the back of the ticket, 11 what that calculation is actually based on. 12 COMM. COX: Now, just -- I think the 13 answer to this is giving the information in units of 14 precision that are the same as the units of accuracy. 15 If it's not accurate to two decimal places, don't give 16 them but one decimal place. If it's not accurate to 17 one decimal place, don't give them any decimal places. 18 But give them something. 19 MR. ANGER: Absolutely. 20 COMM. COX: Would that work? 21 MR. ANGER: And that's exactly the 22 direction we're working. 23 COMM. COX: Okay. 24 MR. ANGER: We're just trying to work 25 through that language. In other words, it's a 0067 1 complicating factor. It's not something that 2 precludes us from doing this. 3 COMM. COX: Great! 4 MR. ANGER: So that's where we're 5 headed. That's the short answer. 6 CHAIRMAN CLOWE: Michael, I don't think 7 you heard Commission Cox say round up. 8 You did say that, didn't you? 9 COMM. COX: Did I say round up? 10 CHAIRMAN CLOWE: I thought you said 11 round up. 12 COMM. COX: I thought I said round. 13 CHAIRMAN CLOWE: Well, you could round 14 up. 15 COMM. COX: I would have to think about 16 whether we would want to round up or down. 17 CHAIRMAN CLOWE: Well, in fairness, if 18 you round up, you have given the highest odds, haven't 19 you? 20 COMM. COX: One in 6.5 would round to 21 1.7. You would be giving them a rosier picture than 22 actual. You would round down, wouldn't you? 23 CHAIRMAN CLOWE: Let's round down. I 24 was going the wrong direction. I wanted to go in the 25 fairest way, so -- 0068 1 MR. ANGER: The most conservative number 2 possible for -- 3 COMM. COX: There are a couple -- I see 4 a couple of pretty good, bright guys -- 5 CHAIRMAN CLOWE: I think I was right. 6 Let's get Dr. Sizemore up -- 7 COMM. COX: Let's take my example. One 8 in 6.5 -- 9 CHAIRMAN CLOWE: If you round up -- 10 COMM. COX: -- better than 1.7, isn't 11 it? 12 CHAIRMAN CLOWE: Yes. 13 COMM. COX: Okay. You round up. 14 CHAIRMAN CLOWE: Okay. 15 MR. ANGER: And we have rounded up. On 16 the back of the on-line roll stock that we presented 17 earlier, we rounded up. 18 CHAIRMAN CLOWE: It's just an attempt to 19 be totally fair and honest. 20 MR. ANGER: Absolutely. So that the top 21 prize odds for Cash Five are like one in 435,896 or 22 '97, so we rounded to one in 436,000 -- 23 COMM. COX: Yes. 24 MR. ANGER: -- that's what we've done. 25 CHAIRMAN CLOWE: Okay. I think 0069 1 Commissioner Cox said round up. 2 (Laughter) 3 COMM. COX: I ultimately landed there, 4 after I saw a couple of pretty bright folks out there 5 going like this (indicating). 6 (Laughter) 7 MR. ANGER: So in short, Commissioners, 8 we are working in the direction of getting this 9 language and information added to the back of the 10 instant tickets. 11 A couple of things I wanted to highlight 12 about that -- and this is just more about timing -- 13 but it is important to note that the Product staff 14 worked several months in advance with regard to our 15 instant ticket game plan and the production of working 16 papers, and so we're actually working now on games 17 that will launch in next calendar year. That 18 basically means that there will be a gap before all 19 tickets with the top prize odds actually appear for 20 sale at retail locations. 21 And, additionally, we also produce some 22 games in advance which are stored for later 23 introduction and insertion into the game plan, and 24 that's to give us a cushion and give us some 25 flexibility to introduce games into the market and be 0070 1 responsive to the market. And we call those shelf 2 games. 3 And so it is possible that we could have 4 a game that we produced as a shelf game, and it may 5 get inserted later on in the instant ticket game plan 6 and it would appear out there. 7 So in short, what I'm saying is that it 8 may take some time before all of our inventory turns 9 over and begins producing this information. But our 10 goal is to finalize this language and finalize how we 11 would produce this on the back of the tickets and 12 immediately begin doing it, going forward with all 13 working papers and all instant games. 14 Commissioners, Suggestion 7 is to print 15 the cash value of annuity prizes on instant ticket 16 games that contain annuity prizes. We do not 17 currently offer a cash value option on any of the 18 instant ticket games that offer an annuity prize. 19 However, if we do pursue this option in the future, we 20 will further evaluate the suggestion at that time and 21 contemplate implementation of that action. 22 And the final suggestion, Suggestion 8, 23 is to remove instant ticket games as soon as all the 24 top prizes in the game have been claimed. 25 Commissioners, you may recall in February of this 0071 1 year, staff presented the Commission with detailed 2 information regarding instant game closings and the 3 process Texas uses to close instant games. In 4 addition, the Research Department provided information 5 from other jurisdictions regarding their procedures 6 for closing games. 7 In that meeting, the research 8 information revealed that no states had a game-closing 9 procedure model quite like Texas. And, in fact, our 10 procedure is one of the more comprehensive models that 11 exist out there. Our procedure take into 12 consideration the cost of printing the game, the 13 amount of prizes paid, the sales for the game, the 14 number of weeks the game has been in market and the 15 average game sales for a game with the same prize 16 point and print quantity. 17 All this allows staff to make a sound 18 business decision about when a game should be closed. 19 Staff continues to follow the same game-closing 20 process today, and we continue to sell some games 21 after all of the top prizes have been claimed. Staff 22 continues to believe that these games contain valuable 23 prizes that interest our players after the top prize 24 has been claimed. And staff does not recommend the 25 implementation of the suggestion at this time. 0072 1 And, Commissioners, that concludes my 2 presentation. We would be happy to answer any 3 questions you have or receive any feedback. 4 COMM. COX: Let's take another run 5 through the top prizes. Let's not look at theory for 6 a moment; let's look at practice. As a practical 7 matter, don't we pretty well do that? Because I've 8 looked at your worksheets and I would imagine from the 9 way you do it, that probably in virtually all of the 10 cases, you're closing them at about that time or after 11 that time. What's your experience, Michael? 12 MR. ANGER: There are times when we end 13 up closing a game where there are still top prizes 14 remaining. 15 COMM. COX: And we would be criticized 16 for that. 17 MR. ANGER: That's right. And we also 18 have situations where we have all the top prizes sold, 19 where the game continues to remain out there. It 20 varies across the spectrum, if you will, Commissioner. 21 I would say that approximately, the comment that you 22 make approximately probably holds true across all of 23 the games. But around the time that we sell through 24 the top prizes of those games, they're selling through 25 and coming up to a sales percentage where we would 0073 1 typically go ahead and proceed with closing them. But 2 they're not tied to that. We're not looking at that 3 as a factor. In fact, I will tell you, while that 4 information is available on the spreadsheet, it is not 5 part of the analysis that staff take into 6 consideration with regard to the closing of the game. 7 We're looking at -- 8 COMM. COX: Looking at whether it's a 9 dog or not? 10 MR. ANGER: We're looking at whether -- 11 that's right. We're looking at whether it's selling. 12 We're looking at how much inventory we still have 13 remaining available. We're looking at revenue to the 14 state. We're looking at a multitude of factors and 15 we're comparing each individual game, based on how 16 it's comparing and indexing, against other similar 17 games that we've had out in the marketplace recently. 18 And that's the process that we go 19 through with the Office of the Controller. They go 20 through and reevaluate that and refresh that analysis 21 for us on a regularly scheduled basis. And so we're 22 looking at a lot of factors. And, quite honestly, the 23 number of top prizes remaining does not factor into a 24 decision to keep a game open or to close the game. 25 It's information. 0074 1 COMM. COX: Now, if I remember our 2 discussion of whether we should close the game once 3 all top prizes have been sold, the answer there was, 4 "We don't know when they're been sold. We can only 5 know when they're been redeemed." 6 MR. ANGER: That's right. We are only 7 aware of the prizes that come forward and are 8 redeemed. We don't know, after a game is introduced, 9 the status of any of the tickets out there, you know, 10 where they might be, what the particular situation is 11 with those tickets. The only thing that he really can 12 report on is whether someone has come forward and 13 claimed those tickets. The top prize could be in the 14 possession of a party who has not as yet come forward. 15 That situation might exist. 16 COMM. COX: If you wait -- if you 17 closed it after all top -- if your only criterion was 18 closing it after all top prizes had been sold, we 19 would probably be keeping the games open a lot longer 20 than we are now, because you would have to wait until 21 it's redeemed, and they have 180 days to redeem it. 22 And we know that some don't ever get redeemed, even 23 the big ones, and that some don't get redeemed until 24 the 180th day. "We'll use that as a savings account." 25 MR. ANGER: That's correct. And some 0075 1 prizes, you know, for whatever reasons, go unclaimed 2 and no one ever comes forward to claim those prizes. 3 And so that's a big part of the reason why that's not 4 part of the business analysis with regard to the 5 closure of these games. 6 COMM. COX: Okay. So, Mr. Chairman, I'm 7 convinced that the procedure that we're using here is 8 properly reporting that but not necessarily making 9 that the sole determinate. I've gone through this 10 process in detail, and it is well thought out and I 11 think very thoroughly professionally done. 12 CHAIRMAN CLOWE: I share in that 13 feeling, Commissioner. And I would like, with your 14 agreement, to ask Director Sadberry to examine this 15 again in-depth and let us hear from him again on this, 16 to make sure we're satisfied. 17 I think you and Michael have done an 18 excellent job of bringing up there's two sides to this 19 and that it would shock me to think we would close a 20 game and we haven't had all of the top prizes sold. 21 That would seem to be unfair. 22 But as you pointed out, we may have sold 23 them and not know this, that we've sold them. And we 24 don't want to do the opposite and place ourselves in a 25 position of selling a game that there is nothing to 0076 1 win, so to speak. That would be the most unfair 2 example that I might use. 3 COMM. COX: Yes. 4 CHAIRMAN CLOWE: And then you have the 5 overlay of a business decision about the fixed costs 6 and then the return on the investment that must be 7 done fairly with the players in mind. This is a good 8 discussion. It's brought up some good points. 9 Director Sadberry, I would like for you 10 to pursue this -- 11 MR. SADBERRY: It will be done, sir. 12 CHAIRMAN CLOWE: -- and tell us what 13 your thinking is when you come back with final 14 recommendations on these eight points. 15 MR. SADBERRY: It will be done. Thank 16 you. 17 CHAIRMAN CLOWE: Have we been reticent 18 and less than forthcoming and shy about giving you our 19 opinions? 20 MR. ANGER: No, sir. I believe you've 21 been very clear. 22 COMM. COX: Very good. 23 CHAIRMAN CLOWE: Anything further? 24 COMM. COX: No, sir. Good report. 25 CHAIRMAN CLOWE: Thank you both very 0077 1 much. 2 Commissioner, would you like a short 3 break? 4 COMM. COX: Great idea. 5 CHAIRMAN CLOWE: Take a short break. 6 Thank you. 7 (Off the record: 10:27 a.m. to 10:40 a.m.) 8 CHAIRMAN CLOWE: May we come back to 9 order. We have a witness who wishes to comment on 10 this item, Mr. Gerald Busald. 11 PROF. BUSALD: Thank you, Commissioners. 12 I'll give you a copy, again, of what I gave you back 13 in June. 14 CHAIRMAN CLOWE: I'm calling on Prof. 15 Gerald Busald relative to comments he would like to 16 make to Item No. IV on the agenda. 17 PROF. BUSALD: Yes, Commissioners. For 18 the record, my name is Gerald Busald. I'm a professor 19 of mathematics at San Antonio College and I guess the 20 instigator of this particular item on the agenda. 21 I certainly would like to thank staff 22 for reviewing these and taking them to heart. And I 23 especially wish to thank the Commissioners for their 24 opinions on a couple of the items that may seem 25 slightly different than the staff. 0078 1 I did want to clarify a couple of items 2 that I thought were not quite there. I'm glad the 3 website is being redesigned. You can find the cash 4 value option amount on the website if you know where 5 to look, and I'm glad it's being redesigned to make it 6 more obvious. The Mega Millions cash value you cannot 7 currently find. I have to go to Ohio to get that. 8 But if we're going to have it on the website, I think 9 that's great. 10 I think there was a little bit of 11 misunderstanding. First of all, the third item, I 12 say, "Remove instant tickets as soon as all the top 13 prizes are gone," not sold. As I agree, we don't know 14 when they're sold; we only know when they're claimed. 15 Even if we put the top prize odds on the 16 back of a scratch off, if all the prizes are gone, 17 those odds are irrelevant. So we're once again back 18 to what difference does it make if you tell them the 19 odds of winning the top prize if actually at that 20 point the top prize is -- the odds are zero? But 21 all you can -- I agree that all you can do on the back 22 of a scratch off is give the design odds. That's all 23 you can do, and that's all they put on the website, 24 and I think that's fair. 25 Obviously, the odds change as tickets 0079 1 are sold. They may go up or down, and that's not 2 something that is reasonable to disclose, so I don't 3 really have any problem with that. 4 Let's see. The other thing I wanted to 5 mention is, the odds on the front of the ticket, you 6 know, the emphasis is on, once again -- and the staff 7 has stated they've always advertised the annuitized 8 amount because it sounds better, and I understand the 9 reason for advertising that. So to put the cash value 10 on there does make a lot of sense. 11 The one thing that Virginia did that 12 wasn't addressed -- and it's not on -- is on their 13 billboard, they actually say the top prize chances are 14 1 in 176 million. They don't say overall odds. I 15 believe our billboards -- and Michael could respond to 16 this -- I don't think that our billboards say odds at 17 all on those. So if it's not there, at least it's not 18 going in one direction versus the other 19 So over all, I just say I am very 20 satisfied to think that I might have helped to 21 instigate some changes. And I was reluctant to bring 22 these -- the reason I brought these back in Jan- -- in 23 June, rather -- when I was aware of a lot of these 24 things, a year ago after I did that presentation in 25 Washington, D.C., where I compared various states, I 0080 1 became aware of a lot of these differences. 2 But because I was on the search 3 committee, I didn't think it was appropriate to bring 4 those forward until after such time as Anthony was 5 named the Executive Director. And so that is the time 6 I brought them forward. I think they've been 7 responded to in a timely manner. And I certainly 8 think we're going in the right direction, and I 9 certainly appreciate your input. 10 CHAIRMAN CLOWE: Any questions? 11 COMM. COX: I do have a question, not 12 related to that specifically, Mr. Chairman. 13 CHAIRMAN CLOWE: Certainly. 14 COMM. COX: Prof. Busald, I'm troubled 15 by a quotation from a Houston Chronicle yesterday that 16 was attributed to you. Would you help me with this? 17 PROF. BUSALD: Yes. 18 COMM. COX: It said, "Busald said the 19 Commission's practices amounts to bait and switch 20 advertising." 21 PROF. BUSALD: Yes. If you advertise 22 one thing and give the odds for something else, that 23 is bait and switch, in my opinion. 24 COMM. COX: Help me tie those together. 25 What are we advertising -- 0081 1 PROF. BUSALD: Well, we're advertising 2 the jackpot. 3 COMM. COX: Right. 4 PROF. BUSALD: And if it's -- so we're 5 advertising the jackpot. Almost everything is 6 emphasized toward the jackpot. But the odds given are 7 overall odds. And so the direction of adding the odds 8 of winning the top prize is removing that objection 9 that I had, because if you advertise one thing and you 10 give the odds for something else, I do believe that is 11 bait and switch. That is my opinion of that. But I 12 think we're addressing that and removing that 13 objection, in my opinion, with what your responses 14 were today. 15 COMM. COX: Okay. And in that same 16 article, there is a quotation from a Prof. Jim Leigh. 17 Did you talk to him? 18 PROF. BUSALD: I don't know who he is, 19 so I have no -- 20 COMM. COX: So you don't know what his 21 remarks were -- 22 PROF. BUSALD: I don't have a connection 23 with him or know who he is. 24 COMM. COX: He referred to something as 25 being misleading and puffery, and I was just wondering 0082 1 if you knew what he was referring to? 2 PROF. BUSALD: No, I don't; I don't have 3 any idea. I didn't have anything to do with that. 4 COMM. COX: Thank you, Mr. Chairman. 5 CHAIRMAN CLOWE: Thank you, Prof. 6 Busald. We appreciate you being here. 7 PROF. BUSALD: Well, thank you very much 8 for your changes -- or proposed changes. I'm looking 9 forward to them being implemented. 10 AGENDA ITEM NO. V 11 CHAIRMAN CLOWE: Next we'll take up Item 12 No. V, consideration of, possible discussion and/or 13 action, including approval of the FY07 Internal Audit 14 Activity Plan on external and internal audits and/or 15 reviews relating to the Texas Lottery Commission 16 and/or to Internal Audit Department's Activities. 17 Ms. Melvin. 18 MS. MELVIN: Good morning, 19 Commissioners. For the record, my name is Catherine 20 Melvin, Director of the Internal Audit Division. 21 Before you today is the proposed fiscal 22 year 2007 internal audit activity plan of which I am 23 seeking your approve. The plan represents proposed 24 projects and activities for the agency's Internal 25 Audit function this fiscal year. 0083 1 Commissioners, at your request, the 2 focus of Internal Audit's efforts in fiscal year 2007 3 will be a planned performance audit of the Charitable 4 Bingo Operations Division. Based on conditions noted 5 in an August 2006 Internal Audit report and prior 6 minimal audit attention, Internal Audit will be 7 continuing its assessment efforts in the Charitable 8 Bingo Operations Division, examining the effectiveness 9 and efficiency of the other functions and 10 responsibilities not covered in our previous audit. 11 The Internal Audit Division is committed 12 to being a valuable resource in improving the agency's 13 operations and is proposing a plan that targets key 14 agency responsibilities, yet builds in the flexibility 15 that allows for Commissioners and management requests, 16 special requests, and those special requests are those 17 requests for unanticipated requests for Internal Audit 18 assistance that may arise throughout the year that 19 require immediate attention. 20 I would like to speak a bit about 21 acceptable level of risk. While the proposed plan 22 results from our consideration of a wide ranging scope 23 of projects, it does not nor does it intend to address 24 or provide coverage for all agency components or 25 systems. Our goal is to optimize our limited 0084 1 resources to provide reasonable coverage in areas we 2 believe require the most attention. 3 However, because we cannot address risk 4 in every area, it is important for the Commission and 5 management to understand the limitations of the audit 6 coverage and the risks they assume in areas not 7 audited. Having said that, I believe the plan 8 allocates the resources of the Internal Audit Division 9 to the most important priorities and risk of the 10 agency at this point in time. 11 In closing, I would like to thank those 12 that assisted in the compilation of this plan and just 13 say that we look forward to helping the agency meet 14 its objectives this fiscal year. If you have any 15 questions at this time, I would be happy to answer 16 those. 17 COMM. COX: Catherine, you show 1,320 18 hours reserved for special requests. I think you said 19 that that's 20 percent of your available hours? 20 MS. MELVIN: Yes, sir. 21 COMM. COX: How do you manage that? We 22 know it isn't going to be exactly 1,320 hours. It 23 could be 600; it could be 1,800. And it's subject to 24 fairly large variability. If you're called on for 25 much more than that, how do you plan to adjust the 0085 1 hours or make additional hours available? 2 MS. MELVIN: That is a challenging area 3 to manage because we don't have much control of what 4 may happen throughout the year. But all the efforts 5 of the Internal Audit Division need to be based on 6 risk. And so as requests come in, as issues come in, 7 we manage those against assessed risk of the agency. 8 So just because a request for Internal Audit 9 assistance comes up, it doesn't mean I draw up a 10 planned project or an existing project to answer that. 11 It has to rise to the significance and I say, "Okay. 12 This really is an immediate issue for the agency." 13 And, of course, that's subject to Commissioner 14 approval at the same time. 15 COMM. COX: So you've got a triage 16 activity first? 17 MS. MELVIN: Yes, sir. 18 COMM. COX: But let's say that 1,800 19 hours' worth of requests came from Director Sadberry. 20 I think we would want you to address all of those. 21 Would you then postpone some of the other activities? 22 Would you look to gain additional resources on a 23 temporary basis? Would you do whatever seemed right 24 at the time? 25 MS. MELVIN: Absolutely. I would use 0086 1 all of those options. 2 COMM. COX: Okay. And if you have a 3 call for significantly fewer than 1,320 hours, are 4 there other projects that you've identified that were 5 at a lower risk that would then come on your radar 6 screen? 7 MS. MELVIN: Yes, sir. In the best of 8 all possible worlds, that would be ideal, so that we 9 could reach down into those other areas that don't 10 make it to the plan but still are of significant risk 11 to the agency. 12 COMM. COX: Okay. Thank you. 13 Thank you, Mr. Chairman. 14 CHAIRMAN CLOWE: Catherine, would you 15 care to elaborate on your performance audit of the 16 Charitable Bingo Operations Division, beyond what 17 verbiage you've given us there? 18 MS. MELVIN: Chairman, I don't have 19 additional information to share with you at this 20 time -- I will bring forward more detail at a later 21 Commission meeting -- other than to say we are 22 planning a full scope performance audit. We don't 23 want to duplicate areas or look at areas that we've 24 previously looked at. However, we will look at how 25 the division as a whole is effectively meeting its 0087 1 charge. And in that process, we do want to examine 2 efficiencies, too. 3 CHAIRMAN CLOWE: So that's going to be 4 comprehensive and would include major functions, 5 including licensing as well as other activities? 6 MS. MELVIN: Yes, sir. I would say 7 their primarily responsibilities are the licensing and 8 enforcement, the two heads of that. And so we spent 9 quite a bit of time in the enforcement side of the 10 house, so licensing would be the other component. 11 CHAIRMAN CLOWE: And enforcement evolves 12 from auditing? 13 MS. MELVIN: Yes, sir. 14 CHAIRMAN CLOWE: Those are closely 15 connected. Very good. 16 Commissioner, I think this requires a 17 motion for approval of this plan. 18 COMM. COX: So move. 19 CHAIRMAN CLOWE: Second. 20 All in favor, please say "Aye." 21 COMM. COX: Aye. 22 CHAIRMAN CLOWE: Aye. 23 The vote is 2-0 in favor. 24 Do you have a copy you want us to sign? 25 MS. MELVIN: Sir, it's the copy before 0088 1 you -- 2 CHAIRMAN CLOWE: Right here? 3 MS. MELVIN: -- if you would sign that. 4 CHAIRMAN CLOWE: Thank you, Ms. Melvin. 5 MS. MELVIN: Thank you. 6 AGENDA ITEM NO. VI 7 CHAIRMAN CLOWE: The next item, VI, 8 report, possible discussion and/or action on the 9 agency's contracts. 10 MR. JACKSON: Good morning, 11 Commissioners. For the record, my name is Tom 12 Jackson. I'm the Purchasing and Contracts Manager for 13 the agency. 14 Commissioners, in your notebooks under 15 Tab No. VI is a report that has been updated for your 16 review. In addition this morning, you have been 17 provided with another spreadsheet that lists all 18 active contracts, showing their month of expiration 19 and a copy of our procedure for contract action and 20 the lead time criteria we follow for contracts due to 21 expire. This additional information is provided as a 22 follow-up to concerns you had last meeting on the 23 expiration of dates of contract and the heavy workload 24 that it creates for the Contracts section. 25 Contract staff is currently reviewing 0089 1 expiration dates and have instructed the staggered -- 2 and I have instructed them to stagger the expiration 3 dates of contracts where appropriate and where we can. 4 If you have any questions, I'll be happy 5 to respond to those. 6 COMM. COX: So what we have here, Tom, 7 is percentage of contracts to expire per month? 8 MR. JACKSON: That's correct. 9 COMM. COX: And I think Mike told me 10 that an awful lot of these August expirations are 11 interagency contracts that are required, that have to 12 be on that date? 13 MR. JACKSON: Yes, sir, that's correct. 14 I believe there are 12 of those that -- 15 COMM. COX: You've got a certain amount 16 that falls there just because it falls there -- 17 MR. JACKSON: Exactly. 18 COMM. COX: -- you can't change those? 19 MR. JACKSON: Yes, sir. 20 COMM. COX: And I see Mike came up. 21 Maybe he's got something he wants to elaborate on. 22 MR. FERNANDEZ: No, sir, I just wanted 23 to make -- my name is Mike Fernandez, for the record. 24 I'm the Director of Administration. 25 I just wanted to make sure we provided 0090 1 all the information possible. I was not at the last 2 meeting, and I apologize for not being here. But I 3 certainly wanted to bring to your attention that we do 4 look at those expiration dates and that we do try to 5 begin a process with enough lead time that we're not 6 squeezed at the end of the year, and I know that 7 that's a concern about workload. It is a concern -- 8 as Tom pointed out, there are 12 that fall at the end 9 of the year, interagency, that we're going to 10 continue. But I have had the opportunity to talk with 11 Tom and his team, and we're looking at those prime 12 contracts which you, I believe, Commissioner Cox, 13 discussed last Commission meeting, and seeing if we 14 can vary those expiration dates. 15 CHAIRMAN CLOWE: Thank you both very 16 much. 17 AGENDA ITEM NO. VII 18 CHAIRMAN CLOWE: Next, Item VII, report, 19 possible discussion and/or action on the 79th and 80th 20 Legislature. 21 Ms. Trevino. 22 MS. TREVINO: Good morning, 23 Commissioners. For the record, I'm Nelda Trevino, the 24 Director of Governmental Affairs. 25 And there are a few items I would like 0091 1 to report on today. First, the agency made its 2 appearance before the Senate Committee on Finance on 3 October the 3rd, to present the legislative 4 appropriations request for the 2008 and 2009 biennium. 5 In response to various questions at the hearing, we 6 have provided the Committee with some supplemental 7 information. 8 Secondly, Chairman Kino Flores' office 9 has contacted us and asked for appropriate agency 10 representatives to appear before the House Licensing 11 and Administrative Committee for the purpose of 12 discussing the Internal Audit Report on Bingo Audit 13 Services. While the meeting notice has not been 14 posted, it's our understanding the Committee intends 15 to hold its hearing on October the 25th at 10 o'clock. 16 We continue to be in communication with the Committee 17 staff as we prepare for this hearing 18 The Governmental Affairs staff continues 19 to monitor interim House and Senate committee 20 activities. And it is anticipated during the next few 21 months interim committee reports will be issued. 22 We'll certainly keep you advised on the issuance of 23 these reports and any recommendations contained in the 24 reports that may impact the Commission. 25 And, lastly, the 80th Legislature will 0092 1 convene on January 9, 2007. And prefiling of 2 legislation for this next regular session begins on 3 Monday, November the 13th. And we will begin our 4 process of tracking filed legislation that impacts the 5 Commission and certainly keep you informed on any of 6 those developments. 7 And this concludes my report, and I will 8 be happy to answer any questions. 9 CHAIRMAN CLOWE: Thank you, ma'am. 10 AGENDA ITEM NO. IX 11 CHAIRMAN CLOWE: Next, Item IX, report 12 by the Executive Director and possible discussion 13 and/or action on the agency's operational status and 14 FTE status. 15 Director Sadberry. 16 MR. SADBERRY: Commissioners, good 17 morning. For the record, my name is Anthony Sadberry, 18 Executive Director. 19 As part of my report on the operations 20 of the Texas Lottery, I wanted to make you aware of a 21 couple of items related to GTECH since they relate to 22 the ongoing monitoring of GTECH. 23 First, a news article issued in Trenton, 24 New Jersey, on October 10, 2006, indicates that a New 25 Jersey assemblyman has requested the New Jersey 0093 1 Criminal Justice Division to conduct an investigation 2 to determine whether an assemblywoman and her former 3 lobbying firm illegally helped GTECH get the New 4 Jersey lottery operator contract, despite bidding 5 nearly $32 million more than the competitor, 6 Scientific Games. 7 Second, on October 12, 2006, GTECH 8 issued a press release that announced it has entered 9 into an asset purchase agreement to acquire 10 substantially all of the assets of Creative Games 11 International, Inc., an instant ticket provider. The 12 acquisition, contingent upon certain pre-closing 13 conditions, is expected to be completed in mid- to 14 late November 2006. 15 Information on both of these items has 16 been forwarded to the GTECH monitoring team which is 17 comprised of the Office of Attorney General, the 18 Department of Public Safety, and the Lottery 19 Commission's Enforcement Division. There are 20 materials in your notebooks for your review regarding 21 status of positions as of October 10, 2006. 22 I would be happy to answer any questions 23 at this time. 24 COMM. COX: No questions. 25 CHAIRMAN CLOWE: Anything further? 0094 1 MR. SADBERRY: That's all, Mr. Chairman. 2 CHAIRMAN CLOWE: Thank you, sir. 3 AGENDA ITEM NO. X 4 CHAIRMAN CLOWE: Next, Item X, report by 5 the Charitable Bingo Operations Director and possible 6 discussion and/or action on the Charitable Bingo 7 Operations Division's activities. 8 Director Atkins. 9 MR. ATKINS: Thank you, Commissioners. 10 Just a couple of items I would like to draw your 11 attention to in my report. 12 We do have one additional vacancy in the 13 Audit section, effective this Friday. We have an 14 employee who is transferring to another state agency. 15 Also quarterly reports for the third 16 quarter of 2006 are due next Wednesday, October 25th. 17 We have included recent information on usage of the 18 Bingo Services Center and we're pleased to see 19 continued growth in the number of external users as 20 well as organizations making use of that service. 21 And, finally, you have two activity 22 reports in your notebook, one through the end of 23 fiscal year '06. The other one picks up with the 24 beginning of fiscal year '07. 25 CHAIRMAN CLOWE: Any questions? 0095 1 COMM. COX: Billy, about what size would 2 you say this type is? 3 MR. ATKINS: I am not sure, Commissioner 4 Cox. We can -- 5 COMM. COX: Well, I could do with a lot 6 fewer cents and even dollars and maybe take thousands 7 in 12-point type, and I would be able to read this 8 baby. 9 MR. ATKINS: We will look into it, sir. 10 COMM. COX: Great! 11 CHAIRMAN CLOWE: Anything further? 12 Thank you. 13 AGENDA ITEM NO. XI 14 CHAIRMAN CLOWE: Next, Item XI, public 15 comment. 16 Ms. Nettles wishes to make comment. 17 Would you come forward, please, ma'am. 18 MS. NETTLES: Good morning, 19 Commissioners. For the record, my name is Dawn 20 Nettles. I'm with the Lotto Report out of Dallas. 21 And before I get started on something serious, I've 22 got to comment about that type size. I, for the life 23 of me, don't know how you can read the Jackpot 24 Estimation Sheet. You see how little that type is? 25 COMM. COX: I've asked for that to be 0096 1 enlarged. And the most relevant sections of it are in 2 boxes and a little bigger size. 3 MS. NETTLES: I have a hard time. I 4 can't read the -- I have to enlarge it 300 or 5 400 percent on my computer to just try to read your 6 estimated sales, your high end and low end sales on 7 that. And even sometimes I still can't read it. And 8 if I print it, I can't read it at all. 9 COMM. COX: There is a lot of data on 10 there, isn't there? 11 MS. NETTLES: Yes, there is -- well, but 12 it's a spreadsheet. You know, it could be bigger. 13 But anyway, good morning, Commissioners. 14 I have several comments here that I would like to make 15 to you-all. And I think I'm going to start first with 16 some of what Gerald was going over. I feel compelled 17 to make this one particular comment. 18 You-all were discussing earlier about 19 games closing and top prizes still being in the games. 20 Right? Well, a few years ago, prior to dissolving the 21 security section here at the agency, one of the things 22 that security did was, they had an encrypted file that 23 came from Scientific Games, the ticket manufacturer, 24 that was kept in a safe here at the Lottery. It was 25 never touched until the game was closed. And they 0097 1 would research any tickets, any top prize tickets that 2 were not claimed. After the game closed, they would 3 be able to go in and determine if the pack ever left, 4 you know, the warehouse, if the ticket sold but was 5 not claimed, if the ticket was returned due to a theft 6 or damaged tickets or something. 7 They made the effort, up until a few 8 years ago, on every top prize, to figure out why it 9 was never claimed, and I think that that's something 10 that you-all really ought to look at and perhaps start 11 doing again. Changes were made at the time that the 12 Security Department dissolved, or however you want to 13 phrase it, where you-all had that back-up in order to 14 be able to check it. At the same time, they could 15 also verify claimed tickets to make sure that those 16 were legitimate tickets and that someone -- that the 17 validations weren't changed or whatever. So that's 18 something that you might want to check into. 19 Still on the tickets, for changes to the 20 tickets, the Lotto Texas tickets, Cash Five, Mega 21 Millions, what have you, I wanted to comment. There 22 is one question I take an awful lot of, and that is 23 people call me and they say, "Well, how many numbers 24 do I have to have to win something on Lotto Texas?" 25 Well, I've known this for a while -- but 0098 1 it's just been buried in my head -- are you aware that 2 on those tickets, it doesn't even tell what you win a 3 prize for? I mean, it doesn't say, "Match three 4 numbers, win," four numbers or five numbers or six 5 numbers. Players have no idea, especially when 6 they're calling from out of state, you know, how many 7 numbers you have to have just to win something. And I 8 think that that is far more important than some of the 9 other stuff that's on the backs of the ticket. 10 I got tickled at Michael a few minutes 11 ago saying he had a ticket from Massachusetts, because 12 ironically I had tickets from New Mexico, Arizona, 13 Nebraska -- there is a fourth state -- Colorado. My 14 husband takes an annual bike ride up to Sturgis, and 15 it just so happened he went in July or August. And so 16 that was when the big power ball jackpot was real 17 high. And I said, "Oh, stop and get me a ticket in 18 every state," so he did. 19 And ironically I won two, you know, 20 little prizes. And I did turn to the back of the 21 ticket myself to see what I had to do. And I wish I 22 had the tickets not for that reason but because those 23 tickets stated the cash value option, how much the 24 power ball jackpot was worth, for the cash value plus 25 the annuitized amount. I can't remember which state 0099 1 did what, though. And I don't have those tickets 2 because they were winners, and I did submit them. 3 Another thing about your advertising, 4 because I kind of place this in advertising. I 5 mentioned this two or three years ago, so nothing has 6 ever been done about it, so I'm going to request it 7 again. People of Texas cannot go to a terminal and 8 get the Megaplier results. There is nowhere that you 9 can get the result from the Megaplier game, and I 10 think that that's very wrong. That information should 11 be in the terminals. Players should be able to obtain 12 it. They should be able to find out how many winners 13 they were. It doesn't come out of the terminal. 14 COMM. COX: Now, what terminal are you 15 speaking of, Ms. Nettles? 16 MS. NETTLES: You can go, after a 17 drawing tonight or today for last night, you can go to 18 your retailer and ask for a payout slip for last 19 night's drawing, and it will tell you that there were 20 50 winners that won something and 100 that won 21 something and so on and so on. It tells you -- gives 22 you a breakdown of how many winners and what the prize 23 was. 24 You can't do that for the Megaplier 25 game. And the only thing you want to know is how 0100 1 many -- the same thing for Mega Millions -- how many 2 people hit the -- it was the No. 4 drawing last night 3 or out of the computer last night, that was a million 4 dollars. People say, "How many million dollar winners 5 did they have?" They have no way of knowing unless 6 they go to the TLC website or my website. 7 And this is something -- all game 8 information is supposed to be available to the people 9 and it still isn't. A couple of years ago when I 10 mentioned this, y'all said it was because there wasn't 11 room on the play slip. Well, design a -- have another 12 game. That's what it is, is a totally separate game. 13 So please, I mean, that's being open. 14 And the people tell me all the time, "Well, we don't 15 have any idea how many people win a million," got an 16 e-mail on it just the other day saying, "Can you tell 17 me how many million dollar winners there has been in 18 Texas?" Well, I had to go count. But I just thought 19 it was sad that, you know, the people can't find that 20 out. 21 Okay. Another terminal issue here. If 22 I have a ticket in my hand and it's a winning ticket 23 and I take it to a retailer and he validates it, he 24 runs it through his computer, validated, and he pays 25 me my $3, $40, $500, whatever, he is supposed to keep 0101 1 that ticket. All right? Now, they don't always do 2 that, but they're suppose to keep the ticket. 3 But anyway, supposing he accidentally 4 hands it back to me and I take that ticket back the 5 next day and he runs it through the machine to 6 validate it, that ticket that prints out says 7 "Previously paid by you," or if it's a different 8 retailer, it will say "Previously paid by other." 9 Okay? Fair, good, legit. All right. 10 The problem is, that only works for 11 three days. Day Four, you take that ticket in and 12 that ticket says, "Not a winner." Well, there was a 13 winner. I see you looking. I don't know what you're 14 looking at. But anyway, that ticket was a winner. 15 And this is a major issue, and I have -- while I've 16 encountered this many times on many problems, with 17 lots of players for a long, long time, it has recently 18 hit me again. And I know this agency is aware of it 19 because I have been copied on all the messages. 20 In the end, the player -- the bottom 21 line on this player is that he had a Pick 3 ticket -- 22 I believe it was a $40 winner -- and he couldn't 23 recall if he cashed it in or not, but he took it to 24 the store and the slip printed "Not a winner." 25 Well, he was honest and he thought, 0102 1 "Well, wait a minute. First of all, it is a winner. 2 All I want to know is, did I pay it or not -- did I 3 get paid, you know? So he contacts me. I give him a 4 little advice. He ends up sending the Texas Lottery 5 an e-mail with a description of what's taking place 6 and he scans in his tickets. And they're clear as 7 day. You can see it extremely well on the e-mail. 8 And he's asking them, "Can you tell me 9 if this ticket paid or not?" Well, the Commission's 10 first response is, "Sorry. Mail your ticket to 11 Austin. Then we will do our investigations." 12 Incidentally, I left out that before he even did that, 13 he not only went to his retailer, but because it said 14 it was not a winner, he went to another retailer and 15 then he went to the Dallas Claim Center. And the 16 Dallas Claim Center could not tell him if it had been 17 validated or not. All he knew was, the winner was 18 printing out "Not a winner" when it was a winner. All 19 right. 20 At that point is when he contacted me. 21 And the Claim Center was unable to tell him if that 22 ticket validated or not. Well, this has been an 23 ongoing situation about three weeks now. And, yes, 24 late yesterday afternoon -- and I came to Austin 25 yesterday, so I saw the message late last night -- 0103 1 with his explanation of what the -- what Bobby Barnett 2 here at the Texas Lottery Commission has finally 3 explained to him what the problem was. 4 And the gist of it is, is that the Texas 5 Lottery is saying that because your carry-over -- the 6 information in your database is so huge that it bogs 7 everything down -- this is kind of the gist of what 8 I'm understanding it to say -- that you just can't 9 afford, without massive work and computer stuff, to 10 make sure that that message, previously paid by you or 11 previously paid by other, comes out. I mean, that's 12 kind of the bottom line. 13 Well, when I read that, first of all, 14 you're running a business here and there are expenses. 15 And this is a major issue with people about whether or 16 not that ticket -- because they take it and they cash 17 it in and they know it's a winner, and it says "Not a 18 winner." Well, that creates lots of arguments with 19 the people in the Texas Lottery -- okay? -- that could 20 be avoided if it just continued to say it was 21 previously paid. 22 And as I understand from Bobby Barnett's 23 message to this gentleman, or their conversation, that 24 the Texas Lottery is just swamped with these kind of 25 requests, and most of them are not legitimate 0104 1 requests. 2 Well, my response to that is -- I had 3 two. My first two immediate thoughts was, No. 1, 4 their computer system is too bogged. There's too many 5 winners to carry forward for 180 days, or 181 days, to 6 say "Previously paid by you" or "Previously paid by 7 other." 8 Well, the very first thing that pops 9 into my mind is, "Oh, Lord, yes. Look at all those 10 $2.00 Cash Five winners," you know, of winning 11 tickets. Look at the masses there of data that they 12 have to keep. They shouldn't have offered a silly 13 $2.00 prize. That's what I've said on the Cash Five. 14 But then I also thought -- I just completely forgot 15 what I was going to say -- I -- there were two really 16 important points, and I just lost my train of thought. 17 Oh, that there was a solution to the 18 entire -- to the whole issue about the printout saying 19 "Not a winner" versus "Previously paid by you." And 20 that solution is what I have recommended and pushed 21 for for years to take place up here, and that is to 22 forbid clerks to checking tickets. Not only do we 23 have dishonest clerks throughout Texas -- and I know 24 this Commission knows it -- we also have lottery 25 terminals that can err in reading -- that's the 0105 1 scanning part of the ticket. 2 But if players were responsible for 3 checking their own tickets, then when they walk into 4 the store with that ticket and hand it to the clerk 5 and say, "This is a $40 winner. I want to collect my 6 money." The retailers spend twice as much time than 7 they have to because they are checking tickets. It's 8 a major issue. That makes -- they make five cents per 9 transaction. But when the players come back to them 10 and hand them the tickets back and say, "Would you see 11 if they're winners, please," then that cuts their cost 12 to two and a half cents per transaction. 13 The retailers would be happy. You would 14 be protecting the citizens of this state if you would 15 forbid clerks from checking tickets. Only validate 16 them. Make the players check their now. That would 17 cut down on what I read last night, based on the 18 conversation with Bobby Barnett and this gentleman 19 from how the TLC is just bombarded with all this 20 stuff. 21 I really wish that you-all would do 22 something, but it's clearly not right for that 23 terminal to say "Not a winner" when the ticket was a 24 winner. The printout should read, for 180 days or 25 whatever, that information needs to be carried. And 0106 1 if you need to reduce the data or increase your 2 computer capacity, I wish you would do it. 3 Okay. Next subject: IRS Form 5754. 4 This form was created by the Internal Revenue 5 specifically for pool players, pool players meaning 6 groups of people that pool their money, buy lotto 7 tickets. As you know, the Texas Lottery has a policy 8 that they recognize only one winner and will cut only 9 one check. 10 This form was designed specifically for 11 lotteries so they could recognize one winner and write 12 one check. It is simply a listing of the winners who 13 are sharing in that and enables each player to receive 14 a W-2G for their tax reporting. The hardships created 15 to the players by the TLC refusing to accept IRS Form 16 5754, by the way -- I think I forgot to say that -- 17 not only does this create a huge hardship for players, 18 because the IRS says, "No, you've won $250,000. It 19 might have been five of you, but only one person is 20 going to get a W-2G. We're going to show that he's 21 on -- or we pay him $250,000 less 25 percent." 22 And then, you know, that's for the 23 taxes, and he's paid all this money, when in reality 24 he really didn't because he's going to go back home 25 and he's going to write a check to the other people in 0107 1 the pool to collect his -- you now, that participated 2 in the deal. Well, come the end of the year, these 3 people have nothing to show for their taxes. And the 4 IRS credited this form specifically so that the 5 lotteries could report who has truly won and how much 6 money has truly been paid by that individual. 7 Now, I always fight for the people's 8 rights, and this is clearly wrong. Texas is only one 9 of three states out of 39 that I polled. I don't know 10 how many lotteries there are in the United States. I 11 think there's 40 or 41 or 42, and I don't know what 12 three states I didn't do. But I have 39 states and 13 all thirty- -- or 36 of the 39 accept 5754's. Texas, 14 Georgia and Wisconsin do not. 15 From the state's standpoint, by refusing 16 to accept 5754's, you are allowing people to walk in 17 here, collect money when they may owe back child 18 support, student loans and taxes to the state. You 19 have missed the opportunity to collect all this money 20 that is really due these entities, so you're hurting 21 yourself. 22 Bobby Heith told me that he thought that 23 the TLC had accepted a 5754 in the past. He wasn't 24 sure, but he said he thought that at one time that 25 they did accept it. And then for some reason, it 0108 1 changed and they didn't. For the Texas Lottery, all 2 that's involved is, you're still recognizing one 3 winner, you're still writing one check. But this list 4 that's on this IRS form, which is an IRS regulation 5 for you-all to accept -- the IRS has no idea that 6 Texas does not do it. The IRS has no idea that 7 Georgia didn't do it, and they had no idea that 8 Wisconsin. They thought all states accepted IRS Form 9 5754. 10 Some of these people have been forced to 11 pay gift taxes of 47 percent, in addition to the 12 federal withholdings. You do the math. You think you 13 win $250,000, but each player walks away with $19,000 14 maybe. It's all in taxes, and it's all useless. And 15 they have a nightmare for themselves at the end of the 16 year. One player will report something. They need 17 separate W-2G's, and that's all that's involved, and 18 checking the social security numbers to see what's 19 owed. Y'all are really missing the boat on this, and 20 this is going to be a major issue. And there are some 21 lawsuits being filed right now as I speak. 22 One more thing -- well, two things. 23 Before I tell you about this, I would like to request 24 for the next meeting that y'all have an item listed on 25 the agenda to discuss the State Auditor's Prize 0109 1 Payment Report that was issued in July. I apologize 2 for it being October and me making this request. But 3 after that -- after it came out, I believe in July, I 4 lost my computer and I got sick, so I haven't been 5 here for the last two or three months in order to take 6 care of my business. 7 But there are some comments that I would 8 like to make on the State Auditor's Report, and I want 9 you-all to be able to talk back to me, which you won't 10 do unless it's on the agenda. So that is a request 11 that I would like to make. 12 My last item here, Texas is famous. I 13 have here from an attorney in Houston by the name of 14 Russell Hall, he wrote a thesis paper but now he's 15 going and making presentations. And his presentation 16 is titled "Internal Revenue Code § 103 and Exclusion 17 of Interest on Texas Lottery Prize Installments." And 18 he has done -- he is contending and explaining how 19 winners would not have to pay taxes, federal taxes, on 20 all of their winnings. 21 And it is -- and he has used Texas 22 extensively. You'll see your papers in his thesis. 23 Your papers -- even my Lotto report is included in it. 24 And he presented this two weeks ago at the Wednesday 25 Tax Forum. And I know that he's getting the word out 0110 1 because I'm getting calls from tax attorneys and the 2 such that he's really doing this. And he's covered 3 everything about the Texas Lottery that you need to 4 know -- I mean that one would want to know, not that 5 y'all need to know. And I don't believe that y'all 6 have seen this. Is anybody familiar with his report 7 and his thesis about the Internal Revenue? 8 Well, this is the only copy that I have, 9 and I'll be more than happy to give it to you. The 10 most important point to this, when y'all start 11 panicking about IRS and taxes and such -- because I 12 know this has come up before, too -- is you ought to 13 think of the advantage to his theory about this. Your 14 sales would blossom if the people did not truly have 15 to pay the taxes, based on their whole winnings. 16 Just very briefly, what he's saying here 17 is, "The players' ability to avoid installment 18 payments invokes the state's borrowing power, which 19 Revenue Ruling 78-140 game did not. As a result, 20 interest on contemporary Lotto Texas and Mega Million 21 jackpots actually paid in installments is potentially 22 excludable, requiring only that the Lottery Commission 23 report those obligations as tax-exempt securities." 24 Now, I just hit you one little sentence 25 in here, and I didn't read you the start, but that's 0111 1 basically his synopsis, the start of it. But this is 2 catching on, and this is being reviewed across the 3 country. And I really think you-all need to see this 4 and Legal should review it. He has a PowerPoint 5 presentation that was presented in Houston on 6 September 26th. It covers the Texas Lottery. 7 And he's got some pretty interesting 8 things in here. Of course, one of the things I liked 9 the best, which y'all won't: "State Lottery Act and 10 its Hurdles 11 "Can't tell what the state is supposed to do 12 " - Circular definitions 13 " - Uncodified, unpublished procedures 14 and rules 15 " - Discretion substitutes for careful 16 drafting." 17 Another bullet, "Can't tell what the 18 state is actually doing 19 " - Lotto Texas jackpot calculations 20 a mystery, Section IIA.2.c.i(b)" 21 something. 22 But I would like for you-all to have a 23 copy of this if you want it. I asked Russell to come 24 here and speak to you-all today and to explain it to 25 you, because I'm not a lawyer and I'm not even going 0112 1 to try to cover this. And he wanted to, but his dad 2 is sick and in the hospital and he could not make it 3 today. 4 So perhaps you-all will review this, and 5 maybe you will invite him to come and explain this to 6 you so that you-all may know of some options for 7 winners. Your sales would blossom if they didn't have 8 to pay taxes. And in essence, what it's saying is, 9 you don't have to pay taxes on the interest. Of 10 course, I realize it's not interest, but -- and that 11 would be -- and this is only on installment payments, 12 too -- you might have a reversal for people instead of 13 taking cash option. 14 Under this, it would be very beneficial 15 for them to take the annual pay. But not only that, 16 instead of clearing 40 percent or 38 percent of their 17 winnings, it would be to their advantage to do this. 18 So if you-all would like a copy of Russell's papers, I 19 will be more than happy to let y'all make a copy, but 20 you've got to give me mine back. Okay? 21 I thank you very much. 22 CHAIRMAN CLOWE: Thank you, Ms. Nettles. 23 COMM. COX: Thank you, Ms. Nettles. 24 CHAIRMAN CLOWE: Commissioner, with your 25 permission, we'll go into executive session. 0113 1 AGENDA ITEM NO. IV (continued) 2 COMM. COX: Mr. Chairman, if we could, I 3 would like to go back to Agenda Item No. IV. 4 CHAIRMAN CLOWE: Yes, sir. 5 COMM. COX: Ms. Kiplin, what does the 6 Lottery Act require that we advertise? 7 MS. KIPLIN: Commissioner, as I 8 understand, the discussion centered around the odds of 9 a winning a prizes, and it's Texas Government Code, 10 Section 466.251. And what it requires is that the 11 overall estimated odds of winning a prize in a 12 particular lottery game must be printed on each ticket 13 and prominently displayed, in association with the 14 sale of lottery products. The estimate must be based 15 on reasonable projections and past experience. 16 COMM. COX: So it doesn't require 17 advertising the jackpot? 18 MS. KIPLIN: No, not this particular 19 statute. And off the top of my head, I'm not aware of 20 any other statute that requires anything be 21 advertised, other than this. There is a provision 22 that talks about unduly influencing a person in 23 connection with an advertisement. 24 COMM. COX: Okay. 25 Well, Mr. Chairman, as I read this 0114 1 article in the Houston Chronicle yesterday -- and 2 Prof. Busald has explained his reference to bait and 3 switch advertising. And as I read this, it seems that 4 Prof. Leigh at Texas A&M Mays Business School is 5 concerned about the same thing. And as I understand 6 it, it is -- here's a number being advertised that say 7 $25 million. And here's a number that says 1 in 75, 8 which is required by statute to be disclosed, but it's 9 not relevant to $25 million. 10 So what I would like to ask is that 11 Director Sadberry and his staff look at this issue, in 12 conjunction with the presentation that was made 13 previously, and look at these concerns that are 14 expressed here that this could be bait and switch 15 advertising, it could be misleading, it could be 16 puffery, all of those terms that are used in that 17 article. I get very concerned when I read things like 18 this, and I want to be sure that we're paying a lot of 19 attention to that. 20 CHAIRMAN CLOWE: Very good. 21 COMM. COX: Thank you, sir. 22 23 24 25 0115 1 AGENDA ITEM NO. IX (continued) 2 CHAIRMAN CLOWE: And since you've 3 mentioned that and we've gone back on one item, I 4 would like to go back to Item No. IX and ask Director 5 Sadberry to speak about Plan B. I received that in my 6 package this week. I've read it with interest. And 7 you didn't comment on it. I would appreciate whatever 8 you would like to say to us about that. 9 MR. SADBERRY: Yes, sir, Mr. Chairman 10 and Commissioners. 11 MS. KIPLIN: I'm sorry. I hate to 12 interrupt you, but I wanted to just I guess put on the 13 record that there has been a matter of interest in the 14 subject of discussion on Plan B, as I understand it, 15 relating to taking over lottery operations. And so 16 not to preempt Director Sadberry, but if this goes 17 into a substantive discussion on that particular item, 18 I think that it really needs to be noticed on a 19 public -- in a future open meeting so that the public 20 is provided notice on that particular item, just 21 because of the public interest. I have no idea what 22 Director Sadberry's plans are, what he's saying, but 23 just to say that from a substantive point of view. 24 CHAIRMAN CLOWE: So you don't feel that 25 his duties adequately cover this Plan B for a public 0116 1 discussion? 2 MS. KIPLIN: I think if it's going into 3 the details of that particular plan, then I think it 4 should be specifically noticed. 5 CHAIRMAN CLOWE: Well, what if he 6 doesn't go into detail, can he comment on it 7 generally? 8 MS. KIPLIN: I think that would be 9 acceptable. 10 MR. SADBERRY: In general, 11 Commissioners, what you have received individually is 12 the documentation that has been thus far developed by 13 the agency for discussion purposes. It is our intent 14 to use that data and going forward with preparing the 15 appropriate documents that are responsive to a number 16 of things, including the report of the State Auditor's 17 Office with respect to prior audit and the current 18 audit of reports regarding contingency plans that are 19 available to the Lottery Commission to operate the; 20 lottery; in addition, to be a working tool for the 21 lottery. In the event of occurrences that would 22 require or show the benefit to the state to operate 23 the lottery, the Lottery Commission to operate the 24 lottery; in addition, to be available for use as a 25 resource in the legislative process in connection with 0117 1 certain riders that are part of the LAR of the agency 2 that is currently under review, and there is a rider, 3 Rider 701, that speaks to this potential contingency 4 and how we might implement that through the 5 legislative process for funding FTE resources, 6 et cetera. 7 That's the general overview. I think 8 the point is -- and I do appreciate the fact that, as 9 you mentioned, it has been distributed and was not 10 included in my report. The point is, we wanted you to 11 know where we stand in that regard. Individually, it 12 is our intent to set up meetings where we can develop 13 this information with you individually further and 14 also to bring it on for discussion and once we have it 15 at the point where it should be discussed as an agenda 16 item of the Commission. 17 CHAIRMAN CLOWE: Thank you very much. 18 Commissioner, are you ready now for 19 executive session? 20 COMM. COX: Yes, sir. 21 AGENDA ITEM NO. VIII 22 CHAIRMAN CLOWE: At this time I move the 23 Texas Lottery Commission go into executive session to 24 deliberate the duties and evaluation of the Executive 25 Director, Deputy Executive Director, Charitable Bingo 0118 1 Operations Director and Internal Audit Director and to 2 deliberate the duties of General Counsel pursuant to 3 Section 551.074 of the Texas Government Code, to 4 receive legal advice regarding pending or contemplated 5 litigation and/or to receive legal advice pursuant to 6 Section 551.074(1)(A) or (B) of the Texas Government 7 Code and/or to receive legal advice pursuant so 8 Section 551.071(2) of the Texas Government Code, 9 including but not limited to: 10 Cynthia Suarez vs. Texas Lottery 11 Commission; 12 Shelton Charles vs. Texas Lottery 13 Commission and Gary Grief; 14 Stephen Martin vs. Texas Lottery 15 Commission; 16 Employment law, personnel law, 17 procurement and contract law, evidentiary and 18 procedural law and general government law. 19 Is there a second? 20 COMM. COX: Second. 21 CHAIRMAN CLOWE: All in favor, please 22 say "Aye." 23 COMM. COX: Aye. 24 CHAIRMAN CLOWE: Aye. 25 The vote is 2-0. The Texas Lottery 0119 1 Commission will go into executive session. The time 2 is 11:36 a.m. Today is October the 18th, 2006. 3 (Off the record: 11:36 a.m. to 12:49 4 p.m.) 5 CHAIRMAN CLOWE: The Texas Lottery 6 Commission is out of executive session. The time is 7 12:49 p.m. 8 Is there any action to be taken as a 9 result of executive session? 10 If not, we'll move back to the agenda. 11 Commissioner, I believe we have covered 12 the agenda. Do you have anything further? 13 COMM. COX: No, sir, I do not. 14 AGENDA ITEM NO. XII 15 CHAIRMAN CLOWE: Then we are adjourned. 16 Thank you-all very much. 17 (Meeting adjourned: 12:49 p.m.) 18 19 20 21 22 23 24 25 0120 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 1st day of November 2006. 15 16 ________________________________ 17 Aloma J. Kennedy Certified Shorthand Reporter 18 CSR No. 494 - Expires 12/31/06 19 Firm Certification No. 276 Kennedy Reporting Service, Inc. 20 Cambridge Tower 1801 Lavaca Street, Suite 115 21 Austin, Texas 78701 512.474.2233 22 23 24 25