0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 6 WEDNESDAY, OCTOBER 29, 2008 § 7 8 COMMISSION MEETING 9 WEDNESDAY, OCTOBER 29, 2008 10 BE IT REMEMBERED THAT on Wednesday, 11 the 29th day of October 2008, the Texas Lottery 12 Commission meeting was held from 9:05 a.m. to 13 p.m., at the Offices of the Texas Lottery 14 Commission, 611 East 6th Street, Austin, Texas 78701, 15 before CHAIRMAN JAMES A. COX, JR., and COMMISSIONERS 16 DAVID SCHENCK and MARY ANN WILLIAMSON. The following 17 proceedings were reported via machine shorthand by 18 Aloma J. Kennedy, a Certified Shorthand Reporter of 19 the State of Texas, and the following proceedings were 20 had: 21 22 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Mr. James A. Cox, Jr. 4 COMMISSIONERS Mr. David Schenck 5 Ms. Mary Ann Williamson 6 GENERAL COUNSEL: Ms. Kimberly L. Kiplin 7 DEPUTY EXECUTIVE DIRECTOR: 8 Mr. Gary Grief 9 DIRECTOR, CHARITABLE BINGO OPERATIONS: Mr. Philip D. Sanderson 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE 3 PROCEEDINGS - WEDNESDAY, OCTOBER 29, 2008......... 9 4 INTRODUCTION OF COMMISSIONER MARY ANN WILLIAMSON.. 9 5 AGENDA ITEM NO. I - Meeting Called to Order....... 10 6 PRESS RELEASE AND REMARKS RE DEATH OF ANTHONY SADBERRY, TEXAS LOTTERY COMMISSION 7 EXECUTIVE DIRECTOR................................ 10 8 AGENDA ITEM NO. II - Report, possible discussion and/or action on ethics, 9 administrative procedure, and open government laws pertaining to the 10 Texas Lottery Commission.......................... 16 11 AGENDA ITEM NO. III - Consideration of and possible discussion and/or action 12 on nominations and appointment to the Bingo Advisory Committee.......................... 27 13 AGENDA ITEM NO. IV - Consideration of 14 and possible discussion and/or action, including proposal on new 16 TAC §402.406 15 relating to Bingo Chairperson..................... 29 16 AGENDA ITEM NO. V - Consideration of and possible discussion and/or action, including 17 repeal of existing 16 TAC §402.103 and/or proposal of new 16 TAC §402.103 relating to 18 Training Program.................................. 38 19 AGENDA ITEM NO. VI - Consideration of and possible discussion and/or action, 20 including proposal, on 16 TAC §402.422 relating to Amendment to a Regular License 21 to Conduct Charitable Bingo....................... 44 22 AGENDA ITEM NO. VII - Consideration of and possible discussion and/or action, including 23 proposal, on 16 TAC §402.410 relating to Amendment of a License-General Provisions......... 49 24 25 0004 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. VIII - Consideration of and possible discussion and/or action, including 4 proposal, on 16 TAC §402.604 relating to Delinquent Purchaser.............................. 50 5 AGENDA ITEM NO. IX - Consideration of and 6 possible discussion and/or action, including adoption, on amendments to 16 TAC §402.200 7 relating to General Restrictions on Conduct of Bingo......................................... 56 8 AGENDA ITEM NO. X - Consideration of and 9 possible discussion and/or action, including adoption, on new rule 16 TAC 10 §402.205 relating to Unit Agreements............. 59 11 AGENDA ITEM NO. XI - Consideration of and possible discussion and/or action, including 12 adoption, on amendments to 16 TAC §402.400 relating to General Licensing Provisions......... 75 13 AGENDA ITEM NO. XII - Consideration of and 14 possible discussion and/or action, including adoption, on new rule 16 TAC §402.442 15 relating to Amendment to Commercial Lessor License........................................... 78 16 AGENDA ITEM NO. XIII - Consideration of and 17 possible discussion and/or action, including proposal, on new rule, 16 TAC §402.104 18 relating to “Gambling Promoter” and “Professional Gambler”........................... 80 19 AGENDA ITEM NO. XIV - Consideration of and 20 possible discussion and/or action, including proposal, on amendments to 16 TAC §401.153 21 relating to Qualifications for License........... 80 22 AGENDA ITEM NO. XV - Report by the Charitable Bingo Operations Director and possible 23 discussion and/or action on the Charitable Bingo Operations Division’s activities........... 144 24 25 0005 1 TABLE OF CONTENTS (continued) 2 PAGE AGENDA ITEM NO. XVI - Report, possible 3 discussion and/or action on lottery sales and revenue, game performance, new game 4 opportunities, advertising, market research, and trends....................................... 151 5 AGENDA ITEM NO. XVII - Report, possible 6 discussion and/or action on transfers to the State and the agency’s budget................ 182 7 AGENDA ITEM NO. XVIII - Report, possible 8 discussion and/or action on agency computer security................................. 187 9 AGENDA ITEM NO. XIX - Report, possible 10 discussion and/or action on the 80th and 81st Legislature............................. 214 11 AGENDA ITEM NO. XX - Consideration of and 12 possible discussion and/or action on external and internal audits and/or reviews 13 relating to the Texas Lottery Commission, and/or on the Internal Audit Department’s 14 activities....................................... 216 15 AGENDA ITEM NO. XXI - Report, possible discussion and/or action on the Mega 16 Millions game and/or contract.................... 222 17 AGENDA ITEM NO. XXII - Report, possible discussion and/or action on GTECH 18 Corporation...................................... 223 19 AGENDA ITEM NO. XXIII - Report by the Executive Director and/or possible discussion 20 and/or action on the agency’s operational status, agency procedures, and FTE status........ 224 21 AGENDA ITEM NO. XXIV - Consideration of and 22 possible discussion and/or action, including adoption, on amendments to rule 23 16 TAC §401.362 relating to Retailer's Financial Responsibility for Lottery Tickets 24 Received and Subsequently Damaged or Rendered Unsaleable, for Winning Lottery 25 Tickets Paid and for Lottery-Related Property.... 224 0006 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XXV - Consideration and possible discussion and/or action, 4 including adoption, on amendments to the Lotto Texas jackpot estimation procedure......... 234 5 AGENDA ITEM NO. XXVI - Report, possible 6 discussion and/or action on Lottery Operations and Services Contract Amendment 7 No. 8 credit calculation......................... 236 8 AGENDA ITEM NO. XXVII - Consideration of the status and possible entry of orders in: 9 A. Docket No. 362-08-3411 – Ziegler’s Foods B. Docket No. 362-08-3472 – Best Stop Food 10 Mart C. Docket No. 362-08-3766 – Trinity Chevron 11 D. Docket No. 362-08-3703 – BJ Mini Mart E. Docket No. 362-08-3767 – Crawford General 12 Store F. Docket No. 362-08-3794 – The Hitching Post 13 G. Docket No. 362-08-990813.B-D – In the Matter of the Refusal to Add Certain Names 14 to the Texas Lottery Commission’s Registry of Approved Bingo Workers: Angel Bailey, 15 Shane Boyd, Catherine Bryant, Benito Camarillo, Jr., Crystal Cruz, Vanessa 16 Egwumba, Shamica Evans, Aaron Johnson, Thomas Lozano, Pete Marquez, Juan 17 Montemayor, Michael Oakes, Estela Ruiz, Jeannie Thomas, and Stephanie Whitehead 18 H. Docket No. 362-08-990813.B-R – In the Matter of the Removal of Certain 19 Respondents from the Texas Lottery Commission’s Registry of Approved Bingo 20 Workers: Annette Gogola, Jil Martin, Sandra Morris, and Valentin Vega, Jr. 21 I. Case No. 2008-699 – Red Men Council 3 Wanonah 22 J. Case No. 2008-700 – Holy Family Catholic Church 23 K. Case No. 2008-554 – VFW Post 6525 Rockdale 24 L. Case No. 2008-892 – Tommy’s Market........ 257 25 0007 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XXVIII - Public comment.......... 238 4 AGENDA ITEM NO. XXIX - Commission may meet in Executive Session: 5 A. To deliberate the duties and evaluation of the Executive Director pursuant to 6 Section 551.074 of the Texas Government Code 7 B. To deliberate the duties and evaluation of the Deputy Executive Director 8 pursuant to Section 551.074 of the Texas Government Code 9 C. To deliberate the duties and evaluation of the Internal Audit Director pursuant 10 to Section 551.074 of the Texas Government Code 11 D. To deliberate the duties and evaluation of the Charitable Bingo Operations 12 Director's pursuant to Section 551.074 of the Texas Government Code 13 E. To deliberate the duties of the General Counsel pursuant to Section 551.074 of 14 the Texas Government Code F. To deliberate the duties of the Human 15 Resources Director pursuant to Section 551.074 of the Texas Government Code 16 G. To receive legal advice regarding pending or contemplated litigation 17 pursuant to Section 551.071 (1) (A) and/or to receive legal advice regarding 18 settlement offers pursuant to Section 551.071 (1) (B) of the Texas Government 19 Code and/or to receive legal advice pursuant to Section 551.071 (2) of the 20 Texas Government Code, including but not limited to: 21 22 23 24 25 0008 1 TABLE OF CONTENTS (continued) 2 PAGE 3 First State Bank of DeQueen et al. v. Texas Lottery Commission 4 James T. Jongebloed v. Texas Lottery Commission 5 USA v. David Crawford and TLC Texas Lottery Commission v. Leslie 6 Warren, Texas Attorney General Child Support Division, Singer 7 Asset Finance Company L.L.C., and Great-West Life & Annuity Insurance 8 Company Employment law, personnel law, 9 procurement and contract law, evidentiary and procedural law, 10 and general government law Lottery Operations and Services 11 contract Mega Millions game and/or contract... 148 12 AGENDA ITEM NO. XXX - Return to open session 13 for further deliberation and possible action on any matter discussed in Executive Session..... 150 14 DISCUSSION RE COMMISSION MEETINGS................ 264 15 AGENDA ITEM NO. XXXI - Adjournment............... 273 16 REPORTER'S CERTIFICATE........................... 275 17 18 19 20 21 22 23 24 25 0009 1 P R O C E E D I N G S 2 WEDNESDAY, OCTOBER 29, 2008 3 (9:05 a.m.) 4 INTRODUCTION OF COMMISSIONER MARY ANN WILLIAMSON 5 CHAIRMAN COX: Good morning. It's 6 9:05. Today is Wednesday, October 29, 2008. 7 Commissioner Schenck is here. 8 I want to read an announcement from 9 Gov. Perry's office. "Gov. Perry appoints Williamson 10 to the Texas Lottery Commission. October 7, 2008. 11 Austin - Gov. Rick Perry has appointed Mary Ann 12 Williamson of Weatherford to the Texas Lottery 13 Commission for a term to expire Feb. 1, 2011. The 14 commission oversees the Texas Lottery and ensures that 15 lottery and bingo games are conducted in a legal and 16 fair manner. 17 "Williamson is a Certified Public 18 Accountant and owner of MKS Natural Gas Company. She 19 is a member of the Texas Society of Certified Public 20 Accountants and past board member of the Weatherford 21 Little League. She is also a past volunteer with 22 Couts Methodist Church and the Weatherford Independent 23 School District. 24 "Williamson received a bachelor's 25 degree from The University of Texas at Austin and a 0010 1 master's of business administration from Texas 2 Christian University. She replaces Fernando Reyes of 3 San Antonio." 4 Commissioner, welcome. 5 (Applause) 6 AGENDA ITEM NO. I 7 CHAIRMAN COX: And I am Jim Cox, and 8 let's call this meeting of the Texas Lottery 9 Commission to order. 10 PRESS RELEASE AND REMARKS RE 11 DEATH OF ANTHONY SADBERRY 12 TEXAS LOTTERY COMMISSION EXECUTIVE DIRECTOR 13 CHAIRMAN COX: I would like to read a 14 statement by Gov. Rick Perry on the death of Anthony 15 Sadberry. "October 28, 2008. Austin - Gov. Rick 16 Perry today issued the following statement on the 17 death of Anthony Sadberry, Executive Director of the 18 Texas Lottery Commission: 19 "Texas lost a genuine leader today when 20 Anthony Sadberry passed away. At every juncture of 21 his life, in school, in his law practice and with the 22 lottery, Anthony seemed to end up in positions of 23 leadership. His peers clearly recognized his innate 24 leadership abilities, concern for others and unfailing 25 common sense. 0011 1 "Anita and I extend our sincere 2 condolences and prayers to his wife, Denise, his 3 family and his friends all over the state." 4 Commissioner, did you have -- you knew 5 Director Sadberry. Did you have anything you wanted 6 to add to that? 7 COMMISSIONER SCHENCK: I think I would. 8 And I first wanted to thank the Governor for those 9 kind thoughts. I know that many of us here today are 10 missing Anthony. 11 It's been my pleasure for the past year 12 to get to know him. He's been sick, as most of us 13 knew. Anthony was a very private, quiet and a 14 dignified man. He was dedicated to this agency and to 15 its people. He never really sought the limelight. He 16 didn't seek wealth. He was trained as a lawyer, and 17 he did the work that good lawyers do. 18 He shouldered other people's problems 19 like they were his own. He took a very careful, a 20 methodical and detailed approach to studying people's 21 problems. He maintained their confidences, and he 22 gave it his best effort, and he gave honest and 23 ethical answers. 24 Anthony, as everyone who works here 25 will know, he treated people with respect, regardless 0012 1 of their rank or their station. I think he cared 2 about people genuinely, and that showed and people 3 knew that who knew him. He was a servant of the 4 people of this state and a good steward of their 5 resources, and I think we can all learn from his 6 example. 7 He could have done a lot of things to 8 promote or enrich himself beyond his financial means 9 or his station, but he didn't do that. People would 10 have understood if he had taken a different path. But 11 I think in a world increasingly populated with 12 entitlement and narcissism, Anthony was aspiring to 13 something more. I don't mean to suggest Anthony was 14 perfect -- no one is -- but he was just a very good 15 man. 16 Thank you. 17 CHAIRMAN COX: Thank you, Commissioner. 18 I, too, appreciate the kind words from 19 Gov. Perry and from you, Commissioner, as well. 20 Commissioner, did you know Director 21 Sadberry? 22 COMMISSIONER WILLIAMSON: I did not 23 have the opportunity to meet him. I spoke with him 24 briefly on the phone once right after my announcement 25 came out. But all I've heard from people that I've 0013 1 talked to is what a fine Executive Director he was, 2 and I know he will be missed. 3 CHAIRMAN COX: Anthony came to us at a 4 very difficult time. We had had some very adverse 5 publicity that reflected on the integrity of the 6 Lottery, which is the most important thing we have and 7 the thing we protect most carefully. And we had a 8 rough relationship with more than one agency and 9 committee in the state government that are very 10 important to us. 11 We were scrutinized almost immediately 12 after Anthony came here, by the State Auditor, who did 13 I think five simultaneous audits, audited just about 14 every part of the Lottery. And because of the 15 excellent work of Anthony and Gary and the rest of the 16 staff, that turned out to be a very positive 17 experience and I think a turning point for us. Our 18 relationships with the State Auditor improved; our 19 relationships win the Oversight Committee improved, 20 and the Texas Lottery came to have a different 21 reputation than it had had when I came here. 22 Almost immediately after that, Anthony 23 began to be ill. It seemed like that his time after 24 he did the very heavy duty was short before he was 25 ill, and not displaying the illness, not letting the 0014 1 world know that he was ill, but working with some of 2 the greatest challenges one could possibly have with 3 his health. Anthony could have taken multiple routes 4 with his illness, and the route he chose was the 5 highest of roads. He chose to fight that illness with 6 every part of him, and he chose to continue to come to 7 work and to serve this agency, even though we could 8 tell that Anthony was braving it out, that it wasn't 9 easy for him to come to work. 10 And for a long time even after he was 11 very ill and had surgery, Anthony would be very close 12 to the first person here and very close to the last 13 person to leave. He was very dedicated to the agency, 14 to the State of Texas, and he was one of the bravest 15 men I've ever known. 16 I would like at this time to ask that 17 we observe a moment of silence in memory of Anthony 18 Sadberry and his service. 19 (Moment of silence) 20 CHAIRMAN COX: Have I called the 21 meeting to order yet? 22 MS. KIPLIN: Yes, sir, you have. 23 CHAIRMAN COX: Okay. I will observe 24 that the Commission's documents, specifically the job 25 description of the Deputy Executive Director, provide 0015 1 that in the absence of the Executive Director, the 2 Deputy Executive Director will serve in that capacity; 3 that is, as Executive Director. And Gary Grief is 4 serving as Executive Director of the Lottery, 5 effective yesterday. 6 Commissioner Williamson, this being 7 your first session we've got a couple of items that 8 relate specifically to you. One, I would like to 9 describe to you generally how we operate up here. The 10 agenda items, of course, are self-evident. There is a 11 presenter, a witness on each of the agenda items. And 12 we ask questions. We, the Commissioners, ask 13 questions any time we would like. If you feel the 14 need to interrupt and ask for clarification right at a 15 point in someone's presentation, please feel free to 16 do so. 17 After the presentation has been 18 completed, I will ask Commissioner Schenck if he has 19 any questions or comments. Then I'll ask you whether 20 you have any questions or comments. I'll make any 21 questions or comments that I have, and then we'll take 22 whatever action is appropriate on the particular 23 agenda item. So it's a fairly simple process and one 24 I'm sure that you're familiar with. 25 0016 1 AGENDA ITEM NO. II 2 CHAIRMAN COX: The second item on the 3 agenda is report, possible discussion and/or action on 4 ethics, administrative procedure and open government 5 laws pertaining to the Texas Lottery Commission. 6 Each time there is a new commissioner, 7 the legal staff presents this matter. And this is 8 particularly for your benefit -- Ms. Kiplin -- 9 although Dave and I will listen to it as a reminder 10 for us. 11 MS. KIPLIN: Commissioners, I 12 appreciate you laying that groundwork for me, and I 13 appreciate the indulgence by you, Mr. Chairman and 14 Commissioner Schenck, as I go through this. 15 And, Commissioner Williamson, I 16 provided you a handout. And it's actually the Texas 17 Ethics Commission guideline, and we've annotated it 18 throughout that pamphlet with excerpts from ours. 19 That would be the Lottery Commission's organic laws, 20 whether it's in 466 or 467 of the Government Code. 21 And so I wanted to just kind of run 22 through this pretty quickly, and I'm going to hit real 23 high levels. And certainly if you have any questions, 24 please stop me. And also as you serve as a 25 Commissioner, don't hesitate to call the Legal 0017 1 Services Division. And if I'm not available, one of 2 the attorneys can help you with any question that you 3 have. 4 The guideline -- and I'm turning to 5 Page 4 -- is entitled -- the first part is "Standards 6 of Conduct and Conflict of Interest." And there are 7 "should nots" that are set out, and the "should nots" 8 really have to do with not accepting any kind of gift 9 or benefit as a result of your office. The focus in 10 the general "should nots" is anything that could be 11 reasonably expected to create any kind of conflict of 12 interest or appear to be intended to influence you in 13 your official duties. 14 There is also the matter under 15 conflicts of interest of a private interest in a 16 measure or decision. And mainly what this stands for 17 is that if you have a conflict of interest, and that 18 can be fairly complicated in terms of determining 19 whether there really is a conflict of interest. 20 It's a factual determination. It 21 stands for the proposition that you should recuse 22 yourself from a matter that is coming before you for 23 action where you have a conflict of interest. There 24 are conflicts of interest provisions that actually do 25 apply specifically to members of the Lottery 0018 1 Commission. And you can turn to Page 14, and then the 2 blue font sets that out for you. 3 Essentially it goes to making sure that 4 you are not accepting any kind of employment or 5 remuneration from somebody who has a substantial 6 interest in the lottery, financial interest in the 7 lottery. Also note you cannot purchase a ticket or 8 claim, collect or receive a lottery prize or share a 9 lottery prize. That's as a member of the Lottery 10 Commission; but, frankly, that goes to all employees 11 of the agency. 12 Turning over to the acceptance of 13 benefits, you will look under gift prohibitions that 14 are applicable to members the Lottery Commission. I 15 guess the general rule of thumb for us would be do not 16 accept a gift where it's intended to influence you in 17 your official capacity. 18 There are gift thresholds as it relates 19 to general ethics law. But you should know that 20 unique for the Lottery Commission, there is no dollar 21 threshold on a gift. So even something that would be 22 considered a de minimis or nominal gift, could apply, 23 depending on the nature of the relationship. And 24 that's set out at the bottom of Page 5. 25 There is a carve-out, there is an 0019 1 exception, so that if the gift is on account of 2 something independent of your office. For example, 3 kinship, a prior relationship. By the way, that 4 exception did not exist of the beginning of the 5 existence of the agency, and that was later put in to 6 recognize if you carry the outright prohibition to its 7 logical -- to an absurd extreme, if my mother played 8 the lottery -- and I think she still does, by the 9 way -- does not live in my house -- and she won more 10 than $600, if she gave me a gift for my birthday, that 11 could trigger a prohibition. And I do like getting 12 gifts from my parents for my birthday. 13 So anyway, that carve-out was put in 14 essentially to recognize, you know, the practicalities 15 of that. Once again, no gifts from somebody who has 16 got a significant financial interest in the lottery. 17 The most important thing in all of this is, when in 18 doubt, ask. Just ask and we'll be glad to help you 19 through the analysis. 20 Know that you are not in a position of 21 accepting a gift on behalf of the Texas Lottery 22 Commission. There is a general law that -- a general 23 rule where if a state agency has the authority, the 24 express authority in its organic law to accept a gift, 25 then the governing board could accept that gift. It 0020 1 would have to have it on an open meeting agenda and 2 then have it as an action. Our agency does not have 3 express authority to accept gifts, so that's not 4 something that can occur here. 5 On Page 9 -- and I'll just leave this 6 to your reading -- are abuse of offices, and this has 7 to do with not using your official position in various 8 ways for non-governmental purposes, a particular use 9 of government property. 10 Now, the law does recognize the 11 incidental use. For example, I have a state phone in 12 my office. Can I call during the course of the day or 13 receive calls that anybody would in their normal life? 14 Yes. It really goes to not excessive or unreasonable. 15 Frequent flyer mileage actually was 16 carved out to recognize that if you're traveling on 17 government business and you get the frequent flyer, 18 you can actually keep that. 19 I'll switch down to "Other Employment" 20 on Page 10. And know that under "Concurrent 21 Employment," in particular, "A member of the Texas 22 Lottery Commission may not accept any employment or 23 remuneration from: 24 "a person that has a significant 25 financial interest in the lottery; or 0021 1 "a bingo commercial lessor, bingo 2 distribution, or bingo manufacturer." 3 And that's in the Texas Government 4 Code, Chapter 467. And then on Page 11, you can see 5 the definitions on who is a person who has a 6 significant financial interest in the lottery. 7 Know that there are revolving door 8 provisions in general, in general government law, but 9 in particular on Lottery Commission members. And 10 those are set out on Page 12 so that you can see the 11 nature of the revolving door and the length of the 12 time that the revolving door provision applies. 13 Personal financial statements. As a 14 member of the Commission, you are required to file a 15 personal financial statement, and my understanding is 16 that you have done so. Know that that's an annual 17 requirement and are due by the end of April of each 18 year. My office will work with you like we do with 19 the other identified folks that are required to file 20 these personal financial statements and remind you of 21 those deadlines. 22 There are other restrictions that 23 apply, and those are set out on Page 14. Know that 24 there is an anti-lobbying provision. And we've had a 25 little bit of conversation about that anti-lobbying 0022 1 provision actually in an open Commission meeting and 2 led to a legal opinion that we provided y'all. But 3 the bottom line is, you cannot use appropriated funds 4 to lobby. What is lobbying? It's affecting the 5 outcome of legislation, either the passage, supporting 6 the passage, or the blocking, you know, killing of a 7 particular bill. 8 You-all are not paid with appropriated 9 funds. And you, frankly, are not paid at all, you 10 know. 11 (Laughter) 12 And so the anti-lobbying provision does 13 not relate to you, but you are not able to use the 14 staff to assist you in any kind of lobbying that you 15 would like to do. 16 Now, there is an exception, and that is 17 we can act as a resource when called upon by the 18 Legislature. And we're not any different than any 19 other agency in that regard. And when we are asked to 20 provide information, we do so. 21 There is another matter that -- and 22 actually, there was a recent AG Opinion that was 23 rendered that clarifies an earlier AG Opinion. But 24 you should know that a member of the Lottery 25 Commission may not directly or indirectly coerce, 0023 1 attempt to coerce, command or advise a person to pay, 2 lend or contribute anything of value to another person 3 for a political purpose. That's actually set out in 4 statute in Chapter 467. 5 An AG Opinion that was rendered in 1996 6 actually expanded on that to say that you cannot -- 7 you can also not solicit funds for a political 8 purpose. There has been a recent AG Opinion that was 9 rendered that makes it very clear that there are 10 aspects of that that would require a further factual 11 analysis on whether it would, in fact, trigger this 12 particular statute. Just know that it exists. And if 13 you have any questions at all, please feel free to 14 call. I went through this pretty quickly. I'm 15 available for any questions that you might have either 16 now or later. 17 I'll touch on the other matters, but 18 you and I have had a pretty good opportunity to visit 19 on the applications of the Administrative Procedure 20 Act, Texas Administrative Procedure Act. And there's 21 really two parts of that. One has to do with 22 contested case proceedings and the other has to do 23 with rulemaking. And today you get to look at both 24 aspects in terms of the matters that are going to be 25 coming before you. 0024 1 Essentially on a contested case 2 proceeding, know there is an ex parte prohibition, 3 ex parte communication prohibition, so that you are 4 not able to communicate with a party in a particular 5 contested case proceeding, either on facts or law that 6 are related to that particular case. 7 We have an attorney that we've carved 8 out to provide independent advice to Commissioners if 9 they want to really explore a particular case and not 10 do so in an open meeting, and that's Sandy Joseph, our 11 Special Counsel. So feel free to call upon her if you 12 get a contested case matter that you want more 13 information on. 14 Also we have talked about the open 15 government laws, and those are essentially the Texas 16 Public Information Act and then the Texas Open 17 Meetings Act. The general rule to remember under the 18 Texas Public Information Act is that any document that 19 you create, information that you create in the context 20 of your serving as a Commissioner is subject to the 21 Texas Public Information Act. 22 There are exemptions that may apply to 23 where that information would be exempt and not be 24 required to be produced in response to an open records 25 request. But the most important thing is to know that 0025 1 it does apply to whatever documents or information 2 that you create as a Texas Lottery Commissioner. 3 And then finally, under the Open 4 Meetings Act, the general rule is that the business of 5 the government needs to be noticed so that the public 6 has the right to come and see what is occurring by the 7 business of the governing body of a commission. And 8 it's triggered by there being a quorum where there is 9 a deliberation that leads to a meeting. 10 This is a three-member quorum. Two of 11 the three makes a quorum. So you are not able to talk 12 outside of an open meeting to one of your colleagues 13 about the business of this agency, without it being 14 properly noticed. There are some exceptions to the 15 business in the open that would allow the governing 16 body to go into a closed meeting, and there are 17 specific requirements on a how a closed meeting has to 18 occur. And so I'll just leave that at that point. 19 And if you have any questions, you know, feel free 20 call on me. 21 There are some exceptions, I should 22 say, outside of an open meeting where in a recent 23 one -- I say "recent," maybe four years ago -- was 24 added that if you-all are attending a legislative 25 committee hearing, we don't have to notice up our own 0026 1 open meeting; that would be a bit awkward, where it's 2 not really our meeting. 3 And you can be there while one of your 4 colleagues is testifying, and you can actually hear 5 that testimony. But you cannot actually deliberate 6 and talk to one of your colleagues even in that 7 setting, so just know that. There is also social 8 exceptions. And if you're attending a conference, you 9 can obviously attend the same conference. 10 Any questions on any of that, anything 11 for either you, Chairman Cox or Commissioner Schenck, 12 that might have come to your mind? 13 All right. Well, thank you for 14 allowing me to put this information on the record. 15 COMMISSIONER WILLIAMSON: Thank you. 16 CHAIRMAN COX: Commissioner, I will add 17 that our vendors are very conscious of our 18 requirements and they help us to comply. I recently 19 went with members of the staff to the GTECH 20 headquarters in Rhode Island. And there were bottles 21 of water and soda out, and there was a place to put 22 your dollar. And when we went to their cafeteria, 23 they made provision for us to pay for our food so that 24 we were in compliance with this. And the same thing 25 occurred when we went to Atlanta to SciGames' offices, 0027 1 so the same provision was made. So people understand 2 that the Texas Lottery is this way and they help us 3 comply. 4 AGENDA ITEM NO. III 5 CHAIRMAN COX: Agenda Item No. III, 6 consideration of and possible discussion and/or action 7 on nominations and appointments to the Bingo Advisory 8 Committee. 9 Mr. Sanderson. 10 MR. SANDERSON: Good morning, 11 Commissioners. For the record, Phil Sanderson, 12 Director of the Charitable Bingo Operations Division. 13 Commissioner Williamson, I would like 14 to welcome you to the board. And I know we had a 15 brief time to discuss bingo a little bit yesterday, 16 and I look forward to working with you in the future. 17 As far as the Bingo Advisory Committee, 18 at the September meeting, Commissioners, you nominated 19 Markey Weaver and Francis Ciancarelli to two of the 20 three vacant positions. We had one nominee who had 21 withdraw her nomination form. I went back and we 22 reviewed the other nominations. And today we're here 23 to recommend Thomas Weekley be re-appointed for a 24 three-year term. 25 I will be glad to answer any questions 0028 1 you may have. 2 CHAIRMAN COX: Phil, does Commissioner 3 Williamson have any information about Mr. Weekley? 4 MR. SANDERSON: Not personally about 5 Mr. Weekley. We briefly talked about the Bingo 6 Advisory Committee yesterday. 7 CHAIRMAN COX: Okay. Have you had an 8 opportunity, Commissioner, to meet with Mr. Weekley? 9 COMMISSIONER SCHENCK: I have. And I 10 interviewed him, and I was comfortable with his 11 nomination. But I was going to make the suggestion 12 that if Commissioner Williamson is uncomfortable 13 voting on something for lack of information, I would 14 recommend that or encourage her to vote as she sees 15 fit, including to abstain. 16 CHAIRMAN COX: Sure. And I know Tom. 17 He's served in the past. Commissioner Williamson, I 18 would offer two things here. One would be that 19 Commissioner Schenck and I, should we vote that way, 20 would approve this nomination. The other would be -- 21 and it would be just fine with us -- should you like 22 an opportunity to interview this person by telephone, 23 we can provide you that opportunity either before or 24 after the vote, and we could vote on it at a future 25 meeting, whatever would be your preference. 0029 1 COMMISSIONER WILLIAMSON: Let's go 2 ahead and vote. Phil and I discussed it. And I 3 didn't feel like I had the background yet to be able 4 to ask him questions. So I will go with whatever that 5 y'all recommend and how you vote today. 6 CHAIRMAN COX: Okay. Would you like to 7 move approval of this -- 8 COMMISSIONER SCHENCK: I was very happy 9 with my conversation with Mr. Weekley. I think he'll 10 continue to give good service to the BAC. 11 And, Phil, as I recall, there is a 12 meeting coming up in about a week and a half? 13 MR. SANDERSON: It's a week from today. 14 COMMISSIONER SCHENCK: Okay. So I will 15 move adoption of the staff recommendation. 16 CHAIRMAN COX: Second. 17 All in favor, say "aye." 18 COMMISSIONER SCHENCK: Aye. 19 CHAIRMAN COX: Aye. 20 Motion carries 2-0, with Commissioner 21 Williamson abstaining. 22 AGENDA ITEM NO. IV 23 CHAIRMAN COX: Okay. Agenda Item 24 No. IV, consideration of and possible discussion 25 and/or action, including proposal, on new 16 TAC 0030 1 §402.406 relating to the bingo chairperson. 2 Ms. Joseph. 3 MS. JOSEPH: Good morning, 4 Commissioners. For the record, my name is Sandra 5 Joseph, Special Counsel, the Legal Division. 6 As you're aware, we have a number of 7 rulemaking items on the agenda today. And I would 8 like to make a few comments that will pertain to 9 particular groups of them so that I'm not repeating 10 the same information over and over. There is certain 11 information that pertains to each of them. 12 In preface, Items IV through VIII are 13 all recommendations that you approve publication of 14 proposed rules in the Texas Register in order to 15 receive public comments for a period of 30 days. As 16 is our general practice, staff has previously provided 17 drafts of each of these proposals to the Bingo 18 Advisory Committee and other interested persons for 19 their comments. Comments received during this 20 informal drafting period were considered in 21 preparation of the drafts that are recommended to you 22 today. 23 Furthermore, the submissions prepared 24 for the Texas Register, in the event you approve 25 publication, include notice for a public hearing to be 0031 1 held on these proposals on Thursday, December 4th, at 2 10:00 a m. In addition, the proposed rules will be on 3 our website, and written comments are invited from the 4 public. 5 If it's your preference, I'll present 6 the T-bar items for your signature at the conclusion 7 of Item VIII on these proposals, rather than offer 8 them to you after each item. 9 CHAIRMAN COX: Okay. 10 MS. JOSEPH: All right. Item IV is 11 proposed new rule 16 TAC §402.406 relating to the 12 bingo chairperson. The purpose of the proposed new 13 rule is to clearly require licensed authorized 14 organizations to appoint a member of their 15 organization who is an officer or director, as 16 described in the organization's bylaws, who will be 17 responsible for overseeing the organization's bingo 18 activities and reporting to the membership relating to 19 those activities. 20 Staff recommends that the Commission 21 initiate rulemaking proceedings by approving 22 publication in the Texas Register in order to receive 23 public comments. 24 Are there any questions? 25 COMMISSIONER SCHENCK: I have one 0032 1 question, Sandy. Can you remind me, do we have any 2 organizations that are not incorporated that are 3 licensed right now? Do you have LLPs or general 4 partnerships? 5 MS. JOSEPH: Phil would have better 6 knowledge of that. 7 MR. SANDERSON: Commissioner, the bingo 8 chairman applies only to the non-profits that conduct 9 bingo. And so I believe most of them are corporations 10 or associations or unincorporated associations. There 11 are not any LLPs or partnerships. 12 COMMISSIONER SCHENCK: Is that as a 13 result of the legal structure that we have so we'll 14 never have anything other than corporations or is it 15 just as the industry practice? 16 MR. SANDERSON: I think that the -- I'm 17 not aware of any non-profits or tax-exempt 18 organizations that are partnerships or LLP type 19 structures. I think the IRS has got some requirements 20 on how organizations are formed. 21 COMMISSIONER SCHENCK: Okay. Well, you 22 see what I'm getting at here? 23 MR. SANDERSON: Yes, sir. 24 COMMISSIONER SCHENCK: There could be 25 organizations that don't have officers or members -- 0033 1 or boards of directors but have managing directors or 2 managing partners, things of that nature. But it 3 doesn't seem like we're going to have any confusion. 4 MR. SANDERSON: I don't believe we 5 will, no, sir. 6 COMMISSIONER SCHENCK: Okay. That was 7 my only question. Thanks, Sandy. 8 MS. JOSEPH: Thank you. 9 MS. KIPLIN: And one thing we can 10 offer: If we get a comment to that regard during the 11 comment period, we can certainly recommend amendments. 12 COMMISSIONER SCHENCK: And we wouldn't 13 need to re-publish for additional notice and comments? 14 MS. JOSEPH: Not if it's in response to 15 a comment. 16 COMMISSIONER SCHENCK: All right. 17 Thank you. 18 CHAIRMAN COX: Commissioner? 19 COMMISSIONER WILLIAMSON: I have 20 nothing. 21 CHAIRMAN COX: Sandy, what are we 22 fixing here? 23 MS. JOSEPH: Pardon? 24 CHAIRMAN COX: Is this in response to 25 one of the Internal Audit group's recommendations? 0034 1 MS. JOSEPH: Well, the staff has 2 identified over the past year the need to have someone 3 who is responsible to report to the membership. And I 4 believe Mr. Sanderson can tell you they've had 5 experiences where they found that perhaps the person 6 designated as operator did not seem to be very 7 knowledgeable about an organization and probably not 8 in communication with them. 9 And so there have been rules adopted 10 over the past year that indicated a bingo chairperson 11 would be responsible for various things, but we did 12 not have a rule that clearly said an organization 13 needs to appoint a bingo chairperson. So I don't 14 recall whether this is in response to an internal 15 audit or a recognition by the staff of a need for such 16 a person to be designated. 17 CHAIRMAN COX: Phil, can you help? 18 MR. SANDERSON: It's not in response to 19 the Internal Audit report. Some of the rules that 20 were drafted that indicate a bingo chairperson needs 21 to be present at an entrance conference of an audit or 22 exit conference or dispute resolution and some other 23 areas, those rules were developed as a result of the 24 internal audit. 25 So it impacts those in the sense that 0035 1 now we're being clear that an organization is required 2 to have a bingo chairperson and designate who that 3 person is. And the Commission had adopted a 4 definition of "bingo chairperson" approximately about 5 a year ago when we began including that term in the 6 rules. And so we're just being clear now that the 7 organizations are required to have a bingo 8 chairperson. 9 CHAIRMAN COX: Okay. I think I'm 10 looking at the substance of the rule on Page 2, Lines 11 12, 13, 14, and 15. Is that correct, Sandy? 12 MS. JOSEPH: That's correct. 13 CHAIRMAN COX: And I see there that 14 they are, in fact, required to have an active officer 15 or member of the Board of Directors, which I assume 16 "active" means that they show up once in a while or -- 17 probably not a precisely defined term? 18 MS. JOSEPH: That's correct. 19 CHAIRMAN COX: So it may mean that they 20 come to meetings and have dinner once a month or once 21 a quarter or once a year, whatever "active" would be 22 in that particular organization. Nor does it 23 prescribe, as I see, any particular unique knowledge 24 or attention to the position. 25 Are those assumed or are those 0036 1 unnecessary? What do we want of this person, other 2 than someone to go to and have signed documents or 3 visit when we're there? Or what's the purpose of this 4 person? 5 MS. JOSEPH: Well, I believe -- it 6 looks like Phil would like to answer that. 7 MR. SANDERSON: The purpose of this 8 rule, as Sandy had mentioned, in the statute, an 9 organization has to have a member oversee the actual 10 conduct of the bingo games, and that person has been 11 termed "operator" in the past, I know throughout the 12 years, and is still considered to be the operator. 13 We have found that whenever we've 14 conducted observations or inspections, the operator 15 does not appear in some cases to have a clear 16 understanding of the organization that they're the 17 operator for or member of. And in that case, since 18 organizations can really make anybody a member that 19 they want to, to a certain extent, we've looked to 20 someone who is an officer or a member of the board of 21 directors that would have a little bit more interest 22 in the organization and their activities more so than 23 their bingo operations, to oversee the activities of 24 bingo. 25 They're not required to be at every 0037 1 bingo occasion, but they're just there as an overseer. 2 They look at the reports. They report back to the 3 organizations at whatever their meeting intervals are 4 as it relates to their bingo activities, you know, how 5 much money they're making and to, you know, adjust -- 6 look at the costs and expenses, to have some insight 7 on how the operation is run. 8 CHAIRMAN COX: Okay. Phil, I heard you 9 say that they are to have a clear understanding of the 10 operations, they're to look at reports and they're to 11 report back to the organization. Now, I don't see 12 that here. Is that somewhere else? 13 MR. SANDERSON: In other rules, they 14 are. And when it talks about the quarterly report 15 rule, it talks about, you know, making a report to the 16 membership on the bingo activities. That's why -- 17 this term is in several rules and has certain 18 requirements that they're required -- you know, 19 they're required to report on certain activities. 20 They're required to attend certain meetings with the 21 TLC and the Bingo Division, but we didn't have a clear 22 rule requiring them to have this person. 23 CHAIRMAN COX: Okay. So we have 24 specified the duties elsewhere, and now we're mopping 25 and saying, "You must appoint such a person"? 0038 1 MR. SANDERSON: Yes, sir. 2 CHAIRMAN COX: Okay. I got you. 3 So the staff recommendation is that we 4 propose this for public comment? 5 MS. JOSEPH: That's correct. 6 COMMISSIONER SCHENCK: I'm going to 7 recommend that we adopt staff's recommendation and 8 propose the new rule by notice and comment. 9 CHAIRMAN COX: Okay. That's a motion? 10 COMMISSIONER SCHENCK: That's a motion. 11 COMMISSIONER WILLIAMSON: Do you want 12 me to second it? 13 CHAIRMAN COX: Yes, ma'am. 14 COMMISSIONER WILLIAMSON: Yes, I'll 15 second the motion. 16 CHAIRMAN COX: Okay. Motion is made 17 and seconded that we approve the staff recommendation. 18 All in favor, say "Aye." 19 COMMISSIONER SCHENCK: Aye. 20 CHAIRMAN COX: Aye. 21 Any opposed? 22 Motion carries 3-0. 23 AGENDA ITEM NO. V 24 CHAIRMAN COX: Agenda Item No. V, 25 consideration and possible discussion and/or action, 0039 1 including repeal, of existing TAC 402.103 and/or 2 proposal of new 16 TAC 402.103 relating to training 3 program. 4 Ms. Joseph. 5 MS. JOSEPH: Yes, Commissioners. Item 6 V is both a proposed repeal of the existing training 7 program rule, along with a new proposed Rule 402.103 8 relating to the training program. The purpose of the 9 proposed repeal and new rule is to add provisions and 10 make it clear that there is an opportunity for members 11 of licensed authorized organizations to complete 12 training that's required by statute by utilizing the 13 Internet or by attending a class in person, as they 14 have done in the past. 15 The option of completing the training 16 by the Internet is a new option and it offers 17 convenience and flexibility. Staff recommends that 18 the Commission initiate the proposed rulemaking in 19 order to receive comments on the draft rule. 20 CHAIRMAN COX: Commissioner? 21 COMMISSIONER SCHENCK: Thank you, 22 Sandy. Do you know, Sandy, what the percentage is of 23 people taking the class by the Internet versus on-site 24 right now? 25 MS. JOSEPH: Well, I would need to look 0040 1 to Phil to answer that. 2 COMMISSIONER SCHENCK: I'm sorry, Phil. 3 MR. SANDERSON: We have put the 4 Internet -- or the on-line training on the Internet 5 was effective June the 25th, I believe, so that's 6 about four months that we've had it out on the 7 Internet. We've had a little over 100 individuals 8 take the on-line class. 9 The on-site classes that we have held 10 in that time period is probably a little bit less than 11 that attendance, so it appears more people are going 12 to the Internet -- taking it on the Internet. In 13 fact, we had one class scheduled out in West Texas 14 that, after it was scheduled for about four weeks, 15 nobody had registered to go to the class. So we've 16 canceled that class, and we're looking at reducing the 17 actual number of on-site classes we have. And, of 18 course, if any organization would like to have one, 19 we'll definitely get with them and put one on. 20 COMMISSIONER SCHENCK: Phil, for my 21 benefit, can you remind me how many remote locations 22 we have where we're offering these services? We have 23 one West Texas, one in Dallas, one in Houston. 24 MR. SANDERSON: Houston and 25 San Antonio. Those are the four regional offices. 0041 1 However, historically we've also done classes like in 2 McAllen, El Paso -- East Texas, Tyler. 3 COMMISSIONER SCHENCK: When we do the 4 classes like that, are we renting out space at a Days 5 Inn or something similar? 6 MR. SANDERSON: Normally an 7 organization has a facility, that they'll let us use 8 either their bingo hall or a banquet room that they 9 have. 10 COMMISSIONER SCHENCK: We're having 11 people take a test at the end of this on-line class to 12 confirm that they've actually paid attention, they 13 haven't just sat through and let the Internet play 14 for -- how long is the class? 15 MR. SANDERSON: Well, the class is 16 about seven hours, but it's divided up into nine 17 separate modules that are between 20 and 45 minutes. 18 So an individual can actually spread the time out as 19 they're taking the class, and there are test questions 20 for each module. And if they -- 21 COMMISSIONER SCHENCK: Is the test 22 administered at the end of all the modules or at the 23 end of each module? 24 MR. SANDERSON: At the end of each 25 module. 0042 1 COMMISSIONER SCHENCK: Okay. That's 2 just to make sure that every 20 minutes or so they're 3 showing signs of life and participating? 4 MR. SANDERSON: Yes, sir. 5 COMMISSIONER SCHENCK: Have we found 6 that people are able to pass the test? I mean, a 7 70 percent pass rate doesn't seem that -- 8 MR. SANDERSON: We've had a few 9 individuals that didn't pass it the first time. I 10 think we've had one person that didn't pass it the 11 first two times, but then they went back and actually 12 passed it. 13 COMMISSIONER SCHENCK: Okay. And they 14 have to take the whole class over again? 15 MR. SANDERSON: Yes, because they don't 16 know which questions they missed. 17 COMMISSIONER SCHENCK: Okay. Do we ask 18 the same questions every time? 19 MR. SANDERSON: Yes. 20 COMMISSIONER SCHENCK: Okay. And that 21 would be true for in-person -- or we don't do it in 22 person? 23 MR. SANDERSON: We don't necessarily -- 24 we don't have the test for in-person because we have 25 them -- they're there and we have two to three staff 0043 1 members there also making sure they stay awake. 2 COMMISSIONER SCHENCK: Okay. But I 3 assume that we're looking for more from the people who 4 show up in person and staying awake? 5 MR. SANDERSON: Yes, sir. There is 6 some interaction in there. 7 COMMISSIONER SCHENCK: Okay. Well, 8 very good. It seems to me like we're going to trend 9 towards people taking almost entirely the on-line 10 class. Okay. That's interesting. Thanks, Phil. 11 COMMISSIONER WILLIAMSON: Phil, what's 12 the time frame that you can take the test on-line? I 13 mean, is it like for days, two days once you start it? 14 MR. SANDERSON: There is not any time 15 frame. 16 COMMISSIONER WILLIAMSON: Not a time 17 frame. So if they start it, they could spend two 18 weeks taking it if they so choose? 19 MR. SANDERSON: Yes, ma'am. 20 CHAIRMAN COX: Good questions. Thank 21 you. 22 Sandy, you're looking for a repeal of 23 the existing rule and a proposal of a rule to replace 24 it? 25 MS. JOSEPH: That's correct. 0044 1 CHAIRMAN COX: Okay? Is there a motion 2 to support the staff recommendation? 3 COMMISSIONER SCHENCK: I move we adopt 4 staff's recommendation. 5 CHAIRMAN COX: Okay. Is there a 6 second? 7 COMMISSIONER WILLIAMSON: Second. 8 CHAIRMAN COX: All in favor, say "Aye." 9 COMMISSIONER WILLIAMSON: Aye. 10 COMMISSIONER SCHENCK: Aye. 11 CHAIRMAN COX: Aye. 12 All opposed? 13 Motion carries 3-0. 14 AGENDA ITEM NO. VI 15 CHAIRMAN COX: Item No. VI, 16 consideration of and possible discussion and/or 17 action, including proposal, on 16 TAC 402.422 relating 18 to amendment to a regular license to conduct 19 charitable bingo. 20 Ms. Joseph. 21 MS. JOSEPH: Item VI is proposed new 22 rule 16 TAC §402.422 relating to amendment to a 23 regular license to conduct bingo. The purpose of this 24 proposed new rule is to specify when an amendment to a 25 license to conduct bingo is needed and to set out the 0045 1 requirements that are applicable to the specific 2 change being requested. The public benefit expected 3 is to provide interested persons with the general 4 requirements and processes related to amending a 5 license to conduct bingo. 6 Again, the staff recommends that the 7 Commission initiate the rulemaking process by 8 publishing the proposed rule in the Texas Register. 9 CHAIRMAN COX: Commissioner? 10 COMMISSIONER SCHENCK: The $10.00 fee 11 that we have here, is this what we think is reasonably 12 necessary to defray the cost of regulation and is it 13 legislatively mandated? 14 MR. SANDERSON: The $10.00 fee is in 15 the statute. 16 COMMISSIONER SCHENCK: Okay. So that 17 moots my first question, then. All right. Phil, I 18 think it would be helpful if you could just remind me 19 and Commissioner Williamson of the process that's led 20 to the point where we have Rule 402.422(a)(1), 21 et cetera, et cetera. We're getting a lot in the -- 22 my year here in the Commission, we've had quite a few 23 rules. We're going through a process that seems to be 24 increasingly detailed with respect to bingo and its 25 operations. And I think the regulated community, it's 0046 1 my understanding, is supporting this. But if you 2 could give some high level explanation of what the 3 driver is for filling in all these intricacies, I 4 think it would be helpful. 5 MR. SANDERSON: The majority of the 6 rules that we are working on right now are process and 7 procedural rules that lay out the process that the 8 bingo staff uses and, in this case here, verifying and 9 approving amendments to an application. 10 And we're putting these out in rules so 11 that individuals have the opportunity to comment. 12 There are steps that they take when they file an 13 amendment, or whatever some of the context of the 14 other rules are, and it gives them clear understanding 15 of what is required of them so that everyone is on the 16 same page. 17 COMMISSIONER SCHENCK: Was there a 18 thought from the State Auditor or someone else that we 19 needed to flesh out more detail and leave less to the 20 discretion or confusion of the regulated community, or 21 our discretion? 22 MR. SANDERSON: Not from the State 23 Auditor. But there was an internal audit on the 24 enforcement and the Audit Department's side of the 25 Bingo Division a couple of years ago that indicated we 0047 1 should be clear and concise in what's expected of the 2 organizations and their bingo operations, which is one 3 of the reasons for the rule on Item No. IX, I believe. 4 But additionally, we moved forward in utilizing that 5 opportunity to look at our licensing function and also 6 to provide clear understanding of what the licensing 7 process is for an organization. 8 COMMISSIONER SCHENCK: Well, 9 Commissioner, I'll just tell you that my year here, it 10 seemed to me that we're getting increasingly small 11 level of detail in bingo. And I think that that's 12 good, because someone who -- and I assume, Phil, we 13 published -- not everyone has it -- the Texas Register 14 handy, or the Texas Administrative Code. But for the 15 regulating community, if someone calls and says, "I 16 want the bingo rules," we have a pamphlet that has the 17 rules in it? 18 MR. SANDERSON: Yes, sir. 19 COMMISSIONER SCHENCK: And so as I 20 understand it, the objective here is by adding detail 21 to remove some of the confusion for people who don't 22 make a career out of trying to interpret law. Of 23 course, every time you add more detail, you add more 24 opportunity for debate about what a particular word 25 means or what a particular provision means. But I 0048 1 think that Phil has been working very carefully, as 2 with the rest of the bingo division, with the 3 regulated community to come to agreement on what these 4 rules mean. 5 And that's an important part of what 6 the Bingo Advisory Committee does, outside the context 7 of these hearings, is to open this process up for 8 consideration by the regulated community, including 9 the charities, including this distributors, including 10 everyone else who is affected by them. And I think 11 it's been a fairly effective process. 12 And it's where -- 60, 70 percent done 13 at this point, Phil? 14 MR. SANDERSON: Yes, sir. 15 COMMISSIONER SCHENCK: Well, thank you 16 for that background. 17 CHAIRMAN COX: Okay. Commissioner? 18 COMMISSIONER WILLIAMSON: No. 19 CHAIRMAN COX: Okay. I move approval 20 of staff recommendation. 21 COMMISSIONER SCHENCK: Second the 22 motion. 23 CHAIRMAN COX: All in favor, say "Aye." 24 COMMISSIONER WILLIAMSON: Aye. 25 COMMISSIONER SCHENCK: Aye. 0049 1 CHAIRMAN COX: Any opposed? 2 Motion carries 3-0. 3 AGENDA ITEM NO. VII 4 CHAIRMAN COX: Item VII, consideration 5 of and possible discussion and/or action, including 6 proposal, on 16 TAC 402.410 relating to amendment of 7 the license-general provisions. 8 MS. JOSEPH: Item VII is proposed new 9 rule 402.410 relating to amendment of a license- 10 general provisions. The proposed new rule specifics 11 when an amendment to a license is needed and sets out 12 requirements that are applicable to all license 13 amendments. The public benefit expected is to provide 14 interested parties with general requirements and 15 processes relating to amending all licenses. This 16 rule is in keeping with the previous rule. 17 Staff recommends publication of the 18 rule. 19 COMMISSIONER SCHENCK: I have no 20 question. 21 COMMISSIONER WILLIAMSON: I have 22 nothing. 23 CHAIRMAN COX: Move approval of the 24 staff recommendation. 25 COMMISSIONER SCHENCK: Second the 0050 1 motion. 2 CHAIRMAN COX: All in favor, say "Aye." 3 COMMISSIONER SCHENCK: Aye. 4 COMMISSIONER WILLIAMSON: Aye. 5 CHAIRMAN COX: Any opposed? 6 Motion carries 3-0. 7 AGENDA ITEM NO. VIII 8 CHAIRMAN COX: Agenda Item No. VIII, 9 consideration of and possible discussion and/or 10 action, including proposal, on 16 TAC 402.604 relating 11 to delinquent purchaser. 12 Ms. Joseph. 13 MS. JOSEPH: Item VIII is draft 14 proposed new rule 16 TAC §402.604 relating to 15 delinquent purchaser. The purpose of this new 16 proposed rule is to clearly set forth for licensees 17 the process and timelines to follow related to late 18 payments for bingo supplies and equipment. The rule 19 provides clarification of Bingo Enabling Act, Section 20 2001.218 relating to payment for bingo supplies or 21 equipment. 22 The statute requires that sale or lease 23 of bingo supplies or equipment must be on terms of 24 immediate delivery or payment not later than 30 days 25 after delivery. If the payment is not made when due, 0051 1 the seller must notify the Commission who in turn must 2 notify all licensed manufacturers and distributors. 3 In the event of a default on payment, a person may not 4 sell to a purchaser who is in default on terms other 5 than cash on delivery. 6 The benefit of the rule is to provide 7 licensees the specific process of notification and the 8 timelines to follow when a licensee is delinquent in 9 payment to a licensed seller. 10 Staff recommends that the Commission 11 initiate rulemaking proceedings by publishing the rule 12 in the Texas Register to receive public comment. 13 COMMISSIONER SCHENCK: Sandy, I'm 14 curious. I don't know if you know but, obviously, as 15 you said, the requirement that involve ourselves in 16 the relationship between the vendor and the purchaser 17 is a statutory one. Do we know why that is, instead 18 of just letting the vendors and the buyers work this 19 out for themselves? This is one of the great 20 mysteries of legislation. 21 MS. JOSEPH: I haven't found any 22 legislative history on that. I did see that this 23 provision was first adopted in '89. I don't know if 24 Phil has anything additional to add. 25 MR. SANDERSON: The only thing I found, 0052 1 it was in '89, which was right prior to the bingo 2 being transferred from the Comptroller to the TABC 3 where the Alcoholic Beverage code has a similar 4 provision as it relates to the relationship between 5 the wholesalers and consumer -- and the -- 6 COMMISSIONER SCHENCK: Retailers. 7 MR. SANDERSON: -- retailers. And 8 other than that, that's the only analogy I could draw 9 between the two. 10 COMMISSIONER SCHENCK: Well, clearly we 11 are required to make some kind of a rule here, then. 12 Would you agree? 13 MR. SANDERSON: I believe so, yes, sir. 14 COMMISSIONER SCHENCK: All right. Do 15 you know what percentage of conductors are not paying 16 on a timely basis? 17 MR. SANDERSON: I don't have that 18 number right off the top of my head. It's on the 19 Internet. I can look real quick and -- 20 COMMISSIONER SCHENCK: Okay. But there 21 are a few out there that are -- 22 MR. SANDERSON: There are quite a few, 23 yes, sir. 24 COMMISSIONER SCHENCK: All right. 25 Well, we have a statute and we have a mandate. I 0053 1 think we need to follow it. 2 I have no future questions. Thanks. 3 COMMISSIONER WILLIAMSON: No, I have no 4 questions. 5 CHAIRMAN COX: Phil, as David says, you 6 know, we're required to do it so we'll do it. Is this 7 a difficult matter for your staff or is it a very 8 routine matter: The reports come in regularly, you 9 make six key strokes to put them on the website and, 10 next case, get them off in a similar fashion? Kind of 11 tell me a little bit about the process. 12 MR. SANDERSON: When an organization 13 goes into default with a distributor -- that's the 14 most common relationship -- the distributor will fax 15 in to us a form that indicates the name of the 16 organization and what the amount of the delinquency 17 is, and we just add that to the computer system. It's 18 uploaded to the Internet the next morning. Once the 19 organization pays the distributor, then they fax us 20 the form again showing that it's been paid, and we go 21 ahead and close the case that we have on the 22 organization and the next morning they're taken off 23 the list. 24 CHAIRMAN COX: Okay. 25 COMMISSIONER WILLIAMSON: I have a 0054 1 question. 2 CHAIRMAN COX: Yes, ma'am. 3 COMMISSIONER WILLIAMSON: Phil, is 4 there ever an opportunity for the purchaser to maybe 5 have a comment or they may not agree with the date? 6 Does that ever arise when the purchaser may have -- in 7 other words, sometimes there are disputes on what 8 constitutes delinquent or not? 9 MR. SANDERSON: I'm not aware of any 10 purchaser disputing a claim of default. 11 COMMISSIONER WILLIAMSON: Okay. 12 CHAIRMAN COX: Okay. Move approval of 13 the staff recommendation. 14 COMMISSIONER SCHENCK: Second the 15 motion. 16 CHAIRMAN COX: All in favor, say "Aye." 17 COMMISSIONER WILLIAMSON: Aye. 18 COMMISSIONER SCHENCK: Aye. 19 CHAIRMAN COX: Motion carries 3-0. 20 MS. JOSEPH: With your permission, I 21 would like to offer the T-bars on the Items IV through 22 VIII. 23 CHAIRMAN COX: Okay. Before you do, 24 Sandy, let me just be sure that I understand what 25 Mr. Fenoglio would like to make a statement on. 0055 1 Is it some of these, Steve, that you're 2 looking at? 3 MR. FENOGLIO: For the record, my name 4 is Stephen Fenoglio. I'm an attorney in Austin, and 5 I'm here representing the state VFW and its member 6 organizations: Veterans of Foreign War, the Bingo 7 Interest Group and also Steve Bresnen. 8 And we have worked with Phil and his 9 staff on this, and we're generally supportive. There 10 will be some tweaks. Some of the questions you've 11 raised we will raise, but we think they are a good 12 idea. It will give a lot of clarity to some licensees 13 who aren't as familiar with the unwritten process. 14 It's going to be more formalized. So we support the 15 action you're recommending taking. 16 And I have a couple of comments on some 17 of the other rules that you're going to adopt, 18 clarifying questions. 19 CHAIRMAN COX: Well, I'll just watch 20 for when you want to -- 21 MR. FENOGLIO: Fair enough. 22 CHAIRMAN COX: -- because I'm showing 23 here that you want to comment on IV through XIV. 24 MR. FENOGLIO: Correct. 25 CHAIRMAN COX: Okay. Thank you, 0056 1 Mr. Fenoglio. 2 MR. FENOGLIO: I'll speak up. 3 CHAIRMAN COX: Okay. Sandy, you want 4 to bring the T-bars for us to sign. 5 (Brief pause) 6 CHAIRMAN COX: Sandy, it looks like the 7 next one, two, three, four are for adoption? 8 MS. JOSEPH: That's correct. 9 AGENDA ITEM NO. IX 10 CHAIRMAN COX: Agenda Item No. VIII 11 (sic) is adoption of 16 TAC 402.200, general 12 restrictions on conduct of bingo. 13 MS. JOSEPH: I believe that's No. IX. 14 Let me make sure. 15 CHAIRMAN COX: That is No. IX. 16 MS. JOSEPH: All right. 17 CHAIRMAN COX: Did I say -- 18 MS. JOSEPH: I think you said No. VIII. 19 CHAIRMAN COX: I'm sorry. 20 MS. JOSEPH: Okay. 21 CHAIRMAN COX: No. VIII we've already 22 done. 23 MS. JOSEPH: Yes. 24 CHAIRMAN COX: No. IX is what I said. 25 MS. JOSEPH: Okay. 0057 1 CHAIRMAN COX: Okay. Thank you. 2 MS. JOSEPH: I thank you. 3 Yes. I would like to offer some 4 remarks that are common to Items IX through XII. All 5 of these are recommendations that you approve adoption 6 of rules that have been previously published in the 7 Texas Register. They were published on August 15, 8 2008, and a hearing was held to receive public 9 comments on September 9th. The comments were 10 received, considered and addressed by the staff in 11 preparing the recommendations before you today. 12 The comments were helpful. And in most 13 instances, changes have been made in response to the 14 comments. In addition, as requested by the 15 Commission, any time frames included in the rules have 16 been clarified to indicate calendar days. A red-lined 17 version of the changes to the text of the rules; as 18 well as the draft prepared for the Texas Register 19 submission, is included in your notebooks. 20 Item IX, in particular, is adoption of 21 amendments to Bingo Rule 402.200 regarding general 22 restrictions on the conduct of bingo, with changes to 23 the proposed text. The purpose of these amendments is 24 to set out the requirements for organizations to 25 follow in order to ensure the fair conduct of a game. 0058 1 Representatives from Fort Worth 2 Bookkeeping, the Bingo Interest Group, Amvets 52 and 3 Mr. Stephen Fenoglio, representing over 700 charitable 4 organizations and several licensed distributors and 5 manufacturers, commercial lessors, submitted written 6 comments in addition. 7 The staff recommends that you adopt the 8 amendments as shown in the draft in your notebooks. 9 CHAIRMAN COX: Commissioner? 10 COMMISSIONER SCHENCK: I had a question 11 on No. IX -- 12 CHAIRMAN COX: Okay. 13 COMMISSIONER SCHENCK: -- which I think 14 I may have answered for myself. But we're changing to 15 say "no person," Line 10. 16 My apologies. My mike was not on. 17 Were you able to get my mumbling? 18 THE REPORTER: Yes. 19 COMMISSIONER SCHENCK: Good. 20 We're changing to say "no person." I 21 think we talked about this before, and maybe this was 22 in response to one of my concerns. But is there a 23 thought here that by striking "licensed organization" 24 and that non-corporeal entities can't act other than 25 through people, that we've covered it by saying now we 0059 1 would say, "No person may tamper or modify or allow 2 others to tamper or modify," that we would catch the 3 organization by "allow others to tamper with" if 4 someone for some reason is tampering with the game who 5 is not within our regulatory jurisdiction, that by 6 allowing a person to do so, we've got the organization 7 that we would need to address this conduct? 8 MR. SANDERSON: There is a definition 9 of "person" in the statute that includes more than 10 just an individual. 11 COMMISSIONER SCHENCK: Okay. That 12 solves that. Great! Thank you. 13 COMMISSIONER WILLIAMSON: No questions. 14 CHAIRMAN COX: Move approval of the 15 staff recommendation. 16 COMMISSIONER SCHENCK: Second the 17 motion. 18 CHAIRMAN COX: All in favor, say "Aye." 19 COMMISSIONER WILLIAMSON: Aye. 20 CHAIRMAN COX: Aye. 21 Any opposed? 22 Motion carries 3-0. 23 AGENDA ITEM NO. X 24 CHAIRMAN COX: Item X, consideration, 25 possible discussion and/or action, including adoption, 0060 1 on Rule 16 TAC §402.205 relating to unit agreements. 2 Ms. Joseph. 3 MS. JOSEPH: Item X is recommended 4 adoption of new rule 402.205 regarding unit 5 agreements, with changes to the proposed text, as 6 published. 7 The purpose of this new rule is to 8 clarify what is required in a unit accounting 9 agreement or a trust agreement forming a unit and how 10 to notify the Commission of any changes to those 11 agreements. At the public comment hearing, 12 representatives from Fort Worth Bookkeeping, the Bingo 13 Interest Group and Mr. Stephen Fenoglio were received. 14 No written comments were received on this rule. 15 Staff recommends that the Commission 16 adopt new 16 TAC §402.205. 17 CHAIRMAN COX: Mr. Fenoglio, did you 18 have comments on this? 19 MR. FENOGLIO: Yes. 20 MS. KIPLIN: Do you mind if I interrupt 21 just one minute, for the benefit of Commissioner 22 Williamson? 23 CHAIRMAN COX: Yes. 24 MS. KIPLIN: And the rest of you, this 25 is my obligatory statement that Mr. Fenoglio knows 0061 1 that I'm going to put on the record. And the reason 2 that I do this is because at this point the comment 3 period is actually closed on this rule. It's before 4 you for adoption. If Mr. Fenoglio offers comment 5 that's new comment before the Commission, then we need 6 to be summarizing that comment and providing an agency 7 response if the agency disagrees with it. And 8 generally we provide a response regardless. 9 Now, my understanding is, Mr. Fenoglio, 10 you indicated clarifying comments? 11 MR. FENOGLIO: Yes. It's within the 12 ambit of the comments that were made. 13 MS. KIPLIN: Okay. Just so you know 14 that. Now, it's clearly the Commission's prerogative, 15 if he came forward today and he said, "I have a new 16 comment I want to provide," I would say the same 17 thing. But it's up to the Commission to decide 18 whether you want to expand that comment period. Know 19 that it might cause a delay in terms of actually 20 taking action, because we would have to go do some 21 work to bring it before you. 22 COMMISSIONER WILLIAMSON: Thank you. 23 COMMISSIONER SCHENCK: We would always 24 have the right to vote "Yes" or "No." If we just went 25 and decided to ignore Steve's comments -- I'm not 0062 1 suggesting that we would -- we wouldn't have a problem 2 with treating it as a comment. It would be if we were 3 to act upon it and not give the public the opportunity 4 to respond or address our -- 5 MS. KIPLIN: And, Commissioner, I think 6 if he provided new comment and you-all received that 7 as comment -- and that's what he would be doing -- 8 then we would need to be summarizing that comment and 9 including it. 10 COMMISSIONER SCHENCK: If we were going 11 to reject his comment as if having any substantive 12 effect on the new rule? 13 MS. KIPLIN: Well, I think that would 14 be your agency response to his comment. 15 CHAIRMAN COX: Let me see if I 16 understand. Is your summarizing comment related to 17 our taking action? 18 MS. KIPLIN: Yes, that is your action. 19 That's part of a required preamble that needs to be in 20 a rule that you adopt summarizing that comment if it's 21 new comment. Now, if it's commenting -- what he said 22 is that it's -- and I'm just offering this in 23 particular for Commissioner Williamson. 24 CHAIRMAN COX: Let me stop you if I 25 could. 0063 1 MS. KIPLIN: Yes. 2 CHAIRMAN COX: Mr. Fenoglio has already 3 had at least one bite at the apple. You're suggesting 4 that if he takes another, it could cause this rule to 5 be exposed again? 6 MS. KIPLIN: Well, it would cause -- if 7 he was offering comment -- this is hypothetical -- if 8 he is going to offer comment that is new comment that 9 is not within the comment that's been received and 10 summarized already -- okay? That's fine -- then that 11 comment must be summarized and must be included in the 12 preamble that is part of the rule that you would 13 adopt. 14 CHAIRMAN COX: Okay. So that 15 effectively seems to say that we wouldn't be able to 16 take action on it today, without scrambling around at 17 least? 18 MS. KIPLIN: Yes, that could be the 19 case. But the latitude that you have is to say to the 20 person in this regard, Mr. Fenoglio, "Mr. Fenoglio, 21 are you offering new comment, comment that has not 22 been received and already summarized?" If the answer 23 is that is, "No, I am not," then we don't have to do 24 any additional work. 25 COMMISSIONER SCHENCK: I can't believe 0064 1 that's right, if he says, "No, it's not," and yes, in 2 fact, it is. 3 MS. KIPLIN: Well, then you've got an 4 issue, and that's why you have to caution them before. 5 COMMISSIONER SCHENCK: So we 6 understand, what is the reasoning behind it? Is it so 7 that the public record of what it was that drove us to 8 make the rule, or craft it was, is complete, so if 9 someone wants to challenge our rule as lacking a 10 substantial foundation, in court or otherwise, they 11 would have a complete record on hand? 12 So I assume you will have to help us 13 decide whether or not Mr. Fenoglio is actually trying 14 to move the process backwards and start over or 15 whether he's just explaining to us the substance of 16 his existing comments, which you've already included 17 in the public record? 18 MS. KIPLIN: Correct. Correct to the 19 question that you asked and what you indicated was the 20 reason for it. I mean, it's part of a required 21 preamble. It's to support your rational -- your 22 reasoned justification about why you adopted the rule 23 that you have and whether you have accepted or 24 rejected that comment. 25 CHAIRMAN COX: And given all of that, 0065 1 Mr. Fenoglio, do you want to say anything? 2 MR. FENOGLIO: I do. And I will keep 3 within the ambit of the comments that were made. And 4 we support the changes, with one clarification, and 5 this has to do with the provision, the new provision. 6 I'm looking on the black line version, 7 Page 3, new Line 9, which says Subparagraph (j). (k) 8 was stricken based on a comment one of my clients made 9 at the hearing, that it was overly restrictive. Read 10 literally, the new language, "Organizations may not 11 act as a unit until all member organizations are 12 licensed." 13 It has been the practice for some 14 organizations, as they're getting their license, to go 15 ahead and sign the unit agreement. They can't conduct 16 until they're licensed. One way you could read this 17 language is, if that happened, then that unit, which 18 is already conducting business, could not conduct 19 business until that new charity is licensed. 20 COMMISSIONER SCHENCK: I think you 21 could read it that way. I think you would have to 22 read it that way. 23 MR. FENOGLIO: Well, and if that's the 24 way, then that -- 25 COMMISSIONER SCHENCK: That's until -- 0066 1 MR. FENOGLIO: That then is very 2 restrictive of the current practice. And -- 3 COMMISSIONER SCHENCK: What's the 4 argument for why the practice would be all right 5 without a license currently? 6 MR. FENOGLIO: Four organizations are 7 already conducting bingo under a unit. A new 8 organization comes forward, not having a license but 9 it's been in business for many years, charitable 10 organization: "We want to join your organization, and 11 we would like to be a part of the unit." The four 12 charities say, "That's great. We will go ahead and 13 put a place at the table for you amending our unit 14 agreement." 15 COMMISSIONER SCHENCK: Well, let me ask 16 you a question. What if the fourth charity is run by 17 a professional gambler? 18 MR. FENOGLIO: What if -- I'm sorry? 19 COMMISSIONER SCHENCK: What if the 20 fourth organization is run by a professional gambler? 21 MR. FENOGLIO: That would be a problem. 22 COMMISSIONER SCHENCK: Yes, it would, 23 which is why we would want to have a license. Right? 24 MR. FENOGLIO: Correct -- no, no. This 25 doesn't have to do with not arguing that the charity 0067 1 doesn't have to get licensed. I believe they do. But 2 the question is, the unit has been amended for the 3 fifth charity. 4 COMMISSIONER SCHENCK: But it already 5 has a license? 6 MR. FENOGLIO: It does not have a 7 license. The amendment itself is a business 8 relationship, and the fourth organization says, "We're 9 going to hold a place at the table for the fifth, 10 assuming you can be licensed." That perhaps today. 11 They don't allow the fifth organization to conduct 12 bingo in any way until they're licensed. But the 13 amendment, the agreement has been amended. The way 14 you would read this, then, if that were the case, the 15 existing four charities could not conduct any business 16 under the unit. 17 COMMISSIONER SCHENCK: But they're all 18 individually licensed? 19 MR. FENOGLIO: The four charities are, 20 yes. 21 COMMISSIONER SCHENCK: But not the 22 fifth? 23 MR. FENOGLIO: But not the fifth. 24 COMMISSIONER SCHENCK: And why could 25 they -- you're saying as part of a unit, the four 0068 1 could not operate and the fifth could not? 2 MR. FENOGLIO: The way I would read 3 that, if those were the facts, that unit then could no 4 longer conduct business under -- 5 COMMISSIONER SCHENCK: Even though all 6 four of them are licensed? 7 MR. FENOGLIO: Yes, even though all 8 four. 9 COMMISSIONER SCHENCK: Then they've 10 been effectively polluted by the inclusion in the 11 unit, proposed inclusion in the unit of an unlicensed 12 charity? 13 MR. FENOGLIO: Of the fifth 14 organization. And they're not trying to do anything 15 with the proposed licensed times of that fifth 16 organization, but they're merely holding a place at 17 the table upon licensure of the fifth. 18 COMMISSIONER SCHENCK: I'm not sure I 19 see the problem here. But -- 20 MR. SANDERSON: I'll clarify it, and 21 hopefully it will answer Mr. Fenoglio's question at 22 the same time. 23 If there's four organizations that are 24 signed and participating as a unit and then they want 25 to add a fifth, they file an amended unit agreement 0069 1 adding that fifth organization. That amendment will 2 not take effect until the organization is licensed. 3 Up until that point in time, the unit that they had 4 formed under the four organizations remains in 5 existence until the amendment takes effect, which 6 would be effective date of the issuance of the license 7 of the fifth organization. 8 MR. FENOGLIO: And with that 9 clarification, I have no further comments. 10 COMMISSIONER SCHENCK: That seems to 11 make sense to me, because an application for an 12 amendment is not self-effectuating. The Commission 13 has to act on it. 14 MR. FENOGLIO: Don't disagree, but the 15 amendment itself under the hypothetical I have given 16 you, which is a real life hypothetical, they've 17 amended the unit, again holding a place at the table, 18 if you will. 19 COMMISSIONER SCHENCK: Phil, if they've 20 amended the unit, that means the amendment has been 21 approved. Would you approve an amendment that would 22 include in a unit an unlicensed charity? 23 MR. SANDERSON: No. So the effective 24 date of the amendment would be the date of the 25 issuance of that fifth organization. 0070 1 MR. FENOGLIO: Again, five 2 organizations can choose to amend a contract. They 3 are not required to have the agency's approval to 4 amend a contract. 5 COMMISSIONER SCHENCK: I understand. 6 You can do all sorts of things. 7 MR. FENOGLIO: Right. 8 COMMISSIONER SCHENCK: You can enter 9 into contracts with people who could not be licensed. 10 Right? 11 MR. FENOGLIO: Theoretically -- yes, 12 they could; they could. That's not what's going on in 13 the real world. The real world, they're going ahead 14 and amending the unit agreement, again only to hold a 15 place at the able unless and until, but the contract 16 has been amended. 17 COMMISSIONER SCHENCK: I think I 18 understand. 19 Now, the question I'm going to ask Kim: 20 Did we just go beyond the scope of the comments that 21 were received in the past? 22 MS. KIPLIN: Well, and I'm looking to 23 Ms. Joseph, because it sounds to me like you've 24 received new comment. And the comment is as a result 25 of the change that's coming before you that the staff 0071 1 is recommending. That's what I'm getting is the gist 2 of this. Correct? 3 MR. FENOGLIO: But the changed -- yes. 4 But the changed comment was in relation to a comment 5 we made. 6 MS. KIPLIN: Well, and then I'm going 7 to -- I'm not the attorney on that, so I've got to go 8 Ms. Joseph and say, "Do you agree with Mr. Fenoglio's 9 representation or should we be summarizing this and 10 bringing this back at a" -- 11 COMMISSIONER SCHENCK: Sandy, before 12 you answer, you should give the answer that is right. 13 I don't want to discourage Mr. Fenoglio or anyone else 14 from coming here and saying whatever they think they 15 want to say before we adopt a rule. If we have to 16 pull this rule for today, revise our commentary to why 17 we're acting in response to comments, that's fine. 18 MS. JOSEPH: Well, it seems to me that 19 Mr. Fenoglio was seeking clarification of the intent 20 behind that new language. And really, although he 21 keeps making comments in a sense, I think he's really 22 seeking clarification. In that sense, I don't believe 23 it would be a new comment. 24 MR. FENOGLIO: And I did not mean it in 25 that way. And if this causes any problems, I'll 0072 1 withdraw all of my comments. 2 COMMISSIONER SCHENCK: No. 3 MR. FENOGLIO: No. I've got the 4 statement. I mean, Phil is an honorable guy. Phil 5 and I just didn't have a chance, Commissioner, to talk 6 before. 7 COMMISSIONER SCHENCK: As much as I 8 agree Phil is an honorable guy, as much as we can make 9 agreements between ourselves, this is not a smoke- 10 filled back room somewhere. We make law in writing. 11 We want comments if people have comments. We'll do 12 whatever we need do. It's our job to make our law 13 work. It's not your job. It's your job to represent 14 your clients and speak your piece regardless of what 15 it does to us. And we need to make sure we get it 16 right. So we'll get it right, period. 17 MR. FENOGLIO: Fair enough. 18 MS. KIPLIN: And so based on 19 Ms. Joseph's comments -- not to belabor the word 20 "comment" -- and Mr. Fenoglio's assertion that she 21 agrees that it was just asking clarifying questions 22 regarding the change, I'm fine with that. 23 Mr. Fenoglio, you do agree with 24 Ms. Joseph's representation? 25 MR. FENOGLIO: I do. 0073 1 CHAIRMAN COX: Commissioner? 2 COMMISSIONER WILLIAMSON: No comment. 3 (Laughter) 4 COMMISSIONER SCHENCK: What are we 5 moving? Is this a motion to adopt? 6 CHAIRMAN COX: I'm going to have to see 7 if I understand here. What was your question, Steve? 8 MR. FENOGLIO: Does the language in new 9 Paragraph (j) prohibit the current practice whereby a 10 unit agreement is amended to add a new unlicensed 11 organization to hold that new organization's place at 12 the table pending approval of the license? 13 CHAIRMAN COX: That's what I thought it 14 was. And the answer I heard was, "No, it doesn't." 15 Now, why is this at issue? It seems to me that -- 16 isn't that hard to wait until the fifth one gets its 17 license? But there seems to be a rush to put one in a 18 unit even before it's licensed. Is there great 19 administrative cost to writing the units or -- 20 MR. FENOGLIO: Good question. In some 21 situations, charities have indicated, "We want to join 22 the unit. We've got an application pending." The 23 four existing charities say, "Okay. We'll hold a 24 place at the table for you," and that charity never 25 follows up. Two other charities have come forward 0074 1 saying, "Hey, we would like to be a part," and those 2 organizations have said, "No, we've got" -- let's call 3 it "A" charity -- "in line." They go off somewhere 4 else, B and C. And so then A falls apart, they try to 5 go find B and C. B and C are no longer interested. 6 So from the real world practice if that happens, then 7 the four existing charities say, "We want to get you 8 encumbered, some skin in the game, if you will. We're 9 going to go ahead and amend the license, so you can't 10 just walk away for no reason." 11 CHAIRMAN COX: Okay. 12 MR. FENOGLIO: And so that's what's 13 going on because, again, that's happened on a couple 14 of occasions. Obviously, if the organization cannot 15 get a license, then they're not going to be able to 16 conduct with the five organizations they planned. 17 CHAIRMAN COX: Okay. Move approval of 18 the staff recommendation. 19 COMMISSIONER SCHENCK: Second the 20 motion. 21 CHAIRMAN COX: All in favor, say "Aye." 22 COMMISSIONER SCHENCK: Aye. 23 COMMISSIONER WILLIAMSON: Aye. 24 CHAIRMAN COX: Any opposed? 25 Motion carries 3-0. 0075 1 MS. KIPLIN: Commissioners, I have an 2 order adopting this rule, which is required by the 3 Administrative Procedures Act. 4 (Brief pause) 5 AGENDA ITEM NO. XI 6 CHAIRMAN COX: Agenda Item No. XI -- 7 are we on the right one, Ms. Joseph? 8 MS. JOSEPH: Yes, sir. 9 CHAIRMAN COX: Good. Consideration of 10 and possible discussion and/or action, including 11 adoption, on amendments to 16 TAC §402.400 relating to 12 the general licensing provision. 13 Ms. Joseph. 14 MS. JOSEPH: Item II concerns the staff 15 recommendation to adopt 16 TAC §402.400 regarding 16 general licensing provisions, with some changes to the 17 proposed text. 18 The purpose of these amendments is to 19 set forth clearly for organizations certain 20 requirements and timelines for the application 21 process. Again, Fort Worth Bookkeeping, Bingo 22 Interest Group commented at the hearing, and 23 Mr. Fenoglio submitted written comments. 24 Staff recommends that you approve 25 adoption of this rule. 0076 1 COMMISSIONER SCHENCK: Sandy, I believe 2 we discussed this in connection with some of the 3 disaster recovery issues we had a couple of months ago 4 and the concern that we weren't entirely consistent in 5 our rules about calendar days or business days. I 6 think this is an improvement. 7 And my understanding is that we also 8 have within our rules somewhere a general counting 9 rule that we, I assume, don't count the day of the 10 first act which causes the clock to start counting but 11 do count the day on which it would end. We don't 12 count intervening weekends -- or we do count 13 intervening weekends and holidays but we don't count 14 if the last day for something to be done is on a 15 weekend or a holiday, we move to the next non-weekend 16 or holiday calendar day? 17 MS. KIPLIN: Correct. That's actually 18 a rule in the counting rule that's in the lottery 19 rules, and there is a rule in the Bingo Act that 20 allows the bootstrapping over to that, that general 21 counting rule. 22 COMMISSIONER SCHENCK: On page 5 we've 23 added some material that operates as a default for 24 when something has been sent, and it says, "An 25 application bearing no legible postmark, postal meter 0077 1 date, or date of delivery to the common carrier shall 2 be [deemed] to have been sent seven calendar days 3 before receipt by the Agency. . ." Do we not require 4 people to date the things that they send to us for an 5 application, for instance, Phil? 6 MR. SANDERSON: They are required to 7 date the application and also required a postmark date 8 if they were to send it. We added this language as a 9 result of a potentially Illegible postmark, if it's 10 smeared, or the absence of a postmark. We have 11 received some things that are absent a postmark. 12 COMMISSIONER SCHENCK: Why don't we 13 just use the date on which it's signed? 14 MR. SANDERSON: I believe that's the 15 last part of the sentence that's added. 16 COMMISSIONER SCHENCK: Okay, if the 17 document is less than seven days earlier. So we're 18 giving them the greater of the two? 19 MR. SANDERSON: Yes, sir. 20 COMMISSIONER SCHENCK: Okay. Thank 21 you. 22 CHAIRMAN COX: Anything else, 23 Commissioner? 24 COMMISSIONER SCHENCK: That's it. 25 COMMISSIONER WILLIAMSON: I have no 0078 1 questions. 2 CHAIRMAN COX: Move approval of the 3 staff recommendation. 4 COMMISSIONER SCHENCK: Second the 5 motion. 6 CHAIRMAN COX: All in favor, say "Aye." 7 COMMISSIONER WILLIAMSON: Aye. 8 COMMISSIONER SCHENCK: Aye. 9 CHAIRMAN COX: Any opposed? 10 Motion carries 3-0. 11 MS. KIPLIN: Commissioners, I have an 12 order. 13 (Brief pause) 14 AGENDA ITEM NO. XII 15 CHAIRMAN COX: Agenda Item No. XII, 16 consideration of and possible discussion and/or 17 action, including adoption, on new rule 16 TAC 402.442 18 relating to amendments to commercial lessor license. 19 Ms. Joseph. 20 MS. JOSEPH: Yes, Commissioners. Staff 21 also recommends adoption of the rule in Item XII, 22 which is Rule 402.442 related to amendment to a 23 commercial lessor license. 24 The purpose of this new rule is to 25 clarify what is required of a licensed commercial 0079 1 lessor in order to amend information contained in 2 their application on file with the Commission. A 3 representative from the Bingo Interest Group commented 4 at the hearing regarding this proposed new rule. No 5 written comments were received on this rule. 6 Staff does recommend adoption of the 7 rule as shown in your notebooks. 8 COMMISSIONER WILLIAMSON: No, I didn't 9 have any questions. 10 CHAIRMAN COX: Move approval of staff 11 recommendation. 12 COMMISSIONER SCHENCK: Second the 13 motion. 14 CHAIRMAN COX: All in favor, say "Aye." 15 COMMISSIONER SCHENCK: Aye. 16 COMMISSIONER WILLIAMSON: Aye. 17 CHAIRMAN COX: Aye. 18 Any opposed? 19 Motion carries 3-0. 20 Let's take about a 15-minute break. 21 MS. KIPLIN: And I'll pass the order at 22 the break. 23 CHAIRMAN COX: Good. 24 (Recess: 10:26 a.m. to 10:42 a.m.) 25 CHAIRMAN COX: Let's come back to 0080 1 order. 2 AGENDA ITEM NOS. XIII and XIV 3 CHAIRMAN COX: Okay. Agenda Item No. 4 XIII, consideration of and possible discussion and/or 5 action, including proposal, on new rule 16 TAC 6 §402.104 relating to "gambling promoter" and 7 "professional gambler." 8 Ms. Joseph, Mr. Wassdorf. 9 MS. JOSEPH: Yes, Commissioners. Items 10 XIII and XIV are related. They are both proposed 11 rulemakings. At a earlier meeting the Commission 12 asked the staff to consider the meaning of the terms 13 "professional gambler" and "gambling promoter" as used 14 in the Bingo Enabling Act and the Lottery Act. You 15 also asked that a draft rule be prepared for 16 consideration. 17 Item XIII is a draft proposed Bingo 18 Rule 402.104 relating to professional gambler and 19 gambling promoter. The purpose of this proposed new 20 rule is to define the terms "professional gambler" and 21 "gambling promoter" as used in the Bingo Enabling Act. 22 Item XIV is a draft proposed amendment 23 to Lottery Rule 402.153 relating to qualifications for 24 a license. The purpose of that proposed amendment is 25 to redefine the term "professional gambler" as it is 0081 1 used in the Lottery Act and the rules of the 2 Commission. 3 Assistant General Counsel Pete Wassdorf 4 has taken the lead on researching the issues related 5 to defining these terms and is available to offer a 6 summary of his research or to assist you with any 7 questions you may have. 8 Would you like a summary? 9 CHAIRMAN COX: Absolutely. 10 MR. WASSDORF: Mr. Chairman, 11 Commissioners, my name is Pete Wassdorf, 12 W-a-s-s-d-o-r-f. I am Assistant General Counsel in 13 the Legal Services Division and have been looking at 14 this issue. I'm new to the agency and have looked at 15 it over the six or eight weeks. 16 We have had some discussions with some 17 stakeholders with respect to this. And I think that I 18 can summarize the stakeholders as being either neutral 19 or favorable towards the proposed rule, with one 20 notable exception who is here today and from whom you 21 will hear. 22 When I started looking at this, I found 23 that there was a general jurisprudence throughout the 24 United States where gambling was generally illegal. 25 And the reference in most case laws to professional 0082 1 gamblers are to unlawful gambling. And there were a 2 number of states that proscribed, had laws against 3 professional gambling or commercial gambling. And 4 there are still 10 states that have laws making it 5 unlawful to be a professional gambler or a commercial 6 gambler. 7 We think that it's reasonably likely 8 that the Legislature had this in mind when they passed 9 both the Bingo Enabling Act and the Texas Lottery Act. 10 There is no statutory definition. There is no case 11 law in Texas that specifically defines either of these 12 acts. There are, of course, cases in other states and 13 statutes in other states. 14 An Attorney General's Opinion from the 15 State of Illinois in 1982 is interesting because they 16 have a similar statute. And the phrase "professional 17 gambler" or "gambler promoter" is used in their 18 lottery act, and it is not defined in the Illinois 19 lottery law. 20 However, the Attorney General 21 determined that the term "gambling" has an established 22 statutory meaning which should be applied in the 23 construction of statutes relating to that subject. In 24 Texas, ordinarily things are given -- terms are given 25 their ordinary meaning unless the context would 0083 1 require otherwise or it would lead to an absurd 2 result. In this particular case, the Attorney General 3 of Illinois found that the context required the term 4 "professional gambler" and "gambling promoter" to 5 refer to unlawful gambling and unlawful promotion of 6 gambling, because the Legislature of the State of 7 Illinois had passed penal codes against gambling and 8 against gambling promotion. 9 I think that it's likely that that same 10 construction would be given to these terms by the 11 Attorney General in Texas; and, therefore, the 12 Commission can consider using that terminology in that 13 context. 14 If you have any particular questions -- 15 I know that you have my memo on the subject, and I 16 would be happy to answer any questions. 17 CHAIRMAN COX: Ms. Kiplin, procedurally 18 we have a witness who wants to speak on this matter. 19 Should we do that before or after the Commissioners' 20 questions or comments? 21 MS. KIPLIN: I think it's really wide 22 open for you-all on how you best want to receive 23 information. If you want to hear that comment first 24 and then ask questions, it's really up to you. 25 CHAIRMAN COX: Commissioner, what's 0084 1 your pleasure? 2 COMMISSIONER SCHENCK: I think we're 3 going to benefit from a back and forth probably on 4 this, but order is probably helpful. I think I would 5 prefer to hear the opposing comment before I go back 6 for the rationales underlying our proposed draft. 7 COMMISSIONER WILLIAMSON: Can we have, 8 for my edification, a little bit of a background of 9 why we're considering this? 10 MR. WASSDORF: It's my understanding 11 that the Bingo Enabling Act was adopted in 1981 and 12 the Lottery Act in 1991, that those terms were both 13 used. The term "professional gambler" and "gambling 14 promoter" were both used in the Bingo Enabling Act. 15 And the Legislature provided that a 16 person could not receive a license of any of the kinds 17 that are provided for in that act if they were 18 professional gamblers or gambling promoters. In the 19 Lottery Act, they don't use the term "gambling 20 promoter," but they do have the proscription against 21 professional gambler. 22 COMMISSIONER SCHENCK: If I'm 23 remembering correctly -- I think we're getting a few 24 more interested speakers here -- if I'm remembering 25 correctly, for the Commissioner's edification, I 0085 1 believe that this is a permanent ban and it's 2 backwards looking at well. It's not just present 3 tense. If a person has been a professional gambler or 4 a gambling promoter, they are forever barred from a 5 license as a bingo operator. And with respect to the 6 lottery, if they are or ever have been a professional 7 gambler, there is no means for rehabilitation. Right? 8 MR. WASSDORF: Well, that appears to be 9 correct. Both acts provide that if a person has been 10 convicted of a felony or any gambling offense, that 11 they are barred for a 10-year period of time from 12 being licensed. The next paragraph says if you have 13 been -- if you are or have been a professional gambler 14 or gambling promoter, in the of the Bingo Act, that 15 you cannot be licensed. The implication is that that 16 would be a permanent bar. 17 COMMISSIONER SCHENCK: So murderers, so 18 I'm clear, get a free pass. Charlie Manson would at 19 this point be eligible for a license in Texas? Ten 20 years? 21 MR. WASSDORF: Well, that's correct 22 it's been more than 10 years. 23 MS. KIPLIN: Since date of last 24 sentence served. 25 COMMISSIONER SCHENCK: Okay. 0086 1 MS. KIPLIN: In your hypothetical, he's 2 still incarcerated. 3 COMMISSIONER SCHENCK: Well, it's 4 California. Anything is possible. 5 MS. KIPLIN: I would like to think 6 that's true. 7 COMMISSIONER SCHENCK: Ten years from 8 tomorrow, in theory, he could get a license in Texas. 9 But someone who was a professional gambler in his late 10 teens would not, read literally. 11 MR. WASSDORF: That's correct. And so, 12 therefore, a person who has committed a felony 13 offense -- murder, robbery or something that's heinous 14 that has fulfilled -- 15 COMMISSIONER SCHENCK: On the other 16 hand, insofar -- you could see the Legislature saying, 17 "We're not concerned" -- well, "Given the nature of 18 the activity here, we're more concerned about the 19 status offense of being a professional gambler than we 20 are people who got into a bar fight" or something of 21 that nature. This is one of the hardest structuring, 22 the construction part -- 23 COMMISSIONER WILLIAMSON: Well, I mean, 24 from what you have explained to me, you have one here 25 if you've done an illegal act, being illegal gambling. 0087 1 And then the next paragraph, it's professional 2 gambler. So do you assume at this point that that's 3 what a professional gambler is, is someone who has 4 committed this illegal act? So we're just trying to 5 clarify that? Is that what we're trying to do? 6 MR. WASSDORF: Well, we're trying to 7 give some meaning to it. It's been suggested -- and, 8 as a matter of fact, the Lottery Commission's rule 9 that was passed when the lottery was at the 10 Comptroller's office just says that a professional 11 gambler is a person who a significant part of their 12 income was derived from gambling. 13 And that, of course, is similar to the 14 type of definition that you run into in case law with 15 respect to the Internal Revenue Service of the United 16 States or of the various states that have income 17 taxes. When they are taxing someone, they refer to a 18 professional gambler as a person who makes most of 19 their income from gambling. 20 But there is another context, and it 21 appears that that other context is the illegal 22 gambler. And, like I said, there are 10 states that 23 currently provide that it is unlawful to be a 24 professional gambler, and professional gambler is 25 defined generally as one who somehow sets up games and 0088 1 profits from the games. 2 COMMISSIONER SCHENCK: Isn't that 3 strange? How many status offenses do we have in this 4 country? I mean, we don't have an offense of being a 5 rapist or an arsonist or a murderer. We have 6 crimes -- well, you can't commit murder; you can't 7 commit arson. So, I mean, I don't know what the proof 8 is in these cases that you are walking around a crime, 9 by virtue of who you are. 10 I assume that in each one of those 11 cases, and not that you would have looked at this 12 level, but they must have specific proof requirements: 13 Have you gambled for so long, so many times or 14 something of that nature? 15 But the problem we have is that there 16 are a lot of states where this is not illegal, where 17 there are people who make a living, or purport to make 18 a living, being professional gamblers. And I had this 19 concern I expressed in an earlier meeting that I'm not 20 sure that Texas has the jurisdictional capacity to 21 reach out with its laws to other states and make 22 illegal conduct as legal where it's taking place. 23 On the other hand, we're not really 24 doing that. We're just saying, "If you want to come 25 to Texas and apply for one of our licenses, we're not 0089 1 going to give it to you." It's a delicate balancing 2 act. And as I understand, you're proposing a limiting 3 construction on the term that would avoid my 4 constitutional concerns about reaching beyond the 5 state, criminalizing conduct that's not -- or imposing 6 consequences for conduct that's not unlawful where it 7 takes place. 8 MR. WASSDORF: Yes, that's correct. 9 And as I was saying, the Attorney General of Illinois 10 has -- when they interpreted this, they said that you 11 should read it in the context of the state having a 12 law making it unlawful to gamble; and, therefore, the 13 professional gambler was the person that was engaged 14 in that unlawful activity, as opposed to the person 15 who is engaged -- in this particular case, they were 16 considering horse racing and they were saying that 17 since that activity is permitted and regulated by the 18 state, that that's not unlawful gambling and that the 19 statute that talked about professional gambling was 20 referring to gambling in the context of the proscribed 21 activities. 22 COMMISSIONER SCHENCK: If I'm 23 understanding correctly, it would be legal today for 24 someone in Texas to have as a career being a 25 professional gambler who could go from one of our 0090 1 horse tracks to another of our horse tracks and make 2 his living that way? 3 MR. WASSDORF: Yes, that's correct. 4 But they couldn't hold a license under our current 5 interpretation. 6 CHAIRMAN COX: Okay. Now, the 7 relevance of this issue is licensing. Is it relevant 8 to both bingo and the lottery? 9 MR. WASSDORF: Yes. It would -- 10 CHAIRMAN COX: In this particular 11 context, are we addressing both of those intentionally 12 or are we addressing only one of them, with the 13 obvious implications with the other? 14 MR. WASSDORF: We're addressing both of 15 them, Mr. Chairman. We're proposing to amend the rule 16 with respect to the Lottery Act and then to add a new 17 rule with respect to the Bingo Enabling Act. 18 CHAIRMAN COX: Okay. Just an 19 administrative question: How does this issue come 20 into play? The person fills out an application. Is 21 there a question on the application, "Are you a 22 professional gambler or promoter of gambling"? 23 MR. WASSDORF: At this time with 24 respect to the Lottery Commission, there is a question 25 on the application, "Are you a professional gambler?" 0091 1 Were the Commission to adopt a rule, it would probably 2 then be a question of the criminal investigation 3 turning up convictions. 4 CHAIRMAN COX: Okay. Let's go back to 5 where we are right now. Right now is there a question 6 on the lottery retailer application, "Are you a 7 professional gambler or are you a promoter of 8 gambling"? 9 MR. WASSDORF: There is just for the 10 professional gambler view. 11 CHAIRMAN COX: Just for professional 12 gambler. And it's checked "Yes" or "No"? 13 MR. WASSDORF: That's correct. 14 COMMISSIONER SCHENCK: Is it just 15 whether you are or whether you are or ever have been? 16 MR. WASSDORF: I haven't actually 17 looked at the application, so I'm not sure. 18 CHAIRMAN COX: So the question is 19 answered "Yes" or "No." And if it's answered "Yes," 20 then we say, "Sorry. You're ineligible because the 21 statute does not permit a professional gambler to be 22 licensed." If they say "No," do we investigate to see 23 whether that's a truthful answer? 24 MR. WASSDORF: It's my understanding 25 that, first of all, that no one has ever answered 0092 1 "Yes." 2 CHAIRMAN COX: Okay. 3 MR. WASSDORF: And, secondly, I don't 4 believe that we investigate to see whether they are or 5 are not. We do do a criminal background check, which 6 would turn up convictions of gambling, but those would 7 not apply to this definition at this time. 8 CHAIRMAN COX: Okay. But, now, 9 wouldn't it then be the case that if no conviction 10 turned up, that would be supportive of your idea that 11 they have not engaged in illegal gambling and then 12 prosecuted, and, therefore, that they had passed that 13 test? 14 MR. WASSDORF: Yes. 15 CHAIRMAN COX: Under the previous 16 interpretation, who could say, I guess. 17 MR. WASSDORF: Who could say? 18 CHAIRMAN COX: Okay. Now, on the bingo 19 side, is there a similar question on the application 20 for a bingo operator's license? 21 MR. WASSDORF: Phil? 22 MR. SANDERSON: On the bingo side, the 23 terms "professional gambler" and "gambling promoter" 24 only apply to a manufacturer and a distributor. And 25 there is a question on the form that is completed by 0093 1 officers and directors that Security or Enforcement 2 utilizes for their background investigations. And I 3 believe -- I'll ask Mr. Carney to correct me if I'm 4 wrong -- but I believe it says, "Are you or have you 5 ever been a licensed professional gambler?" And then, 6 "Are you or have you ever been a gambling promoter?" 7 CHAIRMAN COX: Okay. "Licensed 8 professional gambler," now I haven't heard you 9 addresses that term. 10 MR. WASSDORF: I haven't addressed that 11 term. I wasn't aware there was such a licensure in 12 this jurisdiction. 13 CHAIRMAN COX: Okay. Let me then ask 14 you, Phil -- or you, Pete, or Sandy -- does the 15 application for these manufacturers and distributors, 16 I think you said, mirror the statute or might it be a 17 little our of sync? 18 MR. SANDERSON: The form, I believe -- 19 the statute does not reference "licensed professional 20 gambler." 21 CHAIRMAN COX: Okay. 22 MR. SANDERSON: And now the form -- and 23 this just came to our attention as we were doing the 24 research -- was developed several years ago when they 25 were looking for standards nationwide for 0094 1 manufacturers' background investigations. It was 2 developed by the North American Gaming Regulators 3 Association of which at that time the security 4 director was a member of the committees. And they 5 made that change which, you know, we didn't realize it 6 had the term "licensed" on it until just recently. 7 But that's the way the question has been worded since 8 I want to say '95 or '97. 9 CHAIRMAN COX: Okay. Probably as an 10 aside to this consideration, to Agenda Item XIII, I 11 would like to ask you to get that license in sync with 12 the law. 13 MR. SANDERSON: Yes, sir. 14 CHAIRMAN COX: Okay. Now, given all of 15 that, Commissioner, are you ready for the other 16 testimony? 17 COMMISSIONER SCHENCK: Yes. 18 CHAIRMAN COX: Commissioner? 19 COMMISSIONER WILLIAMSON: Yes. 20 CHAIRMAN COX: I think I can get these 21 in the order that we received them up here. Steven 22 Hieronymus. 23 COMMISSIONER SCHENCK: So I'm 24 remembering, before we get there, for the retail 25 lottery, I was just concerned whether or not they're 0095 1 professional gamblers, not whether they are promoters? 2 MR. WASSDORF: That's correct. 3 MS. KIPLIN: And if I could follow up 4 on a question. I went on our website. The 5 application for a retailer, it's prohibition of 6 holding a license. And the application information 7 says "persons who are or have been professional 8 gamblers and also the spouses of those people." It 9 doesn't go into, in the information or on the 10 application itself, the existing definition of 11 "professional gambler." 12 CHAIRMAN COX: Okay. And that triggers 13 one more question that I have before we take 14 testimony. This law that you described to me, Phil, 15 you said applied to manufacturers and distributors? 16 MR. SANDERSON: Yes, sir. 17 CHAIRMAN COX: Okay. So if I 18 understand the big picture, if you want to be a 19 lottery retailer, you need to be able to check "No" to 20 the question, "Are you a professional gambler?" or 21 "Have you been one?" I don't know which it is. 22 If you want to be a bingo manufacturer 23 or distributor, you must answer "No" to, "Are you a 24 licensed professional gambler?" which we'll get in 25 sync with the law, and "Are you a licensed promoter of 0096 1 gaming?" And then if you want to be anything else in 2 bingo, other than a manufacturer or a distributor, if 3 you want to be commercial lessor, if you want to be a 4 charity, if you want to be whatever other capacities 5 we have, there's no questions at all about being a 6 professional gambler? 7 MR. SANDERSON: That is correct. 8 CHAIRMAN COX: And there is no 9 statutory requirement that a person not be a 10 professional gambler or a promoter of gambling? 11 MR. SANDERSON: That's correct. I 12 would like to add one. On the statement about, "Are 13 you or have you ever been a licensed professional 14 gambler?" that is on the original submission by an 15 officer or director. The renewal applications that 16 they send in just say "professional gambler" or 17 "gambling promoter." 18 CHAIRMAN COX: Okay. I think that 19 we've opened more cans of worms here than we 20 necessarily thought were in the box. But let's be 21 sure that we're following up on all of these ideas 22 that are being developed here, consistency as well as 23 definition. 24 MS. KIPLIN: One more. I just want to 25 follow up so you have this also as part of your 0097 1 information. To be eligible to be a vendor, to 2 provide goods and services in connection with the 3 operation of the lottery, you must be eligible for a 4 sales agent's license. So as a result, you are 5 necessarily bootstrapping or piggybacking into 6 whatever the Commission's interpretation would be on 7 "professional gambler." 8 COMMISSIONER SCHENCK: When you say a 9 vendor, that doesn't necessarily dig down into the 10 employees that the vendor is hiring, does it? 11 MS. KIPLIN: No, not on an employee 12 level. But if it's a corporation, you may have 13 different levels that are set out under 466.155. But 14 the most important thing is to know that -- to be able 15 to provide goods and services in connection with the 16 operation of the lottery, you have to be eligible for 17 a sales agent's license. 18 COMMISSIONER SCHENCK: Okay. 19 CHAIRMAN COX: Mr. Hieronymus. 20 MR. HIERONYMUS: Yes. My name is 21 Steven Hieronymus, and I appreciate the opportunity to 22 speak to you. 23 I want to correct one little thing 24 there. Both in an original application and in renewal 25 applications, owner, officers and directors have to 0098 1 file what's called an individual statement of 2 certification. And in that, the question is, "Are you 3 or have you ever been a professional gambler or 4 gambling promoter?" There is no licensing. That's 5 something we have to sign under penalty of perjury and 6 it's witnessed, et cetera. So that in an original 7 application and in a renewal, that is something we 8 have to file every year. 9 COMMISSIONER SCHENCK: That's with 10 bingo? 11 MR. HIERONYMUS: In bingo. 12 COMMISSIONER SCHENCK: Would you pull 13 the microphone maybe a little closer. 14 MR. HIERONYMUS: Sure. And really to 15 some extent, as Commissioner Williamson asked just how 16 this all got started, was in a review of the 17 statements when some inconsistencies were found with 18 respect to a licensee where on four separate occasions 19 this statement had been signed and sworn to and then 20 information came to light that indicated that the CEO 21 of a particular company was, in fact, a gambling 22 promoter and that was running the casino, et cetera, 23 as a manager and then came to light was also a 24 professional gambler, by his own testimony in a 25 deposition actually in April of this year, a 0099 1 deposition. And when asked about his background, he 2 voluntarily described his background as a professional 3 gambler, which then got him to be interested into the 4 gaming world, et cetera, et cetera. So that's how 5 this all first came about. 6 CHAIRMAN COX: Just a moment, 7 Mr. Hieronymus. 8 Ms. Kiplin -- 9 MS. KIPLIN: Yes, sir. 10 CHAIRMAN COX: -- I'm a little 11 uncomfortable with the recitation of facts of a case 12 with which I am not familiar, which has not to my 13 knowledge come before this Commission. I'm 14 uncomfortable that the person's testimony may have 15 been improperly characterized or may have been 16 characterized outside the definitions that 17 Mr. Wassdorf is proposing we adopt. How do I deal 18 with that? 19 MS. KIPLIN: Well, I think 20 Mr. Hieronymus was attempting to respond to 21 Commissioner Williamson's -- 22 MR. HIERONYMUS: Yes. 23 MS. KIPLIN: -- you know, "Why are we 24 here and why is this an issue for the Commission?" 25 Mr. Hieronymus and I have spoken earlier on many 0100 1 occasions in terms of his testimony before the 2 Commission and on pending matters that may actually 3 come to y'all's attention and action, you know, on, 4 for example, a contested case proceeding. 5 And I continue to caution 6 Mr. Hieronymus to avoid those areas as it comes to the 7 Commission, which presented to you today as a 8 rulemaking matter and the idea of what ought to be a 9 definition, both in the Lottery Act and the Bingo 10 Enabling Act, and I continue to caution Mr. Hieronymus 11 in that regard and to stay on topic. 12 CHAIRMAN COX: I would hope that we 13 would be able to stay on that topic. 14 MR. HIERONYMUS: Oh, yes. Absolutely. 15 I was just -- I really was just trying to -- 16 CHAIRMAN COX: It doesn't need a face 17 or a name. It's a concept that we need to work on. 18 MR. HIERONYMUS: Correct. I 19 understand. 20 So I've had the opportunity to meet 21 with my co-people up here, Mr. Wassdorf and Ms. Joseph 22 and, you know, have significant disagreement with the 23 proposal that's before you. I believe it is contrary 24 to any rules or statutory interpretative methodologies 25 that I'm familiar with. 0101 1 I would point, which it's in your 2 package, in the actual -- I think it's on Page 3 there 3 actually -- restated the Texas Bingo Enabling Act. 4 And I just put the manufacturers -- the distributors 5 mimics that, which is from 2001-2002, and the 6 pertinent seconds of Paragraph 1 and Paragraph 2. 7 Paragraph 1 describes the unlawful type 8 of activity, including unlawful gambling activity. It 9 then goes on to describe a second class of person 10 which is the professional gambler or gambling 11 promoter. Now, if that is to only mean illegal 12 gambling, then that would be a redundant statement and 13 it would be nonsense to have included it. I think you 14 have to interpret -- 15 COMMISSIONER SCHENCK: No; no. I'm 16 sorry. Paragraph 1 we've just said has a 10-year 17 limit on it. Paragraph 2 does not. So if the 18 person -- if we were to interpret the statutes as 19 affecting only unlawful gambling -- or professional 20 gambling or gambling promoting, it would still leave 21 Paragraph 1 to have full effect, if we look to the 22 lack of a 10-year distinction between the two. 23 So if you are an arsonist, you can get 24 a license at Year 11 after your release from prison. 25 If you are a gambling promoter -- or illegal gambling 0102 1 promoter or a professional gambler illegally, it's a 2 lifetime bar. 3 MR. HIERONYMUS: Correct. But it 4 doesn't use the word "convicted," so that's the 5 distinction. One is saying there that was illegal 6 activity -- 7 COMMISSIONER SCHENCK: Well, that would 8 be another point of distinction that would leave the 9 two having separate effect, because it would be open 10 for our investigation and denial of a license in the 11 absence of a conviction; whereas, the first paragraph 12 does require a conviction. 13 MR. HIERONYMUS: Correct. And that's 14 where I believe it's referring to unlawful or illegal 15 activity versus the other one which seems to me to be 16 clearly describing a second class of activity. I do 17 think you have to read them in harmo- -- you know, 18 both the words that are there and the words that are 19 not there and in harmony with one another in order to 20 get an accurate understanding of what the Legislature 21 was attempting to do. 22 CHAIRMAN COX: Let me stop at this 23 point and ask counsel a question. 24 Ms. Kiplin, we are considering a 25 proposal of this rule. 0103 1 MS. KIPLIN: Yes, sir. 2 CHAIRMAN COX: Wouldn't testimony of 3 this nature be more appropriately made at the hearing 4 on this matter rather than here? I'm going to be 5 inclined to propose this, based on the work the staff 6 has done. And I'm not being persuaded by anything 7 that is said here. Maybe I should be opening my mind 8 and preparing to be persuaded. But it seems to me 9 that we have an obligation to expose this matter and 10 get public comment from those people who choose to be 11 at the hearing at the time published. Now, help me 12 through that. 13 MS. KIPLIN: Yes, sir; sure. I think 14 the Commission historically has allowed persons to 15 come before, at the time that y'all are considering 16 proposing a rulemaking, and offering comment. The 17 comment that Mr. Hieronymus is making today will not 18 be part of the comment period, because the rule hasn't 19 been published for public comment. 20 I'm fully anticipating that 21 Mr. Hieronymus will provide comment during the comment 22 period. It's up to the Commission to decide whether, 23 one, you want to allow people to come before you and 24 offer comment. Like I said, for the history of the 25 Lottery Commission you have. So I think to stop at 0104 1 this point would be problematic under the Open 2 Meetings Act, because you have established a pattern 3 of how you conduct your business. 4 I think you have allowed people to 5 comment. If you are at a point where you've heard 6 what you want and your colleagues have heard all the 7 comment that you want to help you decide whether you 8 want to proceed to propose this rule in this form or 9 in an amended or revised form, based on the comment, 10 you can certainly do that. 11 CHAIRMAN COX: Well, let me go further 12 with my point. And, Mr. Hieronymus, maybe you can 13 help me with this. I'm concerned that this is going 14 to be a lengthy presentation that is really beyond the 15 scope of what the three of us do. You've done, I'm 16 sure, a very thorough brief and a very scholarly brief 17 here. 18 I'm not a lawyer. Commissioner 19 Williamson is not a lawyer. Commissioner Schenck is 20 not here practicing as a lawyer. And our staff have 21 made a recommendation for a proposal here. I'm 22 accustomed to hearing folks say, you know, "I think 23 this is really a great idea," "I think it's really a 24 bad idea." But I'm not really accustomed to a 25 detailed dissection of the entire process. Can you 0105 1 assure me that this isn't going to be an all-day kind 2 of process? 3 MR. HIERONYMUS: I think I can assure 4 you that. Certainly most of the times when I've been 5 in front of you, I try to not just come up and give a 6 one-word answer; I try to give something that's 7 actually of benefit to you one way or the other. I 8 also believed I was invited in August. You kind of 9 invited us all to come back and provide you some 10 additional information. 11 You all kind of -- there was some 12 general discussions, throwing things up in the air. 13 And so I took that as an invitation to do, you know, 14 my homework. And I have tried to meet with staff and, 15 you know, I would like to at least finish up. 16 There was one issue particularly 17 relating to the interstate commerce issue that I would 18 like to at least comment on and go from there. My 19 personal belief is, is you need to direct staff to go 20 back and start over. I think this would be 21 overstepping the bounds of your ability in rule- 22 writing. In a nutshell, that is what I would ask you 23 to do, is ask them to go back and do it again. 24 CHAIRMAN COX: Okay. Well, why don't 25 you go through your arguments, and let's try to keep 0106 1 it at the level that we all understand -- I think we 2 all understand -- this Commissioner is addressing, and 3 that is not detailed legal staff work. 4 MR. HIERONYMUS: Well, I'm not an 5 attorney also. 6 CHAIRMAN COX: Okay. 7 MR. HIERONYMUS: So I don't think we 8 have -- I've paid enough money to attorneys to have a 9 degree; I just don't have one. 10 CHAIRMAN COX: Okay. 11 MR. HIERONYMUS: So really then to 12 address the interstate commerce issue, obviously, this 13 is a very complex area, one. I don't pretend to give 14 you advise on that. But I did do some preliminary 15 research and discussed it with some folks. And the 16 basic walk-through that I came away with is to look at 17 something: Is it discriminatory in that does it 18 discriminate between foreign or domestic entities; in 19 other words, an in-state or our-of-stat entity? 20 Clearly the Bingo Enabling Act does not do that. 21 The second one has to do with 22 extraterritorial reach, which I believe is what 23 Commissioner Schenck was referring to. I do not 24 believe it does, and I'll further comment on that. 25 And then the second is whether there is 0107 1 local benefit or whether, you know, there is any 2 weighting of the local benefit. I think the statute 3 makes clear what the Legislature was intending in 4 trying to keep out certain types of interests into 5 the -- limited to gaming that it was allowing, going 6 back to 1981 when bingo was first authorized. They 7 incorporated then similar language into the Lottery 8 Act, at least with respect to the professional 9 gamblers. 10 I did want to make one brief comment on 11 the extraterritorial issue, which I believe is the way 12 you were talking. That's been one of the arguments in 13 the on-line gaming industry, particularly trying to 14 break down barriers to gambling within states, 15 particularly, you know, Internet gambling. 16 And the argument is that you're 17 extraterritorial, in that my server that resides in -- 18 you pick the place -- that you're trying to reach into 19 that jurisdiction because a Texan could play it. The 20 only way they comply with Texas law, then, is to shut 21 off that server, and that would be extraterritorial 22 jurisdiction. And that's the tactic that the on-line 23 gaming folks are using to try to break down some of 24 those barriers. 25 There's been some other discussion, 0108 1 even with the then CPA realm, of some of the state 2 restrictions between licensing. There has been some 3 discussion over the last years of trying to attack it 4 through this thing. I don't believe it's ever 5 actually happened. I think that would be contrary to 6 the interest of Texas with respect to opening the door 7 in this way. I do not believe this is an 8 extraterritorial reach. But, you know, I don't want 9 to go beyond what I should say on there, but I don't 10 believe it crosses that line. 11 I would direct you again to the Lottery 12 Act and your lottery rule. I think the lottery rule 13 would be an appropriate rule with respect to defining 14 "professional gambler." It might include the word 15 "individual" there, because I don't know of an entity 16 that has ever been described as a professional 17 gambler. So you could further define "person" to be 18 an individual. 19 COMMISSIONER SCHENCK: Well, that's an 20 interesting point. I mean, you would agree that if a 21 word has a settled, common meaning, that we would be 22 looking to that settled common meaning? 23 MR. HIERONYMUS: I would agree with 24 that, yes. 25 COMMISSIONER SCHENCK: So you would 0109 1 agree if the word "professional gambler" or "gambling 2 promoter" has a common understood meaning of 3 illegality, that we would be entitled to look to that? 4 MR. HIERONYMUS: I think it's something 5 to be looked at. I think the statute here is pretty 6 clear that with respect to the definition of what that 7 entity would look like, what that person would look 8 like, I kind of have a hard time understanding how 9 that would be applied to a corporation, per se. 10 And I again point, which I said last 11 time, I think that the Penal Code does provide some 12 guidance to give a definition to the gambling 13 promoter. And I would direct -- and I have provided 14 that comment, that the Penal Code does provide some 15 defining language there that could be used, 16 incorporated into a rule that would be presented to 17 you for adoption. 18 And I will close. 19 CHAIRMAN COX: Okay. Any more 20 questions for Mr. Hieronymus? 21 COMMISSIONER WILLIAMSON: No. 22 COMMISSIONER SCHENCK: Not right now. 23 I will say I'm not sure I'm ready to the point where I 24 think we should be proposing a rule, but I may get 25 there, so . . . 0110 1 CHAIRMAN COX: All right. Would that 2 be because of -- would you like to enlarge on that, 3 just to help us running through the rest of the 4 discussion? 5 COMMISSIONER SCHENCK: Well, yes. I 6 will tell you, I think Mr. Hieronymus has some good 7 points. I don't know that I end up agreeing with him. 8 But in my own mind, this is a very difficult problem. 9 You know, we have this list of things that disables 10 someone from getting a manufacturer's license, 11 including an elected or appointed public officer of 12 public employee. 13 Well, you don't have to be a criminal 14 appointed officer of a public corporation for that to 15 take effect. The words "professional gambler" or 16 "gambling promoter" taken literally can mean anyone, I 17 suppose, who has made a business out of professional 18 gambling, regarding of whether that takes place. 19 So there is a question in my mind of 20 whether we would just impliedly add the terms "in 21 Texas," in which case it would invariably be 22 essentially illegal except for being I think a 23 professional gambler, because gambling promoting is, 24 as we pointed out, illegal under the Penal Code. 25 But I think that staff has worked this 0111 1 issue up. I'm not uncomfortable with the conclusion, 2 but it seems fairly thin to me that we have at this 3 point an Illinois Attorney General Opinion that says 4 that the terms "professional gambler" and "gambling 5 promoter" are, in fact, intended to suggest an illegal 6 opprobrium as opposed to just the literal term 7 "professional" and "gambler" put together. 8 On the other hand, as I've said at the 9 last meeting, a broad interpretation of this provision 10 raises all kinds of questions and difficulties that 11 would suggest that a narrow reading might be the more 12 appropriate one. But maybe I'm the only one having 13 problems with this, and that would be fine. 14 CHAIRMAN COX: Let me say that the 15 result that the staff has reached is intuitively 16 appealing to me, because I think it's a fair 17 interpretation of a complex situation that I 18 understand is complex. I understand it's difficult 19 here, because we have a rule in the lottery that 20 hasn't been applied to bingo; and, yet, here we sit in 21 the same building. 22 We have clearly had a change from the 23 time this statute was -- when was the first of these 24 statutes written? 25 MR. WASSDORF: Bingo Enabling Act was 0112 1 '81, I think. 2 CHAIRMAN COX: Okay. In '81. I'm 3 going to suggest that gambling was proscribed in all 4 but two states in the United States, and now it is 5 legal in I would suspect more than 40, in some form or 6 another, maybe more than that, maybe nearly 50. So 7 there has been a lot of change in circumstances that 8 laws have probably not kept up with. 9 Is that part of the thinking you have 10 here, that this needs to go to the Legislature rather 11 than to us? 12 COMMISSIONER SCHENCK: No. I think 13 we're stuck with the problem, and I think we need to 14 pass a -- we need to do something here. And it's 15 interesting, I see your point of view and I attack 16 this from a different perspective, because of my 17 training and background. 18 And my view is, if in 1981 that was the 19 landscape then, I think we're sort of stuck, because 20 the Legislature put us there, though I imagine within 21 the context of our own rulemakings, if there's 22 ambiguity, we can consider subsequent development. 23 But the argument I haven't heard made 24 that I'll make for Mr. Hieronymus' point of view is 25 that I can see why you would say, "We don't want 0113 1 criminals getting a license," and you separate out a 2 different category of people. And I don't mean to 3 suggest gambling -- a professional gambler or gambling 4 promoter in its context or its status compared to 5 other activities. 6 But let's imagine for a moment that 7 this isn't the Lottery Commission, that this is the 8 Child Daycare Commission, and we're licensing a set of 9 bingo operators or -- I'm sorry -- manufacturers or 10 retail lottery agents' child care workers. And if we 11 had said in here, "A person has committed a felony 12 if," et cetera, et cetera, et cetera or, two, "A 13 person who has been or is someone who participates in 14 immoral acts with children," and someone says, "Well, 15 I've never done that in Texas, but I just happened to 16 frequent a small, small southeast Asian country where 17 that's legal. Don't worry about it. I'm going to 18 take care of the children in Texas and ignore my past 19 behavior, because it's lawful and different where it 20 takes place," well, obviously, you could see how the 21 Legislature might say, "Someone who just is a gambler, 22 even if it's not illegal, is not someone we want tied 23 up in the industry here." 24 I don't ultimately come down to that 25 same point of view, I think. But they are treated 0114 1 separately under the statute. And I think ultimately 2 I end up where you are. But there needs to be a 3 narrowing here, because it's not logical -- well, it 4 is logical, but it's probably not functional to have a 5 permanent ban that treats people -- that would treat 6 people more harshly because they were once a gambling 7 promoter or a professional gambler or someplace where 8 it was legal for them to do that and never allow them 9 to receive cover. 10 So I think that I ultimately come down 11 to where you are, but I would like to see more support 12 for the idea that the term 'professional gambler' or 13 "gambling promoter" is a term of art understood to 14 have "illegal" attached to it. 15 CHAIRMAN COX: Okay. That's helpful. 16 Thank you, Commissioner. 17 Mr. Hieronymus, was that the conclusion 18 of your testimony? 19 MR. HIERONYMUS: Well, I always have 20 more to say, but I'm going to not do it because I 21 don't want to get in trouble. 22 CHAIRMAN COX: No, you won't get in any 23 trouble. We're just trying to manage the interests of 24 time and all the folks who want to testify. 25 Now, Mr. Hieronymus, you have on your 0115 1 witness affirmation form Item XIII and Item IV. 2 MR. HIERONYMUS: XIII and XIV. My 3 comments are the same for both. I would just -- 4 CHAIRMAN COX: Okay. XIII and XIV. 5 MR. HIERONYMUS: I spoke to both of 6 those in my proposal. 7 CHAIRMAN COX: Okay. I think the next 8 witness affirmation form I received was from Rob 9 Kohler. 10 And, Rob, did you want to testify or 11 just be on record? 12 MR. KOHLER: Well, Mr. Chairman, after 13 what I've heard, I'm not sure, you know, whether it 14 makes a difference -- unfortunately, what I heard. 15 My name is Rob Kohler, and I represent 16 the Christian Life Commission of the Baptist General 17 Convention of Texas. We were invited to participate 18 in the question that was brought up. I just wanted to 19 make sure for the benefit of the Commissioners that 20 our input was that we would encourage the Commission 21 to seek an Attorney General's Opinion in our state. 22 You're being told about an Illinois 23 Attorney General Opinion and that there is no reason 24 not to -- you know, there's a lot of controversy, 25 there's a lot of smart people that see the world 0116 1 differently. And we would encourage the Commission to 2 do that. 3 I might add that at no time in the 4 discussion that we had was it ever brought up about 5 changing the Lottery's statute or the rules in the 6 Lottery. So, you know, we think that is a very big 7 pie, and we would certainly like the opportunity to 8 weigh in on it, if it matters. 9 So that's all I would like to bring up. 10 CHAIRMAN COX: Okay. Mr. Kohler, my 11 understanding is that you believed that this would 12 relate strictly to bingo and you find here that it's 13 been expanded to the Lottery and that concerns you? 14 MR. KOHLER: Well, yes, it does. I 15 mean, we were expressly -- and that's just part of the 16 clarification as far as our involvement. We had no 17 involvement in changing of the Lottery's -- the 18 rulemaking, the definition -- none. It was discussed 19 at bingo. And our input -- you know, and it's been 20 touched on briefly where if you look at the 21 constitutional amendment, bingo was intended to be a 22 very social game. And you can see in that kind of 23 context -- and you've touched on it a little bit -- 24 that at the time that they didn't want it to turn into 25 something other than what it currently was. It was 0117 1 being played. So -- 2 COMMISSIONER SCHENCK: And, Rob, if I'm 3 understanding, in your view a person who has been a 4 gambling promoter or a professional gambler is just 5 not the kind of person the Legislature wanted 6 participating either in the lottery or in -- 7 MR. KOHLER: I think there was clear 8 interest in it not becoming something, you know, 9 whenever they -- if from -- 10 COMMISSIONER SCHENCK: I don't 11 understand what you mean by "something." 12 MR. KOHLER: A more aggressive form of 13 gaming, of gambling, that if you -- from our research, 14 if you go and you look back in, you know, the 15 conversations that we were having in '81, when -- you 16 know, they recognized it was happening in churches. 17 It was a very simple game. You know, that form of the 18 game is still being played by my kids in their school. 19 And they wanted it to remain that game and that's -- 20 so, you know, in that context I see, you know, 21 where -- you know, what they were trying to do, for it 22 not to become something that it isn't. And -- 23 COMMISSIONER SCHENCK: Okay. So if I'm 24 understanding you right -- 25 MR. KOHLER: And I would -- I would 0118 1 just -- I would encourage you, you know, to seek an 2 Attorney General's Opinion instead of relying on what 3 Illinois Attorney General, AG -- 4 COMMISSIONER SCHENCK: Well, I have 5 thought about that, too, as well. But this is one of 6 those areas where I think with respect to gaming and 7 the relationship between professional gaming and 8 gambling, we probably have the expertise that the 9 Attorney General has, but I'm open to thinking about 10 asking for an Attorney General Opinion. But our 11 research and our lawyers are pretty good, too, and I'm 12 pretty comfortable that we wouldn't turn up more. But 13 perhaps Rob is in a better position to get more hands 14 on deck. 15 MR. KOHLER: Sure. I mean, 16 Commissioner, it's a subject that even in the 17 transcript -- I mean, everybody is saying, you know, 18 this is a big thing to tackle, and there's a lot of 19 different views on it. You know, to me it just seems: 20 Why not? 21 COMMISSIONER SCHENCK: But to be clear, 22 in your view, what the Legislature had in mind, they 23 just didn't want a certain type of people involved in 24 the game? 25 MR. KOHLER: I think for the games to 0119 1 become something that, no more than what they're 2 wanting to approve, which was social, plain old bingo, 3 the bingo that you and I know that -- and my kids 4 play. Again, my kids play it. And the folks I 5 represent don't have one problem whatsoever, you know, 6 with that. 7 But it is alarming, Chairman, though, 8 when we hear different points of views on issues, that 9 your mind is already made up. And I want that on 10 record that that's concerning for an organization that 11 I represent that's sitting back and wants to get a 12 chance at the table no matter, you know, how the chips 13 fall but that we get a fair hearing. 14 CHAIRMAN COX: And let me state that 15 what I said was, I'm inclined to propose this, which 16 means that it would go for a public hearing in front 17 of anyone who wanted to be there, as opposed to the 18 people who came today. So I did not say that I was in 19 favor of this. I said I was in favor of exposing it 20 to the public hearing process. 21 MR. KOHLER: Okay. Well, I'll just 22 tell you that we're just interested in a fair process 23 where everybody gets their shake. 24 CHAIRMAN COX: I think we all are. 25 MR. KOHLER: Okay. 0120 1 CHAIRMAN COX: Commissioner? 2 COMMISSIONER WILLIAMSON: I appreciate 3 your comments. 4 MR. KOHLER: Yes, ma'am. 5 CHAIRMAN COX: Okay. Thank you, Rob. 6 And this is Michael Kerr. Mr. Kerr. 7 MR. KERR: Thank you, Mr. Chairman and 8 Commissioners. My name is Mike Kerr, K-e-r-r. 9 I'll stand corrected, but I probably 10 have more bingo experience than anybody in this room. 11 I've been in the bingo business for more than 25 years 12 now. And I was listening to some of the comments that 13 have come here today, and I'm really concerned. 14 I'm having similar issues in other 15 states. I have a company that we make products for 16 the bingo industry. And I know that early on in the 17 development of the rules and regulations for bingo in 18 this state, there was a concern of some different 19 elements of criteria of people that could possibly get 20 involved. 21 I mean, years ago there was a black 22 cloud that followed around bingo. And there's 23 publications from the seventies that the Mafia was 24 involved and illegal gambling or funneling money 25 through different types of operations similar to 0121 1 bingo. When I listened to the attorney here talk 2 about an Attorney General's Opinion from Illinois, I'm 3 really concerned about that because that, too, is 4 outdated. 5 Since that Opinion that he gave or he 6 quoted, they've introduced riverboat gambling in 7 Illinois. Missouri has riverboat gambling. Again, 8 we're talking about the definition of a professional 9 gambler which is recognized by the federal -- the Tax 10 Code, the Federal Tax Commission. And you can claim 11 yourself as a professional gambler. 12 There's also illegal gambling, and you 13 can be convicted of illegal gambling. So I think that 14 there is a real concern. You talked about this being, 15 rather than testimony, just if you're for it or 16 against it. I'm totally against what is being 17 proposed here. 18 I've done everything in my power to 19 comply with the laws in every state that I go into, 20 including becoming a resident alien in this country. 21 And, you know, I really believe that the intent of the 22 rules was to identify what a person is and to go 23 further. When you have someone that -- you've really 24 got to look at what has happened on this matter in 25 particular. And when you have people that or 0122 1 organizations that admit to one thing and, yet, are -- 2 you know, I don't know how to say it. It's clear that 3 people's -- well, you know, I probably better not. I 4 shouldn't say anything. I will probably reserve my 5 comment. 6 I want to make it clear that I think 7 that the staff have done enough work, or what they 8 feel is enough work. There are -- Commissioner, you 9 talked about how many states. There's 48 states that 10 regulate bingo. There's only two that don't now. And 11 there has been many, many, many opinions on who can be 12 licensed and who can't. 13 There are some states that looked to 14 Texas when they were formulating their rules and 15 regulations, because Texas was one of the first. And 16 they have virtually copied and they have definitions 17 of a professional gambler, and those professional 18 gamblers were never meant to be allowed to be in 19 bingo. 20 Bingo is a social game; bingo has been 21 a social game. You can get so many rogue elements 22 involved when you get professional gamblers involved. 23 I mean, if the staff wants to find out some stuff, 24 just go to Walker County in Alabama and you can see 25 what's going on with professional gamblers. 0123 1 COMMISSIONER SCHENCK: First, thank you 2 for coming. 3 If I can ask a question, Mr. Chairman? 4 CHAIRMAN COX: Please. 5 COMMISSIONER SCHENCK: How long have 6 you been involved in gambling? You said since the 7 seventies? 8 MR. KERR: Eighty -- end of '84. 9 COMMISSIONER SCHENCK: Okay. Well, I 10 find your points helpful. I wish we had more 11 testimony from people who have on-the-ground 12 experience. And you say there's some concerns in 13 Alabama. I don't know that it's controlling one way 14 or the other, but are you aware of any instances in 15 Texas, since you've been involved in bingo here in 16 Texas, of someone who is a legal professional gambler 17 or gambling promoter in some other jurisdiction being 18 involved in our bingo games that have corrupted it in 19 some specific way? 20 MR. KERR: Well, I know that there 21 are -- in the licensing process, as these gentlemen 22 have testified, it talks about whether you have been a 23 professional gambler or a promoter, and there are 24 people in the state that have been that and on their 25 application have said that they are; and, yet, they're 0124 1 still licensed. 2 COMMISSIONER SCHENCK: Okay. 3 CHAIRMAN COX: Could I follow on that 4 for just a moment? 5 COMMISSIONER SCHENCK: Sure. 6 CHAIRMAN COX: I thought I asked the 7 question earlier: Has anyone ever checked "Yes" on 8 that? And someone told me no one has ever checked 9 "Yes." 10 MR. SANDERSON: I'm not aware of "Yes" 11 being checked on that question. 12 CHAIRMAN COX: Mr. Kerr, if you could 13 help, not necessarily -- 14 MR. KERR: Not here. I'll do it after. 15 CHAIRMAN COX: -- but if you could help 16 us with that, I would certainly appreciate it. 17 MR. KERR: Gladly. 18 COMMISSIONER SCHENCK: If I could just 19 bring you back to my question. With respect to those 20 people -- I don't want you to mention who they might 21 be -- are you aware of any particular problem stemming 22 from their backgrounds with respect to the operation 23 of the games here in Texas? 24 MR. KERR: No, because again, it's not 25 the operation of the games. The requirement for this 0125 1 question of whether you're a gambler or professional 2 gambler or promoter, in the absence of saying, "Are 3 you an illegal? Have you ever been convicted of an 4 illegal gambling event?" or "Have you been convicted 5 of illegal gambling?" this only applies to the 6 manufacturers and distributors. It doesn't really 7 apply to the operation of the game. 8 CHAIRMAN COX: Right. 9 COMMISSIONER SCHENCK: With respect to 10 manufacturers and distributors, as you sit here today, 11 can you recall any particular problem, without giving 12 me any names? 13 MR. KERR: Yes. What I'm 100 percent 14 confident of is that Texas over the years has had some 15 of the toughest regulations from a manufacture's 16 perspective and that I really don't believe that there 17 has been ever any intentional products or 18 opportunities from a manufacturer or distributor to be 19 involved. I don't know of any ever, although, just an 20 example of some of the toughness. 21 I can remember at one point we were 22 introducing some instant bingo tickets, and they're 23 all made the same way. They come off printing presses 24 in the same way. And we changed the color of ink on 25 the back of one. Instead of being black, it was blue. 0126 1 We submitted the black one; we didn't get the blue one 2 approved, because we never submitted it. 3 So Texas has been very, very strict. 4 And you should respect that. And it's held in high 5 regard. Texas was the first state in the nation to 6 regulate electronic bingo. And when Ronald Reagan 7 signed Senate Bill 555 in 1988, it classified three 8 types of gaming, federally recognized them. And many 9 states use that now. 10 And there's so many different 11 variations that people are taking from this that I 12 really hate to see the largest charitable bingo 13 industry in the nation be affected by something that 14 we're referring to, an outdated illegal -- or Illinois 15 Attorney General's Opinion. 16 COMMISSIONER SCHENCK: Well, I 17 appreciate that. But do you share any concern of 18 those who would say: Let's take a guy who is 20 or 25 19 years old who lives in another state and works, I 20 guess as a gambling promoter -- I suppose there are 21 people that do that legally -- or spends some time as 22 a professional gambler and 10 or 15 years later he's 23 in Texas and wants to be involved in bingo. 24 MR. KERR: I think if you admit that 25 you're a gambler, you're a gambler. To complement 0127 1 your comments, once you're a pedophile, you're a 2 pedophile. 3 COMMISSIONER SCHENCK: Okay. I 4 appreciate your point of view. It's very helpful. 5 MR. KERR: And once you've been a -- if 6 you're a murderer -- I mean, it's not saying that you 7 haven't been absolved of it or paid your dues. I 8 think the question is, or the comment that I have or 9 the concern is that when the rules and regulations 10 were introduced here was specifically to identify 11 certain segments or certain people or to keep the game 12 to a social type game. 13 COMMISSIONER SCHENCK: Well, then -- 14 MR. KERR: Now, technology has changed 15 and the industry has changed, and we have all become 16 educated. 17 COMMISSIONER SCHENCK: You would 18 understand perhaps why we might end up with a 19 different rule for bingo than we would for lottery 20 games? 21 MR. KERR: Oh, absolutely. 22 COMMISSIONER SCHENCK: Okay. If there 23 was -- 24 MR. KERR: My understanding was similar 25 to what the last gentleman said, that "I thought this 0128 1 was all just regarding bingo. I didn't know it had 2 anything to do with the Lottery." 3 COMMISSIONER SCHENCK: I understand. 4 Thank you. 5 CHAIRMAN COX: Commissioner? 6 COMMISSIONER WILLIAMSON: I'm just 7 absorbing the information right now. There's a lot of 8 questions still to be answered. 9 CHAIRMAN COX: Mr. Kerr, I think I 10 heard you say -- you didn't check whether you were far 11 or against or neutral. I think I heard you say -- 12 MR. KERR: I'm against it. 13 CHAIRMAN COX: You're against -- 14 MR. KERR: -- the proposed -- 15 CHAIRMAN COX: -- XIII and XIV both? 16 MR. KERR: XIII. I haven't looked at 17 XIV. 18 CHAIRMAN COX: Okay. And your concern 19 is that the terms "professional gambler" and "promoter 20 of gambling" are being construed by the recommended -- 21 MR. KERR: Correct. 22 CHAIRMAN COX: -- rule in too liberal a 23 manner? 24 MR. KERR: Just being construed. There 25 are states -- there are legislation, there's rules, 0129 1 there's regulations that identify promoters, gamblers, 2 professional gamblers, illegal gambling activities. 3 It's common throughout the United States. 4 I think one of you Commissioners 5 suggested that -- or maybe it was the attorney here -- 6 that suggested that there is a status on your tax 7 return, federal tax return, that you can identify 8 yourself as a professional gambler. When I first got 9 in this business and moved to Missouri, one of the 10 first people that I met told me he was a professional 11 gambler. He was not allowed to be licensed by the 12 Missouri Gaming Commission, because of that stature. 13 CHAIRMAN COX: All right, sir. 14 MR. KERR: I've met Phil several times 15 ago, and I worked closely with his predecessor. And 16 I'll make myself available to anybody at any time. 17 CHAIRMAN COX: Thank you very much for 18 that. We appreciate your testimony. 19 Rob, did you want to try -- 20 MR. KOHLER: I did. I've got one 21 thing, if I may. 22 Regarding the addition of the 23 Lottery -- you touched on it, Commissioner Schenck -- 24 that check has nothing to do other than the licensees; 25 if it's a corporation, their board members. It 0130 1 doesn't have anything to do with the guy that's 2 selling the ticket that's on the street. It's just as 3 a person can be convicted, you know, ever how many 4 times of being a professional gambler, moral 5 turpitude, anything, and they're the ones that are 6 interacting with your customers, that person behind 7 the cabinet, not the person that has to answer "Yes" 8 or "No" to this. So that's just another reason to 9 take a couple of steps back. 10 COMMISSIONER SCHENCK: That's a 11 question for the Legislature, though, isn't it? 12 MR. KOHLER: Well, just to make sure 13 that you understand that the interaction, that person 14 that is there selling the tickets can be a 15 professional gambler, can be a felon. And even to go 16 further on that, yes, another reason to seek the 17 Attorney General's guidance. 18 But thank you for giving me the 19 opportunity to share that. 20 CHAIRMAN COX: Thank you, Mr. Kohler. 21 Okay. I think we've gone through all 22 of the public testimony. 23 Commissioner, where do you think we 24 are? 25 MR. FENOGLIO: Mr. Chairman? 0131 1 CHAIRMAN COX: Yes? 2 MR. FENOGLIO: For the record, my name 3 is Stephen Fenoglio. I had also indicated -- 4 CHAIRMAN COX: You were on that number. 5 I'm sorry. I had you through XIV. 6 MR. FENOGLIO: Yes. And I'll be very 7 brief. I think the rule -- where you are today, I 8 think it's ripe for publication. And I think there's 9 some issues that were discussed today that I had not 10 even thought of, and I had visited at length with both 11 of your counsel about the proposed rule. I know 12 they've given a lot more thought to it than I have. 13 Just because you publish for public comment does not 14 mean that you'll end up taking the rule forward. It 15 doesn't foreclose a request for an AG Opinion. And, 16 by the way, if you do request an AG Opinion, you're 17 looking about six months before you'll get the 18 Opinion, which would be through the end of the 19 session. 20 And my clients would like some clarity 21 on the matter, because of my comments two months ago. 22 If you look at what a gambling promoter is, it could 23 be a manufacturer or distributor who just promotes 24 their product. A manufacturer or distributor of bingo 25 product is a, quote, gambling promoter. And I don't 0132 1 think anyone would suggest that those people could not 2 get licensed. They should get licensed. So that's 3 where we were coming from originally. 4 So to cut to the chase, I think you've 5 got maximum flexibility. You can publish it for 6 public comment -- and I think you should -- and see 7 what the comment is. That doesn't foreclose any 8 actions that you might decide to do after the comments 9 have been made. 10 Thank you. I'll be happy to answer any 11 questions. 12 COMMISSIONER SCHENCK: I don't have any 13 questions. Thank you. 14 COMMISSIONER WILLIAMSON: I don't 15 either. 16 CHAIRMAN COX: Thank you, Mr. Fenoglio. 17 COMMISSIONER SCHENCK: Mr. Chairman, to 18 answer your question, I am not sure where I am in 19 terms of whether we should publish for comment or 20 continue to contemplate here or to ask for an Attorney 21 General Opinion. I think I would prefer to defer to 22 your better judgment on that. I just would like to 23 make clear, I'm not yet sure where I come out on this, 24 which is part of why we have this entire comment 25 process, because it is helpful. I can see both sides 0133 1 of this. 2 And, frankly, I think our staff have 3 done a fantastic job of legal research here in 4 helping, to the extent we can find help anywhere. And 5 I don't know that the Attorney General's office would 6 have any more. I think we're working within our 7 assigned area of expertise here. 8 So if your view would be that it would 9 be in our interest to publish for public comment and 10 then to take that comment very carefully and review it 11 carefully, I think that would be a fine way to go. 12 CHAIRMAN COX: Commissioner? 13 COMMISSIONER WILLIAMSON: I agree with 14 David. I think we still need to get comments and 15 receive more. And like I said, if we decide we're not 16 comfortable, we can pull it down. At the end of the 17 day, the Legislature might not like what we do anyway. 18 CHAIRMAN COX: Sandy and Pete, did you 19 hear anything here today that you didn't hear or 20 discern from your own research before you published 21 this proposed rule? 22 MR. WASSDORF: No, sir, I don't think 23 so. I would make one comment, though, that with 24 respect to an Attorney General's Opinion, an Attorney 25 General's Opinion will look at what is before them. 0134 1 And when they look at something that does not have an 2 agency rule, they may come down one way because they 3 have no direction; whereas, if you adopt a rule and 4 they have not only the statute but also the rule 5 before them, they may come down in a different 6 position because of that. And so you should consider 7 that in making your decision as to whether to go 8 forward or not. 9 The other comment I would make is that 10 while that Attorney General's Opinion in Illinois is a 11 1982 Opinion and is fairly old, it's the legal 12 reasoning that they were using that was of interest to 13 me, that they had the same statute that we have. They 14 had no statutory definition, as we did not. And they 15 had criminal penalties for gambling, as we have. And 16 they said basically that the statute should be read in 17 context with those criminal penalties, those criminal 18 provisions. So I think that that is kind of a -- it's 19 a timeless type of evaluation. 20 COMMISSIONER SCHENCK: Well, I don't 21 want to jump on to your argument, but I'll say the 22 older it is, the better it is from your perspective. 23 I mean, the Legislature is presumably aware of like 24 laws in other states when it acts. And the fact that 25 that rule was on the books and has been unchallenged 0135 1 since, I think -- I'm not just trying to suggest where 2 I come out on this, but I think your argument doesn't 3 lose force by the age of the -- 4 MR. WASSDORF: Right. As I said, that 5 there are approximately 10 states that still have 6 statutes addressing professional gambling as a 7 criminal activity. And I have not had the time to go 8 back and look at what the other states' statutes may 9 have been 26 years ago, so there may have been others 10 that had professional gambling as a criminal activity 11 at that time, but I don't know. 12 CHAIRMAN COX: Would you like 13 additional time to do that research, Mr. Wassdorf? 14 MR. WASSDORF: Well, I can do that 15 while -- yes, I can do that while anything -- any of 16 the process is going forward. 17 CHAIRMAN COX: So you would not want to 18 take down this rule for comment while you're 19 completing your research? 20 MR. WASSDORF: No, I don't think so. I 21 think that we can conduct the research within that 22 period of time. 23 CHAIRMAN COX: Okay. Ms. Joseph? 24 MS. JOSEPH: I didn't hear anything 25 that was a new concept or rationale that we had not 0136 1 considered either. So at this point I think our 2 recommendation would be to continue to propose these 3 rules for public comment. 4 CHAIRMAN COX: Ms. Kiplin -- 5 MS. KIPLIN: Yes, sir? 6 CHAIRMAN COX: -- do you have any 7 thoughts on this? 8 MS. KIPLIN: No. I think proposing the 9 rules for public comment, I do agree with the staff 10 and Mr. Fenoglio, it doesn't preclude you from 11 deciding to pull that rulemaking down and staying 12 where you are currently. It doesn't preclude you from 13 seeking comment and deciding that you want to come up 14 with something that's a completely different 15 definition, based on the comment you received. It's 16 simply to elicit comment in a formal setting so that a 17 comment can be processed and summarized for you-all. 18 MS. JOSEPH: I would like to add one 19 thing. 20 CHAIRMAN COX: Yes. Please, 21 Ms. Joseph. 22 MS. JOSEPH: The issues did come up 23 originally in the context of bingo. That's what 24 brought this matter to our attention. In looking at 25 that, we, you know, quickly realized that there was a 0137 1 similar provision in the Lottery Act. And that's why 2 we also are recommending to you an amendment to the 3 Lottery rule, because we believe that the Commission 4 would want to be consistent in its definitions. 5 I'm apologetic to Mr. Kohler. He says 6 he didn't realize the lottery rule was being 7 considered. But that developed during our examination 8 of these issues and the belief on the part of the 9 staff that it would be desirable for the Commission to 10 have consistent definitions and not contradictory ones 11 for bingo and lottery. 12 CHAIRMAN COX: Well, I certainly concur 13 with that. And Ms. Kiplin has kept me involved in 14 this process at a high level and on terms that I can 15 understand, certainly not some of the professional 16 terms that you look at. And I have believed from the 17 beginning of this discussion that we needed to be 18 consistent between the lottery and bingo. On the one 19 hand, we had a definition -- I believe it's correct -- 20 in the lottery rules, not the statute. 21 MS. JOSEPH: That's correct. 22 CHAIRMAN COX: And then we had a 23 reference in the bingo statute but not the rules, if 24 that's correct. 25 MS. JOSEPH: That's correct. 0138 1 CHAIRMAN COX: And clearly we've got a 2 significant that we need to address on an overall 3 basis. Whether we do it all at once or stepwise, I 4 think arguing for doing it all at once is a very good 5 one. 6 I would say this, given that there were 7 some people that were surprised that it was going to 8 be applied to lottery until such time, I assume, as 9 they saw this agenda, do you think you've given 10 adequate notice for the public comment for people to 11 adequately prepare for this, assuming they knew 12 nothing about it before today? 13 MS. JOSEPH: Well, the rule that we 14 offered, of course, 30 days from the time that the 15 rule is published, if it is published, in the Texas 16 Register. If that's not adequate time, someone can 17 certainly request or file a motion that the Commission 18 extend the comment period. 19 CHAIRMAN COX: Okay. Now, they would 20 not -- if I understand our plans for meetings, our 21 next meeting would be the third Wednesday in December, 22 so there would not be time for such a motion to be 23 heard by the Commission? 24 MS. JOSEPH: The hearing is proposed 25 for this on December 4th. So that's correct. The 0139 1 Commission would not be meeting before that, but we 2 could -- let's see. 30 days. I'm not sure exactly 3 when this will be published. 30 days -- 4 MS. KIPLIN: Commissioners, if it would 5 help you -- and I'm sorry to interrupt -- but I think 6 on another rulemaking in the past where there was some 7 degree of interest on both sides, you actually had a 8 60-day comment period or longer comment period. And 9 you can certainly do that if you wish. The only 10 limitation you have is from the time that you propose 11 a rule, six months later it's withdrawn by operation 12 of law if you haven't taken any action on that 13 rulemaking. 14 CHAIRMAN COX: So I think that that's a 15 good thought for, as we get to the ultimate staff 16 recommendation, that we think about a 60-day notice 17 period to be sure that we're giving anyone who wants 18 additional time and needs additional time to prepare, 19 particularly given that we've got holidays coming up, 20 that might be a good idea. 21 Now, Mr. Wassdorf, I want to go back to 22 one of your points which was compelling to me when I 23 heard it from you several weeks ago, about why it 24 would not be particularly productive perhaps to go to 25 the Attorney General at this time. And what I 0140 1 remember hearing you or Ms. Kiplin say was that the 2 Attorney General gives great deference to an agency 3 that is applying its own statutes. Did I quote you 4 more or less correctly on that? 5 MR. WASSDORF: Yes, you quoted me more 6 or less correctly on that. There are three 7 departments of state government -- the Legislative 8 Department, the Executive Department and Judicial 9 Department. And the constitution provides that none 10 of those shall perform any function that's 11 attributable to another. 12 However, both the Legislative 13 Department and the Judicial Department have recognized 14 that the Legislature cannot anticipate every possible 15 eventuality, and especially here in Texas where we 16 have biennial sessions -- it's two years between 17 sessions -- and that the Legislature can't address all 18 of those things. 19 And so the Legislature has delegated a 20 portion of their legislative authority to executive 21 agencies to adopt rules that have the force and effect 22 of law. And that delegation has to be within their 23 area of authority from the Legislature and it has to 24 be reasonable and et cetera. And so that's why these 25 rules have the force and effect of law, because they 0141 1 are a delegated activity. Neither the Attorney 2 General nor the judiciary has that type of authority. 3 In other words, they have to look at exactly what is 4 written, and they can't go really any further than 5 that. They have to give it the interpretation that 6 the law would require; whereas, the state agency, the 7 executive agency, can further define that. 8 And so the Attorney General -- that's 9 what I was talking about when I was addressing 10 Commissioner Schenck a while ago -- is that the 11 Attorney General, if he is presented with a question 12 without any legislative rule -- I mean, any agency 13 rule -- then he has a certain limitation; whereas, if 14 there is an executive rule, an agency rule in place, 15 then he has to take that into consideration also. So 16 there may be some additional import to the rule, to 17 the Attorney General. 18 CHAIRMAN COX: And, Commissioner, I 19 think I heard you say, "If not us, who"? 20 COMMISSIONER SCHENCK: Yes. I mean, 21 the blind leading the blind doesn't really add much to 22 the process. I mean, I don't think we're going to 23 find meaningful legislative history from the Attorney 24 General's office. And what they would be adding to it 25 is words in ink. And I think we have expertise to 0142 1 bring to bear here, and I think we need to do it. 2 My proposal would be to publish both of 3 these rules for public notice and comment, reserving 4 my right to possibly vote against them when and if we 5 get there. But I think that our lawyers have done 6 their work. I think that we have a judgment to bring. 7 I mean, this is a question ultimately of discretion. 8 We have competing interpretations here, one that 9 satisfies some, one that satisfies others. And 10 reasonable minds could differ about which way you go. 11 We just have to make a decision. 12 CHAIRMAN COX: Commissioner? 13 COMMISSIONER WILLIAMSON: Nothing 14 further. 15 CHAIRMAN COX: All right. I take that 16 as a motion? 17 COMMISSIONER SCHENCK: I so move. 18 CHAIRMAN COX: And could we amend your 19 recommendation to provide for a 60-day notice period? 20 MS. JOSEPH: We, we can. I will on the 21 T-bar memo indicate 60 days and initial it. And then 22 if y'all sign off on it, I think that will cover it. 23 CHAIRMAN COX: Okay. Excellent. And 24 like Commissioner Schenck, I reserve the right to vote 25 against it, and I will probably come to the hearing. 0143 1 But I think this is a matter of enough interest and 2 enough importance that we need to move along with the 3 process. And I think that talking this work, which is 4 very good work, back and trying to start it over would 5 put us six months down the road, and I think it would 6 be in the greater interest of the people to get this 7 matter before a public hearing sooner rather than 8 later and get some guidance out there to folks who are 9 needing guidance. 10 So I second. Is there any further 11 discussion? 12 COMMISSIONER SCHENCK: No. 13 COMMISSIONER WILLIAMSON: No. 14 CHAIRMAN COX: Okay. All in favor, 15 say, "Aye." 16 COMMISSIONER SCHENCK: Aye. 17 COMMISSIONER WILLIAMSON: Aye. 18 CHAIRMAN COX: Aye. 19 Opposed? 20 Motion carries 3-0. And I understood 21 that motion to be and seconded for Items XIII and XIV 22 both? 23 COMMISSIONER SCHENCK: Yes, both. 24 CHAIRMAN COX: Okay. Thank you very 25 much for the public testimony. It's been very 0144 1 helpful. And I hope that we can work on this 2 interactively through the comment period so that we 3 are able to reach any consensus that might be among us 4 before we have to vote at that time. 5 AGENDA ITEM NO. XV 6 CHAIRMAN COX: Okay. Phil, report of 7 the Charitable Bingo Operations Director. 8 MR. SANDERSON: Good afternoon, 9 Commissioners. In your notebook is the report of the 10 activities of the Bingo Division. I would like to 11 point out that the staffing of positions, we've been 12 conducting interviews for the inspector positions this 13 week, and we have a couple of interviews scheduled 14 next week for the Operational Planning and Performance 15 Coordinator. We're still reviewing the Audit Manager 16 and the Auditor III applications. We still have 17 pending a posting for a training position as well as 18 another administrative assistant position. 19 The next BAC meeting is scheduled for 20 next Wednesday. It is my understanding, due to 21 previous commitments, Commissioner Schenck and 22 Commissioner Williamson will not be able to attend. 23 So, Commissioner Cox, you can attend at your pleasure. 24 CHAIRMAN COX: Okay. I'm going to try 25 to, Phil. I'm got something that I'm trying to 0145 1 rearrange right now. 2 MR. SANDERSON: And then quarterly 3 reports were received -- were actually due Monday, 4 this past Monday. And we're looking at the completion 5 of data, entering those within the next 10 days. 6 The on-line operator training program, 7 as I mentioned earlier, we've had over 100 individuals 8 complete the training. And there is a survey at the 9 end, and we continue to receive positive response to 10 that training. We have also since implemented the 11 pre-licensing interview for new organizations, is now 12 available on the Internet. And they can take the 13 pre-licensing interview on the Internet as well now. 14 Also each year we're required to 15 conduct surveys for the Compact with Texas, and we 16 conduct our survey in June and we continue to receive 17 a 97 percent or greater rate on the excellent to good 18 customer service. 19 And that concludes my report. 20 CHAIRMAN COX: Phil, we've talked at 21 several meetings about filling these audit positions 22 and specifically the need to fill the lead auditor 23 position so that that person might have a part in the 24 process of hiring some of the other auditors. Do we 25 need to consider another approach? You know, we have 0146 1 published this opening as good until filled, I 2 believe. 3 MR. SANDERSON: Yes, sir. 4 CHAIRMAN COX: So it means it continues 5 to be published and has been out there for a long 6 time. Can you help me with how long a long time is? 7 MR. SANDERSON: The initial posting was 8 on August the 4th. So that's just a little over -- 9 almost three months now. Next week will be three 10 months. 11 CHAIRMAN COX: Okay. That seems 12 longer, doesn't it? And I guess it's because we were 13 contemplating that. 14 Should we be doing something else? 15 Should we be looking at getting professional 16 assistance in beating the bushes? Do you think we've, 17 through our financial officers and auditors, have we 18 beat every bush that can be beaten? Do we need to 19 start calling people in for interviews and seeing if 20 we have something there that we can work with? 21 MR. SANDERSON: I met with Ms. Melvin 22 earlier this week to go over the applicants to see if 23 there was a pool that we could begin interviewing. I 24 believe we identified a few that we could start the 25 interview process. I just got notice that we had 0147 1 received three more applications this week, so we'll 2 take a look at those applications. 3 CHAIRMAN COX: Three more this week? 4 MR. SANDERSON: Yes, sir. 5 CHAIRMAN COX: Good. 6 MR. SANDERSON: And I have been in 7 contact with Ms. Melvin and Ms. Pyka, and I know they 8 have reached out to colleagues and associations that 9 they're members of, to try to increase the applicant 10 pool. 11 CHAIRMAN COX: Okay. Well, one of the 12 things that we've done in the past is begin 13 interviewing some of the candidates. And even if we 14 don't find an acceptable candidate, to get the 15 interviewing process going while we continue to hope 16 that someone who really just fits it to a T comes in. 17 And I would encourage you to move forward in that 18 manner. It will get us to a solution sooner. 19 MR. SANDERSON: And we are. And that's 20 the purpose of the meeting I had with Ms. Melvin this 21 week, was to go ahead and look at possibly scheduling 22 those interviews the latter part of next week or week 23 after next and start doing interviews. 24 CHAIRMAN COX: Okay. Thank you, Phil. 25 Okay. Commissioners, we are at 10 0148 1 after 12:00. We have I would guess at least another 2 hour to go. 3 Ms. Kiplin, Mr. Grief, do y'all have 4 any estimates that you think would refine that a 5 bit -- a lot more than an hour, probably not an hour 6 or anything of that nature? 7 MR. GRIEF: For our next item? 8 CHAIRMAN COX: For the rest of the 9 agenda. 10 MR. GRIEF: Oh. 11 CHAIRMAN COX: I'm trying to get to 12 whether we should take a lunch break and get to 13 executive session and then come back in an hour or so 14 or whether we should try to work on through this, 15 recognizing that I don't want the Commissioners to get 16 hungry and, therefore, grumpy. 17 MR. GRIEF: I would recommend the 18 former, Mr. Chairman. I think the rest of the meeting 19 will take over an hour. 20 CHAIRMAN COX: Okay. So with y'all's 21 permission, we'll go into executive session at this 22 time. 23 AGENDA ITEM NO. XXIX 24 CHAIRMAN COX: At this time I move the 25 Texas Lottery Commission go into executive session: 0149 1 A. To deliberate the duties and 2 evaluation of the Executive Director, the Deputy 3 Executive Director, Internal Audit Director and 4 Charitable Bingo Operations Director and to deliberate 5 the duties of the General Counsel and Human Resources 6 Director, pursuit to Section 551.074 of the Texas 7 Government Code. 8 B. To receive legal advice regarding 9 pending or contemplated litigation pursuant to 10 Section 551.071(1)(A) and/or to receive legal advice 11 regarding settlement offers pursuant to Section 12 551.071(1)(B) of the Texas Government Code and/or to 13 receive legal advice pursuant to Section 551.071(2) of 14 the Texas Government Code, including but not limited 15 to: 16 First State Bank of DeQueen, et al, 17 versus Texas Lottery Commission; 18 James T. Jongebloed versus Texas 19 Lottery Commission; 20 USA versus David Crawford and TLC; 21 Texas Lottery Commission versus Leslie 22 Warren, Texas Attorney General Child Support Division, 23 Singer Asset Finance Company, L.L.C., and Great-West 24 Life & Annuity Insurance Company; 25 Employment law, personnel law, 0150 1 procurement and contract law, evidentiary and 2 procedural law and general government law; 3 Lottery Operations and Services 4 contract; 5 Mega Millions games and/or contract. 6 Is there a second? 7 COMMISSIONER SCHENCK: I second the 8 motion. 9 CHAIRMAN COX: All in favor, say "Aye." 10 COMMISSIONER SCHENCK: Aye. 11 COMMISSIONER WILLIAMSON: Aye. 12 CHAIRMAN COX: Aye. 13 Motion carries 3-0. 14 The Texas Lottery Commission will go 15 into executive session. The time is 12:09 p.m. 16 And I believe that we'll be able to be 17 back by about 1:15. So y'all feel free to go wherever 18 that will get you. 19 (Off the record for executive session: 20 12:09 p.m. to 1:51 p.m.) 21 AGENDA ITEM NO. XXX 22 CHAIRMAN COX: The Texas Lottery 23 Commission is out of executive session. The time is 24 1:51 p.m. 25 Is there any action to be taken as a 0151 1 result of executive session? 2 AGENDA ITEM NO. XVI 3 CHAIRMAN COX: If not, let's move on to 4 Item XVI -- Ms. Kiplin, would that be correct? Of the 5 agenda? 6 Report, possible discussion and/or 7 action on lottery sales and revenue -- 8 MS. KIPLIN: Yes, that's correct. 9 CHAIRMAN COX: Thank you -- game 10 performance, new game opportunities, advertising, 11 market research and trends. 12 Now, Ms. Pyka, Mr. Tirloni -- Kathy, 13 are you comfortable enough to do this? 14 MS. PYKA: I am. Thank you very much. 15 I'm fine. I am. 16 CHAIRMAN COX: Would you rather have a 17 straighter chair than that one or -- 18 MS. PYKA: This is perfect. 19 CHAIRMAN COX: -- a less straight chair 20 than that? 21 MS. PYKA: This is perfect. We're 22 good. Thank you very much. 23 Good afternoon, Commissioners. My name 24 is Kathy Pyka, Controller for the Texas Lottery 25 Commission. With me to my right is Robert Tirloni, 0152 1 our Products Manager. And Gary Grief is going to join 2 us on this presentation today to talk about our 3 research update. 4 Our first slide that we have for you 5 reflects revenue from sales, a net revenue to the 6 state through week ending October 18th of 2008. Total 7 sales for this seven-week period amounted to 8 $432.5 million, with prize expense of $271.4 million, 9 for a sales contribution of $161.1 million. 10 Our net revenue to the state reflects a 11 9.4 percent decrease as compared to the $120.5 million 12 figure for this same period in Fiscal Year 2008. 13 And, Commissioner Williamson, for the 14 purposes of calculating the net revenue to the state, 15 I wanted to walk through that calculation with you. 16 Our first element of expense is the retail commission 17 amount that represents five percent of sales, or 18 $21.6 million. The fee paid to the lottery operator 19 vendor is 2.6999 percent of sales, or $11.7 million, 20 followed by the $18.6 million for administrative 21 appropriation. 22 While the statute does allow us to use 23 12 percent of gross sales for administrative purposes, 24 the amount that can be expended is limited by the 25 General Appropriations Act method of financing as well 0153 1 as any riders to the appropriation bill. So while 2 there is 12 percent in statute, we have historically 3 spent around about 10 percent of that total. 4 And back up just a second, Robert. I'm 5 sorry. 6 CHAIRMAN COX: Kathy, I don't know 7 whether this -- work this comment in at the 8 appropriate place or this question. 9 MS. PYKA: Okay. 10 CHAIRMAN COX: How much of our being 11 behind last year to date is related to Ike more or 12 less -- 13 MS. PYKA: Certainly. 14 CHAIRMAN COX: -- and how much of it is 15 related to non-Ike? 16 MS. PYKA: Certainly. I think when we 17 get past this slide, we'll talk about it there when we 18 talk about the different games. 19 So before leaving this slide, I wanted 20 to note that the $271.4 million amount recorded as 21 prize expense as a percentage of sales is 62.7 percent 22 for the current time period, as compared to 23 63.1 percent for the same period last year. 24 And then this next slide is where we'll 25 compare our Fiscal Year 2009 sales to our Fiscal Year 0154 1 2008 sales, by game, at the same period. So while we 2 noted on the earlier slide our total decline is 10.7 3 percent, at the bottom of the slide, or $52 million, 4 the overall sales decline includes $13.3 million, or 5 11.6 percent in on-line games and $38.7 million, or a 6 10.5 percent decline, in instant ticket sales. 7 The on-line games are portrayed with 8 the white font, reflecting a $7.7 million year-over- 9 year decline. And I wanted to note for your 10 attention, Commissioner, as we go through those, Lotto 11 Texas game down $6 million year-over-year. 12 And I just wanted to give you an idea 13 on jackpots that we've had in Fiscal Year 2008. We 14 had two jackpots, one at $26 million. And then at 15 this point last year, we were at a jackpot with a 16 $15 million level. This fiscal year our high has been 17 an $18 million. And right now we're at $6 million on 18 Lotto, Texas. 19 Similarly, as we look at Mega Millions, 20 we're down $1.3 million, or 7.2 percent, with that 21 particular product. Last fiscal year we had two 22 jackpots that were over $60 million, and then we had 23 two, one at $12 million, another at $26 million. This 24 year our highest jackpot level has been $42 million, 25 with us being hit at $24 million, $15 million and 0155 1 $12 million. And right now we're at $23 million. So 2 you can see the difference in jackpot levels on those 3 two online games. 4 Moving down to the daily games, they're 5 presented in the green font, and they reflect an 6 overall decline of $5.6 million, or 10 percent year- 7 over-year. And then again the instant, as we had 8 noted before, has a $38.7 million decline or 9 10.5 percent. 10 And to go back to your question, 11 Chairman Cox, I wanted to talk about the $52 million 12 decline. We do recognize that we had some difficult 13 weeks in September related to Hurricane Ike and how 14 that impacted our sales statewide. As we've looked at 15 the overall decline, we know that the Houston district 16 is down about 16.8 percent in comparing their year- 17 over-year decline. When you quantify that in dollars, 18 that represents about $24,000 of that $52,000 decline. 19 MR. TIRLONI: $24 million. 20 MS. PYKA: I mean $24 million. Thank 21 you. 22 We recognize all of the $24 million 23 isn't 100 percent Ike, because sales statewide are 24 down. But we believe that anywhere between the range 25 of about 12 to 14 could be Hurricane Ike, with the 0156 1 balance just being our overall sales that are down 2 statewide. 3 I know Robert wanted to touch a bit on 4 the status of the retailers and that particular 5 district. 6 If you want to maybe do that now, 7 Robert? 8 MR. TIRLONI: Sure. 9 For the record, my name it Robert 10 Tirloni. I am the Products Manager for the 11 Commission. 12 Last month we met right in the middle 13 of the month, around the -- I think it was the 17th of 14 September. At that time I had told you that the 15 Houston district has approximately 5,000 selling 16 terminals. And at the time of our meeting, we had 17 well over 2,500 that were not selling at the time. 18 Things have greatly improved now. We 19 have less than 200 selling terminals that are not 20 selling. So things have greatly improved since we 21 last met. But, as Kathy just noted, Houston is 22 experiencing the biggest sales decline of any of the 23 districts. 24 MS. PYKA: And the Houston district 25 generally represents about one quarter of our overall 0157 1 statewide sales, and so it is a tremendous impact to 2 us, no doubt. 3 CHAIRMAN COX: So, Kathy, I heard you 4 say that about a third of that decline might be 5 attributable to Ike? 6 MS. PYKA: Correct. 7 CHAIRMAN COX: The remaining 8 two-thirds, or about 7 percent, is just sales are 9 down? 10 MS. PYKA: Correct. And I would say 11 that as we completed the sales through this past 12 Saturday, the good news that we see is, is we looked 13 at the last week -- three weeks of sales, we're seeing 14 that while we're down from Fiscal Year 2008, we're 15 looking at a flat line at least. We're not trying to 16 merge those lines still. So hopefully we're past the 17 worst of it and recognize that we're simply just down 18 year-over-year and with other factors contributing to 19 that decline. 20 So with that, moving to the next slide, 21 Robert will now begin a discussion on sales by our 22 different products. 23 MR. TIRLONI: Commissioners, we have 24 some new slides for you this month. This is the first 25 new slide. And, Chairman, I think you asked us to 0158 1 develop this pie chart for you and the other 2 Commissioners. This pie chart shows the total fiscal 3 year sales of $432.5 million, broken down by the two 4 product categories, instants and on-line. And as you 5 can see, the instant sales continue to make up 6 slightly over 76 percent of the total sales, with 7 on-line representing the other 23 and a half. 8 The next slide that we have -- 9 CHAIRMAN COX: Robert, let me stop you 10 right there -- 11 MR. TIRLONI: Yes, sir. 12 CHAIRMAN COX: -- for an historical 13 reference. And if you need to ask Gary to help on 14 this one, please do. 15 What we're seeing right now is that 16 three-fourths of our sales are the instant product. 17 Now, there was a time -- and let's create a year, '96, 18 '97, '98, whichever one y'all want to -- when that mix 19 was the reverse. 20 MR. TIRLONI: I think it was probably 21 closer to 60/40, probably in the mid-nineties with -- 22 CHAIRMAN COX: 60/40 for the on-line? 23 MR. TIRLONI: 60/40 for instant, 24 representing 60, on-line representing about 40. 25 CHAIRMAN COX: Okay. So it's never 0159 1 been the reciprocal? 2 MR. TIRLONI: No. 3 CHAIRMAN COX: But the percentage has 4 grown over time but not in leaps and bounds for the 5 instant product and away from the on-line product? 6 MR. TIRLONI: Yes. Absolutely. 7 CHAIRMAN COX: And do you attribute 8 that to better marketing and a wider variety of 9 instant tickets or do you attribute it to a trend that 10 would have been there whether the tickets were that 11 much better marketed or not? 12 MR. TIRLONI: I think it's two things. 13 I think it's -- on the instant side, we have a variety 14 of price points, a variety of themes. We have the 15 benefit of being able to have the product directly on 16 the counter in front of the consumer. Those are just 17 some of the benefits of the instant product category. 18 And the flip side of that for the 19 on-line category is lack of visibility in the retail 20 location, because there's nothing but a blue computer 21 that sits on the counter, and that's what represents 22 the on-line games. And the fact that the on-line 23 games are very mature. They're pretty much offered at 24 the $1.00 price point. They're jackpot-driven. 25 And on the on-line side, you have a 0160 1 long gap between your ticket purchase and 2 determination of win; whereas, you know, instants, you 3 can make a purchase and you can scratch a ticket. And 4 if you've won, you can cash that ticket in and perhaps 5 buy more. On on-line you are sometimes waiting days 6 before you can find out if the ticket that you've 7 actually purchased is a winner or not. So I think 8 those are some of the factors that make the instant 9 category much more appealing to the playing public 10 and, therefore, more successful. 11 CHAIRMAN COX: Thank you. 12 MR. TIRLONI: Now, Commissioners, this 13 is another new slide. What this slide does is 14 basically -- we've always shown you our instant sales 15 broken down by price point. That's the next slide. 16 But this one is new because it takes that 17 $101.5 million in on-line sales and actually breaks it 18 down by each individual on-line product. 19 And so what you see as the big red 20 piece of the pie is Pick 3, representing slightly 21 under $35 million, followed by Lotto Texas, 22 representing $24 million and almost 24 percent of the 23 total sales realized thus far this fiscal year. Right 24 behind Lotto is Mega Millions, at $16.5 million. And 25 you can then also see all the rest of the pieces of 0161 1 the pie. 2 COMMISSIONER SCHENCK: Now, Robert, for 3 my edification and for our new commissioner, these are 4 all -- when we say "on-line games," these are games 5 for which people are buying tickets with numbers. And 6 we have a booth -- right? -- that when you do new 7 commissioner orientation, you'll walk by and you can 8 see the balls pop out, and they're very meticulously 9 weighted to a hundredth of a gram or thousandth of a 10 gram all the time. And this distinguishes a group 11 from all of our scratch-off games which people can 12 also buy right here next door to the Commission, and 13 there is a place to cash them in. 14 But we've broken these two up because 15 there tends to be very different sales trends within 16 these various games. Some of these are new within the 17 last two years, the Daily 4 and Sum It Up, which is an 18 additional second layered game, you can see us taking 19 a tiny percent. Also I think Pick 3 is, relatively 20 speaking. 21 MS. PYKA: Sum It Up. 22 MR. TIRLONI: Sum It Up on Pick 3 is, 23 yes. 24 MS. PYKA: We introduced the Daily 4 25 game at the end of September of Fiscal Year 2008, so 0162 1 it's just exceeded its one-year anniversary. And then 2 we introduced Pick 3-Sum It Up following that. 3 COMMISSIONER SCHENCK: And our 4 traditional game is the Lotto Texas, the green 5 portion, which increasingly takes a smaller bit of 6 this pie. The Mega Millions game is a multi-state 7 game that we have a conference call -- on Thursday? 8 MS. PYKA: Every Tuesday and every 9 Friday. There's 12 states that belong to the Mega 10 Millions group, and we set the jackpot by joining in 11 all of our sales estimates for each of those 12 states 12 to determine what the next jackpot roll will be if not 13 hit. 14 COMMISSIONER SCHENCK: And the longer 15 the jackpot rolls go before winning, the better off, 16 because we're depending on the interest factor, and 17 interest rates have been very low, so it's not been as 18 helpful as it traditionally is. But that's the full 19 panoply of nonscratch-off games that we offer. 20 Are we thinking about any additional 21 on-line offerings right now? 22 MR. TIRLONI: Right now we are 23 considering some possible tweaks to Lotto, not 24 anything that would actually change the base game or 25 the matrix or anything along those lines, but we're 0163 1 looking at some possible enhancements that we can 2 make, or add-on games that we can add on to that 3 product. 4 COMMISSIONER SCHENCK: To Lotto Texas? 5 MR. TIRLONI: To Lotto Texas. And 6 we're working with out statistician on looking at some 7 prize tables at this point. 8 COMMISSIONER SCHENCK: How many states 9 are in the Mega Millions game? 10 MS. PYKA: There's 12 states total. 11 COMMISSIONER SCHENCK: Okay. 12 MR. TIRLONI: And then, Commissioners, 13 this next slide is the standard slide that we have 14 been showing you on a regular basis now. This is the 15 instant ticket sales broken down by price point. And 16 thus far this fiscal year, we've realized $331 million 17 in instant sales. 18 And you can see the biggest slice of 19 the pie is this yellow slice right here, and that is 20 the $5.00 price point. So that is our best seller, 21 followed by our $2.00 price point, our second best 22 seller. And to continue the sequence, the $10 would 23 be the next best, and then the $3.00 game would be 24 following the $10 as the best seller. And then you 25 can see where all of the rest of the price points kind 0164 1 of shake out. 2 COMMISSIONER SCHENCK: Robert, have we 3 seen the greatest gains in the $50 and the $20 in the 4 last year or so? 5 MR. TIRLONI: The $20 is actually doing 6 very well this current fiscal year. It's one of the 7 price points that is seeing an increase over last 8 fiscal year. The $50 is down, though, over last 9 fiscal year. 10 The price points that are up right now 11 for this fiscal year are the $3.00, the $5.00 and the 12 $20, compared to the same number of weeks year-over- 13 year. We've had some very strong $5.00 offerings. 14 The State Fair of Texas game has done very well for 15 us. The Texas Ranger Chopper motorcycle game that we 16 talked a little bit about last month is also doing 17 very well for us. And we have one of our Christmas 18 games, which is at the $5.00 price point, just 19 started. And I believe that was our No. 1 seller last 20 week. 21 MS. PYKA: It was two, I think, Robert. 22 CHAIRMAN COX: Well, we rolled the 23 Christmas spirit out a bit early, didn't we? 24 COMMISSIONER SCHENCK: We don't wait 25 for Thanksgiving before we -- 0165 1 MR. TIRLONI: Well, we are kind of like 2 the retail stores that you go into now. We typically 3 start putting our Christmas games out at the end of 4 October. That's pretty much been what we've done now 5 for years, and it seems to work well. 6 MS. PYKA: It was the No. 2 game, and 7 it sold -- 8 MR. TIRLONI: The No. 2 game. 9 MS. PYKA: -- $2.9 million. 10 COMMISSIONER SCHENCK: What is shown on 11 the Christmas card? Is it a Christmas tree, Santa 12 Claus or some other non-secular -- 13 MR. TIRLONI: Well, we've got about six 14 different Christmas -- holiday games that are coming 15 out this year, and they all vary. I can certainly get 16 you the actual ticket artwork if you would like to see 17 it. 18 COMMISSIONER SCHENCK: I would like to 19 see that, yes. 20 MR. TIRLONI: I can get you void 21 samples before you leave today. 22 COMMISSIONER SCHENCK: Thank you. 23 MR. TIRLONI: I have one item of 24 update, and then I have one other additional slide 25 that I have to show you. Chairman and Commissioner 0166 1 Schenck, last month you asked us to put some data 2 together related to sales in other comparable 3 jurisdictions such as New York, Florida, Ohio, 4 Illinois, California. And I wanted to let you know 5 that Kathy's group has already charted all of that 6 data for a 10-year period, so they've charted sales 7 history in those most comparable jurisdictions from 8 1998 forward. 9 We looked at that, and we thought we 10 needed to go one additional step and get some 11 additional information. And what we're doing right 12 now is working with GTECH to actually look at that 13 sales history and identify major events such as 14 introduction of a new instant game prize point or 15 introduction of a new on-line game, increase an ad 16 budget or decrease an ad budget. So when we look at 17 that sales data line, we can actually see different 18 events that took place in that lottery's history. And 19 hopefully that would give us more insight into the 20 fluctuations we might see in that sales data. 21 So we're working to put that final 22 piece of the puzzle, so to speak, together and we hope 23 to have that all ready for you at the next meeting. 24 So I wanted to let y'all know that we're working 25 towards that goal. 0167 1 CHAIRMAN COX: Thank you. Was Georgia 2 on that list? 3 MR. TIRLONI: I think we do have 4 Georgia in there, too. 5 COMMISSIONER SCHENCK: Are you going to 6 be controlling for states with different laws, like 7 video terminals or -- 8 MS. PYKA: What we did is, we excluded 9 keno and VLT so that we could stay with more of the 10 traditional lottery products that we have. But I 11 think as we look at those milestones of things that 12 may be different, and then also went ahead and I 13 wanted to chart to show population, because we styled 14 it in a per capita style of the chart. And just 15 seeing the dynamics of Texas population and the growth 16 as compared to some of maybe those other states that 17 had flat line population from 1998 to the present, I 18 thought that was an important factor to share with 19 you. 20 MR. TIRLONI: I have one other update 21 for you on the Lotto game. You know that I always 22 like to give you updates when we have a jackpot ticket 23 sold in the state. And we did have a ticket sold for 24 the Saturday, October 18th drawing. It was sold in 25 Corpus. The jackpot that we were advertising was 0168 1 $18 million. That's the annuitized jackpot amount. 2 The ticket was a Quick Pick ticket, and it was a cash 3 value option valued at slightly over $11 million. 4 That ticket was claimed and processed today, earlier 5 today. 6 And the retailer is eligible for a 7 $180,000 bonus. And we are working with the retailer 8 right now on processing that bonus payment. And the 9 retailer that sold the ticket was one of our corporate 10 accounts. It was the Stripes location in Corpus. 11 And that concludes our portion. But 12 Mr. Grief is going to cover some of the research 13 information for you this month. 14 MR. GRIEF: Thank you, Robert and 15 Kathy. 16 Commissioners, the Texas Lottery has a 17 contract with Ipsos Reid to provide a wide variety of 18 research services to the agency regarding sales, 19 trends and player attitudes. And among the many 20 questions that are asked of the survey participants 21 each month are three questions that relate to the 22 public's perception of the Texas Lottery. These 23 particular questions date back to the mid-nineties and 24 were originally asked to be included in these monthly 25 survey questions by the Commissioners who served on 0169 1 the board at that time. 2 The current Commission has asked that 3 the results of these survey questions be presented at 4 a Commission meeting every six months, or more 5 frequently if we detect significant changes in the 6 data. The results of the surveys that you're going to 7 see today, they're done on a monthly basis, but 8 they've been rolled up into a quarterly report, and 9 that's how you'll see it today. 10 This first slide shows the results of 11 the survey question that asks, "How well-informed are 12 you about the Texas Lottery, about who the Texas 13 Lottery is and what they do?" And as you can see on 14 the slide, the copper coloring indicates more 15 positively informed, the light blue is neutral, and 16 the dark blue is not informed. 17 I understand that the differences that 18 you see on these surveys over time, according to our 19 research team, are not statistically significant. I 20 also understand that the margin of error on a survey 21 of this size -- which again 400 people a month. This 22 is a quarterly basis, so 1,200 people -- the margin of 23 error is about three percent. 24 CHAIRMAN COX: Plus or minus three 25 percent which, looking at the top, the gold, is about 0170 1 the maximum variability that you see? 2 MR. GRIEF: Yes, sir. 3 CHAIRMAN COX: So there is no 4 statistical significance on that chart? 5 MR. GRIEF: That's my understanding; 6 yes, sir. 7 CHAIRMAN COX: And it goes back 8 to aught -- is it Q1'06? 9 MR. GRIEF: This particular chart. But 10 we have results that go well further back. 11 CHAIRMAN COX: Okay. It suggests a 12 question that I'll hold until after we look at the 13 rest of your slides. 14 MR. GRIEF: Very good. 15 This second slide shows the results of 16 the survey question that asks, "How would you describe 17 your overall opinion of the Texas Lottery?" And 18 again, the copper portion of the bar indicates a 19 positive response; light blue, neutral; dark blue, 20 negative. 21 COMMISSIONER SCHENCK: Quarter Three of 22 2006 was a trying time for us -- or Quarter Four I 23 guess was -- no, no. Three was the worst. 24 MR. GRIEF: Okay. If we can go to the 25 next slide, Robert. And this is the final slide. 0171 1 The question on this particular slide 2 is, "How much do you agree or disagree with the 3 statement that the Texas Lottery is operated fairly 4 and honestly?" And again, copper indicates agree; 5 light blue, neutral; dark blue, disagree. 6 And that concludes this presentation. 7 I'll be happy to try and answer any questions. 8 CHAIRMAN COX: Gary, one question on a 9 specific matter. There was a time that we were 10 getting a set of questions, one of which was related 11 to whether the money goes to education or, "Did you 12 know the money goes to education?" or "Do you believe 13 the money goes to education?" Was that part of the 14 demographic or another study or was this once part of 15 this? 16 MR. GRIEF: I'll look at staff and see 17 who remembers the answer to that question. 18 Mike? 19 MR. FERNANDEZ: It's my understanding 20 it's part of this survey. Is that correct, Mr. -- 21 MR. GRIEF: This particular survey. 22 Mike Fernandez, our Director of Administration, has 23 told me it's part of this survey. 24 CHAIRMAN COX: Okay. So would somebody 25 take a look and let me know whether the beneficiary 0172 1 advertising campaign that we did last year had any 2 impact on the response to that question, whether that 3 raised awareness of whether our beneficiary is 4 education or whether people didn't even notice? 5 MR. GRIEF: Certainly. We'll pull that 6 data together and have that for you at the next 7 meeting or to you individually before then. 8 CHAIRMAN COX: And then I would ask a 9 question for Commissioner Schenck and Williamson. I 10 have been looking at this data for six years now, and 11 it never changes. And, yet, you're relatively new; 12 you're brand-new. And it's probably, I'm going to 13 guess, something that you're interested to know at 14 least one time. 15 Gary, how much does it cost us to get 16 this data put together on an annual basis? 17 MR. GRIEF: Well, because again, 18 Chairman, these are just three questions among many 19 that are asked. 20 CHAIRMAN COX: That would be asked 21 anyway as a part of our ongoing marketing research? 22 MR. GRIEF: That's correct. So the 23 cost is negligible. 24 CHAIRMAN COX: Okay. 25 COMMISSIONER SCHENCK: That being true, 0173 1 I don't see why not to ask -- well, we might vary the 2 questions from time to time, like the beneficiary 3 question. 4 MR. GRIEF: And we have talked about 5 these questions, Commissioner, about varying those. 6 And what the research people tell us and what Ipsos 7 Reid tells us is, when you do that, then -- 8 COMMISSIONER SCHENCK: There is not a 9 comparative pool. 10 MR. GRIEF: That's right. You're 11 starting over basically. 12 COMMISSIONER SCHENCK: I mean, I think 13 we have a long enough trend here to suggest that 14 there's not a statistically significant variance. 15 MR. GRIEF: And I'll just give the 16 invitation to the Commissioners. We can ask any 17 questions we like, if there are other questions you 18 might be interested in. 19 COMMISSIONER SCHENCK: Well, as part of 20 the overall survey, are we asking people whether 21 they're familiar with what the payout rate is and 22 whether they're responding to that with purchase 23 decisions, if they answer "Yes" to the question, "Do 24 you play the Texas Lottery"? 25 MR. GRIEF: I'll ask Dr. Sizemore to 0174 1 come up and try to speak to that if he can. 2 MR. SIZEMORE: Good afternoon, 3 Commissioners, Mr. Chairman. I am David Sizemore, 4 Research Coordinator for the Texas Lottery. And I 5 would ask that you repeat. I didn't hear everything 6 that you asked on the question. 7 COMMISSIONER SCHENCK: My question was, 8 we seem to have something of a black art. I'm trying 9 to define at what point we are better off with 10 advertising versus our increasing prize payout 11 percentage. The question I asked was whether we 12 inquire of our research pool whether they know what 13 the payout percentage is or whether they believe it to 14 have increased or decreased following off of a lead-in 15 question of, "Do you play with regularity?" 16 MR. SIZEMORE: I don't think we've ever 17 asked a question specifically about the prize payout. 18 COMMISSIONER SCHENCK: That might help 19 us inform ourselves of whether -- 20 MR. SIZEMORE: We're aware of it. 21 COMMISSIONER SCHENCK: Most people are 22 acting subconsciously with their playing decisions 23 about why it is they play. But I've heard it 24 suggested that the higher the payout percentages, the 25 more people play and that people are responding to 0175 1 payout. 2 MR. SIZEMORE: There are, however -- 3 MR. GRIEF: Let me try to address that. 4 What I would say to that, Commissioner, is the 5 response that you would see from people would not be 6 as a result of them knowing that the prize payout 7 percentage is going from 63 to 65 or higher. It would 8 be the experience of winning more frequently. And 9 even more importantly, the retailers who sell the 10 ticket -- 11 COMMISSIONER SCHENCK: Yes, but 12 wouldn't they have to play a lot to know the 13 difference between a 63 and a 61 percent payout rate? 14 MR. GRIEF: Well, that's where the 15 retailers come in. And the retailers see every win 16 that comes in on those tickets, and they're the ones 17 who are really our ambassadors of what tickets pay out 18 and what tickets don't. Our players, many of them if 19 not most of them, will come in and say, "What ticket 20 is paying out?" especially if they're an avid player, 21 "What ticket is paying out?" 22 COMMISSIONER SCHENCK: Isn't the 23 answer, "They all are"? I mean, the payout rates are 24 whatever they are. I mean, the fact that somebody 25 just won on a scratch --I guess. I mean, I'm not 0176 1 going to bark at the guy at the individual retail 2 level. But -- 3 MR. SIZEMORE: We do collect 4 information on why people stop playing certain games, 5 and we have been doing that for a while. And one of 6 the top reasons that tends to emerge is that they're 7 not winning enough, which would speak to some extent 8 about the winning experience, which is sort of a 9 de facto payout, prize payout percentage or awareness 10 of it, although that's a tough claim to make without 11 any stronger critical evidence. 12 COMMISSIONER SCHENCK: I think right 13 now we operate without data. This is all anecdotal -- 14 right? -- I mean. So we're talking about the 15 retailers that get the sense that a game is hot, like 16 a hot deck in blackjack or something. But I mean, 17 that's not a real data point. I don't know. Maybe 18 it's worth asking: "Are you even familiar with what 19 the payout rates are in the game that you play?" 20 CHAIRMAN COX: Gary -- correct me if 21 I'm wrong -- the website includes the information that 22 would enable a player to compute the odds on every 23 game? 24 MR. GRIEF: Yes, sir, that's correct. 25 CHAIRMAN COX: So it's not a lack of 0177 1 available information that we're dealing with here. 2 They can go take this table of occurrences there, that 3 there are so many tickets they sell for so much, there 4 are so many winners of this size, times that prize -- 5 that payout point, et cetera, and they all add up to 6 some number that you put over this one and divide the 7 total sales proceeds into the prize, and that's the 8 payout percentage? 9 MR. GRIEF: That's exactly correct, 10 yes. 11 CHAIRMAN COX: So I'm often asked, do 12 we know how many people know that? And, of course, we 13 don't know the answer to that. 14 COMMISSIONER SCHENCK: That's what my 15 question was. 16 CHAIRMAN COX: And the unfortunate 17 thing -- and I very much support exactly the point 18 that you're making -- the unfortunate thing is that in 19 research about gambling and other things like 20 gambling, people don't tell the truth. They either 21 overstate their case or they understate their case, 22 depending on whether they feel really good about being 23 a big gambler or whether they're ashamed of being a 24 big gambler, if they really remember. 25 COMMISSIONER SCHENCK: The sequence of 0178 1 the question should find that out -- 2 CHAIRMAN COX: The question -- 3 COMMISSIONER SCHENCK: -- the sequence. 4 And you could ask, "Do you play?" 5 "Yes." 6 "What do you play?" 7 And then when they say, "Yes," "Are you 8 familiar with the payout percentage?" and they say, 9 "Yes," then, "What is it?" 10 (Laughter) 11 MR. GRIEF: I will offer this as an 12 example: Many times we'll ask a question, "How often 13 do you play the Texas Lottery?" And a person will 14 say, "I play five or six times a year." And then 15 we'll ask the very same person, "How often do you play 16 Lotto Texas?" "Oh, I buy my tickets every week." So 17 that isn't atypical of the type of responses we get 18 when we're using surveys, just by way of example. 19 CHAIRMAN COX: You know, the idea that 20 you would respond to the various stimuli that we offer 21 out there I think is very, very hard for a player to 22 identify. The point has been made that the player is 23 most interested in how often they win. The point has 24 been made that players care nothing about how often 25 they win or how much they win, if they're going to win 0179 1 at all, that, you know, if I'm going to win $3.00 a 2 week, I had rather not win anything. But if I've got 3 a chance to win a million dollars, then that's 4 something totally different. And one of the things 5 that we've learned in our demographic study is that we 6 asked this sample of 2,000 people -- David, I think it 7 was a sample of 2,000 that the University of Houston 8 used last year? 9 MR. SIZEMORE: 1,700. 10 CHAIRMAN COX: 1,700. Thank you -- 11 which is a big sample size. And we find that if they 12 gambled the amount of money that they said they did 13 and we blew them up by a segment of the population, 14 that we might or might not get close to what our sales 15 were. 16 So not to argue at all against the idea 17 that you're putting forth, because I think it's 18 something that we should be doing, because we're doing 19 it, I would say that we're going to have difficulty 20 knowing how much to rely on it, as we do with a lot of 21 the information that we seek through the market 22 research, because the witnesses are self-reported 23 players. We don't know that they're players. And 24 beyond that, we know less about what they tell us. 25 COMMISSIONER SCHENCK: But that 0180 1 argument could be made for every question we ask them. 2 CHAIRMAN COX: Exactly. Virtually 3 every question that we ask them. And if there's some 4 that y'all would like to add and see what we get, 5 let's do it. 6 One thing that I did early on in my 7 tenure here -- and y'all might want to do it -- I 8 don't know how recently it's been done, Mike 9 Fernandez, but we had a big session in here with the 10 Ipsos Reid people who came and told us what they did. 11 And we had the advertising people here who really 12 didn't know what Ipsos Reid did. And we had our 13 outside marketing people, consultants from The 14 University of Texas, and our in-house people. 15 And they all sat down, and we hashed 16 the questions that were asked. And some of the 17 questions we said, "There's no reason to ask those." 18 And the marketing research people said, "Well, we 19 insist that we get to ask those." And we said, "No. 20 We're paying the bill. Don't ask those." We cut a 21 lot of the questions out and added some in their 22 place. 23 And I think if there is an opportunity, 24 Gary, to have a session like that, it could be very 25 helpful. 0181 1 MR. GRIEF: Those occur on a regular 2 basis, and we would be happy to have any and all 3 Commissioners who would like to participate come to 4 one of those. 5 CHAIRMAN COX: There is a very long 6 list of questions. And some of them, it's really not 7 clear what they're getting at. And some of them, it 8 was clear they weren't getting it anyway. So fresh 9 eyes on those would be helpful. 10 Sorry, David. I may have gone further 11 than you wanted me to on your -- 12 COMMISSIONER SCHENCK: That's exactly 13 what I was suggesting. Thank you. 14 CHAIRMAN COX: So, I guess, Gary, since 15 it doesn't cost much and doesn't take much time, still 16 every six months, let's look at those or any time, 17 again, as you might see some trend that you think we 18 should be looking at. 19 MR. GRIEF: Will do. Thank you. And 20 that concludes our presentation. 21 MR. TIRLONI: I had one last note. 22 Last month when we were talking about the hurricane in 23 Houston, you did ask about the two claim centers that 24 were impacted in the Houston sales district, and 25 that's the Houston claim center and the Beaumont claim 0182 1 center. And both of those claim centers reopened for 2 business on Monday, September 22nd. 3 COMMISSIONER SCHENCK: Thank you, 4 Robert. 5 CHAIRMAN COX: Thank you. 6 AGENDA ITEM NO. XVII 7 CHAIRMAN COX: Agenda Item XVII, 8 report, possible discussion and/or action on transfers 9 to the state and the agency's budget. 10 Ms. Pyka. 11 MS. PYKA: Again, for the record, Kathy 12 Pyka. 13 Tab 17, Commissioners, includes 14 information on the agency's transfers to the state as 15 well as the agency's budget. 16 And Commissioner Williamson, for 17 background purposes, I wanted to share that Section 18 466.355 of the Texas Government Code outlines the 19 specific purposes of the state lottery account, 20 including a requirement that each month the agency is 21 required to transfer to the Foundation School Fund by 22 the 15th of the month any balance remaining from sales 23 of tickets, license fees and application fees, after 24 the payment in prizes and the cost of operation and 25 administration of the lottery. 0183 1 And then the allocation of unclaimed 2 prizes is transferred on a quarterly basis, with the 3 first $10 million transferred each quarter to the 4 Department of State Health Services, with the balance 5 of any excess funds transferred to the general revenue 6 unappropriated account. That just kind of gives you a 7 background on the transfers that we do. 8 And, Commissioners, the first report in 9 your notebook includes the transfers and allocations 10 to the Foundation School Fund, the allocation of 11 unclaimed prizes for the period ending September 30th 12 of 2008. Total cash transfers to the state were 13 $76.7 million. 14 The second page of your notebook 15 includes the detail on the $76.7 million, including 16 this $76 million that was transfer to the Foundation 17 School Fund, with a balance of $728,000 transferred 18 from unclaimed prizes. This does represent an 19 11.3 percent decrease for the total amount transferred 20 to the Foundation School Fund in September of '07. 21 Also included in your notebook is a 22 report of lottery sales, expenditures and transfers 23 from Fiscal Year 1992 to date. Total cumulative 24 transfers to the Foundation School Fund through 25 September of this fiscal year totaled $10.7 billion. 0184 1 Also included under this item is the 2 agency's Fiscal Year 2008 Method of Finance Summary 3 for the fiscal year ending August 31 of 2008. The 4 Commission's lottery account budget is $193.7 million. 5 Of this amount, 90.6 percent was expended and 6 encumbered through the end of the fourth quarter or 7 the end of the fiscal year. 8 The Bingo Operations budget, funded by 9 general revenue, is $15.2 million, with 92.3 percent 10 expended and encumbered through the fourth quarter. 11 Commissioners, I had indicated in a 12 previous meeting that we had transferred $13.9 million 13 of unspent administrative funds for Fiscal Year 2008. 14 We will be proceeding with transferring another 15 approximate $4 million of unspent admin to wrap up our 16 final transfer for Fiscal Year 2008. 17 And then last, I also wanted to -- 18 CHAIRMAN COX: Kathy, let me just be 19 sure that we're clear. I think you said that we get 20 12 percent of revenue as administrative expense? 21 MS. PYKA: That is correct. 22 CHAIRMAN COX: And 5 percent of that 23 goes to retailers and 2.7 percent goes to GTECH. And 24 we then spend some of that and return a significant -- 25 of additional amount and return a significant portion 0185 1 of it to the state? 2 MS. PYKA: That is correct, 3 Mr. Chairman. Currently the full 12 percent is not 4 appropriated to us. It's a little bit over 10 percent 5 and we have historically spent around 10 percent of 6 that 12 percent. So any portion of that 12 percent 7 that's not appropriated is sent over to the state 8 treasury as a transfer to the Foundation School Fund. 9 In addition to that, due to any 10 stewardship efforts that we have here in the agency, 11 any of our appropriation that is unspent at year end 12 we also transfer to the Foundation School Fund as 13 unspent administration. 14 CHAIRMAN COX: Okay. So taking a look, 15 Kathy, at the top of this page that's rate and has 16 blue bars across the top, I think it's the one you 17 were on that talks about the total fund, 5025 lottery 18 dedicated account -- 19 MS. PYKA: Yes. 20 CHAIRMAN COX: -- $193.66 million. If 21 you look at the Lottery Operations line, the Lottery 22 Field Operations, the Marketing and Promotion line, 23 Security line and Central Administration, you come to 24 something like $30 million? 25 MS. PYKA: Correct. 0186 1 CHAIRMAN COX: That number is more or 2 less the number outside of -- beyond outside contracts 3 that we have focused on in this operation? 4 MS. PYKA: That is correct. 5 CHAIRMAN COX: I won't say control 6 over, because there's a lot of fixed costs in there 7 that must be incurred. But the other things are 8 contract amounts that we administer. These are 9 expenses that we pay directly to the provider, whether 10 it be employees or other vendors? 11 MS. PYKA: Leases for buildings, so 12 forth and so on, that is correct. But 85 percent, 13 Commissioner Williamson, of our total budget is 14 outsourced as a contractual obligation. 15 CHAIRMAN COX: Okay. 85 percent is 16 outsourced? 17 MS. PYKA: Yes. 18 CHAIRMAN COX: Thank you. 19 MS. PYKA: Certainly. Before I leave 20 this item, Commissioners, I wanted to bring to your 21 attention -- and I know that y'all all received a copy 22 of it -- but we did get a request from the Governor's 23 Office on the 14th of this month, which was a request 24 that went to all agencies in which the Governor's 25 Office asked that we notify his office regarding any 0187 1 plans or our plans and how we will reduce travel 2 expenditures in Fiscal Year 2009. And so with your 3 material today, we've included the letter that we 4 responded with. It is dated October the 24th. And we 5 will certainly make certain that any travel we do is 6 part of our statutory requirements or the revenue 7 generation of this agency or any of our requirements 8 that we're required to do in order to regulate bingo. 9 I would be happy to answer any 10 questions that you might have. 11 CHAIRMAN COX: Thank you, Kathy. 12 MS. PYKA: Thank you, Commissioners. 13 AGENDA ITEM NO. XVIII 14 CHAIRMAN COX: Item XVIII, report, 15 possible discussion and/or action on agency computer 16 security. 17 Mr. Fernandez. 18 MR. FERNANDEZ: Good afternoon, 19 Mr. Chairman. If you would permit me, sir, Mr. Grief 20 made a comment on the last agenda item about quarterly 21 tracking. If you wish, I would be happy to send you 22 meeting notifications. If any of you would like to 23 attend, we'll coordinate that through Gary's office 24 and make you aware of it. 25 CHAIRMAN COX: So this is the time when 0188 1 you go through the questions that are being asked? 2 MR. FERNANDEZ: That's correct. That's 3 when they go through those questions that are being 4 asked -- 5 CHAIRMAN COX: Okay. 6 MR. FERNANDEZ: -- and discuss those 7 questions. So if you would like to do that, I'll 8 coordinate that, with your permission. 9 I'm here this afternoon to give you an 10 overview of computer security for the Lottery 11 Commission. And I've prepared some -- 12 CHAIRMAN COX: Mike, let me go back 13 just a second. 14 MR. FERNANDEZ: Yes, sir. 15 CHAIRMAN COX: If either Commissioner 16 would not be able to attend that and would just like 17 to see a list of the question, would you be able to 18 provide those? 19 MR. FERNANDEZ: Absolutely. In fact, 20 we can provide a list of those questions right now. 21 We would be happy to e-mail those to you if you would 22 like to take a look at them. I think the benefit of 23 attending that meeting would be to hear the 24 discussion -- 25 CHAIRMAN COX: Yes. 0189 1 MR. FERNANDEZ: -- both from Ipsos 2 Reid, from our staff, from TracyLocke and the folks 3 that are in that room. The reason being is that 4 sometimes you get a better understanding from hearing 5 the guys on the ground, if you will, discuss the whys 6 and wherefores and what they're looking for with those 7 questions, as opposed sometimes to hearing perhaps 8 myself discuss them in an aggregate level. 9 CHAIRMAN COX: Are we going to see a 10 contractual, a review of contractual relationships 11 today, Mike? 12 MR. FERNANDEZ: No, sir. 13 CHAIRMAN COX: For Commissioner 14 Williamson's benefit, about what do we pay Ipsos Reid 15 a year? 16 MR. FERNANDEZ: I think they bill out 17 around $93,000 a year. 18 MS. PYKA: A month. 19 MR. FERNANDEZ: Yes, a month. 20 MS. PYKA: About $825,000 a year. 21 CHAIRMAN COX: Okay. So this is not an 22 insignificant expense for us? 23 MR. FERNANDEZ: No. It's a large 24 contract. Thank you. Now, when I first started 25 dealing with Ipsos on that contract, I think we were 0190 1 billing at about a million a year. And it's down to, 2 as Kathy pointed out, $876,000 I think is what it is 3 now. But I think it would be of interest, if you have 4 the time and are available, to do that. But I'll make 5 sure that you get a copy of the questions. And if you 6 have any comments or suggestions, we'll schedule a 7 conference call with the team that works on that and 8 certainly take your input, be happy to have your 9 input. 10 Again today I'm here to talk about 11 security, give you an overview of security for the 12 agency. And I've prepared some comments that I'm 13 going to go through with you, and I'm going to cover a 14 lot of information. This will be at a level 15 certainly -- that certainly won't compromise our 16 security schema, if you will, but I believe will give 17 you the information that you're interested in hearing. 18 And I would be happy to answer any questions at any 19 time through the course of this presentation. 20 Texas Administrative Code, Chapter 202, 21 more commonly referred to as TAC 202, outlines the 22 information security standards for the State of Texas 23 that apply to all state agencies. TAC 202 provides 24 the security framework under which all state agencies 25 operate by setting forth guidelines for managing 0191 1 security risk, providing information resources 2 security safeguards and reporting security incidents. 3 TAC 202 states, "Each agency shall create, distribute 4 and implement information security policies." It 5 further provides the scope of the policies to be 6 developed. 7 In accordance with this requirement, 8 the agency has implemented a comprehensive information 9 resources security program. This program includes an 10 information resources security manual referred to as 11 the IRSM, annual information resources security 12 awareness training and an information security 13 agreement that all employees are required to sign as 14 well as biennial security audits. 15 Specific processes and procedures in 16 place to safeguard against improper access include 17 information resources security policies that outline 18 the staff's responsibility in maintaining the security 19 and confidentiality of the agency's information 20 assets. 21 The policy states that to the degree 22 the duties of their job require the use of automated 23 systems, users are responsible for information 24 resources security and that violations of information 25 resources security policies or procedures may result 0192 1 in disciplinary action. User ID and password 2 authentication requires unique user IDs, ensures 3 employees only receive access to those systems and 4 applications required to perform their job duties, and 5 provides audit trails for accountability. 6 IR security awareness training. 7 Mandatory training is provided to all employees on an 8 annual basis. This training emphasizes agency 9 security policies, appropriate use of IR assets, staff 10 responsibility for maintaining the security and 11 confidentiality of data in their custody and have to 12 report possible violations or misuse of these assets. 13 Annual penetration testing. We 14 currently contract with the Department of Information 15 Resources to conduct network and systems penetration 16 testing which identify vulnerabilities, and we have 17 been doing that. I would like to interject at this 18 time, Gary Grief and I talked about this, I guess, 19 five years ago, Gary, when I had responsibility, 20 direct responsibility for IT. 21 In fact, I am the Information Resources 22 Manager, by statute, for the agency. And one of the 23 things that I saw when I came in is that we were 24 really not doing penetration testing. And Gary and I 25 sat down and had a conversation about that. And we 0193 1 went to the Department of Information Resources and 2 had asked them, because they provided that service at 3 one time. They contracted it out to Sprint and other 4 organizations. But now they have built a very 5 substantial team that is very well-versed in doing 6 that, headed up by a retired FBI agent who had that 7 responsibility with Homeland Security. 8 So they come annually -- and I think 9 we're one of the few agencies, I suspect, that do that 10 annually -- and do penetration testing. Now, that 11 schedule, unbeknownst to any staff other than 12 Ms. Kotal, myself and Mr. Grief. So our Information 13 Resources staff that monitor exploits don't know 14 really what's going on at that time. 15 CHAIRMAN COX: Let me ask a question at 16 this point. 17 MR. FERNANDEZ: Yes, sir. 18 CHAIRMAN COX: By "penetration," what's 19 the term? 20 MR. FERNANDEZ: Penetration testing. 21 And what that is, is that's external testing. And 22 what they're trying to do is that DIR lays out certain 23 goals. And what those goals are, are to penetrate 24 into your network and then to penetrate into servers 25 and then to penetrate into applications. And so what 0194 1 they're doing is that they have teams that launch 2 different types of exploits to see if they can 3 accomplish their goals. And at the end of that 30 4 days or 35 days, or however many days they run those 5 trials, they'll come back and provide a report which 6 is a confidential report to the agency. 7 CHAIRMAN COX: Is this what we might 8 hear referred to as hacking, they try to hack into the 9 system? 10 MR. FERNANDEZ: That's correct; 11 absolutely. But interestingly enough, when you talk 12 about hacking, they also do what -- they have begun to 13 do, and they've done that here -- social engineering. 14 And social engineering or social hacking, if you will, 15 is where they'll send you an e-mail and they'll say, 16 "Mr. Chairman, my name is Mike Fernandez. I work for 17 the Information Resources group of the Texas Lottery 18 Commission. And we're verifying and validating 19 sign-ons for security purpose. Will you please enter 20 yours." 21 And surprisingly enough, they'll get 22 bites. People will do that. So all of a sudden, 23 boom! They now have someone's accessibility. So they 24 launch all types of exploits. But now they've begun 25 to do a little more social engineering than they have 0195 1 previously. 2 CHAIRMAN COX: Let me make it clear for 3 the record, I don't have a sign-in. 4 MR. FERNANDEZ: No, sir. I apologize. 5 CHAIRMAN COX: Okay. 6 MR. FERNANDEZ: I should have used Gary 7 as a -- 8 CHAIRMAN COX: I do not have access. 9 MR. FERNANDEZ: Well, actually, when 10 they sent that, I got one of those. They sent it 11 in to -- I think last year or year before last, I 12 think they sent it in to 22 staff. 13 CHAIRMAN COX: Okay. And my next 14 question is, why do you and Gary and Joan get to know 15 about the surprise attack? 16 MR. FERNANDEZ: Well, because we don't 17 want staff preparing, if you will, or being on the 18 alert to see something and immediately get on it or -- 19 COMMISSIONER SCHENCK: Well, that 20 wasn't the question. It's why do you guys get to 21 know? 22 CHAIRMAN COX: How do I know that you 23 didn't direct staff to, "Hey, get ready. Here it 24 comes"? 25 MR. FERNANDEZ: I don't know. That's a 0196 1 good question. That's because we're the ones that 2 sign -- I'm the one that signs the agreements with 3 them. 4 CHAIRMAN COX: I would suggest that we 5 look at best practices. And would best practices be 6 that nobody knows, that it's a total surprise audit 7 and they do it and they give you a report and say, "We 8 did it"? 9 MR. FERNANDEZ: So what we'll do is, 10 we'll just do an interagency agreement with them that 11 says between some period of time they will have to 12 conduct that test. 13 CHAIRMAN COX: That seems better to me. 14 MR. FERNANDEZ: That works for me. 15 COMMISSIONER SCHENCK: I agree. 16 MR. FERNANDEZ: We'll certainly do 17 that. Additionally TAC 202 requires system 18 identification and authentication and it requires 19 banners. And what I mean by a banner is that when you 20 come on any system in the State of Texas, and 21 certainly when you come on our system to sign on, 22 before you sign on, there is a banner that comes up 23 before you sign on. And that banner says 24 "Unauthorized uses prohibited. Uses may be subject to 25 security testing and monitoring. Misuse is subject to 0197 1 criminal prosecution." And "There is no expectation 2 of privacy." 3 COMMISSIONER SCHENCK: Now, this comes 4 up every time one of our employees logs on. Is that 5 right? 6 MR. FERNANDEZ: That's correct. It's a 7 banner that comes up right before the sign-in. 8 COMMISSIONER SCHENCK: And I believe 9 you said before, when somebody signs on with us, they 10 have training on confidential information and 11 appropriate access to the computer and information 12 systems here at the Commission? 13 MR. FERNANDEZ: That's correct, 14 annually. 15 COMMISSIONER SCHENCK: And they sign -- 16 MR. FERNANDEZ: They sign a security 17 agreement. So what occurs -- and again, many of these 18 guidelines are laid out in TAC 202. So this is not 19 unique to this agency. So what occurs is that when 20 you become an employee of the Texas Lottery 21 Commission, you're going through HR, through Ms. Mays' 22 shop. And part of that orientation is, is that 23 they're going to give you a copy of our Information 24 Resources Security Manual, the manual that I alluded 25 to a moment ago. And what will occur, you'll have 0198 1 ample time to read that manual, which discusses the 2 policies, the procedures of the agency in terms of 3 security. 4 And then what you're asked to do is to 5 sign an Information Security agreement. And what that 6 Information Security agreement really is doing is 7 highlighting certain aspects of that manual, of those 8 policies, and you sign that. Every year you're 9 required mandatory training, to go back through 10 Information Security training. And at the end of that 11 training, again you're going to be required to sign 12 that Information Security agreement. 13 Now, what occurs is that as that 14 individual gets assigned to their duty station or 15 their work area, what's going to occur is, the manager 16 of that work area, their supervisor is going to sign a 17 document that says what systems under the purview of 18 that division they want that individual allowed into. 19 And that will be -- 20 COMMISSIONER SCHENCK: And what 21 mechanisms do we have in place to make sure that 22 people are remaining within that circumscribed field 23 of access? 24 MR. FERNANDEZ: What we have is a 25 sign-on and sign-on authentication. So what occurs is 0199 1 when our staff, when the technical staff get that 2 information, what they're going to do is that they're 3 going to set up those sign-ups. Now, they will set up 4 those systems' accesses. Now, there's some exceptions 5 to that, and that is out of the Controller's Office. 6 There are some sign-ons that are 7 controlled strictly by the Controller's Office. But 8 the division sets the accessibility for their 9 employees. What IT does then is, they assign 10 authentication so that you sign in and you 11 authenticate with your password. And that's what 12 allows you to get to those certain application 13 systems. So it doesn't allow you into exec or it 14 doesn't allow you into procurement. It doesn't allow 15 you into -- 16 COMMISSIONER SCHENCK: Okay. So we 17 control, then, so that the janitor is not going to be 18 getting people's social security numbers and their 19 home addresses and things of that nature -- 20 MR. FERNANDEZ: That's correct. 21 COMMISSIONER SCHENCK: -- assuming he 22 has a computer. What can we do with respect to 23 employees other that -- you say once a year they 24 receive the training and that instructs them what they 25 may and may not do by way of accessing our computers 0200 1 and using our information. Is that right? 2 MR. FERNANDEZ: That's correct. But 3 the limiting factor, Commissioner, is their sign-on. 4 That's what's going to allow me to get into certain 5 areas. The fact is, there are certain areas, just 6 because of the security issues, we don't allow staff 7 in. Gary Grief is the Deputy Executive Director. He 8 can't enter the computer room. His badge will not get 9 him in the computer room at all. 10 COMMISSIONER SCHENCK: Well, I 11 understand. But let's assume that there's some 12 employees here who, by necessity, are going to have 13 access to proprietary or confidential information -- 14 MR. FERNANDEZ: Absolutely. 15 COMMISSIONER SCHENCK: -- as part of 16 their job. 17 MR. FERNANDEZ: There are many 18 employees that have access. 19 COMMISSIONER SCHENCK: Despite having 20 told them, having their signature saying they 21 understand that they're not supposed to make misuse of 22 the information, there may be people who nonetheless 23 blow right through the rules and do that. What do we 24 do, if anything, additionally that we're not doing 25 today to protect against people who, despite our best 0201 1 efforts, are going to misuse the system? 2 MR. FERNANDEZ: Well, let me go back a 3 little ways on your comment. Staff have access to 4 confidential data in the course of their job. My 5 staff have that access; certainly on the programming 6 side, the technical folks. Probably in organizations 7 you're going to find handfuls of people that have very 8 broad access: One, technical applications systems 9 programmers, because they're in there troubleshooting 10 the issues and they're working on problems. 11 The auditor, Catherine Melvin, her 12 staff will have unlimited access, if you will, to 13 systems and audits. And then probably the other two 14 are Ms. Pyka's shop and Mr. Carney's shop, to a 15 varying degree. 16 Now, when that individual has access to 17 the systems that I've granted or Kathy has granted to 18 them, they're going to be able to access that 19 information without question. We're not daily 20 monitoring that, because that's their job. In my 21 conversations with Bill Perez, what we view that as -- 22 to a degree, not unlike Ms. Melvin's shop -- is those 23 are trusted employees. Now, there can be monitors 24 that are put on, and those monitors are to look at 25 every action that they take. 0202 1 COMMISSIONER SCHENCK: Would that be 2 cost-prohibitive, don't you think? 3 MR. FERNANDEZ: Well, you know, it's 4 difficult for me to say it's cost-prohibitive. It 5 would be awfully time-consuming. Let me tell you the 6 problem from my perspective on my staff. If I have a 7 technical person or if I have an applications 8 programmer and his job is to download data from the 9 Comptroller of Public Accounts every day, who extracts 10 from the Comptroller's Office, and copy that 11 information into various formats and provide that data 12 to Ms. Pyka, I can flag any download of any kind. 13 But the fact is, after the first day I 14 go down and look because I get a flag on this fellow, 15 what I'm going to say is, "That's his job. That's 16 what he's supposed to be doing." He's not doing 17 anything out of the norm. There is no red flag being 18 raised, other than if I set those flags. 19 So what starts to happen to you, in my 20 opinion, is that if I'm doing that on all of Kathy's 21 employees, all the Cat Melvin's employees, all of my 22 technical folks, all of Mr. Carney's folks, then I've 23 got a very large field of play that I'm going to have 24 to be looking at every day when, in fact, they're 25 doing what they're supposed to be doing under the 0203 1 rights granted them in access. 2 And so in terms of the costs, it could 3 be costly for the software. But I think your staff 4 time cost and resource requirements are just going 5 to -- you're going to have to hire staff to do just 6 that, is where that will take you. 7 COMMISSIONER SCHENCK: Well, in a way, 8 is this any different from the valuable things we have 9 in the agencies -- the pens, the paper, the 10 notebooks -- unless you're going to look in 11 everybody's purse every day to make sure that they're 12 not taking something beyond their own lipstick and 13 wallet and keys? 14 MR. FERNANDEZ: Absolutely. 15 COMMISSIONER SCHENCK: Unless you're 16 going to treat everyone as a criminal every day, you 17 should hold them upside-down by their ankles and shake 18 them as they leave? 19 MR. FERNANDEZ: Absolutely. And Bill 20 Perez, the DIR security chief, and I have had lengthy 21 conversations about this. 22 CHAIRMAN COX: And, Mike, let me add to 23 what Commissioner Schenck said. Even if you do all 24 those things, what we're really talking about is not 25 whether somebody did something necessarily but whether 0204 1 they intend to do something? 2 MR. FERNANDEZ: That's correct. And 3 most thinks you find are reactive. 4 CHAIRMAN COX: And so -- 5 MR. FERNANDEZ: You catch it on the 6 back end. 7 CHAIRMAN COX: The intent of -- let's 8 say the person that you were talking about that 9 gathers the information from the Controller's Office, 10 you look the first day and you find, "Yes, in fact, he 11 had access," you go every day and find that he had 12 access and that it was permissible access. That 13 doesn't tell you a thing about what he might do with 14 the data a year later? 15 MR. FERNANDEZ: That's correct. And 16 the problem, as Commissioner Schenck alluded to, you 17 know, two things. One is, this is just electronic 18 means. The fact is, we store information in file 19 cabinets, a variety of information that we would deem 20 confidential, and it's in file cabinets I suspect in a 21 number of offices, and it's under lock and key and 22 badge access to the building. 23 So the prohibition of that moving 24 off-site is no different than the electronic means 25 unless -- you know, Bill Perez's comment to me is, 0205 1 "You know, Mike, you can't keep an employee from doing 2 a bad act," and that's the issue. And the problem 3 is -- we talked about that at length, because both of 4 us have read articles now about companies that have 5 high security issues where they won't let you bring a 6 cell phone in there. You cannot bring your own cell 7 phone because you can take pictures with that cell 8 phone. So now those companies are issuing you a cell 9 phone that doesn't have a camera on it. 10 But at the end of the day, unless it's 11 a no-load zone, meaning only two people can access 12 that and they have to do it together, and you bring 13 them in and you put them through a clean room and they 14 change clothes and they leave, and they come back and 15 go through the same process, that that's probably the 16 best you can get. And Bill Perez looked at me and he 17 said, "Yeah. That's as long as they don't have a 18 photographic memory." 19 So is there any way to completely 20 eliminate that? Well, if there is, we don't know it 21 yet. Okay? We don't know it yet. And I would go 22 back. I think Bill's comment -- and Gary has met with 23 Mr. Perez on a number of occasions. But I think his 24 comment is correct, is that we hire employees, we 25 background check employees, we hope they're honest 0206 1 employees. But it's very difficult to keep an 2 employee from doing a bad thing. We try to put in 3 place everything we can put in place to monitor it, 4 within reason, balancing the cost, the resource 5 requirements to monitor and manage that. 6 But what we know is that we know more 7 and more problems and thefts, if you will, data thefts 8 are coming internally as opposed to hackers. 9 COMMISSIONER SCHENCK: Mike, I'll be 10 direct. I saw -- you know we've had an incident here 11 in the recent past, and I'll well aware of it. My 12 view was with respect to the ongoing matter, I didn't 13 want anyone here doing anything or saying anything 14 that would compromise the ability of other people to 15 do their job, to take care of that situation. 16 I read a story in the Dallas Morning 17 News shortly after this came to light that suggested 18 that the agency was not, in fact, looking at increased 19 security for its computer systems. So I ask you 20 directly: Is that true? Are we just sitting back and 21 not actively looking at our computer security options? 22 Or are we, as I suspect, constantly examining our 23 options and doing what we can? 24 MR. FERNANDEZ: Well, thank you for the 25 question. And I also read that article, but I read 0207 1 lots of articles and people say lots of things. 2 COMMISSIONER SCHENCK: Yes, but I don't 3 like -- I don't want to leave unspoken -- I know what 4 you're doing. 5 MR. FERNANDEZ: I agree. Here is what 6 I would say to you: We have a security officer. 7 Okay? We are required, as all agencies under TAC 202, 8 to have a security officer. We have a full-time 9 security officer, computer security, Barry Fealy, who 10 I know that you met on different tours. And I know 11 Commissioner, that -- and I know Mr. Cox has met him 12 and I know you'll get a chance to meet him also. 13 Barry Fealy's responsibility is data 14 security, full-time. And he would be here with me 15 today. But the fact is, he's in a security class. 16 And he is required to stay abreast of all of the 17 information that we have at our disposal, through DIR 18 and through other means, to try and ensure that we 19 have the best computer security that we can provide 20 and put on the ground. Mr. Fealy also has two other 21 responsibilities. He has disaster recovery and he has 22 business continuity -- okay? -- which fit very 23 closely; the three of those fit very closely. 24 TAC 202 requires that we give a monthly 25 report to the Department the Information Resource, all 0208 1 agencies. But as part of that, we tell them of any 2 incidents or we tell them if we're seeing an abnormal 3 number of hits where people are trying to launch 4 things at us. But what DIR also does is, DIR is 5 continually putting out information to agencies that 6 are talking about different kinds of security risks 7 that are being perpetrated, or being launched, if you 8 will, in agencies. 9 Now, what we do above that is that we 10 also talk to security organizations. We also look at 11 white papers that are put out. Barry Fealy and 12 Catherine Melvin and I recently had a conversation 13 with a principal for Gartner, who runs their security 14 practice. And what we were looking at is: What can 15 we do to discourage, if you will, or to overcome or to 16 increase our end-point security, just the thing you've 17 mentioned, good guys going bad or guys have that kind 18 of access doing stuff that they shouldn't be doing, 19 what can you do about that? 20 Mr. Fealy, within this last month, has 21 also talked to McAfee. McAfee is a leading company in 22 anti-virus security. They also have verticals that 23 talk about end-point security. So we're looking to 24 see from them: Is there anything out there that we 25 don't know about? Is there something new in the 0209 1 marketplace? 2 We've also had those same conversations 3 with Sematech, and we continue to have those 4 conversations with DIR. So this happened, and we've 5 just been sitting around looking out the window and 6 hoping everything was hunky-dory? Well, no. We've 7 got a guy that does that full-time. I'm required to 8 get so many hours of continuing education every year, 9 by law, and part of that continuing education is going 10 to be computer security. So we're continually looking 11 at it. 12 What we know is that we know the bad 13 guys, if you will, the back hats out there that are 14 hackers, the gangs, what they're doing -- they've got 15 plenty of time. And what they're doing is, they're 16 looking at operating systems, they're looking at 17 networks and they've got enough time to launch 18 different types of exploits at that to be able to 19 penetrate. 20 And they continue to find 21 vulnerabilities. Microsoft will put out a new OS. 22 The fact is, those guys will be on top of that in a 23 week with ways to hack it, with ways to do things to 24 it. At the same time, you've got the other side, 25 you've got the McAfees, and they can launch -- a new 0210 1 virus can get out there. It can be out there today. 2 The fact is, state agencies or private organizations, 3 through McAfee, can know that within hours. And we 4 can be putting fixes on it, and we have been able to 5 do that, to avoid that. 6 But I guess the kernel of the issue is, 7 what do you do about an employee, a trusted employee? 8 And what we're doing is, we continue to look at any 9 new information that comes out about end-point 10 security and what that entails, what kind of software 11 that is, what the overhead management is on that 12 software to operate in the organization. 13 And how intrusive is it? I mean, the 14 fact is, I can put a monitor on Gary Grief's computer, 15 I can see every stroke that he puts on the keyboard. 16 I can tell if he downloads anything to a disk. I can 17 tell if he puts anything on a memory stick. I can 18 tell if he shuts off anything. But am I going to do 19 that on 380 employees or, if I'm a big agency, 4,000? 20 And again, that's where we're trying to balance. 21 COMMISSIONER SCHENCK: And I know that 22 you're doing that. I'm sorry that you don't always 23 get the opportunity to tell that story, particularly 24 when instructions are not to tell that story, because 25 it might interfere with something that's ongoing 0211 1 someplace else. 2 MR. FERNANDEZ: Well, I appreciate that 3 very much. 4 CHAIRMAN COX: Commissioner, I might 5 add to that, Mike was talking in both general and 6 specific terms but more specific to the instance that 7 you were referencing. The day I learned of it, I was 8 in a meeting with Mike Fernandez, among other people. 9 And I believe it was that day I said, "Would you check 10 with DIR and find out if there are higher standards of 11 security that we should be adopting." And it was 12 certainly days rather than weeks when I saw him again 13 and asked him, and he had already done it. 14 COMMISSIONER SCHENCK: Not a surprise 15 to me. 16 MR. FERNANDEZ: Well, I appreciate it 17 very much. If you have any other questions? 18 COMMISSIONER WILLIAMSON: I just 19 appreciate the background. 20 MR. FERNANDEZ: Thank you very much. 21 CHAIRMAN COX: Commissioner? 22 COMMISSIONER SCHENCK: Nothing more. 23 CHAIRMAN COX: Mike, I've got one more. 24 You referred initially to a standard-setting group 25 that started with a T. 0212 1 MR. FERNANDEZ: Yes, sir, Texas 2 Administrative Code. 3 CHAIRMAN COX: Okay. The Texas 4 Administrative Code. Are there higher or different 5 standards that might apply to us as a different kind 6 of state agency? We're an enterprise fund, as you 7 know. And, you know, we have different, if not more 8 sensitive data. I recognize that there are other 9 people out there who have -- personally identifying 10 the information. 11 We are required to gather that as a 12 matter of law from people who don't have to play our 13 game; whereas, I think in some of the other cases 14 where agencies have sensitive information, it's so 15 that they can make payments to those people upon their 16 application. It may be a fine difference but, yet, a 17 difference. 18 Is there another set of standards that 19 we should add to that, whether it be financial 20 institutions or of best practices in the world's best 21 lotteries, that would say that there is another level 22 that we should consider that is cost effective? 23 You know, there is no sense chasing our 24 tail on this thing. If we're going after something 25 that can never be achieved, then we should do our best 0213 1 and move along, recognizing that there is a risk. But 2 if we can mitigate that risk on a cost-effective 3 basis, are there other places we can look beyond the 4 Texas Administrative Code for guidance on what best 5 practices might be for an enterprise fund for a quasi- 6 government business? 7 MR. FERNANDEZ: Well, when you say 8 "other places to look," I think there are others that 9 set standards. And, really -- and we have gone to 10 look, after you and I have had some conversations 11 about this issue. We have looked at that. 12 And, really, probably the most I guess 13 stringent set of standards being set is in the credit 14 card industry. Okay? And so they have an 15 association, a group, and they have a group that 16 certifies people that come in and look to see if 17 you're meeting the standards and at what level you 18 are, like 6 sigma or zero defects. 19 We have looked at their standards. 20 That gets down to the level of detail in terms of 21 processing financial transactions. And Mr. Fealy has 22 been doing a lot of homework about that. And we're 23 looking to see where certain standards that are being 24 promulgated by that organization would be relevant to 25 our operation. 0214 1 But I would say to you that in terms of 2 what I've seen, the credit card industry is really 3 probably, you know, the leading edge, if you will, in 4 terms of standards and best practices and that. 5 And, as you know, there is a problem 6 that they had with retail transactions for abusing 7 credit. So nothing is foolproof. 8 CHAIRMAN COX: Sure. 9 MR. FERNANDEZ: But certainly we're 10 looking at that, that association and their standards 11 right now. 12 CHAIRMAN COX: Excellent. Thank you 13 very much, Mike. 14 MR. FERNANDEZ: Yes, sir. 15 AGENDA ITEM NO. XIX 16 CHAIRMAN COX: Agenda Item No. XIX, 17 report, possible discussion and/or action on the 80th 18 and 81st Legislature. 19 Ms. Trevino. 20 MS. TREVINO: Good afternoon, 21 Commissioners. For the record, I'm Nelda Trevino, the 22 Director of Governmental Affairs. And I have a few 23 updates to provide you today. 24 Included in your meeting notebook are 25 several documents. The first is the agenda for the 0215 1 House Licensing and Administrative Procedures 2 Committee hearing that was held on October the 8th. 3 At the request of Chairman Kino Flores, the agency was 4 asked to appear at the hearing to provide an update on 5 several agency related matters. 6 Mr. Sadberry provided testimony at the 7 hearing, and senior members of the Commission staff 8 were also in attendance to assist with responding to 9 questions. 10 Also included in your notebook is a 11 copy of the October 10, 2008 letter provided to 12 Chairman Flores and members of the committee, in 13 response to additional information that was requested 14 at the hearing. 15 Additionally, at the request of the 16 committee, the agency was asked to provide 17 recommendations for statutory changes that would help 18 or assist the agency. The October 7, 2008 letter to 19 Chairman Flores included in your notebook is in 20 response to this request. 21 It is our understanding these 22 recommendations will be considered by the committee 23 for possible inclusion in their interim committee 24 report to the next Legislature. It is our 25 understanding the committee will meet sometime after 0216 1 the general election to consider and adopt their 2 committee recommendations. 3 As I reported at last month's meeting, 4 we will also be monitoring the actions of other Senate 5 and House committees for any other committee 6 recommendations adopted that may be of interest to the 7 agency, and we will certainly keep you advised of 8 those actions. 9 The last item included in your notebook 10 is a listing of legislative dates of interest. And 11 you will note that prefiling of legislation for the 12 81st Legislature begins on November the 10th. And the 13 Legislature will convene its regular session on 14 January 13, 2009. We will begin our practice of 15 providing you legislative bill-tracking reports of 16 bills filed that may impact the agency. 17 This concludes my report. And I will 18 be glad to answer any questions that you might have. 19 CHAIRMAN COX: Thank you very much, 20 Nelda. 21 AGENDA ITEM NO. XX 22 CHAIRMAN COX: Item XX, consideration 23 of and possible discussion and/or action on external 24 and internal audits and/or reviews relating to the 25 Texas Lottery Commission, and/or on the Internal Audit 0217 1 Department's activities. 2 Ms. Melvin. 3 MS. MELVIN: Thank you Mr. Chairman, 4 Commissioners. I'll provide a brief update this 5 afternoon of both external and internal audits of the 6 agency. 7 Regarding external audits, the 8 financial auditors will be returning on-site next week 9 to complete their work. They conduct both the annual 10 independent audit of our financial statements and the 11 agreed upon procedures engagement of the Mega Millions 12 transactions. 13 The other external audit underway is 14 the security study. And this, of course, is from the 15 State Lottery Act which requires this review be 16 conducted every two years, with the results available 17 prior to the convening of the regular legislative 18 session. And the firm conducting this review is on 19 track to complete their work on time. 20 Regarding internal audits, yesterday we 21 released our report on an internal audit of charitable 22 bingo licensing. A copy of that report has been 23 placed before you, and we intend to present that 24 report at the next Commission meeting. 25 We have also completed an internal 0218 1 audit of background investigations, those background 2 investigations conducted by the agency. We have 3 provided a draft of that report to management and will 4 likely be issuing that report within the next month 5 also. 6 Lastly, we have begun an internal audit 7 looking at the closing procedures of those instant 8 ticket games that are closed because the top prizes 9 are claimed. And our intent is to get that report out 10 also by the end of the year. 11 And that's all I have as for update 12 from Internal Audit, unless you had any questions for 13 me. 14 CHAIRMAN COX: Catherine, a couple, one 15 on your game closing procedures audit. Would you be 16 looking at the reasonableness of the 42-day period? I 17 think our rule provides that the game has to be 18 physically out of the retailer within 42 days after 19 some date. And that was one that 60 was recommended. 20 We pushed for more and got 42. I don't know -- 21 MR. GRIEF: 45. 22 MS. MELVIN: 45. 23 CHAIRMAN COX: 45. Thank you, Gary. 24 I don't know whether that was -- we got 25 it because we pushed for it and it's unrealistic or 0219 1 whether 20 would be reasonable. Is it within the 2 scope of your work to look at that question? 3 MS. MELVIN: Yes, it is, sir. And my 4 lead auditor on that project is Susan Oballe. May I 5 ask her to join me? 6 CHAIRMAN COX: Please. 7 MS. MELVIN: And she can provide you a 8 little more comment on that. 9 MS. OBALLE: Good afternoon, 10 Commissioners. For the record, I'm Susan Oballe. 11 And, yes, Chairman Cox, we will be 12 looking at that. Actually, we're going to be looking 13 at the rule itself, the wording of the rule and the 14 terms that are used in that rule, and we'll be looking 15 at that and then the procedures, because that rule 16 calls for a procedure to ensure that the games -- the 17 ending of the sales of the games within 45 days. 18 And so the ending of sales, we're going 19 to be looking at what that means and what all that 20 entails. So when we do our testing, we'll look at how 21 quickly those tickets get back. We plan to provide 22 that in the time frame of, you know, one to 14 days, 23 15 to 28 days. So we'll give you some time frames of 24 how quickly they come back. And if we see that the 25 majority are coming back prior to the 45 days, then of 0220 1 course we can recommend that that be shortened. Or if 2 all of them are coming back at the 45th day, then 3 maybe that's not a reasonable time frame. 4 CHAIRMAN COX: Okay. Thank you. 5 MS. MELVIN: Does that answer your 6 question? 7 CHAIRMAN COX: Catherine, one other 8 question. You're responsible for the security audit. 9 Is that correct? 10 MS. MELVIN: Yes, sir. 11 CHAIRMAN COX: At our last meeting, we 12 spoke with the principal from the firm that's doing 13 that security audit, and we asked them to take a look 14 at the misuse of authorized access to data and to 15 inform us as soon as they had any conclusion about 16 whether we had procedural or other problems that may 17 have permitted that. Do you know whether they have 18 looked at that and whether they will be reporting to 19 us before, I think, January, when I think they said 20 they would report their total findings? 21 MS. MELVIN: Yes, Commissioner, they 22 have looked at that. And I have met with the firm and 23 the auditors conducting that review. And I certainly 24 don't want to speak for them, but I think I can share 25 with you some of their comments. 0221 1 Specifically what they did was, they 2 looked at the specific instance. They looked at 3 controls that might have allowed that to occur. And 4 they informed me that they would certainly come back 5 to me and to you immediately if they felt that there 6 was something that could have prevented that 7 particular instance, which their conclusion was, there 8 wasn't. 9 However, they are looking at the 10 control environment in the context of their security 11 review. And so I know, Commissioner Schenck, you had 12 asked, you know, "What are the types of things that we 13 can have in place to lessen the likelihood of that 14 type of thing occurring?" And so that is precisely 15 part of the work of the security study. They are 16 looking at our controls over access. 17 Mr. Fernandez detailed the necessity to 18 have trusted employees and to ensure that they have 19 access to sensitive information, as part of our jobs. 20 However, we want to ensure that access is granted very 21 judiciously, that it's approved in advance, that we 22 terminate access when that's no longer needed. 23 So that whole environment of ensuring 24 that we lessen the likelihood of misuse of access. I 25 think Mr. Fernandez's comments about it's, you know, 0222 1 almost impossible really to prevent that type of thing 2 from ever occurring. But what our auditors certainly 3 are examining is looking at the control environment to 4 lessen the possibility, if that's helpful. 5 CHAIRMAN COX: Thank you very much, 6 Catherine and Susan. 7 AGENDA ITEM NO. XXI 8 CHAIRMAN COX: Item No. XXI, report, 9 possible discussion and/or action on the Mega Millions 10 game and/or contract. 11 Mr. Grief. 12 MR. GRIEF: Commissioners, other than 13 to let you know that I'll plan on attending the next 14 meeting of the Mega Millions directors, I have nothing 15 else to report under this item. 16 COMMISSIONER SCHENCK: Thank you, Gary. 17 CHAIRMAN COX: Gary, I understand that 18 there was a sticking point about only executive 19 directors attending. Do you see anybody saying, 20 "Gary, you're the Deputy Executive Director. We know 21 you're acting as the Executive Director, but you can't 22 come"? 23 MR. GRIEF: No, sir, I don't. I'm 24 familiar with the group, and I think they'll be very 25 receptive to my attendance. 0223 1 CHAIRMAN COX: Excellent. Excellent. 2 AGENDA ITEM NO. XXII 3 CHAIRMAN COX: Item No. XXII, report, 4 possible discussion and/or action on GTECH 5 Corporation. 6 Mr. Grief. 7 MR. GRIEF: Commissioners, other than 8 the items that are already in your notebook about 9 various events relating to GTECH, I have nothing else 10 to report. 11 COMMISSIONER SCHENCK: No questions. 12 Thank you. 13 CHAIRMAN COX: I will report that I 14 received a call from Jaymin Patel who is the Chief 15 Executive Officer of GTECH. He had intended -- he 16 told me several months ago that he had intended to 17 attend our October meeting. He found that he had a 18 board meeting -- I believe it was in Europe -- that 19 precluded his being here this time, and he asked could 20 he come to the November meeting. 21 I invited him to certainly come to the 22 November meeting, after which we decided we're not 23 going to have a November meeting. So Ramon and Gary 24 tell me that we're working on that and believe and 25 hope that Mr. Patel will be with us at the December 0224 1 meeting. 2 MR. GRIEF: Yes, sir. 3 AGENDA ITEM NO. XXIII 4 CHAIRMAN COX: Okay. Item No. XXIII, 5 report by the Executive Director on the agency's 6 operational status, agency procedures and FTE status. 7 Mr. Grief. 8 MR. GRIEF: Commissioners, once again, 9 other than the FTE information that's in your 10 notebooks, I have nothing further to report. 11 COMMISSIONER SCHENCK: Thank you, Gary. 12 I appreciated the update earlier from Phil on bingo. 13 That would be the only place I have questions, and I 14 think that's taken care of now. 15 COMMISSIONER WILLIAMSON: I have no 16 questions. 17 CHAIRMAN COX: Okay. 18 AGENDA ITEM NO. XXIV 19 CHAIRMAN COX: Item No. XXIV -- I think 20 we had public comment on this item -- Item No. XXIV, 21 consideration of and possible discussion and/or 22 action, including adoption, on amendments to Rule 16 23 TAC 401.362 relating to retailer's financial 24 responsibility for lottery tickets received and 25 subsequently damaged or rendered unsaleable, for 0225 1 winning lottery tickets paid and for lottery-related 2 property. 3 Ms. Rienstra and Mr. Rogers. 4 MS. RIENSTRA: Commissioners, Deanne 5 Rienstra, Assistant General Counsel. 6 Staff is recommending adoption of 7 proposed amendments to 16 TAC 401.326, with changes. 8 The proposed amendments were published in the 9 August 15, 2008 issue of the Texas Register. The only 10 non-substantive change that is made to the proposed 11 amendments is the word "operation" to pluralize it in 12 order to refer to "Lottery Operations" instead of 13 "Lottery Operation Division." A red-lined version is 14 provided in your notebook. 15 A public hearing was held on 16 September 4, 2008, at the Lottery Headquarters. No 17 members of the public were present. The Commission 18 received no written comments during the public comment 19 period. 20 I have no further information at this 21 time and am happy to answer questions. And Ed Rogers 22 is also available. 23 COMMISSIONER SCHENCK: Thank you. I 24 believe I've dragged you around this bush multiple 25 times. I don't think I'll push you again. I 0226 1 appreciate all your work on this. 2 CHAIRMAN COX: I have a witness 3 affirmation form on this item. I believe Item No. 4 XXIV, Ms. Nettles. 5 MS. KIPLIN: And, Mr. Chairman, this 6 requires me to make my obligatory comment, that the 7 comment period is concluded with regard to this rule. 8 There was no comment. 9 I don't honestly know what Ms. Nettles 10 plans to say. But if she's offering comment on this 11 rule, this is going to open the comment period. We 12 would need to summarize that comment and provide an 13 agency response. Had an opportunity for comment both 14 at the comment hearing and also written comment, and 15 no comment was received. 16 CHAIRMAN COX: Okay. Ms. Nettles, can 17 you help Counsel and us with the nature of the 18 testimony you would like to give here? 19 MS. NETTLES: Yes, sir. For the 20 record, my name is Dawn Nettles. I'm with the Lotto 21 Report out of Dallas. 22 And, Commissioners, I had not seen this 23 rule until this morning, and I hadn't read it until 24 this morning. 25 CHAIRMAN COX: Okay. Excuse me just a 0227 1 moment. 2 MS. NETTLES: Okay. 3 CHAIRMAN COX: Where does that put us, 4 Counsel? 5 MS. KIPLIN: If you take comment from 6 Ms. Nettles, and she plans to provide comment, I don't 7 believe that you'll be in a position of moving forward 8 on this rule. I would also encourage, I think on a 9 staff level, that there is a purpose for a comment 10 period, and it's to move rules through a process. And 11 the rule was published at the time. As a matter of 12 fact, I think we brought it back a couple of times 13 before we even actually proposed it. I could be wrong 14 on that. It is on the website. It was posted in the 15 Texas Register, and we also noticed a public hearing. 16 COMMISSIONER SCHENCK: But if she were 17 to offer comments to us just for the purpose of "yea" 18 or "nay," up or down vote -- 19 MS. KIPLIN: I would actually have to 20 summarize that and put it in the preamble of the rule. 21 MS. NETTLES: I understand what Kim is 22 saying. And I can assure you that what I have to say 23 will affect your adopting the rule today. It is that 24 major. 25 CHAIRMAN COX: Well -- 0228 1 MS. NETTLES: So it's up to y'all as to 2 whether or not you want to hear comment or repeal it. 3 CHAIRMAN COX: We've got an apple and 4 bites at it issue here. 5 How long has this been on the other 6 website, Kim? 7 MS. KIPLIN: I'll go back to 8 Ms. Rienstra on that. But once it's published in the 9 Register, we put it up on the website. 10 MS. RIENSTRA: I can't give you an 11 exact date, but I know we did publish it in the Texas 12 Register on August 15th. 13 CHAIRMAN COX: Okay. It was published 14 in the Texas Register on August 15th and presumably 15 went up on our website sometime around then? 16 MS. RIENSTRA: Yes, sir. 17 CHAIRMAN COX: Then you had a hearing 18 on -- 19 MS. RIENSTRA: September 4th. 20 CHAIRMAN COX: -- September 4th, which 21 was almost two months ago. 22 MS. RIENSTRA: Yes, sir. 23 CHAIRMAN COX: And that really ended 24 things, the hearing on September 4th. At that point, 25 it's the staff reacting to reactions and getting it on 0229 1 the agenda in proper timing for approval. 2 MS. KIPLIN: The only correction I 3 would make on that or offer is that you had it out for 4 a 30-day public comment period. And so from 5 August 15th, which would have been the date of the 6 publication, you could have received written comment 7 even past September 4th, up until -- well, 30 days 8 from that. I'm just going to say September 15th. I 9 could be off by a day. 10 CHAIRMAN COX: Okay. So up until 11 September 15th, comment could have been received, 12 although we didn't get any? 13 MS. KIPLIN: That's correct. 14 CHAIRMAN COX: The options that we have 15 here are to reject the comment, to accept the comment, 16 with the understanding that will delay for a month 17 enacting a rule that I believe is badly needed. Or we 18 can reject the comment and advise Ms. Nettles that she 19 can petition for a rehearing on this rule any time 20 within 60 days, or she may request a hearing on this 21 rule within 60 -- and we have to react to it within 60 22 days? 23 MS. KIPLIN: Well, and I think what 24 you're referring to is the requirement in the 25 Administrative Procedures Act that somebody can 0230 1 petition for rulemaking and that the governing body 2 has to respond within 60 days of that petition about 3 whether they're going to grant or reject that 4 petition. Granting necessarily means moving forward 5 with a rulemaking. But you can reject and you state 6 your reasons why you reject as well. 7 CHAIRMAN COX: Commissioner, do you 8 have any thoughts on this? 9 COMMISSIONER SCHENCK: Well, it seems 10 to me that -- well, there is no choice other than to 11 delay. We can't put the rule in effect today, no 12 matter what the comments are, if we accept the 13 comments. 14 CHAIRMAN COX: That's correct. 15 COMMISSIONER SCHENCK: Well, I agree. 16 We've been going over this over and over again. On 17 the other hand, I think she has the right to submit to 18 us something that she thinks the rule should be. So 19 if that's the option, I would propose that we vote on 20 the rule and then allow her to petition for us to 21 unmake the rule and put a new rule in its place. 22 MS. KIPLIN: Well, petition for 23 rulemaking; right. And that would be a petition, we 24 would receive that and then obviously put it on 25 your -- 0231 1 COMMISSIONER SCHENCK: That's obviously 2 not an ideal resolution, but I think we are where we 3 are, unfortunately. 4 MS. NETTLES: And I know your rules, 5 and I'm sorry. I don't usually read retailer things. 6 But this one here, it is a rather major thing and it 7 would affect -- everything I've seen in all these 8 years, it would stop you. So go ahead and adopt it. 9 COMMISSIONER WILLIAMSON: Well, 10 obviously, I will concur with my two colleagues here 11 in this particular situation. And then if you need to 12 do whatever it is you need to do to reopen it, then 13 we'll do what we need to do. 14 CHAIRMAN COX: Yes. I think that 15 Ms. Nettles, as valuable as your comment is, I think 16 that the people who have worked within the process to 17 get this approved need to be honored. And we will 18 certainly honor any request that you have that we 19 reconsider this matter, well within the time required 20 for us to react to your request. 21 MS. NETTLES: So are you telling me, 22 Kim, that what I need to do is take my time and write 23 this up? 24 MS. KIPLIN: Well, what I'm saying is, 25 based on what I'm hearing the Commission say, although 0232 1 they haven't voted, what they plan on doing is moving 2 forward, adopt the rule based on the staff's 3 recommendation. And we'll file that, and it will be 4 effective 20 days after we file it with the Register. 5 You're free to file a petition for rulemaking. 6 MS. NETTLES: So I need to file -- I 7 have to do the work on it? 8 MS. KIPLIN: Well, it would be your 9 petition; so, yes, you would need to do that. 10 MS. NETTLES: So I would have to do 11 that? Okay. 12 CHAIRMAN COX: Okay. This is a rule 13 that I think corrects a situation that has been very 14 difficult for retailers, particularly a large number 15 of small retailers to deal with. And I applaud it, 16 and I move that we adopt the Staff's recommendation. 17 COMMISSIONER SCHENCK: I second the 18 motion. 19 CHAIRMAN COX: All in favor, say "Aye." 20 COMMISSIONER SCHENCK: Aye. 21 COMMISSIONER WILLIAMSON: Aye. 22 CHAIRMAN COX: Any opposed? 23 Motion carries 3-0. 24 Thank you, Ms. Nettles. 25 COMMISSIONER SCHENCK: Now, there is 0233 1 not a particular form she has to follow to submit -- 2 MS. KIPLIN: No. She -- 3 MS. NETTLES: Can I -- 4 MS. KIPLIN: Commissioners, I have an 5 order for you. 6 MS. NETTLES: I have a form here I want 7 to fill out. 8 CHAIRMAN COX: Excuse me, Ms. Nettles? 9 MS. NETTLES: I want in the public 10 comment whenever it's public comment time. I would 11 like to submit comment on some things I've heard here 12 today. So I want to give you another form. Okay? 13 CHAIRMAN COX: I'm just going to put it 14 on here that you're also -- if that's okay, Kim -- 15 also wanting Item No. XXVIII. 16 Okay. You know, we have gone on an 17 hour and 40 minutes past reconvening. I would ask the 18 Court Reporter if you would like a short break? 19 THE REPORTER: How much longer is it 20 going to be? 21 CHAIRMAN COX: We will be a few more 22 minutes. 23 THE REPORTER: I'm fine. 24 CHAIRMAN COX: Okay. Commissioners? 25 COMMISSIONER WILLIAMSON: I'm fine. 0234 1 COMMISSIONER SCHENCK: Fine. 2 AGENDA ITEM NO. XXV 3 CHAIRMAN COX: All right. Item XXV, 4 consideration and possible discussion and/or action, 5 including adoption, on amendment to the Lotto Texas 6 jackpot estimation procedure. 7 Ms. Pyka. 8 MS. PYKA: Thank you. For the record, 9 Kathy Pyka. 10 And according to the agency's policies 11 and procedures, Lotto Texas Jackpot Estimation 12 Procedure OC-JE-002 is attached for your consideration 13 and approval in your notebooks. 14 Following the Commission meeting on 15 June 25th of 2008, the Lotto Texas jackpot estimation 16 procedure was published in the Texas Register on 17 June 30th of 2008, and on the agency's website 18 June 27th of this year. This met the requirement that 19 it be posted for minimum days, 30 days in the Texas 20 Register on the agency's website before receiving 21 public comments on the proposed procedure. 22 We held a public hearing on 23 September 10th to allow the public to comment on the 24 proposed procedure. Notice of a public hearing has 25 given in the same manner as those regular meeting of 0235 1 the Commission, as outlined in our agency policies. 2 And a minimum of 30 days has lapsed between the public 3 comment hearing and the request by staff for you to 4 approve this procedure. To date there have not been 5 any comments received in writing or at the public 6 comment hearing on this proposed procedure. 7 Commissioners, it's recommended that 8 the procedure be approved. And if approved, the 9 procedure will be published in the Texas Register and 10 on the agency's website. Prior to placing it in the 11 Texas Register and on the agency's website, the 12 sections of the procedure that are confidential by law 13 will be redacted. 14 I would be happy to answer any question 15 that you might have. 16 CHAIRMAN COX: Commissioner? 17 Move approval of the staff 18 recommendation. 19 COMMISSIONER SCHENCK: Second the 20 motion. 21 CHAIRMAN COX: All in favor, say "Aye." 22 COMMISSIONER SCHENCK: Aye. 23 COMMISSIONER WILLIAMSON: Aye. 24 CHAIRMAN COX: Aye. 25 Any opposed? 0236 1 Motion carries 3-0. 2 MS. PYKA: Thank you, Commissioners. 3 CHAIRMAN COX: Thank you, Ms. Pyka. 4 AGENDA ITEM NO. XXVI 5 CHAIRMAN COX: Item XXVI, report, 6 possible discussion and/or action on Lottery 7 Operations and Services Contract Amendment No. 8, 8 credit calculation. 9 Ms. Pyka. 10 MS. PYKA: Again for the record, Kathy 11 Pyka. 12 This afternoon I'm going to provide an 13 update on Amendment No. 8 of the Lottery Operations 14 and Services Contract and the amount due to the 15 Commission for the fourth quarter of Fiscal Year 2008. 16 I'm going to provide a summary again of the contract 17 amendment. Section 10.3.3 of the amendment provides 18 an annual credit to the Commission equal to 12 percent 19 of GTECH's annual incremental revenue from sales over 20 the previous fiscal year for every tenth of a percent 21 of increase in prize payout. 22 Section 10.3.4 of the amendment 23 requires GTECH to provide an annual credit to the 24 Commission equal to 4.5 percent of the year-over-year 25 decline in dollar returns to the state if sales remain 0237 1 flat and the weighted prize payout increases by a 2 tenth of a percent. 3 Commissioners, while the fourth quarter 4 resulted in a $641,368 credit, it was time to do the 5 cumulative credit calculation for the full fiscal 6 year, which resulted in a credit of $2,468,537. 7 Section 10.3.4 of the contract does 8 limit the amount of credit that's available to the 9 Commission to $1.2 million. We have actually received 10 that amount of credit from GTECH, and we have returned 11 the balance of $296,403 back to them that we had 12 already (cough) the date above and beyond the 13 $1.2 million. 14 I would be happy to answer any 15 questions. 16 CHAIRMAN COX: Commissioner, this could 17 very well sound like a lot of Greek, and it looks like 18 a lot of Greek when you get it on the spreadsheet. 19 What this basically is, is an amendment of the 20 contract with the lottery operator that recognizes 21 that while their fees are based on gross sales, that 22 the school children of Texas only participate in net 23 revenues. And, therefore, the views are not 24 completely aligned. 25 This was an effort, as an interim item 0238 1 between negotiations of major contracts, to better 2 align our position with that of the lottery operator. 3 COMMISSIONER WILLIAMSON: I kind of got 4 that. 5 When was this negotiated, when the 6 contract changed? 7 MS. PYKA: The contract has been in 8 effect now for two fiscal years. We began using the 9 credit provisions in the contract September 1st of 10 2006. 11 CHAIRMAN COX: Commissioner? 12 COMMISSIONER SCHENCK: Thank you, 13 Kathy. 14 MS. PYKA: You're welcome. 15 CHAIRMAN COX: This is a report? 16 MS. PYKA: Just a report. 17 CHAIRMAN COX: It does not require 18 approval. Thank you, Ms. Pyka. 19 MS. PYKA: Thank you, Commissioners. 20 CHAIRMAN COX: Okay. Ms. Kiplin, how 21 would you like to take the cases? 22 AGENDA ITEM NO. XXVIII 23 CHAIRMAN COX: In the interest of 24 helping at least one person here, why don't we take 25 public comment before we take the cases -- 0239 1 MS. KIPLIN: Sure. 2 CHAIRMAN COX: -- and let Ms. Nettles 3 give us her comments. 4 MS. KIPLIN: Certainly. 5 CHAIRMAN COX: I know that I-35 back to 6 Dallas is a long one. 7 MS. KIPLIN: And so, Mr. Chairman and 8 Commissioners, under the public -- I just want to put 9 this on the record. Under the public comment item, 10 you can hear public comment. But generally speaking, 11 you really can't deliberate that public comment 12 because it's not been specifically noticed, the topic 13 has not. 14 My suspicions are, because of 15 Mr. Nettles' earlier comments, that she plans to at 16 least in part comment on an item that actually is 17 specifically noticed, and I think that's fine, because 18 it was noticed up for the open meeting. But if it 19 goes into areas that are not specifically noticed, 20 your deliberations are actually limited to 21 deliberating whether you want to put it on an agenda 22 for a future Commission meeting. 23 COMMISSIONER SCHENCK: And we have 24 already adopted the rule. 25 MS. KIPLIN: Yes, you've already 0240 1 adopted the rule. But I'm just saying I wanted to 2 make sure, because this is the first time Commissioner 3 Williamson, on a public comment matter you kind of 4 understand the rules and engagement. 5 COMMISSIONER WILLIAMSON: Okay. 6 CHAIRMAN COX: Thank you, Ms. Nettles. 7 MS. NETTLES: Thank you for taking me 8 out of order here on this. For the record again, my 9 name is Dawn Nettles, and I'm with the Lotto Report 10 out of Dallas. 11 And, Kim, you will be happy to know 12 that I'm only going to discuss three little old 13 subjects, and they've all been discussed today. 14 I want to start with the security 15 issue, because hearing Mr. Fernandez and y'all's 16 discussion on this, I am compelled to comment on that 17 deal. 18 As I understood, the Lottery had an 19 employee who simply stuck a CD is his computer and 20 backed up or copied onto a CD the directory. Okay? 21 And in this directory were all these files that he was 22 not supposed to take. 23 The Lottery has, as I understand, a 24 very good, sophisticated computer system and you-all 25 do backups. And there in a difference in copying 0241 1 information from a computer to doing backups, to save 2 your work, you know, when it's backed up. And I'm 3 also relatively certain that you-all have sensitive 4 information, but you don't really have that much. 5 I mean, you've got all the winners, 6 their information, retailer. You have social security 7 numbers. You have that. That's really sensitive 8 information. Okay? But much of the other stuff you 9 have really isn't. I mean, it's not going to hurt 10 1,000 people or 70,000 people or 100,000 people. 11 So what my point is, is you can take 12 your highly sensitive information in those files, 13 whatever program they're in, whatever software is 14 used, and you can prevent them from being copied or at 15 least require two people in order to copy them. I'm 16 not -- there is -- and that is how a number of large 17 organizations and topnotch security folks do handle 18 their sensitive information. 19 So when I say that the security at the 20 Texas Lottery is, in my opinion, not very good, that's 21 what I'm referring to. I run my computer, and I 22 publish The Lotto Report, and it's not sensitive. It 23 is copyrighted. And for a very long time, as I 24 published it, I protected my file, which nobody could 25 do. No one could edit it. All they could do was 0242 1 print it and read it. 2 You've heard of read-write on computers 3 where you're allowed to read it but you can't write to 4 it? Well, I'm saying the same thing on the sensitive 5 files. It would be up to staff to determine what is 6 sensitive. But I wanted to make that comment because 7 I'm the one who said all that. 8 And, of course, when you were talking 9 about 97,000 winners' names compromised, that's a huge 10 issue. And the guy clearly did wrong. But then at 11 the same time, he should have never been able to do 12 that, because something should have flagged him as he 13 was coping that directory over. All right? That's my 14 comments on it. I don't expect you-all to say 15 anything back. 16 COMMISSIONER SCHENCK: Well, that's all 17 right. I'll ask you a question, if you care to answer 18 it. You don't have to. I take it you know this 19 gentlemen? 20 MS. NETTLES: No, I don't know him from 21 Adam. 22 COMMISSIONER SCHENCK: Okay. And 23 you've not personally gotten any information from him 24 ever? 25 MS. NETTLES: No. I don't even know 0243 1 who he -- I mean, I know his name now, but I've never 2 met him in my life. 3 COMMISSIONER SCHENCK: Okay. So what 4 you're gathering about this, you're gathering from the 5 public press? 6 MS. NETTLES: No, sir. I gathered it 7 from the search warrant. 8 COMMISSIONER SCHENCK: From -- 9 MS. NETTLES: The search warrant. 10 COMMISSIONER SCHENCK: Yes, the public 11 information. 12 MS. NETTLES: Right. Public 13 information. 14 COMMISSIONER SCHENCK: Thank you. 15 MS. NETTLES: Yes. I don't know this 16 guy. I know his name is Joe, you know, but I do 17 not -- I've never met him, to my knowledge. I don't 18 even know what he did here. For all I know, he worked 19 in payroll. I don't know. 20 COMMISSIONER SCHENCK: Thank you. 21 MS. NETTLES: No, I don't know him. 22 I wanted to talk to y'all about the 23 sales, but I really hesitate to do so. I have read 24 your transcripts -- I haven't been here in a while, 25 and I've read the transcripts. And I keep reading 0244 1 where staff says, "The games are mature. People are 2 tired of the on-line games." And I am once again 3 coming here and telling you that that is not the case, 4 that is not why your sales are down. 5 In y'all's discussion a little bit ago 6 about Ipsos Reid and the surveys -- and Commissioner 7 Schenck, you said you're kind of operating without 8 data. Okay? Do you remember saying that? You were 9 asking questions about why players aren't buying or 10 the percentage of sales and things likes that, should 11 we up the percentage to get a better payback, would 12 that increase sales and blah-blah-blah. 13 I don't know whether to take the time 14 and go it a couple of games, explain it to you. I 15 think for the purpose of each of you new 16 commissioners, I really think it would behoove you to 17 really know this. 18 But on your information, operate 19 without data, I have to comment on that one, because I 20 have provided data -- the people of Texas have 21 provided comments to this Commission since 1999, and 22 they've had as many as 3,000, 3,500 on each of the 23 Lotto Texas rule changes. And the people of Texas 24 have told the Commission what they would like in a 25 game. 0245 1 Lotto Texas, there's been three or four 2 major rule changes on it. And each time those rule 3 changes were done, it was to increase the odds and 4 make the game harder to win. And the prize structure 5 was changed on the games, and it created fewer 6 winners. 7 Now, the first basic rule of thumb on 8 gambling issues is if you want to make a lot of money, 9 you create a lot of winners. You let them win. The 10 more they win, the more they'll spend, and everybody 11 knows that. 12 When you do these rule changes, an 13 error that this Commission has made over all these 14 years, 10 years, is when they compute their changes to 15 the game, what they fail to recognize is that people 16 do not win Lotto Texas every day. Every time there is 17 a drawing, they do not win. A person may win once 18 every three or four or five or six months. Okay? 19 And when you change the prize 20 amounts -- let's just take a four of six, or even 21 three of six, that's matching three of six numbers in 22 Lotto Texas. When Lotto Texas first started in 1992, 23 a player got $3.00. When they changed the rule in 24 2000, they got $5.00 for matching three of six 25 numbers. Okay? 0246 1 Now, I'm going to completely disregard 2 the huge screw-up on the bonus ballgame, but I'm going 3 to jump now to the current game, which is six in 54, 4 and they lowered it to $3.00. Well, players have to 5 match three numbers in order to go cash in that ticket 6 to find out what they're going to win. 7 So when you do your rule changes, while 8 I can compute it and foresee what's going to happen, 9 y'all don't; I do. I know what a player's reaction 10 is. On this last Lotto Texas rule change two years 11 ago, a person matching four of six numbers will now 12 get $40 to $50. It's about what they pay on the 13 prizes for matching 4 of 6 numbers. 14 Well, the players were used to $100, 15 and I knew what was going to happen. And sure enough, 16 three, four months into the new game, this last six in 17 54 game, I started getting e-mails from people, said, 18 "Oh, Gosh! I see what you mean. This isn't worth 19 playing." 20 That costs you. You don't have any 21 winners. There's no word-of-mouth. You don't have to 22 advertise. The people who support Lotto, Cash 5, 23 these games, we want the lottery. We just wanted fair 24 games of chance and decent prizes. On your 25 presentation on the Corpus Christi winner that came in 0247 1 today to collect, I know this one. Robert told you 2 all about that, but he did not tell you that it took 3 15 draws to reach $18 million. And I also notice he 4 didn't tell you that y'all were short to fund the 5 prize because you didn't have enough in sales to pay 6 the prize. 7 If you want a successful lottery, which 8 you have a very -- you have the basis and you have the 9 people and you have the support. They just don't have 10 the games that they're willing to support. You-all 11 are creating losers, and that's why they're not 12 supporting the game. They're cutting their spending. 13 Whenever they go out and they find out 14 that they've got to match four numbers and all they're 15 getting is $40, trust me, they're unhappy. Cash 5, 16 when it started -- how many years? -- 15 years ago, it 17 was played twice a week, had $100,000 jackpots, 18 $200,000 jackpots. And, Robert, you said earlier that 19 games that are jackpot-driven is where you get your 20 sales. 21 They took Cash 5, because it was so 22 good, it was such a fantastic game, that the Lottery 23 wanted to increase it. They said, "We want to do this 24 four times a week. We're going to change it to four 25 draws a week." I said, "Don't do that, because you're 0248 1 not going to bring in new players. What's going to 2 happen is the people who support it twice a week are 3 now going to have to split their money into four 4 draws. Your jackpots are going to fall; you're going 5 to lose." 6 What did they do? They changed it to 7 four draws a week. That's precisely what happened. 8 So then what did they do? They came back and they 9 said, "Oh, we're going to lower the odds. We're going 10 to give you 37 numbers instead of 39. We're going to 11 lower the odds. We're going to give you a $2.00 12 prize, and we're going to have six draws a week." 13 What happened? The same thing. I said, "Don't do it. 14 It's a massive mistake. You're not going to have any 15 jackpots. You're going lose your players." 16 Your sales, what I want you-all to know 17 is that the people of Texas want a lottery. And 18 you-all could get back -- you won't ever get what you 19 got when know the lottery started, because when a 20 lottery starts and launches, it's going to have 21 tremendous sales, and then it's going to level off to 22 your core players. And what you have is your core 23 players who have decreased their spending because of 24 the prize levels and the difficulty of winning and the 25 fact that nobody wins. 0249 1 If you-all had gone back two years ago 2 to six in 50 instead of going to the six in 54, 3 because you were afraid there were going to be so many 4 winners that you couldn't drive your jackpots up. 5 Well, it takes sales to drive the jackpots up, and you 6 don't have the sales. And to offer 26 million to one 7 odds, when you don't even sell but between 1.5 million 8 and 2 million tickets per draw, you're not going to 9 have the winners. 10 You've got all these draws, consecutive 11 draws, with no winners. People are very dissatisfied 12 with that. Why play? You're not going to win 13 anything. Or if you do win, you're not going to win 14 anything worthwhile. So when you take a game and you 15 bring it down that far, that's what's wrong. You go 16 back to six in 50. Your recipe for success up here is 17 to reduce the number of draws on your Cash 5, go back 18 to twice a week, and I promise you you'll see the 19 $100,000 jackpots again. And it will be worth -- it 20 won't cost you four times as much to conduct those 21 draws, and you will get the players back. You take 22 Lotto Texas back like it was and you've got it made. 23 Now, the agency is in trouble over Pick 24 3 and Daily 4. And A year ago, I not only put that on 25 my website but it's on the record here and it's in my 0250 1 public comment that that was the biggest financial 2 mistake this agency has ever made, and it was, and I 3 have been proven right. The reason for it is when you 4 play Pick 3, which is your most popular game, a player 5 expected to win $40 for 50 cents, he spends 50 cents 6 and he gets $40, and he would win $40 about once a 7 month, maybe more often -- okay? -- for 50 cents. 8 You took that game and you put -- for 9 50 cents, you're giving him a $2.00 prize. That set 10 you back. The Daily 4, those who moved over to the 11 Daily 4 -- and I wasn't opposed to a Daily 4 game, but 12 it's too many draws. But your Daily 4 game is what 13 took this whole Commission completely down. 14 Your scratch tickets, which I'm not 15 going to go into today, but you're on a decline on 16 your scratch tickets, and it's going to continue to 17 worsen. If you don't make some very serious changes 18 on the scratch tickets, y'all are going to really be 19 screaming the blues one year from now, because you've 20 got some real serious problems. I've been out in the 21 field for the past year. I have interviewed players; 22 I have watched them. I have spent a great deal of 23 time with retailers, and I see the problems, and 24 they're very serious problems and it's costing you. 25 And I'll give you only one little 0251 1 example. You have a ticket out there right now that 2 just started a couple of weeks ago or something called 3 King Tut. It's a very complicated -- it's a game 4 that's very easy to make a mistake on, and that 5 mistake is very costly. 6 You should ask staff how many people 7 show up at the claim centers thinking that they've won 8 a prize on this King Tut ticket, where they are 9 instructed at the claim center, before they're even 10 handed a claim form, to put their ticket in the ticket 11 scanner to verify it's a winner. 12 The claim center won't even touch the 13 ticket until it's run through there, and that's 14 because so many people have made mistakes. So many 15 people have spent their valuable time and at two and 16 three and $4.00 a gallon for gas, driving a hundred 17 miles to go to a claim center to collect on a ticket 18 that's not a winning ticket. It's a horrible, 19 horrible game. Okay? 20 There's all kinds -- I carried a winner 21 up there just last week to collect her money. I 22 checked her ticket before I took her, to make sure it 23 was really a $1,000 winning ticket. It's things like 24 this. And then those that aren't catching them or 25 aren't driving to the claim center, they're throwing 0252 1 away all these winning tickets. I mean, y'all love 2 that for the unclaimed prize fund. Okay? That's 3 great. But what it's doing is, the player is getting 4 discouraged and he's walking away and not buying 5 scratch tickets. 6 Now, you've got another ticket out 7 there that I've really got ugly words for, because to 8 me it's a trick that the Commission has played. And 9 I've got a whole bunch of them out in my car I could 10 show you, and it's a $20 ticket. 11 And, Commissioners, I know you're not 12 familiar with scratch tickets, but it's Double Million 13 Doubler 1040 -- help me. What's the name of it? -- 14 1040. It's the first ticket this agency has ever come 15 out with that you have two ways to win on the top 16 portion of the ticket. You scratch off and you have 17 five winning numbers. And then you scratch off the 18 bottom part. And if you match your number, then you 19 win that amount of prize. But what the Commission did 20 this time is, they decided to add a second winning 21 way; and that is, if you match three prize amounts in 22 that same body part, then you win that prize. 23 Well, players all over this state are 24 only checking half of that ticket. They have no idea 25 that if they match three prize amounts, that they're a 0253 1 winner. And we're talking $20 tickets. And I've seen 2 people go in and spend $300 and not have a winning 3 ticket, throw them all in the trash can and get picked 4 up by the clerk or me or whoever, and we go cash them 5 in. 6 I'm really not going to -- it's things 7 like this. And that ticket -- for the record, that 8 ticket, it's very clearly marked. It says "Match your 9 winning number or match three prize amounts." Okay? 10 But players do not read the tickets. They never have 11 and they're not going to start. And they have no idea 12 how badly they're getting screwed. 13 But I tell you what, the bottom line 14 is, is it's the Texas Lottery who is going to get 15 screwed, because the people are out there saying, "I 16 buy these tickets and I don't win anything. I quit." 17 Okay? That's really the bottom line. You're creating 18 losers. 19 Now, I've only told you two 20 little-bitty things, and there's really a whole bunch 21 of others on the scratch tickets that need to be 22 addressed. And, if not, it's really going to cost 23 y'all problems. 24 I'm not going to go into -- I'm 25 finished on that. I want to make one more comment, 0254 1 because I know everybody in this room is dying to know 2 what Dawn found in this rule. This is an excellent 3 rule. This is the rule about the retailers. But you 4 do have a serious mistake in it. There is a serious 5 issue here. And it's on Page 3, Line 12, (b), and 6 it's "Responsibility for Winning Lottery Tickets 7 Paid." 8 This thing says that the lottery 9 retailer is supposed to -- in essence, it's telling 10 you to tear up the tickets, destroy the tickets. Yes, 11 they are supposed to do that, but there is an 12 exception to the rule. And that exception is, is that 13 this agency has failed to remember or recognize the 14 validation errors. 15 What that means is, you scratch off a 16 ticket and let's just say it's an easy ticket and 17 you're just matching one number. Say your winning 18 number is 25, and, "Gee, there is a 25 on that 19 ticket," and you uncover your prize amount, and it 20 says you've got $50 coming. 21 You hand that ticket to the store clerk 22 and he scans it. He says, "I owe you $10." And the 23 player says, "Oh, no; oh, no. That's a $50 winning 24 ticket." 25 "Oh, no, sir. My terminal says $10. 0255 1 That's all I can give you." "Well, you give me my 2 ticket back." He's got to have that ticket to go 3 back, to go to a claim center to collect it. 4 And I know of a number of tickets -- 5 and I know the agency knows about it; I know the claim 6 centers are aware of the validation errors. So you've 7 got a rule here that needed an exception, a real 8 simple exception, because of a player -- if you think 9 a store clerk is going to get beat up or shot because 10 he's instructed to tear up a ticket that's a winning 11 ticket and he needs to go to a claim center, that's 12 not fair at all. 13 And that is a problem with this rule. 14 It just needed one little old exception. And I 15 personally am not going to go to the trouble of 16 writing this up and fighting and driving to Austin to 17 be nice enough to tell you what's wrong with it for it 18 to have gotten through staff. And I promise you, 19 you've got validation errors. 20 I was called to a store Sunday, and I 21 was handed by the store a winning ticket and the 22 receipts, completely intact, because the player bought 23 the ticket, only uncovered the ticket's checker bar 24 code -- it's a little white thing -- stuck it in the 25 ticket scanner. The ticket scanner said, "Hey, it's a 0256 1 $10 winning ticket." He never even bothered to 2 unscratch the rest of the ticket, which a lot of 3 players do. Okay? Handed it to the clerk, said, 4 "This is $10." The clerk scanned it, types in the 5 correct four digits on the face of the ticket, machine 6 says "Not a winner." 7 He hands it back, says, "Sorry. That's 8 not a winner." And he said, "Oh, yes, it is. You do 9 that again." So the clerk takes it back, because the 10 player is irate, scans it again. And guess what? 11 It's a winning ticket. And I've got the original 12 receipt and one for about 20 seconds later. 13 Now, that's not the same validation 14 error that I'm talking about in this other instance. 15 But you've got too many people out there that have to 16 have that ticket back to go to a claim center to get 17 the correct amount. There's lots of mistakes on them, 18 too, on the players' end, where they think they've won 19 so much when they really haven't, and in that case, 20 you know. But he needs to be satisfied on that. 21 I thank you for hearing me. You-all 22 have a nice day. 23 CHAIRMAN COX: Thank you, Ms. Nettles. 24 25 0257 1 AGENDA ITEM NO. XXVII 2 CHAIRMAN COX: Agenda Item No. XXVII. 3 Ms. Kiplin, how would you like to go 4 through these case? 5 MS. KIPLIN: Commissioners, if I could 6 go through A through F, those are all lottery cases. 7 In each of those cases, the Administrative Law Judge 8 at the State Office of Administrative Hearings is 9 recommending adopting the Staff's recommendation to 10 revoke the licenses. The reason is either a criminal 11 history, which makes the licensee ineligible to hold 12 the license or insufficient funds at the time that we 13 swept. 14 And at this time I would request that 15 you vote to adopt the ALJ's recommendation. 16 CHAIRMAN COX: Commissioner? 17 COMMISSIONER SCHENCK: I have no 18 questions. I'm fairly familiar with this process. 19 COMMISSIONER WILLIAMSON: No, I have 20 none. 21 COMMISSIONER SCHENCK: I feel 22 comfortable moving that we adopt the staff's 23 recommendation. 24 CHAIRMAN COX: Would you like to 25 second? 0258 1 COMMISSIONER WILLIAMSON: Oh! Second. 2 CHAIRMAN COX: All in favor, say "Aye." 3 COMMISSIONER SCHENCK: Aye. 4 CHAIRMAN COX: Any opposed? 5 Motion carries 3-0. 6 That's A through F, Ms. Kiplin? 7 MS. KIPLIN: Yes, sir. I just handed 8 you-all the orders for those dockets, A through F. 9 The next two I would like to take up 10 are G and H. Commissioners, those are registry of 11 bingo workers' matters. In one of the dockets, it's 12 refusing to add a person to the registry, and then the 13 other docket is removing somebody from the registry. 14 In each of those cases, it had to do with a 15 disqualifying criminal history. 16 The ALJ at the State Office of 17 Administrative Hearings did recommend revocation -- or 18 removal or refusal to add. The staff would request 19 that you adopt the ALJ's recommendation. 20 CHAIRMAN COX: And this is on Items G 21 and H? 22 MS. KIPLIN: Yes, sir. 23 CHAIRMAN COX: Commissioner? 24 COMMISSIONER SCHENCK: I have no 25 questions. 0259 1 CHAIRMAN COX: Any questions? 2 COMMISSIONER WILLIAMSON: I have no 3 questions. 4 COMMISSIONER SCHENCK: I move we adopt 5 the staff's recommendation. 6 CHAIRMAN COX: Second. 7 All in favor, say "Aye." 8 COMMISSIONER WILLIAMSON: Aye. 9 COMMISSIONER SCHENCK: Aye. 10 CHAIRMAN COX: Opposed? 11 Motion carries 3-0. 12 MS. KIPLIN: Commissioners, the 13 remaining cases are agreed orders. And if I may I 14 would like to take Items I and J. 15 CHAIRMAN COX: I and J. 16 MS. KIPLIN: Those are authorized 17 organizations' conductors. These are agreed orders 18 where the staff and the respondent have reached an 19 agreement regarding the disposition. And each of 20 these two has to do with the failure of the 21 organization to retain the prize fee and then remit 22 it. Staff would request that you adopt the proposed 23 agreed order. 24 CHAIRMAN COX: And that's I and J? 25 MS. KIPLIN: Yes. 0260 1 CHAIRMAN COX: Commissioner? 2 COMMISSIONER SCHENCK: I have no 3 questions. 4 CHAIRMAN COX: Commissioner? 5 COMMISSIONER WILLIAMSON: I have no 6 questions either. 7 COMMISSIONER SCHENCK: I move we adopt 8 staff's recommendation. 9 CHAIRMAN COX: Okay. Is there a 10 second? 11 COMMISSIONER WILLIAMSON: Second. 12 CHAIRMAN COX: All in favor, say "Aye." 13 COMMISSIONER SCHENCK: Aye. 14 COMMISSIONER WILLIAMSON: Aye. 15 CHAIRMAN COX: Aye. 16 Any opposed? 17 Motion carries 3-0. 18 MS. KIPLIN: Commissioners, the matter 19 of Item K, that's another authorized organization. 20 The staff and the respondent have reached an 21 agreement. This had to do with the organization 22 allowing somebody who is not on the bingo registry, 23 the bingo worker registry, to use an ID card. And in 24 that matter, the person had a disqualifying criminal 25 history and would not have been eligible. 0261 1 The respondent has agreed to a penalty 2 of $200. Staff recommends that you vote to accept 3 that proposal agreement. 4 CHAIRMAN COX: Commissioner? 5 COMMISSIONER SCHENCK: I have no 6 questions. 7 COMMISSIONER WILLIAMSON: I have no 8 questions. 9 CHAIRMAN COX: Is there a motion to 10 approve staff's recommendation? 11 COMMISSIONER SCHENCK: I move that we 12 adopt staff's recommendation. 13 CHAIRMAN COX: Is there a second? 14 COMMISSIONER WILLIAMSON: Second. 15 CHAIRMAN COX: All in favor, say "Aye." 16 COMMISSIONER SCHENCK: Aye. 17 CHAIRMAN COX: Aye. 18 Any opposed? 19 Motion carries 3-0. 20 MS. KIPLIN: Commissioners, the 21 remaining docket, Item L, is another agreed order. 22 This is on the Lottery side. This is a case that had 23 been on your agenda I think two Commission meetings 24 ago, and we asked to be able to pass that item to give 25 the staff an opportunity to conduct further 0262 1 investigation. 2 And the reason for that is because this 3 was a ticket that had white over the signature line 4 and then a signature, and it went to one of the claim 5 centers down here for a forensic analysis. And below 6 the claimant's signature underneath the whiteout was 7 the signature of an individual named Dedric William. 8 Investigation occurred. There is an 9 agreed conclusion of law and I think a finding, yes, 10 to support that of false information that was provided 11 to the Lottery. We don't have any other information 12 regarding the particular claim, because we cannot 13 locate Mr. Williams. 14 COMMISSIONER SCHENCK: Have we tried 15 the Dallas County DA's office? Have we done 16 everything we can to find this Dedric Williams? 17 MS. KIPLIN: I'm going to refer to the 18 Enforcement Division Director on the efforts of the 19 supplemental investigation. But my understanding is 20 that this gentleman was not able to be located. 21 MR. CARNEY: Yes. For the record, Jim 22 Carney, Enforcement Director. 23 Mr. Commissioner, the investigator has 24 contacted the District Attorney's office, and we've 25 made every effort to make contact with this gentleman. 0263 1 We know for a fact he's gotten the message that we 2 want to speak to him. He's avoiding us. 3 COMMISSIONER SCHENCK: Well, I think 4 we've done everything we can. 5 MS. KIPLIN: The recommended penalty 6 against the retailer for the violation, which was 7 providing false information to investigators, is a 8 30-day suspension. The staff recommends that you -- 9 COMMISSIONER SCHENCK: Is there a fine 10 attached to this, Kim? 11 MS. KIPLIN: No, there is no fine 12 attached to this. 13 COMMISSIONER SCHENCK: Is that because 14 we decided not to impose one or because one is not 15 available? 16 MS. KIPLIN: Well, it would be by 17 agreement only, because you don't have the authority 18 to impose that on somebody under the State Lottery 19 Act. 20 COMMISSIONER SCHENCK: Okay. 21 COMMISSIONER WILLIAMSON: I have no 22 questions. 23 CHAIRMAN COX: And I believe I noticed 24 in the report to Chairman Flores that that item was 25 mentioned as a possible area for helpful legislation 0264 1 for us -- 2 MS. KIPLIN: Yes, sir. 3 CHAIRMAN COX: -- that we would have 4 the opportunity to fine that person instead of fining 5 the school children of Texas by closing that operation 6 down. 7 MR. CARNEY: I just would point out 8 that there are pending criminal charges against the 9 retailer separate from this. 10 COMMISSIONER SCHENCK: Excellent. 11 Excellent. Thank you. 12 I move we adopt staff's recommendation. 13 CHAIRMAN COX: Second. 14 COMMISSIONER WILLIAMSON: Second. 15 CHAIRMAN COX: All in favor, say "Aye." 16 COMMISSIONER SCHENCK: Aye. 17 COMMISSIONER WILLIAMSON: Aye. 18 CHAIRMAN COX: Aye. 19 Motion carries 3-0. 20 All right. Is there any more public 21 comment? I have no witness affirmation forms that I 22 can find. 23 DISCUSSION RE COMMISSION MEETINGS 24 CHAIRMAN COX: Okay. And finally, 25 Ms. Kiplin, is it permissible at this time for us to 0265 1 deliberate scheduling of meetings? 2 MS. KIPLIN: I think a general 3 discussion can occur. And to the extent that you 4 require, you know, much more specific process, we can 5 certainly notice it up for -- 6 CHAIRMAN COX: Okay. Well, let me just 7 give a short summary. When Chairman Clowe was here, 8 we began, I think about the time the state auditor 9 came in, meeting twice a month, and we met quite some 10 time on the first and third Wednesdays, I think, or 11 something like that. 12 When we concluded that we only needed 13 to meet once, we went to every third Wednesday, and 14 that has been our target, although there have been 15 exceptions to accommodate various schedules. And 16 basically staff has just found a combination of days 17 or a day that works for the two of us, since Chairman 18 Clowe left. 19 With the three of us, I sense a need 20 that we discuss the idea that we have a set date, and 21 it can be whatever y'all want it to be or it can be 22 whatever date staff would find most ideal as to both 23 second, third or fourth and Monday through Friday. 24 I understand, Commissioner, that the 25 third week is a good week for you, and it works for me 0266 1 as a general matter. 2 COMMISSIONER SCHENCK: It usually works 3 for me as well. 4 CHAIRMAN COX: Okay. Is there a 5 particular day of the week that stands out above all 6 others for any one of us? 7 COMMISSIONER SCHENCK: Well, again in 8 my law practice, the middle of the week sort of ends 9 up being kind of a challenge for me from time to time. 10 I've been able to work it out. But from time to time, 11 I might -- unless we want to have a universal 12 practice, Fridays or Mondays, particularly Fridays, 13 seem to be a little bit better for me. But I'm happy 14 to work around anybody's schedule. 15 CHAIRMAN COX: Commissioner, any 16 thoughts on -- 17 COMMISSIONER WILLIAMSON: I don't 18 really care what day of the week. Probably Fridays 19 are easier, because it does kind of mess up your whole 20 work week when you take off at least two days. At 21 least I do. So the day of the week is flexible for 22 me. 23 CHAIRMAN COX: Okay. Gary, is there 24 anything that comes to your mind that would affect 25 staff availability in general on Fridays as opposed to 0267 1 the Wednesdays? 2 MR. GRIEF: I do believe more staff 3 would likely be available on Wednesdays than on 4 Fridays, but Fridays would work fine. We just need to 5 get those scheduled and make arrangements. 6 COMMISSIONER WILLIAMSON: I mean, 7 David, does Thursday work for you? Or is that 8 irrelevant whether it's Thursday or Friday? 9 COMMISSIONER SCHENCK: Well, I think 10 there is really no difference between Thursday and 11 Wednesday -- 12 COMMISSIONER WILLIAMSON: Okay. 13 COMMISSIONER SCHENCK: -- or Tuesday. 14 COMMISSIONER WILLIAMSON: Okay. Well, 15 what about a Monday? 16 COMMISSIONER SCHENCK: Monday works 17 fine for me as well. 18 COMMISSIONER WILLIAMSON: I mean, I 19 assume the staff would be more available on Monday? 20 MR. GRIEF: Monday would certainly work 21 better for staff, yes, sir. 22 CHAIRMAN COX: Okay. And does that 23 work, too, as far as notices and briefings and all of 24 that, that -- I typically had a briefing on Monday, 25 but that doesn't mean it can't be on Thursday before a 0268 1 Monday. 2 MS. KIPLIN: Well, I think -- it's 3 really whatever the Commission's pleasure is, and we 4 can see how it works out on Mondays. Mondays are -- I 5 think generally, you know, people use the day before 6 to really get prepared, so that would be on a weekend. 7 But it's the Commission's pleasure, and the staff will 8 work around it. 9 COMMISSIONER WILLIAMSON: What about on 10 Friday? 11 COMMISSIONER SCHENCK: That keeps them 12 busy on the work-week doing work and working on the 13 weekend when they would otherwise not be working, 14 which is -- I'm thinking like a lawyer now. 15 No, I'm fine. If you want to do 16 Wednesdays, I'm fine with Wednesdays. 17 MR. GRIEF: And I'll just tell you, 18 we've had Commission meeting on every day of the week. 19 MS. KIPLIN: Even Saturdays. 20 MR. GRIEF: And staff can work -- it 21 really doesn't matter from staff's perspective. I 22 mean, you asked me what was easier, and I told you. 23 But we can do it any day. 24 CHAIRMAN COX: Okay. So I heard you 25 say that Friday was weakest. And beyond that, it's 0269 1 pretty much of a toss-up. And then Kim says that some 2 people are going to be required to prepare on 3 Sunday -- 4 COMMISSIONER SCHENCK: Why not Friday? 5 CHAIRMAN COX: -- to which I am 6 sensitive. And Gary says that some people will -- 7 that Friday is perhaps our least attended day; and, 8 yet, most of the people here are high level folks, and 9 I tend to see them around on Fridays. 10 COMMISSIONER SCHENCK: My question is, 11 why wouldn't people be preparing on Friday for a 12 Monday Commission hearing -- meeting instead of -- 13 MR. GRIEF: My guess is, the only 14 person that would be preparing on a Sunday for a 15 Monday meeting is your General Counsel. 16 (Laughter) 17 That's my sense of it. 18 MS. KIPLIN: I'm just going back to the 19 years at the Railroad Commission of Monday morning 20 conferences and everybody working over the weekends. 21 MS. PYKA: Well, we survived, two times 22 a month, knocked them out. 23 COMMISSIONER WILLIAMSON: You guys work 24 it out and just tell me what day I need to be here, 25 and then we'll work out the -- 0270 1 CHAIRMAN COX: Well, let's see if we 2 can do something here to help. 3 COMMISSIONER WILLIAMSON: Okay. 4 CHAIRMAN COX: What I hear is that the 5 third Monday would be the best that we can set for 6 everybody here, because it's -- you are okay with any 7 day of the week, you prefer the third week of the 8 month? 9 COMMISSIONER WILLIAMSON: Third week of 10 the month would be -- 11 CHAIRMAN COX: You prefer Monday or 12 Friday? 13 COMMISSIONER SCHENCK: Or a Friday, 14 yes. 15 CHAIRMAN COX: And Gary says that 16 Monday is better for staff and Kim says Friday. Gary 17 thinks that Kim is speaking for herself only. So 18 we'll (laughter). 19 COMMISSIONER WILLIAMSON: Well, see, 20 you would keep our agenda short. If we have it on 21 Friday, then we're out of here at 2:00 and y'all -- 22 CHAIRMAN COX: Will accord him the 23 appropriate respect -- 24 COMMISSIONER WILLIAMSON: Start at 25 8 o'clock rather than 9 o'clock. 0271 1 COMMISSIONER SCHENCK: Why don't we try 2 just one -- we can experiment and see how it goes. 3 COMMISSIONER WILLIAMSON: Yes. And if 4 y'all just -- we'll change it. 5 CHAIRMAN COX: Okay. Good. So we will 6 not have a meeting in November, it being almost 7 November as we speak. The meeting in December will be 8 the third Monday of the week. Is that what we got? 9 COMMISSIONER WILLIAMSON: Oh, we're 10 going to try Monday first, and then if it's just not 11 good, then we'll do Fridays? 12 COMMISSIONER SCHENCK: Yes, that's 13 fine. 14 CHAIRMAN COX: I'm sorry. Y'all said 15 Fridays, didn't you? 16 COMMISSIONER SCHENCK: Let's try 17 Friday. 18 CHAIRMAN COX: Friday. Okay. The 19 third Friday in December. And -- 20 COMMISSIONER WILLIAMSON: What date is 21 that? 22 (Laughter) 23 (Simultaneous discussion) 24 COMMISSIONER WILLIAMSON: What actually 25 is the date on that Friday? 0272 1 MR. TIRLONI: That's the 19th. 2 MS. KIPLIN: Oh, okay. I got it. 3 School is out. 4 COMMISSIONER SCHENCK: School is out? 5 COMMISSIONER WILLIAMSON: What date -- 6 oh, Austin school. When is school out here? 7 COMMISSIONER SCHENCK: How about the -- 8 well -- 9 CHAIRMAN COX: Okay. Let's go back to 10 Commissioner Williamson's idea. Y'all work it out and 11 tell us what it is. 12 COMMISSIONER WILLIAMSON: Y'all work it 13 out. Why don't we formalize it as of January. 14 COMMISSIONER SCHENCK: Yes, that's 15 right. 16 COMMISSIONER WILLIAMSON: Y'all figure 17 out when in December, since it is the holidays. 18 CHAIRMAN COX: Make December work for 19 everybody and then tell us what you think would be -- 20 at the December meeting, what you think would be best 21 for January for a trial period, and we'll go from 22 there. 23 MR. GRIEF: And I'm just thinking we -- 24 and I'll talk to Kim -- I'm thinking we'll be looking 25 more at the second Friday for just December, which 0273 1 might make it better for everybody. 2 CHAIRMAN COX: And that kind of puts it 3 in between now and the January meeting. 4 COMMISSIONER SCHENCK: That's closer 5 to -- 6 CHAIRMAN COX: I don't think we'll have 7 a problem with that. 8 MR. GRIEF: We will take a look at 9 that. 10 CHAIRMAN COX: Okay. One follow-up. 11 Commissioner, you were provided the 12 tickets? 13 COMMISSIONER SCHENCK: Yes, I like 14 them. They do not contain exactly what I feared they 15 might, which makes me happy. 16 CHAIRMAN COX: Yes, me too. 17 And thank you for that question. 18 COMMISSIONER SCHENCK: Yes. 19 CHAIRMAN COX: Is there any further 20 business? 21 AGENDA ITEM NO. XXXI 22 COMMISSIONER SCHENCK: I move we 23 adjourn. 24 CHAIRMAN COX: Okay. 25 COMMISSIONER WILLIAMSON: Second. 0274 1 CHAIRMAN COX: Okay. We vote on that 2 one by abandoning the place. 3 (Laughter) 4 COMMISSIONER SCHENCK: With our feet. 5 Good seeing you, Mr. Chairman. 6 CHAIRMAN COX: Thank you. 7 COMMISSIONER WILLIAMSON: Thank you. 8 CHAIRMAN COX: Thank you, Commissioner. 9 (Meeting concluded: 4:11 p.m.) 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0275 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 7th day of November 2008. 15 16 17 ________________________________ 18 Aloma J. Kennedy Certified Shorthand Reporter 19 CSR No. 494 - Expires 12/31/08 20 Firm Certification No. 276 Kennedy Reporting Service, Inc. 21 Cambridge Tower 1801 Lavaca Street, Suite 115 22 Austin, Texas 78701 512.474.2233 23 24 25