0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 6 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 7 WEDNESDAY, DECEMBER 13, 2006 § 8 9 10 COMMISSION MEETING 11 WEDNESDAY, DECEMBER 13, 2006 12 13 BE IT REMEMBERED THAT on Wednesday, 14 the 13th day of December 2006, the Texas Lottery 15 Commission meeting was held from 8:00 a.m. to 16 2:39 p.m., at the Offices of the Texas Lottery 17 Commission, 611 East 6th Street, Austin, Texas 78701, 18 before CHAIRMAN C. TOM CLOWE, JR., and COMMISSIONER 19 JAMES A. COX, JR. The following proceedings were 20 reported via machine shorthand by Aloma J. Kennedy, a 21 Certified Shorthand Reporter of the State of Texas, 22 and the following proceedings were had: 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Mr. C. Tom Clowe, Jr. 4 COMMISSIONER: Mr. James A. Cox, Jr. 5 GENERAL COUNSEL: 6 Ms. Kimberly L. Kiplin 7 EXECUTIVE DIRECTOR: Mr. Anthony J. Sadberry 8 CHARITABLE BINGO ASSISTANT EXECUTIVE DIRECTOR: 9 Mr. Phil Sanderson 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE NO. 3 AGENDA ITEM NO. I - Meeting Called to Order.. 9 4 AGENDA ITEM NO. II - Report by the Bingo Advisory Committee Chairman, possible 5 discussion and/or action regarding the Bingo Advisory Committee's activities, including 6 the November 8, 2006 Committee meeting....... 9 7 AGENDA ITEM NO. III - Consideration of and possible discussion and/or action on 8 nominations and/or appointments to the Bingo Advisory Committee..................... 23 9 AGENDA ITEM NO. IV - Report, possible 10 discussion and/or action on the implementation of recommendations contained 11 in the Internal Audit report on bingo audit services .................................... 33 12 AGENDA ITEM NO. V - Consideration of and 13 possible discussion and/or action, including proposal of repeal on 16 TAC §402.603 14 relating to bonds or other security ......... 57 15 AGENDA ITEM NO. VI - Consideration of and possible discussion and/or action, including 16 proposal, on new Rule 16 TAC §402.305 relating to progressive bingo ............... 66 17 AGENDA ITEM NO. VII - Consideration of and 18 possible discussion and/or action, including proposal of amendments, on 16 TAC §402.300 19 relating to pull-tab bingo .................. 81 20 AGENDA ITEM NO. VIII - Consideration of and possible discussion and/or action, including 21 proposal of amendments, on 16 TAC §402.400 relating to general licensing provisions .... 89 22 AGENDA ITEM NO. IX - Consideration of and 23 possible discussion and/or action, including proposal, on new rule 16 TAC §402.204 24 relating to prohibited price fixing ......... 91/163 25 0004 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. X - Report, possible discussion and/or action on instant 4 bingo or pull-tab bingo ..................... 119 5 AGENDA ITEM NO. XI - Report, possible discussion and/or action on lottery 6 sales and revenue, game performance, new game opportunities, market research 7 and trends .................................. 149 8 AGENDA ITEM NO. XII - Report, possible discussion and/or action on transfers 9 to the State ................................ 153 10 AGENDA ITEM NO. XIII - Consideration of and possible discussion and/or action on 11 the Lotto Texas procedures .................. 155 12 AGENDA ITEM NO. XIV - Report, possible discussion and/or action on the 2006 13 demographic report on lottery players ....... 126 14 AGENDA ITEM NO. XV - Consideration of and possible discussion and/or action, 15 including proposal, on new rule 16 TAC §401.316 relating "Daily 4" on-line 16 game rule ................................... 166 17 AGENDA ITEM NO. XVI - Consideration of and possible discussion and/or action, 18 including proposal of repeal and proposal of new Rule 16 TAC §401.307 relating to 19 "Pick 3" on-line game ....................... 166 20 AGENDA ITEM NO. XVII - Consideration of and possible discussion and/or action on 21 external and internal audits and/or reviews relating to the Texas Lottery 22 Commission and/or on the Internal Audit Department's activities and/or on the 23 Internal Audit Charter ...................... 197 24 AGENDA ITEM NO. XVIII - Report, possible discussion and/or action on the agency's 25 contracts ................................... 199 0005 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. XIX - Consideration of and possible discussion and/or action on 4 the lottery drawings audit services procurement ................................. 200 5 AGENDA ITEM NO. XX - Consideration of 6 and possible discussion and/or action on the audit services procurement .............. 200 7 AGENDA ITEM NO. XXI - Report, possible 8 discussion and/or action, including amendments and/or extension, on the 9 agency's instant ticket manufacturing and services contract ....................... 202 10 AGENDA ITEM NO. XXII - Report, possible 11 discussion and/or action, including amendments and/or extension, on the 12 agency's advertising contract ............... 204 13 AGENDA ITEM NO. XXIII - Report, possible discussion and/or action, including 14 amendments and/or extension, on the agency's market research contract ........... 205 15 AGENDA ITEM NO. XXIV - Report, possible 16 discussion and/or action on the agency's HUB program, including the agency's 17 performance on the FY 2006 Annual HUB Report ...................................... 206 18 AGENDA ITEM NO. XXV - Report, possible 19 discussion and/or action on the 80th Legislature ............................ 208 20 AGENDA ITEM NO. XXVI - Report, possible 21 discussion and/or action on the terminal validation of tickets ....................... 212 22 AGENDA ITEM NO. XXVII - Report, possible 23 discussion and/or action on the Mega Millions game and/or contract ............... 260 24 25 0006 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. XXVIII - Commission may meet in Executive Session: 4 A. To deliberate the duties and evaluation of the Executive Director 5 and/or Deputy Executive Director pursuant to Section 551.074 of the 6 Texas Government Code. B. To deliberate the duties and 7 evaluation of the Internal Audit Director pursuant to Section 8 551.074 of the Texas Government Code. C. To deliberate the duties, appointment 9 and/or employment of the Charitable Bingo Operations Director pursuant to 10 Section 551.074 of the Texas Government Code. 11 D. To deliberate the duties and/or reassignment of the Assistant 12 Charitable Bingo Operations Director pursuant to Section 551.074 of the 13 Texas Government Code. E. To deliberate the duties, appointment 14 and/or employment of an Acting Charitable Bingo Operations Director 15 pursuant to Section 551.074 of the Texas Government Code. 16 F. To deliberate the duties of the General Counsel pursuant to Section 17 551.074 of the Texas Government Code. G. To receive legal advice regarding 18 pending or contemplated litigation and/or to receive legal advice 19 pursuant to Section 551.071(1)(A) or (B) of the Texas Government Code 20 and/or to receive legal advice pursuant to Section 551.071(2) of the 21 Texas Government Code, including but not limited to: 22 Cynthia Suarez v. Texas Lottery Commission 23 Shelton Charles v. Texas Lottery and Gary Grief 24 Stephen Martin vs. Texas Lottery Commission 25 0007 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 Patsy Henry v. Texas Lottery Commission 4 First State Bank of DeQueen et al. v. Cletus Irvan 5 Employment law, personnel law, procurement and contract law, 6 evidentiary and procedural law, and general government 7 law Mega Millions game and/or 8 contract Pull-tab bingo ................ 263 9 AGENDA ITEM NO. XXIX - Return to open session 10 for further deliberation and possible action on any matter discussed in Executive Session. 265 11 AGENDA ITEM NO. XXX - Consideration of the 12 status and possible entry of orders in: A. Docket No. 362-07-0088 - Convenient 13 Food Mart B. Docket No. 362-07-0087 - Corner 14 Quick Stop C. Docket No. 362-07-0201 - MQ Food Mart 15 D. Docket No. 362-06-3144 - Trainer Hale Truck Stop 16 E. Docket No. 362-06-3145 - Town & Country Plaza 17 F. Docket No. 362-06-3146 - Monica's Food Mart 18 G. Docket No. 362-06-3147 - G's Minute Stop 19 H. Docket No. 362-06-3148 - Red Barn Kountry Food Store 20 I. Docket No. 362-06-3149 - Rosenberg Chevron 21 J. Docket No. 362-06-3386.B - In the Matter of Karla Roddy .............. 266 22 AGENDA ITEM NO. XXXI - Report by the Executive 23 Director and/or possible discussion and/or action on the agency's operational status, 24 agency procedures and FTE status............. 267 25 0008 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. XXXII - Report by the Charitable Bingo Operations Director and 4 possible discussion and/or action on the Charitable Bingo Operations Division's 5 activities................................... 147 6 AGENDA ITEM NO. XXXIII - Public Comment...... 271 7 AGENDA ITEM NO. XXXIV - Adjournment.......... 272 8 REPORTER'S CERTIFICATE....................... 273 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0009 1 P R O C E E D I N G S 2 WEDNESDAY, DECEMBER 13, 2006 3 (8:00 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN CLOWE: We can come to order. 6 We'll get under way. 7 Good morning. It is 8:00 a.m., December 8 13, 2006. Commissioner Cox is here. My name is Tom 9 Clowe. We'll call this meeting of the Texas Lottery 10 Commission to order. 11 AGENDA ITEM NO. II 12 CHAIRMAN CLOWE: We'll begin with Item 13 II on the agenda, report by the Bingo Advisory 14 Committee Chairman, possible discussion and/or action 15 regarding the Bingo Advisory Committee's activities, 16 including the November 8, 2006, committee meeting. 17 Ms. Taylor, good morning. 18 MS. TAYLOR: Good morning, 19 Commissioners. My name is Suzanne Taylor. I'm the 20 Chair of the BAC. The report was included in your 21 notebooks. I don't know if you had a chance to read 22 it, if you wanted me to expand on it any further or 23 answer any questions. 24 COMM. COX: What is your pleasure, 25 Mr. Chairman? 0010 1 CHAIRMAN CLOWE: Let's ask any questions 2 we have regarding the meeting. Anything on your mind? 3 COMM. COX: Well, I attended half the 4 meeting, and I believe you had attended the previous 5 half of the meeting. 6 CHAIRMAN CLOWE: Correct. 7 COMM. COX: So I was there for a good 8 deal of it. I have read the report. There is one 9 issue that I wanted to talk a little bit about, 10 Mr. Chairman, related to this, and that is getting as 11 clear a focus for me on the role of the Bingo Advisory 12 Committee with respect to potential candidates for the 13 committee. 14 CHAIRMAN CLOWE: The nominating process? 15 COMM. COX: Yes, sir. 16 CHAIRMAN CLOWE: Yes. 17 COMM. COX: I was there when they 18 discussed the application of Jeff Minch of the 19 Littlefield Corporation to serve on the committee. 20 And it was indicated that his company has two halls in 21 which members of the BAC operate; and, therefore, 22 there seemed to be some kind of a conflict of interest 23 or something of that nature. 24 I didn't think it was appropriate at the 25 time for me to get into a discussion, but I'm having a 0011 1 hard time seeing the conflict of interest. And this 2 looks like a very qualified candidate. So I wanted to 3 just talk about the process, what are we asking them 4 to do with respect to applications of this nature? 5 Are we asking for recommendations or should the 6 recommendations come to the bingo staff for our 7 consideration and we go from there? 8 CHAIRMAN CLOWE: I think that's well- 9 founded, Commissioner. I think we have two issues 10 here. One is perhaps individual qualifications and 11 the other is process, in that I think we need to have 12 a clear understanding of what the process is. We 13 might start with that, if that's agreeable with you. 14 COMM. COX: Good. Perfect. 15 CHAIRMAN CLOWE: And I think maybe it 16 might be wise to call on the General Counsel to give 17 us her understanding of the process. 18 And, Suzanne, I invite you to enter into 19 this discussion. My understanding is that you as 20 chair appoint the nominating committee. Has that been 21 what your function has been? 22 MS. TAYLOR: Yes, sir. 23 CHAIRMAN CLOWE: And who is currently 24 the chair of the nominating committee? 25 MS. TAYLOR: Kim Rogers is. 0012 1 CHAIRMAN CLOWE: And who is on that 2 committee? 3 MS. ROGERS: It's myself and Larry 4 Whittington. 5 CHAIRMAN CLOWE: And it's been your 6 practice to create nominations to actually, when a 7 vacancy occurs, be active in soliciting individuals to 8 create nominations? 9 MS. ROGERS: Yes, sir. 10 And for the record, my name is Kimberly 11 Rogers, just so you know. 12 The process that's been happening since 13 I've been chair of the nominating committee, is when 14 someone submits their nomination form into the Bingo 15 Department, it is forwarded to myself, and I take 16 that. And if there's -- prior to -- about last year 17 we had three or four that would come in at a time. I 18 would give a couple to someone else who was on the 19 committee with myself and we would go over them. 20 If they were qualified in the aspects of 21 they held a position that was available that they were 22 applying for, we would call them and go through 23 questions that were -- those questions were given -- 24 handed down to me from people who had done it before 25 my time. 0013 1 And we looked for people who lived in 2 certain areas that weren't recognized already on the 3 BAC board, individuals who knew about bingo, who 4 were -- you know, worked in it from day-to-day, not 5 someone who is looking to learn about bingo, is one of 6 the things we always looked for. And then we would 7 get back together and talk about it, and we would pick 8 the person that we thought was the most qualified for 9 the position. Then we would turn around, and I would 10 tell Billy at that time, "This is the person who we 11 think would be the best for this position," and then 12 he would handle it from there. And I believe after 13 that time, it went to yourselves. 14 CHAIRMAN CLOWE: Do you have a job 15 description or a description of that function for the 16 nominating committee to follow? 17 MS. ROGERS: Was I given a written 18 instruction sheet? No, sir. 19 CHAIRMAN CLOWE: How were you educated 20 about your task and how to perform it when you were 21 named chair of the nominating committee? 22 MS. ROGERS: I asked Danny Moore, who 23 has done it prior to me and who was the individual who 24 contacted myself, "How had y'all done this in the 25 prior time?" 0014 1 CHAIRMAN CLOWE: That's fine. 2 MS. ROGERS: And then I did exactly what 3 he told me. 4 CHAIRMAN CLOWE: I just want to 5 understand -- 6 MS. ROGERS: Right. 7 CHAIRMAN CLOWE: -- how you -- 8 MS. ROGERS: I will add to that, if an 9 individual was not in the position that they were 10 applying for, like if they were applying for the 11 commercial lessor position and they no longer own a 12 commercial lessor license, Worlanda or Billy would 13 make me aware of this and we would not go any further 14 with the process, because they didn't fit -- you know, 15 now, of course, that's something that can be changed, 16 it can be done -- but they didn't fit the criteria of 17 what they were applying for. And also Mr. Minch, in 18 speaking of that -- I don't know. Is this time to -- 19 CHAIRMAN CLOWE: No, let's don't get 20 into that. 21 MS. ROGERS: Okay. 22 CHAIRMAN CLOWE: We're just talking 23 about process here. 24 MS. ROGERS: Okay. Process. If they 25 did not fit the position they were applying for, we 0015 1 didn't go any further. 2 CHAIRMAN CLOWE: Okay. And then, Phil, 3 there has been a reaching out when vacancies occur. 4 So I assume if the nominating committee hasn't been 5 doing it, the staff has, relative to making within the 6 industry the vacancies known and encouraging people 7 who have an interest and are qualified to indicate 8 that interest. Is that correct? 9 MR. SANDERSON: That is correct, 10 Chairman. Right now we have included -- in fact, 11 going out this week or next week with the quarterly 12 reports will be a nomination form. There's three 13 positions coming up with a term expiring February 1, 14 2007. We've also included a form in the Bingo 15 Bulletin that's being mailed this week. And also on 16 the website we put a notice that we're now accepting 17 nominations. 18 CHAIRMAN CLOWE: Okay. Now, Counselor, 19 if I understand what we've heard correctly, when 20 nominations are sought after, the staff is actively 21 advertising within the industry, making known those 22 vacancies and encouraging people to step forward who 23 may be qualified and wish to contribute into the 24 effort of the BAC. The nominating committee functions 25 under a chair appointed by the chair of the BAC and 0016 1 really has a criteria for performance that is historic 2 and word of mouth, not codified in a job description 3 or a rule setting down, so to speak. And then the 4 nominations are reported to the BAC. 5 And, Suzanne, do you vet those 6 nominations and take action on them in the BAC 7 meetings? 8 MS. TAYLOR: When the nominating 9 committee comes and makes a report to the full 10 committee of their recommendations, then if the 11 committee agrees, we make a motion to forward the 12 recommendations to the Commissioners. 13 CHAIRMAN CLOWE: Okay. And then they 14 come to the Commission in open meeting. 15 Now, Counselor, I think the question 16 that Commissioner Cox and I would pose to you relative 17 to the process is, are we following the correct 18 practice and are we within what in your opinion is the 19 legal framework in this process? 20 MS. KIPLIN: And I'm looking to 21 Ms. Joseph, because I think she's been more involved 22 on a specific level in terms of this process. So I 23 invite her to make any comments, but I'll respond 24 specifically to your question. 25 And the process for nomination is not 0017 1 set out in rule or in statute, either in the general 2 statute on state agency advisory committees or the 3 rule or your Bingo Advisory Committee statute that 4 gives you the authority, if you wish, to have a Bingo 5 Advisory Committee. 6 What is set out is the nomination period 7 and the different categories for nomination; you know, 8 for qualification or for a position on the Bingo 9 Advisory Committee, and then the term, the period for 10 which somebody would serve and then what would make 11 somebody ineligible. But the process in and of itself 12 is not set out. 13 So the general comments that I would 14 make would be making sure that, since it's really your 15 committee, that you are comfortable with the process 16 and that you as the Texas Lottery Commission are 17 seeing I guess the persons or the individuals, to the 18 extent you wish, bubbling up. 19 In just listening to the process that's 20 been set out factually, one concern that you might 21 want to deliberate is what happens to those 22 individuals that are stopped at the Bingo Advisory 23 Committee level from coming to you? In the past -- 24 and this may not be a good analogy -- but I think in 25 terms of a selection, for example, of a person who -- 0018 1 for example, the Executive Director, you did appoint, 2 for example, a selections committee, but I think you 3 reserved the right to look at any applications that 4 you wanted yourself -- 5 CHAIRMAN CLOWE: I want to correct you 6 for the record. It was the search committee -- 7 MS. KIPLIN: I'm sorry. 8 CHAIRMAN CLOWE: It's not a selection 9 committee. 10 MS. KIPLIN: My apologies. 11 CHAIRMAN CLOWE: Never known as a 12 selection committee. 13 MS. KIPLIN: My apologies. 14 CHAIRMAN CLOWE: And we were very clear 15 on that for the very reason that I'm making the point 16 to correct you, in that we wanted a broad search. But 17 from the very beginning, it was clear the selection 18 was the prerogative only of the Commissioners. And I 19 think we ought to move away from that in regard to 20 this, because I see this process as it is established 21 where we have a staff searching for nominees, they 22 come to the nominating committee, there is a vetting 23 process going on there. And then there is another 24 vetting process going on with the BAC. And I think 25 Commissioner Cox and I want to look at that, but we 0019 1 want to talk about process right now so we understand. 2 MS. KIPLIN: And I stand corrected. My 3 apologies for that. But getting to the Bingo Advisory 4 Committee and the process, the criterion that they're 5 using is not set out, as best I could tell. I mean, I 6 did read the transcript. But in terms of maybe too 7 much from one, one hall, those are not considerations 8 that are set out in the rule. 9 What is set out is the composition -- 10 you know, charity, distributor and its actual lessor. 11 But, now, I will say that in the past historically -- 12 this goes pretty far back -- the Commission did -- not 13 this current complement of commissioners -- but the 14 Commission did consider things -- for example, 15 geographic location in terms of making sure that there 16 was a good, broad representation on that level. 17 But the process that I'm hearing is not 18 set out in the rule, statute or otherwise. 19 CHAIRMAN CLOWE: By way of that last 20 comment, are you considering that type of 21 qualification in your -- 22 MS. ROGERS: The geographical? 23 CHAIRMAN CLOWE: -- deliberations? 24 MS. ROGERS: By all means, because right 25 now on our BAC, we have someone from West Texas, from 0020 1 North Texas, from East Texas, from central and from 2 south, which, because bingo is so different. And so 3 many of our reports that Phil gives focus on why is 4 bingo this way in this area and why is it this way in 5 this area? Why are they doing this here and why are 6 they not doing it there? Sure. And right now I think 7 we have done a very good job at getting very dispersed 8 amongst Texas, you know, with different individuals, 9 yes. 10 CHAIRMAN CLOWE: Commissioner Cox, what 11 are your comments? 12 COMM. COX: Well, I think you pretty 13 well laid them out when you described the search 14 process that we have for the Executive Director's 15 position. In that process, you and I go forward in 16 every application. We could ask them to interview 17 anyone we chose to. And whether they recommend it or 18 not, we could have interviewed them. We didn't in 19 that particular case, but we could have. 20 CHAIRMAN CLOWE: But in one case I 21 actually added a person to the interview by the search 22 committee, who was not first ranked in the top group. 23 COMM. COX: Yes. 24 CHAIRMAN CLOWE: That's an example I 25 think of what you're talking about. 0021 1 COMM. COX: And I think this is the way 2 this should be, too. I think that the Bingo Advisory 3 Committee should not be a self-perpetuating 4 organization. It should be selected by the Commission 5 considering all the factors that they consider and all 6 the ones they ask us to consider. But I don't believe 7 that they should be in a position to keep us from 8 considering a qualified candidate. 9 CHAIRMAN CLOWE: I agree. Do you want 10 to give the Bingo Advisory Committee chair that 11 instruction and ask that chair to pass it on to the 12 chair of the Nominating Committee and leave it at 13 that, or do you want to go deeper into any current 14 situations that you're aware of at this time? 15 COMM. COX: Well, there is a current 16 situation that I'm aware of. I should tell you that 17 Jeff Minch of the Littlefield Corporation, through his 18 counsel, contacted our General Counsel and asked for a 19 meeting with me. General Counsel arranged that 20 meeting, and Director Sadberry and I met with 21 Mr. Minch. What he wanted to talk about was this 22 issue. He believed that he was well-qualified. He 23 believed that given the number of halls that his 24 company owns, that this kind of occurrence, if you 25 will, that someone is serving on the committee who 0022 1 works out of one of his halls would be expected, 2 because of the pervasiveness of his ownership. 3 He seemed to be a very well-qualified 4 person who operates all over the state. And it seems 5 to me that he is just what we're looking for, as 6 opposed to saying, "Well, he's in a hall that's 7 already represented." You know, one of the things 8 that the Act does -- I believe it's the Act rather 9 than the rule -- is suggest or require that these 10 people be from the various aspects of the industry, 11 that some of them be charities, that some of them be 12 commercial operators, that some of them be suppliers. 13 And by virtue of that, you're going to have 14 represented on the committee interests that could be 15 adverse. That's okay. That's the way it was set up, 16 so that everybody could be heard. And I think it's 17 important that we hear from a broad representation of 18 people. 19 CHAIRMAN CLOWE: Counselor, Commissioner 20 Cox is expressing philosophy now. And I think the 21 next step is to, if it's proper within the confines of 22 the agenda, to hear from the folks who have been 23 involved in this process and hear what their response 24 is, if that's proper. Are we on firm ground there? 25 MS. KIPLIN: I think you are. As you 0023 1 were discussing the process on appointments and 2 nominations of the Bingo Advisory Committee, I think 3 we're moving into Item III more specifically than the 4 Bingo Advisory Committee, Chairman's report on the 5 Bingo Advisory Committee activities. 6 AGENDA ITEM NO. III 7 CHAIRMAN CLOWE: All right. Let me 8 announce that item so that we're in good order, and 9 that is Item No. III, consideration of and possible 10 discussion and/or action on nominations and/or 11 appointments to the Bingo Advisory Committee. We're 12 going to work on II and III together now. 13 You heard what Commissioner Cox has 14 said. Tell us what your thinking is in response to 15 that, please. 16 MS. TAYLOR: Can I interrupt just one 17 minute? Commissioners, I don't believe that it was 18 ever the intent of the BAC or our understanding that 19 because the BAC did not recommend a nomination, that 20 the nomination would still not go before the 21 Commissioners. I don't ever think that I thought they 22 were going to be thrown in the trash can. 23 CHAIRMAN CLOWE: I think that's fair. I 24 think -- Suzanne, my take on it over the years has 25 been, it's been more of an effort to get people to 0024 1 volunteer and to participate and to allow themselves 2 to be nominated. But I think this is a good issue 3 that has come up. And since Commissioner Cox has been 4 involved in this meeting, we're now discussing a 5 little unusual situation, but I think it's very 6 positive. So I understand your thought. But let's go 7 back in to where the nominating committee was on this 8 issue. 9 MS. ROGERS: Okay. Just one quick 10 thing, along with what Suzanne said. All the 11 nomination committee -- I'm sorry -- applications come 12 from Worlanda or Billy's office. So Suzanne is not 13 the one forwarding them to me. I just want that to be 14 clear. They would come from there. And myself also, 15 I don't know that y'all don't get a copy of every one 16 of them. 17 And are you asking me something specific 18 in reference to Mr. Minch? I don't understand what 19 I'm supposed to be answering here. 20 CHAIRMAN CLOWE: Yes, yes. 21 MS. ROGERS: Okay. As to why his 22 application was not forwarded -- why we did not 23 recommend him. Is that what you're asking? 24 CHAIRMAN CLOWE: Why you took the action 25 that you did. 0025 1 MS. ROGERS: Okay. Myself, along with 2 Danny Moore at the time when Mr. Minch first applied, 3 he was on the nominating committee at the time. 4 CHAIRMAN CLOWE: Danny Moore? 5 MS. ROGERS: Yes, sir. Danny Moore 6 and also -- I can never remember his name -- not Jack. 7 MR. SANDERSON: Thomas Weekley. 8 MS. ROGERS: Thomas Weekley. Thank you 9 very much, Phil. 10 Thomas Weekley also was on the 11 committee, but both those individuals are no longer on 12 the board at this time. 13 We discussed Mr. Minch, all three of us. 14 It's not just myself that made the decision. We 15 always discuss all of them. When an application would 16 come in, if they weren't qualified for the position, I 17 would notify the other individuals on the committee. 18 They would agree with me: Okay. We don't go any 19 further with that one. We'll look for one that is 20 qualified. Mr. Minch was qualified for the 21 position -- or is qualified for the position. 22 I stated that he is with the Littlefield 23 Corporation, the same as Rosie and the same as Jack. 24 MR. SANDERSON: Thomas Weekley. 25 MS. ROGERS: Thomas Weekley. But it 0026 1 wasn't Tom Weekley, though, that helped me before on 2 the committee. Who was the other committee member 3 that left? 4 COMM. COX: Mario Manio? 5 MS. ROGERS: Huh-uh. 6 MR. SANDERSON: Pete Pavolvsky. 7 MS. ROGERS: Pete. I'm sorry. So it 8 was myself, Danny and Pete when Mr. Minch first 9 applied. We discussed it, that he is also with the 10 Littlefield Corporation. At that time, Rosie and Tom 11 had already been nominated and put on the committee. 12 I myself felt that when you have a board 13 as small as ours, which is only eight people, three of 14 them -- and, yes, they're associated in different 15 ways, but they all are tied together. He comes from 16 an area -- he is from Austin, which is his area 17 that -- Tom is already from Austin. Right? No, Tom 18 is not from Austin. Our general public is from 19 Austin. 20 So he already -- and that was one thing 21 that we look at, the geographical area, you know, that 22 we want people separated all around. He's very 23 qualified. Mr. Minch is very qualified; I will give 24 you that. But they're all tied together to the 25 Littlefield Corporation. 0027 1 And I felt that if something came about 2 that we were asked to look at and it was something 3 that would hinder corporations, let's just say, in 4 operating bingo -- and I'm just pulling something out 5 of the air -- it's going to affect those three people 6 tremendously. They are charities. And at this time I 7 felt we already have two individuals. Mr. Minch has a 8 great voice. He has two people that work with him 9 that can bring any issues that he has to the board. 10 And I was not alone. Danny Moore also felt the same 11 way. 12 And when Mr. Minch reapplied, I 13 contacted Larry and I asked Larry if he would like to 14 go any further with it, if he would like to interview 15 him or bring this to you. And he said no, his opinion 16 was the same as what Danny and I also had, and Pete. 17 COMM. COX: I think that's well- 18 reasoned. At the same time, I see another side to it. 19 I see that the charities need representation and the 20 lessors need representation, and I think that we 21 should have the best representation from those that we 22 can get. I don't see any ganging up as a possibility, 23 particularly when we have two charities and one 24 commercial lessor which have very different interests. 25 I just don't see that. But I don't know the industry 0028 1 as well as you folks on the committee do. 2 So I certainly appreciate their bringing 3 these kinds of things to us for our consideration as 4 we deliberate who we would add to our advisory 5 committee. 6 CHAIRMAN CLOWE: I agree. And I think 7 this discussion is extremely positive. I might tell 8 you, by way of history and background, the former 9 director of the Charitable Bingo Division, as a matter 10 of practice, discussed with me on a one-on-one basis, 11 as a matter of practice, nominees that were not only 12 being considered but then were, in fact, in the 13 process. And he and I would discuss those informally 14 so that I felt like I was up to speed on the process. 15 And there were some people who expressed 16 interest from time to time, and it turned out, for one 17 of a number of reasons, they were not qualified. So 18 that satisfied I think to a great extent the process 19 that Commissioner Cox is describing that he wants and 20 that I want, too. 21 This is the first time to my knowledge 22 we've had a situation like this, and I think 23 Commissioner Cox has stated it succinctly. We 24 certainly appreciate your thinking and the effort that 25 you put into it. And that applies to the BAC, 0029 1 Suzanne, and your touching it at well. 2 COMM. COX: Absolutely. 3 CHAIRMAN CLOWE: But the Commissioners, 4 I think, want the final -- must have the final say in 5 this. And we will then, I think as a result of this 6 discussion, ask you to make it a practice to make the 7 Commissioners aware of all applications. 8 And, Phil, I see this as your role as 9 Assistant Director at this time, fulfilling the duties 10 that you are, in absence of the director, to keep us 11 informed of all applications. 12 Commissioner Cox, if you're satisfied 13 with this airing of this subject and verbal 14 instructions on this, we might consider this subject 15 aired. 16 COMM. COX: I'm good with all that. 17 And thank you. We really appreciate 18 your service and appreciate the effort that was put 19 forth here. As I say, Kimberly, I think your process 20 was well-reasoned and properly directed. 21 MS. ROGERS: I appreciate that. And I 22 want to make it clear, I don't want to do this on my 23 own. I do try to get other opinions, because I know 24 we all have opinions. 25 COMM. COX: Sure. 0030 1 MS. ROGERS: I do not have the 2 capability of getting those applications to you where, 3 I guess, Phil would. And if y'all would like, or one 4 of you would like to contact through Phil or whatever 5 to discuss any of them, I would be more than happy to 6 give you a breakdown as to what the interview said and 7 how we discuss things. 8 COMM. COX: I think, Mr. Chairman, I'm 9 okay with the process as it is. You know, the way the 10 search works for the Executive Director, Human 11 Resources sent the applications directly to us at the 12 same time they sent them to the search committee. And 13 then we got a recommendation, and then we did what we 14 chose to do. And I see this process as working the 15 same way. And this way, we get the benefit of staff 16 recommendations, we get the benefit of the 17 deliberation of the Bingo Advisory Committee, and then 18 we can call it as we see it. 19 CHAIRMAN CLOWE: And we very much 20 appreciate, one, the collaborative effort -- 21 MS. ROGERS: Thank you. 22 CHAIRMAN CLOWE: -- of your committee 23 and Suzanne's oversight as chair of the BAC. And I 24 know that you understand we just must reserve the 25 final decision for ourselves. 0031 1 MS. ROGERS: Yes. 2 MS. TAYLOR: Commissioners, even when we 3 forward a recommendation of a nominee to you, that 4 doesn't mean we think it's slam dunk. We know that 5 you are going to talk to the individuals and that 6 everything is up to you one way or the other. All 7 we're saying is, we do think that this person is 8 beneficial or the reasons why we think this person 9 might not be beneficial to the BAC or there might be a 10 problem. Never did we ever think that one way or 11 another that it's a sure thing. 12 COMM. COX: Sure. 13 CHAIRMAN CLOWE: I think we have that 14 clear understanding, and there is unanimity in all of 15 that. This is the first time something like this has 16 come up, and I think this discussion has been very 17 beneficial. 18 And there are two letters, Commissioner 19 Cox, from Mr. Minch, one dated October 18, 2005; the 20 second, which is undated, which I understand was 21 electronically transmitted to the General Counsel 22 yesterday, and it's addressed to you and to me. We'll 23 make those letters part of the record. 24 And it may be that we want to have 25 further discussions now, following this discussion, 0032 1 with Phil, as the Assistant Director of the Charitable 2 Bingo Division, and with Kimberly and Suzanne about 3 this nominee. But I think we probably don't want to 4 pursue this any further at this time. Are you -- 5 COMM. COX: I'm good with that, yes. 6 CHAIRMAN CLOWE: -- good with that? 7 Mr. Fenoglio, you had filed an 8 appearance form, wishing to speak on Items II and III, 9 and we're there. I'll call on you at this time. 10 MR. FENOGLIO: Thank you, Mr. Chairman, 11 Commissioner Cox. For the record, my name is Stephen 12 Fenoglio. I filed an appearance. And I have nothing 13 further to add. I think the Commission is on track. 14 I will be happy to answer any questions. 15 I do represent Littlefield Corporation 16 in most of their charitable bingo matters. 17 Thank you. 18 CHAIRMAN CLOWE: Okay. And, 19 Mr. Fenoglio, while you're there, you filed 20 appearances in one, two, three, four, five -- six more 21 items. I will depend on you to wave your hand when 22 you want to speak. And if you want to pass, don't 23 wave it, rather than trying to keep track of whether 24 I've called on you or not. 25 MR. FENOGLIO: Fair enough. The burden 0033 1 is on me. Thank you, Mr. Chairman. 2 CHAIRMAN CLOWE: The burden is on you; 3 that's right. Thank you. 4 Commissioner Cox, before we move on, did 5 you have anything further about the meeting on 6 November the 8th that you wish to comment on -- 7 COMM. COX: No, sir, I did not 8 CHAIRMAN CLOWE: -- the BAC? 9 COMM. COX: There were a couple of 10 matters discussed that I believe related to -- one 11 related to the advisory opinion and I think -- I've 12 looked at that and I think staff has worked on that. 13 I didn't see anything that looked like 14 an open item to me. 15 CHAIRMAN CLOWE: Very good. I feel the 16 same way. 17 AGENDA ITEM NO. IV 18 CHAIRMAN CLOWE: Then we'll move on to 19 Item IV, report, possible discussion and/or action on 20 the implementation of recommendations contained in the 21 Internal Audit record on Bingo Audit Services. 22 Mr. Sanderson. 23 MR. SANDERSON: Commissioners, I have 24 provided for you in your notebook a copy of the 25 spreadsheet that the division will be utilizing to 0034 1 track the implementation of the Internal Audit 2 recommendations. We have also provided a copy of the 3 spreadsheet to Governmental Affairs, who in turn has 4 provided the spreadsheet to members of the Committee 5 on Licensing and Administrative Procedures and will 6 continue to do so on a regular basis. 7 The draft rule relating to internal 8 controls has been completed and continues to be 9 circulated among all staff in the Audit Department for 10 fine review and comment. Additionally, a copy of this 11 draft was provided to the internal auditor for her 12 review and comment and also to help ensure that we're 13 moving in the right direction on the specific 14 recommendation. 15 Additionally, the workgroups have 16 completed drafts of the following documents which are 17 currently being circulated for staff's review and 18 comment: The revisions to the general audit rule, 19 revisions to the violation list, a draft final audit 20 report as well as the completion letter, workpaper 21 documentation requirements and, most recently, House 22 rules and fair conduct of bingo rule. We have 23 completed six of 23 procedures that have been revised. 24 These drafts will also be made available 25 for review and comment to Internal Audit as they are 0035 1 being developed. The Cost Standards Workgroup has 2 completed a draft that is being circulated and will be 3 part of the rule that is being developed to address 4 the term of reasonable or necessary, which is 5 scheduled to be presented in the January Commission 6 meeting. 7 On December the 6th, I met with members 8 of the agency's Purchasing and Contract staff in 9 preparation of developing a request for a quote to 10 obtain training for the audit draft on the yellow book 11 standards, workpaper documentation and report writing. 12 The request for a quote was issued on Friday, December 13 the 8th, with responses due by December the 18th. 14 This training is currently targeted for the February- 15 March 2007 time frame. 16 That completes the comments on this 17 agenda item, and I will be glad to answer any 18 questions. 19 COMM. COX: Mr. Chairman, I continue to 20 be concerned about resources, and I am concerned in a 21 number of ways. One, I'm concerned that the weight -- 22 the technical complexity of the issues being addressed 23 here are beyond the resources of the Bingo staff. I'm 24 concerned that they may even be beyond the staff -- 25 capabilities of the staff of the entire Commission, 0036 1 not necessarily from a lack of expertise but from a 2 lack of time. 3 Now, we've got people who are spending 4 an awful lot of time on these that don't work for the 5 Bingo Division, and they've got full-time jobs in 6 addition to this. And I guess I want to ask Phil -- 7 and I want to asked Director Sadberry -- whether at 8 this meeting or the next one, Phil, do you believe 9 that we have in this place, making reasonable call on 10 Director Sadberry's resources, the technical expertise 11 and the man-hours to get this job done within the time 12 allotted, which I think is overly generous? 13 MR. SANDERSON: I believe that we do 14 have the technical expertise within the agency to help 15 move the process along and get these recommendations 16 implemented. The time is going to be the big factor 17 as far as resource time for the individual staff. 18 If you notice, we've already lost five 19 audit positions in the last six or eight months. So, 20 you know, that's five individuals that we don't have 21 at this current time. 22 COMM. COX: And we've lot our director. 23 MR. SANDERSON: And we've lost the 24 director, yes, sir. I know that the staff is 25 committed; the Bingo staff is committed to finalize 0037 1 these documents. And I know the assistance that we're 2 getting from Director Sadberry and his staff has been 3 very beneficial, so I do believe that we can 4 accomplish this. 5 Now, there are some meetings I think 6 that were originally scheduled that the Director of 7 Bingo had previously scheduled or was going to 8 schedule, some other agencies, and I have not had the 9 time to follow up with those and set those meeting 10 dates yet. But there are some other agencies that 11 we've reached out to, to just getting information and 12 some knowledge from them. 13 COMM. COX: Are you working enough with 14 Ms. Melvin and her staff to be able to assure me -- 15 and, Catherine, I look to you and to Phil as well as 16 Director Sadberry -- that at the end of the day when 17 this is all done, we're going to have a quality 18 product, or that we're not going to get there and 19 suddenly Catherine is going to look at it and say, 20 "This ain't it"? 21 MR. SANDERSON: I believe -- I'm not 22 going to speak for Catherine Melvin -- but I believe 23 that we are working closely with her and her staff 24 also, and they're reviewing some of these documents as 25 we go through the process, and offering their 0038 1 comments. 2 COMM. COX: Mr. Chairman, could we ask 3 Catherine to come up? 4 CHAIRMAN CLOWE: Certainly. 5 MS. MELVIN: For the record, Catherine 6 Melvin, Director of the Internal Audit Division. 7 COMM. COX: Catherine, I know you're 8 walking a very fine line here. You can't do this 9 work. 10 MS. MELVIN: Yes, sir. 11 COMM. COX: But it's got to satisfy you. 12 MS. MELVIN: Yes, sir. 13 COMM. COX: And it needs to satisfy you 14 I think not just at the end of the day but all through 15 the day, that the process is there to produce a 16 quality product, because the end product isn't going 17 to be seen for quite a while in some of these things. 18 So I think you almost need to be auditing the process 19 as well as the final product. Is that something you 20 can do? 21 MS. MELVIN: That is a challenging place 22 for any auditor to be in, obviously. But we are 23 working very closely with Phil and his staff. We are 24 attending meetings. We are looking at rough drafts. 25 We are looking at final drafts of items and providing 0039 1 our comments, providing our guidance and any 2 recommendations that we have. 3 However, throughout that process, we 4 have to be very clear and clean, that we certainly are 5 not directing, we are certainly not in any way 6 authorizing or approving or disapproving or indicating 7 any kind of disapproval of their actions or the 8 directions that they're going. 9 But one thing that I think is very 10 helpful is that we come back to the intent of the 11 audit recommendations, and I think that's something 12 that we talked about quite a bit. And so to that 13 extent, Internal Audit is involved. We're at the 14 table 15 COMM. COX: Do you think that this 16 process is too slow? Do you think that some of the 17 items lapping over into '08 is too slow? 18 MS. MELVIN: I think it is too slow from 19 the perspective of the licensees. I think it would be 20 too slow from the perspective of the public that we 21 regulate. But I think from the perspective of 22 standing in-house and looking at the availability of 23 resources and just knowing the complexity of the 24 issues that we're dealing with and the task of 25 establishing a different infrastructure than we've had 0040 1 in the past, I think that that does take some time. 2 And I think while the desire is to have it done sooner 3 than later, I think that there is a necessary process 4 and a careful deliberation that has to occur. So 5 that's a difficult question to answer, because I think 6 it somehow needs to be a balance of those two. 7 COMM. COX: And I think you've done a 8 wonderful job of framing the question that I was 9 trying to ask and couldn't get my arms around. 10 Mr. Chairman, I think what Catherine has 11 said is that it's too slow from the standpoint of 12 those who are regulated. And I wonder whether it is 13 too slow for this Commission, given that we are 14 responsible for strict control and close supervision 15 of the operation of bingo. And we're kind of in a 16 state of suspension while all this work is being done. 17 Should we be constrained by internal resources or 18 should we be looking to the needs of the industry and 19 the needs of satisfying our statutory requirements and 20 requiring that additional resources be brought to 21 bear? 22 CHAIRMAN CLOWE: My answer to that 23 question would be: It is too slow. And we are not 24 being diligent in allowing this process to go on 25 beyond what is a reasonable time. And in my opinion 0041 1 we're beyond that in the plan that's been laid out, 2 and we should call on additional resources. I'm not 3 satisfied with the plan as it's laid out, as one 4 commissioner. 5 COMM. COX: What I think I might suggest 6 that we do -- and, Director Sadberry, let me call on 7 you for any comments you may have. Just last month 8 your resources have been strained to the limit, 9 working to help the Bingo folks get these rules on the 10 table at this point, and we applaud the effort that 11 you have made there and that your staff has made. 12 You can't continue at that pace. You 13 can't continue to devote that kind of resources to 14 bingo matters, with all the things you have going on 15 in the lottery, is my perception. And so would you 16 address for me that and the idea of whether we need to 17 bring in other resources to satisfy our obligation to 18 the licensees and to satisfy the requirements of our 19 statutory charge. 20 MR. SADBERRY: Commissioner, I share 21 that interest and I share that concern. To give you 22 an idea of some of the things we have done to address 23 it, first, from an inclusion and information sharing 24 standpoint so that both Bingo Division and lottery 25 functions from a business standpoint are aware of the 0042 1 resources that are being dedicated and the focus of 2 that work, I have taken steps to include bingo 3 representation in all aspects of the agency where 4 these discussions are occurring. I'll give you an 5 example. The business committee meetings which 6 historically have not included bingo representation 7 and others, and I've spread that representation around 8 my understanding of bingo leadership so that it can be 9 a diversified approach, and that would ensure the 10 greatest degree of information sharing so that we are 11 basing decisions on information as opposed to 12 perception, or lack of either, from an accuracy 13 standpoint. 14 Secondly, I haven't had direct 15 discussions with the agency controller concerning how, 16 if we were authorized or requested to do so by the 17 Commission, we might engage outside resources through 18 financing, and these discussions have been preliminary 19 in nature. They obviously get into areas such as the 20 continuation or expansion of the overhead and indirect 21 cost sharing, which we know is under focus from the 22 agency's standpoint. 23 My understanding is that there is 24 funding available from the bingo appropriations to 25 allow for salaries and other possible sources that 0043 1 might be a means of engaging outside agency resources, 2 realizing and recognizing the -- I certainly agree 3 with you on the dedication. For example, the Legal 4 Services Division and others associated with the work 5 of the rules preparations, a lot of which is on your 6 agenda today and the materials that are before you, is 7 based upon my knowledge of a monumental task and 8 effort and an extremely dedicated work process from 9 the members of this agency across the board. We don't 10 make distinctions in those kinds of efforts between 11 bingo and lottery, the work of the agency, and I think 12 that's the proper focus we place on them, recognizing 13 there are functions in each division that must be 14 addressed. And also the legislative task force that 15 we have dedicated resources to, which is comprised of 16 a number of personnel staff across the agency as well 17 is ongoing. 18 What I've done recently is taken a 19 method of looking at what work is being done through 20 committees and workgroups within the agency and to 21 emphasize and prioritize the implementation of the 22 audit recommendations of the bingo audit section as a 23 priority and to look at what we need to do to focus on 24 that effort. 25 There is a meeting scheduled for Friday, 0044 1 which I personally plan to attend, so that we can see 2 where we are and where we need to go and what 3 resources may be needed in that regard. I don't 4 share -- possess the degree of expertise of what the 5 bingo functions are across the board from a division 6 standpoint. 7 But just in the conversational approach 8 and the sharing of information that I have thus far, I 9 am concerned that even with the maximum dedication of 10 agency resources, which we will give to all aspects of 11 the agency, and certainly including the Charitable 12 Bingo Division, that we cannot realistically project 13 that we can do both, which is in essence catch-up, 14 which is what the audit recommendations -- that may be 15 an oversimplification, but that seems to be the 16 process we're dealing with, catch-up with the 17 deficiencies that need to be addressed, and also 18 continue to regulate forward. That's asking a lot, 19 and I would want to do it right. 20 What I would focus on is looking at what 21 resources that are available, external to the agency, 22 what funding sources are available, what the needs are 23 and what the practical approaches are and to get that 24 done post-haste. That's as much a judgment call as 25 anything else. But you've asked, and I think that's 0045 1 what you've done. That would be my judgment on the 2 situation. 3 COMM. COX: I think that's a perfect 4 response, Mr. Chairman. It's in good hands. And 5 Director Sadberry is going to look at it with the 6 folks and make sure that we have the right priorities 7 and the right resources, and that's right where I 8 would like to see it be. 9 CHAIRMAN CLOWE: I agree with that. And 10 I would like to add, Director Sadberry, that I think 11 where Commissioner Cox and I are is not to say to Phil 12 or any of the members of his staff, we're not 13 satisfied with your efforts and we don't think you're 14 doing a good job. To the contrary, what I heard 15 Commissioner Cox say is, you have a full list of 16 tasks, and this is possibly and probably overburdening 17 you and you need help. So I don't want anybody to 18 feel like we're not appreciative of the efforts that 19 have been ongoing. 20 On the other hand, from I think 21 Commissioner Cox's position and mine, we just cannot 22 let this process continue and let the industry wait 23 for results. We must move. Things come to my mind 24 about reaching out for help on a positive and a 25 negative side. On the negative, let's don't reach out 0046 1 to some so-called expert and have them come in and ask 2 us all what we think we ought to do and then tell us 3 that's what we ought to do. I'm acquainted with those 4 kinds of outside helpers, and that's a waste of money 5 and it's a waste of time. 6 On the other hand, on the positive side, 7 I think we might reach out to State Auditor Keel and 8 see if there is a group in the state auditor's office 9 that might be assigned to help us with our auditing 10 problems and give us direction and advice and maybe 11 temporarily assign some people to us to work through 12 this. 13 There may be other agencies that we 14 could reach out in that way, to help us with our 15 licensing tasks. And that's the kind of expert help 16 that I think is available within the state network of 17 agencies that might be very beneficial to us. There 18 may be other areas that we could call on that just 19 don't come to mind immediately but are there. That's 20 what we need to do, I think in Commissioner Cox's mind 21 and mine, to get this process moving. And we just 22 cannot say to the industry, you've just got to sit 23 there for 12 months or whatever and not know where you 24 are in regard to regulation. That's not fair. We 25 just can't accept that. 0047 1 And, Phil, we're speaking to you and 2 Director Sadberry as a team, working together with all 3 of your staffs, and we're going to address the search 4 for a Director of the Charitable Bingo Operations 5 Division shortly, and that's a part of this process as 6 well. 7 Does that give you some comfort, 8 Commission Cox? 9 COMM. COX: I would like to add to that, 10 Catherine, you're spending a lot of time that I don't 11 think was in your budget. Maybe it's in your budget 12 for special projects or unidentified, whatever comes 13 up. But I'm concerned that this will delay your audit 14 of the rest of the bingo operation, which I think is a 15 critical project. And I ask you to look at your 16 resources and see whether you might need to call on 17 the state auditor to help you either with your audit 18 tasks or with this process or with both. 19 MS. MELVIN: We certainly will do that. 20 I do agree that our current level of assistance is 21 rapidly eating into our budget. We do set aside time 22 for special projects, but that's assuming that nothing 23 else will come up during the year that our immediate 24 assistance will be needed. 25 COMM. COX: Thank you, Mr. Chairman. 0048 1 CHAIRMAN CLOWE: And I think, 2 Commissioner Cox, I want to mention in the overall 3 strategy that, for example, we have a number of rules 4 that are on our agenda that we're going to be dealing 5 with today that relate to bingo. And the addressing 6 of those rules is important, and they are the result 7 of needs that have been pointed out, and they are 8 taking time and effort on behalf of all the members of 9 the staff of the agency. But at the same time, I 10 think we're focused on a larger project really of 11 revamping of the Charitable Bingo Division, includes 12 the audit function, licensing, administration. And we 13 really want that to move ahead and we want it to be 14 done well. 15 COMM. COX: Yes, sir. 16 CHAIRMAN CLOWE: As you point out, we 17 don't want to get to the end of it and have the 18 internal auditor say, "This doesn't do the job." It's 19 got to be done well. 20 COMM. COX: Yes, sir. 21 CHAIRMAN CLOWE: This is a big job. 22 And, you know, there sets the industry out there 23 wondering what's going to happen to them. And I'm 24 concerned about that, as I know you are. We want to 25 keep them informed, keep them involved and be fair 0049 1 with that industry. 2 MR. FENOGLIO: And, Mr. Chairman, I'm 3 waving. 4 CHAIRMAN CLOWE: I see you, 5 Mr. Fenoglio. 6 Anything further, Director Sadberry, on 7 this? 8 MR. SADBERRY: No, sir. Mr. Chairman 9 and Commissioner, I definitely agree. I think some of 10 the initiative regarding the interagency contracting 11 opportunities were, in fact, being addressed -- I 12 forget who said it, may have been Phil, maybe 13 Catherine -- prior to Billy's departure. If we can 14 capture where we were in that process -- and I know 15 Kathy Pyka was aware of that, and some of those 16 meetings had occurred -- I think that's the place to 17 begin in terms of resources. I agree with you. And 18 from my experience, you know, experts are not what we 19 need. We need experience and assistance, and that's 20 how we'll focus on a going- forward basis. 21 CHAIRMAN CLOWE: I would call on State 22 Auditor Keel to get into this with both feet and help. 23 And surely he can put together a team of people 24 that -- you know, we can pay for their expenses and 25 they can bootstrap us into getting going on this and 0050 1 doing it right. 2 MR. SADBERRY: That will be my first 3 step in the process. 4 CHAIRMAN CLOWE: Okay. Now. 5 Mr. Fenoglio. 6 MR. FENOGLIO: Thank you, Mr. Chairman 7 and Commissioners. For the last two years, I've sat 8 on this side of the table in audits, and I've seen on 9 the industry side more audits I believe than anyone 10 else, and I've been aware that the process has been 11 broken for quite a while. Due to ex parte rules, 12 there's limits to what I can say. 13 But having said that, we were glad when 14 it was recognized. And, Commissioner Cox, your first 15 concern when you read it and understood it was: Do we 16 have the resources and can we do it timely? And from 17 my perspective, I don't know what the resources are of 18 the state auditor. I can imagine that they're getting 19 geared up for a number of things that are happening at 20 the huge circus that's scheduled to start the first 21 full week of January. 22 And from our perspective, we think it 23 needs to happen now. And as a part of this process, 24 as you both know, Chairman Flores asked certain 25 members of your staff and industry and me to start 0051 1 drafting a bill, and we've done that and we're going 2 to have several other meetings. And your staff were 3 extremely well-prepared for that, including 4 Ms. Melvin. 5 But as a part of that process, it is 6 likely that we may identify issues that need 7 legislative changes. And my only concern is, if the 8 state auditor can't get out of the gate quickly and up 9 to speed quickly -- and charitable bingo is a 10 different animal than a number of other issues. The 11 only industry that the state comes close to regulating 12 that might be similar to the nuances of bingo is 13 alcohol. But even then, you've got a lot of 14 for-profit entities -- almost all for-profit entities 15 involved who regularly engage outside CPAs. On the 16 charitable bingo side, that's not the case, as you 17 know. 18 And my concern is in this process that 19 if it takes too long, whoever the audit person or 20 company or team is, identifies needed legislative 21 changes. And realistically you've got until about 22 mid-March to do that. And if this were a private 23 company -- and it's not -- I think you would know 24 immediately what to do once you identify the type of 25 significant pervasive problem you have, is you would 0052 1 go and hire an outside auditor. 2 And I agree with you, I wouldn't want 3 them to listen to what y'all think are the problems 4 and then come up with that magical recommendation. 5 But there are plenty of good audit firms who can come 6 up to speed on these issues quickly, and that may be 7 another avenue. I don't know about your budget and 8 all of that, but this is a problem that is broken. It 9 has been broken for a while. I have seen good audit 10 work on the Bingo Division, and I've seen lousy. And 11 one of the best ones had to do with a hall out in West 12 Texas, and it was pervasive fraud that went on. At 13 least that's my view, and I think your staff agreed 14 with that. 15 I'm starting to hear from some rumor 16 mills in the industry that, "The Division is not going 17 to be auditing anyone for a while, so we can do what 18 we want," and I don't think that's in anyone's best 19 interest. And most of the industry doesn't have that 20 mentality. But, like any industry, there may be a few 21 outlaws here and there, some of them we may have read 22 about in the newspaper in Fort Worth, for example, in 23 the last six months. 24 But my only concern is -- I agree with 25 you, to put the pedal to the metal and get it done 0053 1 quickly, because I think there probably will be some 2 legislative changes that need to be made, and we only 3 have a limited time to do that. 4 And I'll be happy to answer any 5 questions. 6 COMM. COX: Catherine, you know what's 7 in your report better than anybody else does. Have 8 you looked at what you think the needs are in light of 9 what Mr. Fenoglio just said, prioritizing things that 10 might require statutory changes? 11 MS. MELVIN: When we conducted our 12 audit, we specifically took reference points of 13 examining what the audit services function could be 14 doing within the framework of the existing law. And I 15 think we took that approach because we have heard in 16 the past that -- and we are aware of challenges within 17 the Act, some inconsistencies and some updates that 18 are needed. But we wanted to examine the practices 19 that were occurring within the framework of the law, 20 of the existing act. And so we felt that even as to 21 needed improvement of the Bingo Enabling Act, maybe 22 there's still much room for growth that could occur 23 and there's still room for improvement that could 24 happen without statutory changes. 25 Now, I do agree with Mr. Fenoglio, that 0054 1 there are larger issues that need to be addressed, and 2 some of them are more in the licensing end of the 3 business and other things that were not within the 4 scope of my review. 5 COMM. COX: Well, I would encourage you 6 to take a look -- I know that you and at least one 7 member of your staff are working with the script that 8 Mr. Fenoglio mentioned -- 9 MS. MELVIN: Yes, sir. 10 COMM. COX: -- chaired by Chairman 11 Flores. 12 MS. MELVIN: Yes, sir. 13 COMM. COX: And I hope that you will 14 look for things of the nature that Mr. Fenoglio 15 described and bring them to that process as early as 16 possible so that they perhaps can be incorporated. 17 MS. MELVIN: Yes, sir. 18 CHAIRMAN CLOWE: Before you leave, 19 Mr. Fenoglio, I want to make a comment on a couple of 20 your comments. First of all, as you and I know, this 21 is not private business. 22 MR. FENOGLIO: Yes, sir. 23 CHAIRMAN CLOWE: And if it were, I could 24 assure you that if Commissioner Cox and I were on the 25 board of directors, we would have done many things 0055 1 already that we have not done to this point in time. 2 And we've got to go through the system and we've got 3 to work it through rules and procedures that are 4 proper for a state agency. 5 That doesn't preclude going outside and 6 hiring a private audit firm. And I appreciate that 7 suggestion and comment. We have done that in the past 8 on the lottery side with law firms, and it's been very 9 productive. And certainly that's a worthwhile 10 suggestion. And I hope Phil and Director Sadberry 11 will take that comment and make that a selection that 12 they look at in the form of taking that action. 13 The expression that I made of wanting to 14 get something done is from sitting on your side of the 15 table more than I've sat on this side of the table. 16 But I am concerned about one thing that you mentioned, 17 and that is the rumors you've heard about you can do 18 anything you want to. 19 You know, it's like being on Interstate 20 35 and driving 70 or 72 or three miles an hour and 21 somebody goes by you doing 90 miles an hour. In the 22 end, they're going to get caught. And a record is 23 made when transactions occur, and eventually that's 24 going to come to light. And I would respond to your 25 comment by way of saying we hope the industry 0056 1 understands that we're approaching this problem in a 2 diligent manner. We want to get to the right place. 3 We want the industry to cooperate. We appreciate your 4 suggestions and others, and we want you to work with 5 us as we solve this problem. But we certainly hope 6 there will be no one who will try to take advantage of 7 the transition that we're in. That eventually will 8 come out. 9 MR. FENOGLIO: And I agree with that. 10 My only comment -- and the folks that I like to think 11 that I represent understand the audit process, support 12 the audit process and do the right thing with the 13 resources they have. But because it's dragging, I am 14 concerned that there will be a few -- not many -- but 15 a few who will look at that as an opportunity to 16 speed, if you will, because DPS has got all their 17 troops at a headquarters for new training, to follow 18 on your analogy. 19 And we all know people speed. I may 20 have done it once or twice myself. But I think it 21 needs to get closure. And I know y'all support that. 22 I'm not trying to suggest anything to the contrary. I 23 know that y'all are frustrated. I see and hear the 24 frustration from your side of the table. The industry 25 shares the same frustration, and we're willing to 0057 1 devote -- if there are needed resources from our side 2 of the table, we're willing to devote those. 3 CHAIRMAN CLOWE: Well, again, we need 4 the collaborative process. And, you know, where you 5 have the rule of law, eventually all the outlaws get 6 caught sooner or later or, in your case and mine, 7 maybe the statute runs on some minor infractions. 8 (Laughter) 9 MR. FENOGLIO: Let's hope so. Thank 10 you, Mr. Chairman. 11 CHAIRMAN CLOWE: Thank you, sir. 12 Anyone else wishing to speak on this 13 item? I have some other appearance forms. I think 14 we've pretty well covered this. Thank you, Catherine. 15 AGENDA ITEM NO. V 16 CHAIRMAN CLOWE: Then we'll move on to 17 Item No. V, consideration of, possible discussion 18 and/or action, including proposal of repeal, on 16 TAC 19 402.603 relating to bonds and other security. 20 Ms. Joseph. 21 MS. JOSEPH: Good morning, Commissioner. 22 My name is Sandy Joseph, assistant General Counsel. 23 Before I specifically address this item, 24 I would like to provide two comments that are 25 applicable to all five of the rulemaking items on your 0058 1 agenda for bingo. First of all, staff is recommending 2 that five rule proposals be published in the Texas 3 Register for public comment. The comment period 4 following publication is often referred to as the 5 formal comment period. I would just like to emphasize 6 that the formal comment period provided for by the APA 7 is an opportunity to obtain valuable comments and 8 input from those that may be affected by the rules. 9 We've had varying degrees of opportunity for informal 10 comments on these proposals. But in any case, these 11 proposals are not set in stone, and staff will 12 certainly welcome and consider all comments during any 13 formal comment period that you may authorize. 14 Second, we're recommending that a public 15 hearing be scheduled for all five of the proposals for 16 January 18, 2007, with the possibility of continuing 17 on January 19th if necessary. We believe that 18 scheduling all of the rules on the same day would be 19 more convenient for those wishing to attend the public 20 hearings. Those are my two general comments. 21 COMM. COX: Mr. Chairman, a question on 22 process. I see that you have a lot of witness 23 affirmation forms there. When the rule comes to us 24 and we look at it and decide whether we want it to be 25 exposed and then there is a public comment period and 0059 1 we look at those comments and read them and our staff 2 reads them, we decide whether the rule needs to be 3 revised, taken down and rewritten, can be fixed and 4 approved, et cetera, and at this meeting, what is the 5 role of public comment? 6 CHAIRMAN CLOWE: That's an excellent 7 question. And I think -- I'll go back and thank Sandy 8 for her comments, because I think she's shedding light 9 on that. 10 Where we are in this process right now 11 is that considerable work has been done on these rules 12 that are going to be presented to us today. A great 13 deal of staff time, a great deal of industry time, a 14 great deal of joint time has been devoted to getting 15 us to where we are. In my mind, none of these rules 16 are perfect the way they are being considered today. 17 What staff is doing is coming to us at 18 this point and saying, "We need to make these changes 19 or create these rules. We've worked them up to the 20 point where we would like to ask you to let us go 21 forward with a public comment period." There is no 22 obligation on our part, as these rules are presented, 23 to allow them to go forward, to do anything at all if 24 we don't choose to. One option we have is to, in 25 their present form, allow them to be put up for public 0060 1 comment or we can say, "We don't like them in their 2 present form. Go back and work them over and do some 3 changing to them." 4 Sandy's comments are that, as I heard 5 what you said, Sandy, that this is a process. And 6 comments that are made today, if we allow comments at 7 this point -- and it's my intention to do so -- and in 8 the public comment period, in the public meetings, 9 will be taken very seriously -- 10 COMM. COX: Okay. 11 CHAIRMAN CLOWE: -- and will be 12 considered. This is not a done deal. These rules are 13 not in their final form by any stretch of the 14 imagination. And then we consider them at the end 15 of -- usually it's 30 or sometimes a longer period of 16 consideration. And then we can do whatever we want 17 with the rules. We're not bound in that product when 18 it's presented, to adopt it. We can throw it out. We 19 can say, "We're not satisfied. Go back and work it 20 some more." We can do it any way we want to. These 21 are our rules. 22 COMM. COX: So we will be receiving and 23 considering comment that we get today as to whether we 24 want to expose these rules for further comment? 25 CHAIRMAN CLOWE: That's right. 0061 1 COMM. COX: Thank you. 2 CHAIRMAN CLOWE: And it's been our 3 style, as you well know, to welcome comment from the 4 industry, to encourage it. And so whatever comments 5 are made to us today under these public appearances 6 that you've commented on I would hope would be made 7 again in the formal comment period, verbally and/or in 8 writing, however the applicant or the witness might 9 wish to make them. 10 COMM. COX: Thank you. 11 CHAIRMAN CLOWE: And thank you, Sandy, 12 for stressing the fact that this is a process and 13 these rules are not a done deal as they're presented 14 today. 15 Are you satisfied? 16 COMM. COX: Yes, sir. 17 MS. JOSEPH: All right. I'll proceed 18 with my -- 19 CHAIRMAN CLOWE: Would you like to go 20 forward? 21 MS. JOSEPH: Yes. Item V is a draft 22 proposal to repeal bingo administrative rule, 23 §402.603, pertaining to bonds or other security. The 24 staff is working on a proposed new rule related to 25 bonds or other security, which we plan to present to 0062 1 you at your January meeting. A primary purpose of the 2 new rule that we are working on will be to clarify and 3 simplify the bond and other security requirements. 4 The intent is that the Commission would adopt the 5 proposed repeal that we are presenting today. At the 6 same time a new rule would be adopted so we do not and 7 would not recommend any time when there is not a rule 8 in effect. 9 CHAIRMAN CLOWE: No action requested on 10 this at present? 11 MS. JOSEPH: We do ask that you approve 12 today permission for us to initiate repeal of this 13 rule. 14 CHAIRMAN CLOWE: Pending a final vote? 15 MS. JOSEPH: No. We ask to go ahead and 16 publish today notice of the repeal. The reason for 17 doing it at this time was to go ahead and provide 18 notice to the public that we are considering and are 19 working on a new rule. And we thought this would be a 20 way to get it out to the public, that there are going 21 to be some changes made in the bond rule. 22 CHAIRMAN CLOWE: And then if we approve 23 this, is there another action? 24 MS. JOSEPH: Yes, at the January 25 meeting. 0063 1 CHAIRMAN CLOWE: So we would then repeal 2 in final form the current rule and adopt the new rule 3 at that time? 4 MS. JOSEPH: I'm afraid I'm confusing 5 you a little bit. Today we would propose repeal of 6 this rule. At January, we would hope to propose 7 initiation of a rulemaking proceeding to consider a 8 new rule. Then somewhere down the line, a month or 9 two subsequent to January, after a comment period, we 10 would come back to you for adoption of the repeal and 11 adoption of the new rule. We would sync those two up. 12 CHAIRMAN CLOWE: Okay. So if we approve 13 the proposal to repeal the rule today, we still have 14 to vote on the adoption of the repeal -- 15 MS. JOSEPH: Yes. 16 CHAIRMAN CLOWE: -- in a subsequent 17 meeting? 18 MS. JOSEPH: Yes. 19 CHAIRMAN CLOWE: So the proposal to 20 repeal is not, in fact, adoption of the repeal? 21 MS. JOSEPH: That's correct. I would 22 say -- 23 (Laughter) 24 COMM. COX: You had that right up, 25 didn't you? 0064 1 CHAIRMAN CLOWE: You know, the repeal of 2 the rule doesn't require a statutory period, does it? 3 MS. JOSEPH: Yes, it does require a 4 30-day comment period. 5 CHAIRMAN CLOWE: Okay. That's why you 6 want the proposal to repeal, to be in conformance with 7 the APA on the repeal of the bond rule? 8 MS. KIPLIN: Correct. If I might just 9 weigh in. This is considered to be a rulemaking under 10 the APA. 11 CHAIRMAN CLOWE: You've got to have the 12 comment period and it's not the final action? 13 MS. KIPLIN: That's right. It's the 14 same as any rulemaking, whether it's proposing 15 amendments, proposing a new rule or proposing a 16 repeal. You've got to go through public comment 17 period. 18 CHAIRMAN CLOWE: Okay. I'm clear and 19 I'm comfortable with that. 20 MS. JOSEPH: So I would recommend 21 initiating the rulemaking process by publishing the 22 proposed repeal in the Texas Register for a comment 23 period of not less than 30 days. Subsequently there 24 will be a future presentation to consider final 25 adoption of the repeal. 0065 1 CHAIRMAN CLOWE: Any comments, 2 Commissioner Cox? 3 COMM. COX: Mr. Chairman, this rule was 4 questioned by our Legislative Oversight Committee. As 5 I understand the situation, the statute provides for a 6 bond of up to three times the amount of revenue 7 expected for some period. And our rule conflicts with 8 the statutes, in that it calls for the bond to be at 9 three times rather than up to three times, so I think 10 this is something that we should definitely do. 11 CHAIRMAN CLOWE: Okay. And Mr. Trace 12 Smith has filed an appearance form and he shows 13 himself for this. Mr. Fenoglio has just said he 14 wanted to comment on it. Are you up or down on this? 15 MR. FENOGLIO: We're for the proposal 16 from staff, and we'll work with them on the new 17 drafting of the rule. Thanks. 18 CHAIRMAN CLOWE: Thank you, sir. 19 And I believe those are the only 20 appearance forms we have on Item No. V. Is there a 21 motion? 22 COMM. COX: So move. 23 CHAIRMAN CLOWE: Second. 24 All in favor, please say "Aye." 25 COMM. COX: Aye. 0066 1 CHAIRMAN CLOWE: Aye. 2 Opposed "No." 3 The vote is 2-0 in favor. 4 AGENDA ITEM NO. VI 5 CHAIRMAN CLOWE: Move to Item No. VI, 6 consideration of and possible discussion and/or 7 action, including proposal on new rule 16 TAC 402.305 8 relating to progressive bingo. 9 Ms. Joseph. 10 MS. JOSEPH: And, Commissioners, with 11 your permission, I do have T-bar memos for your 12 initials as to whether you approve or disapprove staff 13 recommendation. I'll hold those until the completion 14 of all of five items if that's your -- 15 CHAIRMAN CLOWE: Very good. 16 MS. JOSEPH: All right. Item VI is a 17 draft rule amendment prepared for submission to the 18 Texas Register in order to propose the adoption of new 19 rule 16 TAC §402.305, progressive bingo. The purpose 20 of the new rule is to ensure that the Texas charitable 21 bingo industry has information on requirements for 22 conducting and reporting a style of bingo game known 23 as progressive bingo. 24 A workgroup, including Commission staff, 25 representative Bingo Advisory committee members and 0067 1 other industry representatives, met on several 2 occasions to consider rulemaking pertaining to 3 progressive bingo. The following persons participated 4 in one or most of the meetings: Stephen Fenoglio, 5 Knowles Cornwell, Darin Peters, Jack Dougherty, Mario 6 Monio, Rosalie Lopez, Shayne Woodard, Jamie McNally, 7 Glenn Goulet, Joe Garcia, Danny Moore and Phil 8 Sherwood. The proposed rule is a result of the 9 workgroup's efforts. 10 I would like to point out that there are 11 two provisions in the proposed rule that workgroup 12 members do not favor. The first is on Page 3 in your 13 notebook for this item, Line 23, Subsection (c)(2). 14 It provides that all disposable bingo card/paper 15 sheets and the electronic equivalent sold for the 16 progressive bingo game shall be sold for the same 17 price for that game. Staff included this because we 18 believe that it goes to the basic fairness of the 19 game. I did want to point out that the workgroup did 20 not support that particular provision. 21 The second is on Page 4, Line 3, 22 Subsection (f). It provides that the number of ball 23 calls shall increase by one on each successive bingo 24 occasion in a progression. This provision was 25 included in an effort to provide some degree of 0068 1 uniformity in how the game is played. 2 Other than these two provisions, I 3 believe the workgroup was of a consensus and agreement 4 on the rule proposal. I do recommend that the 5 Commission initiate the rulemaking process by 6 publishing the proposed rule in the Texas Register in 7 order to receive comments for a period of not less 8 than 30 days. 9 Are there any questions? 10 COMM. COX: No questions. 11 CHAIRMAN CLOWE: We have two appearances 12 on this item. Mr. Paul Bergman -- 13 MR. BERGMAN: I'm okay, sir. 14 CHAIRMAN CLOWE: -- come forward. 15 MR. BERGMAN: I'm okay right now. 16 CHAIRMAN CLOWE: You're okay with it? 17 MR. BERGMAN: Yes. 18 CHAIRMAN CLOWE: All right. 19 MR. BERGMAN: So far. 20 CHAIRMAN CLOWE: All right. And then 21 Mr. Hank Anawaty, you filed an appearance. 22 MS. TAYLOR: He's out of the room right 23 now, Commissioner. 24 CHAIRMAN CLOWE: Okay. Anyone else? 25 MS. TAYLOR: Commissioner -- 0069 1 CHAIRMAN CLOWE: Mr. Fenoglio? 2 MR. FENOGLIO: Yes, sir, Commissioners. 3 And also Trace Smith has filed a comment, if it's all 4 right with you -- 5 CHAIRMAN CLOWE: I have his. 6 MR. FENOGLIO: -- he can come up. 7 CHAIRMAN CLOWE: I have his appearance 8 form. 9 Come forward, please, sir. 10 MR. FENOGLIO: We worked on this -- for 11 the record, my name is Stephen Fenoglio. I filed an 12 appearance. We worked on this rule. And I think our 13 last meeting was sometime in October. It may have 14 been -- well, sometime in October -- and we didn't see 15 the rule. And it is true that there is some 16 disagreement is industry since the rule was published 17 on the website. Not surprisingly, there was other 18 comment. And we alluded to this during our meeting, 19 that we were concerned -- there are some progressive 20 bingo games that are being played today. Nothing in 21 the statute precludes progressive bingo games from 22 being played. You're still under your stream of 750 23 per game and 2,500 per session cap. 24 And we knew of a couple of instances at 25 VFW posts that was playing quite frequently a 0070 1 progressive game. And our concern was, whatever the 2 industry is doing today, let's not preclude it by a 3 new rule, unless there is some good reason. And I 4 think staff -- and we've sat with Phil and Sandy quite 5 a bit -- I think they agreed to that. 6 So what Mr. Smith has come forward with 7 is, he actually is at the hall that I was not 8 personally aware of that plays a lot of progressive 9 games. And part of the rule would outlaw their very 10 successful progressive bingo games at Texarkana, 11 Texas. And I don't think that's a reason not to go 12 forward with it, but I want to identify that we will 13 have significant comments and we hope we can get the 14 staff to buy into those on that. There are a couple 15 of areas of disagreement. And, again, with that 16 understanding, we're comfortable with moving forward 17 with the rule. 18 CHAIRMAN CLOWE: And, Mr. Smith, would 19 you like to comment? 20 MR. SMITH: Yes, sir. I would like to 21 just conclude what Steve said. We do run a type of 22 progressive game, that it does fall within the 23 parameters of the law now. It would stop what we are 24 currently doing now under the law, to where it would 25 make it not as successful. And I think that is the 0071 1 ultimate goal of the rule, is to make something for 2 the industry that is successful for the charities to 3 generate income from. 4 I just think in its current form, it 5 needs a little work. I think the spirit of the 6 proposed rule is good. 7 CHAIRMAN CLOWE: Okay. And so you would 8 be willing to interact in this comment period and work 9 with the staff and be a part of this process? 10 MR. SMITH: Absolutely. 11 COMM. COX: May I ask Mr. Smith a 12 question? 13 CHAIRMAN CLOWE: Yes, sir. 14 COMM. COX: Mr. Smith, would you be 15 willing to identify for us the provisions that would 16 cause you a problem? 17 MR. SMITH: Yes, sir. You'll have to 18 give me just a moment, and I'll find that again here. 19 COMM. COX: Sure. 20 MR. SMITH: I think the main thing that 21 I was concerned about -- I'm having trouble finding it 22 here -- 23 COMM. COX: Maybe if you could describe 24 it, Ms. Joseph could find it. 25 MR. SMITH: Okay. That it has to be 0072 1 within one particular charity. If, say, there are a 2 group of charities that get together and hold a 3 progressive game and say the game will rotate. If you 4 limit it to just the one charity has one progressive 5 game, if the charities cannot collaborate together in 6 a hall, it makes it difficult for that progressive 7 game to be successful. If you can get more than one 8 charity to collaborate and, for instance, if they 9 agree that on, say, Monday night, the jackpot number 10 will be 54 numbers, the next charity in line says, 11 "Well, yes, I realize this will rotate. I'll take the 12 next step and tomorrow night will be my night, but it 13 will be 55 numbers," or whatever the case may be. 14 Did you find that, Stephen? 15 MR. FENOGLIO: Commissioner Cox, it's 16 Subparagraph (e), Page 4, Lines 19 through 21, I 17 believe. And there's a -- I was not aware of this 18 particular issue. I can see a couple of issues that 19 we would need to flesh out with staff. I can imagine 20 some of the accounting, transparency of accounting 21 between two charities that are, quote, collaborating 22 on this type of prize. And I think this type of 23 problem can be solved by understanding the issue and 24 then working together to address the issue. 25 And there may be a separate rule, just 0073 1 so you know -- and Phil and I did talk about this -- 2 charities that want to do it in a unit versus 3 charities that, for whatever reason, have not chosen 4 to form a unit under the unit accounting provisions 5 that were contained in House Bill 2519. 6 CHAIRMAN CLOWE: Thank you, gentlemen. 7 Anything further? 8 MR. SMITH: No, sir. 9 COMM. COX: Mr. Chairman, I would like 10 to ask Ms. Joseph a question. 11 You indicated that the workgroup was not 12 unanimous, on Page 3, Lines 23 and 24, which says, 13 "All disposable bingo cards/paper sheets, and the 14 electronic equivalent, sold for the progressive game 15 shall be sold for the same price." 16 MS. JOSEPH: That's correct. 17 COMM. COX: Help me understand why 18 someone would disagree with that. 19 MS. JOSEPH: Well, I believe -- we have 20 members of the workgroup here, Knowles Cornwell. He 21 might could speak on that. But my understanding was, 22 they just wanted to have the option of pricing their 23 product the way they wanted to. 24 COMM. COX: In other words, they might 25 offer a game that has better odds to people playing 0074 1 paper or opposed to a machine, or vice versa? 2 MS. JOSEPH: It would be the same game 3 but have -- 4 COMM. COX: I said would have different 5 odds. 6 MS. JOSEPH: Well, yes. 7 COMM. COX: Because if they pay less to 8 enter, the expected value of the bet increases? 9 MS. JOSEPH: Yes. 10 COMM. COX: Help me understand why that 11 would be fair, why anyone would ask for that. 12 MS. JOSEPH: I don't think I can help 13 you. 14 COMM. COX: It looks to me like an 15 opportunity for mischief. 16 Mr. Chairman, on that particular one, I 17 believe that we should expose it just as it is. My 18 understanding is that the law currently may permit in 19 other bingo games, other than progressive, the 20 charging of a different price for paper ticket versus 21 a machine ticket. I don't understand why that is the 22 case. 23 But I hope that the group that you're 24 working with, Mr. Fenoglio, will consider the 25 appropriateness of allowing those tickets to be sold 0075 1 for different prices. I can't see any logic to that. 2 MR. FENOGLIO: And just briefly, and we 3 will, because we knew that was a point of discussion 4 in getting close to disagreement. At River City Bingo 5 Hall, I can tell you we charge different prices to 6 play the same game. And part of it is, if you buy 7 more paper you get a cut in the price of what you pay 8 versus if you buy a three on or a six on. If you buy 9 an 18 on, you're going to get a better price break. 10 We also have half pays. And if you want 11 to play in the half pay, it's a different price to bet 12 than if you want to play and have the opportunity to 13 win the full pay. Also within that, the price of the 14 electronics does not reflect, because we're renting 15 electronics for 66 faces, it's a different pricing 16 scheme altogether. 17 My concerns -- and it was purely from -- 18 and I raised the issue first -- it was purely from 19 just let's not let the government decide how we price 20 our product. I don't know all the nuances. And 21 again, I wasn't aware that Trace Smith -- and I've 22 represented charities out in Texarkana before -- I 23 wasn't aware they were conducting a progressive game 24 like they are. And so I was trying to anticipate, is 25 it best that we have one and the same price for every 0076 1 product? Because, within the industry, there are 2 different prices. 3 In looking at the lottery side -- and I 4 look at lottery tickets all the time. I go on your 5 website. And it may be the same $2.00 cost for a 6 lottery scratch off, but the prize is not radically 7 different. And so the way people choose to price 8 products sometimes makes perfect sense to me. But 9 oftentimes I can't figure out why they do it. And so 10 my position was, I'm not sure I want a rule telling me 11 the price that I have to charge. 12 COMM. COX: I see two sides to this, 13 Mr. Chairman. And I look forward to hearing the 14 public comment on that particular point, because I 15 think it's a very important point. 16 Now, the second one, Sandy, is Page 4 -- 17 let's see -- (f), Lines 22 through 25. 18 MS. JOSEPH: Yes. The particular 19 sentence begins at the end of Line 23, I believe. 20 COMM. COX: And this calls for the 21 number of balls called to increase at each progressive 22 session. The first one, it might be 50, then it would 23 have to be 51 at the next one, 52 at the one after 24 that, 53 at the one after that. And you've indicated 25 that some members of the workgroup were opposed to 0077 1 that one? 2 MS. JOSEPH: Yes. 3 COMM. COX: What was their concern? 4 MS. JOSEPH: I believe they wanted the 5 option to be creative and create games that they 6 believed would be exciting and just have -- not have 7 regulation affecting that area. 8 COMM. COX: Mr. Chairman, I had some 9 discussion with staff on this issue, and I'm concerned 10 about this one because we talked about several other 11 areas of the game that are not specified in the rule. 12 I said well surely it must say that it's a cover-all 13 game. No, it doesn't say that. It can be whatever 14 kind of game they choose for it to be. So that's 15 something that's going to be -- the idea of this I'm 16 told is so that things will be consistent among halls 17 and when people walk in, they would know how to play 18 the game. 19 But then I find, well, there isn't a 20 requirement that the play style be the same, which 21 would seem to be the first thing you would want to be 22 consistent if you wanted consistency. There is no 23 requirement in this rule that any minimum number of 24 balls be drawn, which creates the possibility, perhaps 25 only theoretically, that it would not be a fair game 0078 1 because there might not be any way of winning it if, 2 for instance, you have to cover 24 spots and they're 3 only going to draw 23 balls. So I think the rule 4 should cover that. 5 But I believe that if you're looking for 6 consistency, you ought to have consistency. If you're 7 looking for flexibility, you ought to have 8 flexibility. I don't think you should mix and match. 9 So I think probably I would come down on the side of 10 the people in the industry who disagree with this 11 rule, but I look forward to hearing public comment on 12 all of these issues. 13 CHAIRMAN CLOWE: Well, there is a good 14 preview of some cogent comments. 15 MS. JOSEPH: Yes. 16 CHAIRMAN CLOWE: Be guided. 17 MS. JOSEPH: Thank you. 18 CHAIRMAN CLOWE: Anything further on 19 this item? 20 Is there a motion. 21 COMM. COX: So move. 22 CHAIRMAN CLOWE: Second. 23 All in favor, please say "Aye." 24 COMM. COX: Aye. 25 CHAIRMAN CLOWE: Aye. 0079 1 The vote is 2-0 in favor. 2 Sir, did you have a comment? I didn't 3 mean to overlook you. 4 MR. ANAWATY: I was out in the lobby 5 when my name was called. 6 I agree. 7 CHAIRMAN CLOWE: Come forward, please. 8 We've taken action, but we would be happy to hear from 9 you. 10 MS. KIPLIN: And, Mr. Chairman, while 11 he's coming up, I have looked at the preamble, and I 12 want to be clear. It's a comment period for 30 days. 13 And you discussed where you say not less than. So 14 when you made your vote, I wanted to make sure you 15 knew that in the preamble, it's a 30-day comment 16 period on this rule. 17 CHAIRMAN CLOWE: Very good. Thank you. 18 MR. ANAWATY: Thank you, Chairman. I am 19 here today on behalf of Texas Charity Advocates. I 20 believe you-all know that our primary goal, our 21 purpose is to better educate the Legislature and the 22 public in general about the good that comes from 23 charitable bingo. We also have a secondary role which 24 is to stay informed on proposed rules and legislation 25 that affect our members. And that is the authority 0080 1 that I'm under today in front of you. 2 The association agrees with Mr. Fenoglio 3 and Mr. Smith and would like to add that it is 4 excessive amount of recordkeeping and regulation in 5 this rule that influences our decision to be against 6 it. And it's not so much the definitions that are 7 within the rule, but it's the amount of recordkeeping 8 and the fact that most of our members are already 9 conducting a game that is similar to this, without all 10 of the burdensomeness of recordkeeping. 11 CHAIRMAN CLOWE: Very good. Anything 12 further? 13 MR. ANAWATY: We would be happy to work 14 also with the staff on this, if needed. 15 CHAIRMAN CLOWE: Any questions, 16 Commissioner? 17 COMM. COX: No, sir. 18 CHAIRMAN CLOWE: Did you state your name 19 for the record? 20 MR. ANAWATY: It's Hank Anawaty -- 21 CHAIRMAN CLOWE: Good. 22 MR. ANAWATY: -- Texas Charity 23 Advocates. 24 CHAIRMAN CLOWE: Thank you, sir. 25 MR. ANAWATY: Thank you. 0081 1 CHAIRMAN CLOWE: Then we'll move on to 2 Item No. VII. 3 Would you like to take a break? We'll 4 take a short break, then. Thank you. 5 (Off the record: 9:33 a.m. to 9:47 6 a.m.) 7 AGENDA ITEM NO. VII 8 CHAIRMAN CLOWE: All right. We'll come 9 back to order now and move to Item No. VII, 10 consideration of and possible discussion and/or 11 action, including proposal of amendments, on 16 TAC 12 402.300 relating to pull-tab bingo. 13 Ms. Joseph. 14 MS. JOSEPH: Thank you, Chairman Clowe. 15 Before you is a draft rule amendment prepared for 16 submission to the Texas Register in order to propose 17 the adoption of amendment to Rule 16 TAC §402.300 18 pertaining to pull-tab bingo. 19 A workgroup consisting of Commission 20 staff, representative Bingo Advisory Committee members 21 and other industry representatives met on 22 November 21st and November 27th of this year to 23 consider rulemaking pertaining to pull-tab bingo. The 24 following persons participated in one or more of the 25 meetings: Stephen Fenoglio, Knowles Cornwell, Larry 0082 1 Whittington, David Heinlein, Kimberly Rogers, Brandon 2 Safstrom and Darin Peters. The proposed amendments 3 result from the workgroup's efforts. 4 The purpose of the proposed amendments 5 is to provide manufacturers with more specific 6 information on pull-tab ticket construction and 7 packaging standards, to provide more flexibility for 8 manufacturers to design and sell pull-tab products, to 9 provide information on a new jackpot pull-tab game, to 10 provide for accountability for sales and redemption of 11 pull-tab tickets, to clarify permissibility of video 12 confirmation of winners and digital flares, to 13 describe a new style of pull-tab game, and to clarify 14 existing language. 15 I would like to call your attention in 16 particular to two subsections. First on Page 7, 17 Subsection (a)(17), there is a provision pertaining to 18 video confirmation. This subsection is included to 19 provide that a video representation of the winners of 20 a game is permissible. This is not intended and we do 21 not believe that it allows in any way any play of the 22 game or anything other than just a mere representation 23 of the winners. I wanted to clarify that. 24 The second is Subsection (b)(5) on Page 25 9, Line 16. This provision provides that once a deal 0083 1 is submitted to the Commission for testing, the 2 manufacturer may offer that deal for sale to licensed 3 distributors. Subsection (c) provides that upon 4 notice that a ticket has been disapproved, all sales 5 will cease and the manufacturer must immediately 6 notify the distributor, and the distributor must 7 notify affected licensed authorized organizations to 8 cease all sale, use or other distribution. The 9 distributor must then provide confirmation to the 10 Commission that the notification has occurred. 11 There was agreement among the workgroup 12 on this rule. I recommend that the Commission 13 initiate the rulemaking process by publishing the 14 proposed rule for a comment period of 30 days. 15 Are there any questions? 16 CHAIRMAN CLOWE: Commissioner Cox? 17 COMM. COX: Do we have anyone wanting to 18 make public comment on this one, Mr. Chairman? 19 CHAIRMAN CLOWE: Mr. Fenoglio is a 20 maybe. I don't believe I have any other appearance 21 forms for anyone else. 22 MR. FENOGLIO: For the record, my name 23 is Stephen Fenoglio. And we support the proposed 24 publication. 25 CHAIRMAN CLOWE: Thank you, sir. 0084 1 MR. FENOGLIO: I would be happy to 2 answer any questions. 3 COMM. COX: You're probably not going to 4 support my proposed amendment. 5 Mr. Chairman, I can't live with Page 9, 6 Lines 16 and 17 that would allow a game to go on the 7 street before we test it. 8 CHAIRMAN CLOWE: Sandy, do you have any 9 response to Commissioner Cox on that concern? 10 MS. JOSEPH: No. I would say that staff 11 share that concern to a large degree. We were 12 persuaded that it would be perhaps acceptable to 13 include that provision, with a strong requirement of 14 notification by a manufacturer/distributor, once they 15 were notified that a game had been disapproved. We 16 felt like the game could be stopped in its track, so 17 to speak, rather quickly. But we certainly appreciate 18 that concern. And if the Commission so chooses, the 19 rule can certainly be published without that 20 provision. 21 COMM. COX: Well, I don't think it will 22 be as easy as it sounds. My concern is that we would 23 have permitted a game to be sold in the public that 24 was not an appropriate game. I don't see how you can 25 say that you're exercising strict control and close 0085 1 supervision when you let people sell untested games. 2 Now, let's look at the other side of 3 that. The industry probably wants this because we're 4 too damn slow approving games. Let's approve games 5 faster. 6 Phil, how quick would you approve games? 7 MR. SANDERSON: Once we receive the deal 8 for testing, under normal circumstances, if there's no 9 problems and depending on, you know, if there's 10 numerous submissions, probably within three to five 11 business days. 12 COMM. COX: Sounds pretty quick to me, 13 and it sounds like a good trade-off between the 14 burdensome process of trying to recall a game that's 15 already gone to the four corners of this state or 16 however many corners this state has. 17 So, Mr. Chairman, I don't know whether 18 it makes any sense to even propose that rule, that 19 part of the rule, because I can't support it. 20 CHAIRMAN CLOWE: I share in that 21 concern. 22 Counselor, can we change that wording at 23 this time? 24 MS. KIPLIN: Yes, we certainly can. 25 We'll work on that. 0086 1 MS. JOSEPH: I have prepared a T-bar 2 memo for your signature, indicating that you approve 3 publication as proposed by staff, with the exception 4 that staff proposed Subsection (b)(5) be deleted. And 5 so we can certainly -- you could sign off on that, and 6 we would certainly delete that section if that's your 7 desire. 8 COMM. COX: But, Mr. Chairman, along 9 with that, I would ask for as formal a commitment as 10 we can get from the Charitable Bingo Division that 11 these approvals be done post-haste. 12 CHAIRMAN CLOWE: And I think you said 13 three to five business days? 14 MR. SANDERSON: Yes, sir. And there 15 again, that's if they come in as meeting all the 16 requirements for the packaging and so forth. A lot of 17 the deals that we have to get resubmitted, the 18 packaging is incorrect, so it's up to the manufacturer 19 to submit it properly. And, you know, we can 20 definitely disapprove it just as quick as we can 21 approve it. 22 COMM. COX: And if they're submitting 23 them to us now improperly, that's the way they're 24 going to go to the industry if we're not checking? 25 MR. SANDERSON: Yes, sir. 0087 1 MS. KIPLIN: And it may be that during 2 the comment period, we'll get comment and consider 3 putting a time period in terms of approval. So that 4 you're looking for formal commitment and putting it in 5 a rule I think is maybe the way to go. 6 COMM. COX: Then I wouldn't have any 7 problem with saying that after five days it's approved 8 unless we formally object. 9 CHAIRMAN CLOWE: Yes. That's the 10 fail-safe, not that it would be disapproved -- 11 COMM. COX: Right. 12 CHAIRMAN CLOWE: -- but that it would be 13 approved. 14 Okay. Do you want to amend that rule at 15 this time? 16 MS. KIPLIN: No. I think if you-all are 17 okay with that, is invite comment and work out that 18 process through the comment period and then bring it 19 back at the appropriate time for your consideration. 20 CHAIRMAN CLOWE: And then assuming the 21 vote is affirmative, Sandy, you would give us the 22 T-bar that deletes that item and incorporate this 23 discussion in the comments during the period of 24 comment before you bring the rule back? 25 MS. JOSEPH: Definitely. 0088 1 CHAIRMAN CLOWE: Mr. Fenoglio, do you 2 have something to add? 3 MR. FENOGLIO: Briefly. 4 And, Commissioner Cox, you hit the nail 5 right on the head. In certain instances, it's been 6 months where a licensee hasn't heard anything. And so 7 with that understanding, I think we can move forward 8 and I think we can come to a resolution on those 9 issues. 10 One of the things that helps with this 11 rule is, there are for the first time some detailed 12 manufacturing standards, and we have collectively 13 talked about those. It's another peek at the rules 14 where you can kind of peek open and see. But they 15 were never codified in what the standard was. We've 16 now got that, and so I think we can work those issues 17 out. And I think -- while I was a little shocked by 18 your comment, I think there is an avenue to work that 19 out. 20 COMM. COX: Okay. 21 MR. FENOGLIO: Thank you. 22 CHAIRMAN CLOWE: Is there a motion? 23 COMM. COX: I move that we submit this 24 rule for comment, with the deletion of Page 9, Lines 25 16 and 17. 0089 1 CHAIRMAN CLOWE: Does that conform to 2 what you have? 3 MS. JOSEPH: Yes. 4 CHAIRMAN CLOWE: Second. 5 All in favor, please say "Aye." 6 COMM. COX: Aye. 7 CHAIRMAN CLOWE: Aye. 8 Proposed "No." 9 The vote is 2-0 in favor. 10 AGENDA ITEM NO. VIII 11 CHAIRMAN CLOWE: Next we'll move to Item 12 No. VIII, consideration of, possible discussion and/or 13 action, including proposal of amendments, on 16 TAC 14 402.400 relating to general licensing provisions. 15 Ms. Joseph. 16 MS. JOSEPH: Item VIII is a draft rule 17 amendment prepared for submission to the Texas 18 Register in order to propose amendments to Rule 19 §402.400 pertaining to general licensing provisions. 20 The purpose of the amendments is to set forth new 21 application guidelines that would allow an authorized 22 organization to submit an original application to 23 conduct bingo without noting the playing location, 24 dates, times and starting date, if the organization is 25 requesting a determination of its eligibility status 0090 1 for a license to conduct bingo. 2 The proposed new process would allow an 3 organization to receive a determination of its 4 eligibility status prior to knowing its playing 5 location, dates, times and starting date, so that the 6 Commission would be able to more quickly issue a 7 license when that information has been identified by 8 an authorized organization and provided to the 9 Commission. 10 I recommend that this proposed rule be 11 published in the Texas Register in order to receive 12 public comments for a period of 30 days. 13 CHAIRMAN CLOWE: Any questions? 14 COMM. COX: No, sir. 15 CHAIRMAN CLOWE: Move the adoption of 16 the staff recommendation. 17 COMM. COX: Second. 18 CHAIRMAN CLOWE: All in favor, please 19 say "Aye." 20 COMM. COX: Aye. 21 CHAIRMAN CLOWE: Aye. 22 Opposed "No." 23 The vote is 2-0 in favor. 24 25 0091 1 AGENDA ITEM NO. IX 2 CHAIRMAN CLOWE: Next, Item No. IX, 3 consideration of, possible discussion and/or action, 4 including proposal, on new rule 16 TAC 402.204 related 5 to prohibited price fixing. 6 Ms. Joseph. 7 MS. JOSEPH: Item IX is a draft rule 8 amendment, again prepared for submission to the Texas 9 Register, in order to propose the adoption of new rule 10 16 TAC §402.204 pertaining to prohibited price fixing. 11 The proposed rule would provide additional information 12 to manufacturers, distributors and authorized 13 organizations relating to Texas Occupation Code 14 §2001.556 pertaining to price fixing. The proposed 15 rule sets forth relevant definitions and includes 16 provisions to give guidance to assist licensees in 17 remaining in compliance with the statute. It also 18 provides examples of factors that may establish a 19 violation or a defense to an allegation of price 20 fixing. 21 In 2002, the staff of the Bingo Division 22 sought to suspend or revoke the bingo licenses of 23 manufacturer Game Tech International and distributor 24 Trend Gaming Systems for violation of the Act by 25 conspiring to fix the price at which bingo equipment 0092 1 or supplies were sold. The ALJ at SOAH disagreed with 2 the staff's recommendation. In his analysis, the ALJ 3 stated that, quote, "Agency policy in this area has 4 not been established because the Commission has not 5 promulgated rules for enforcement of the price-fixing 6 statute." 7 Subsequently the Commission conducted 8 additional investigations of possible price fixing. 9 At the June 29, 2005 House Licensing and 10 Administrative Procedures committee meeting, Chairman 11 Flores asked why the Commission had not adopted rules 12 on price fixing. In response, the Director of the 13 Charitable Bingo Operations Division testified that 14 the staff would move forward to develop and propose a 15 rule to provide clarification to the statute 16 prohibiting price fixing. 17 Shortly thereafter, a workgroup, 18 including Commission staff, representative Bingo 19 Advisory Committee members and other industry 20 representatives was established to consider rulemaking 21 pertaining to price fixing. The following persons did 22 participate in one or more of the meetings: Danny 23 Moore, Rosalie Lopez, Jamie McNally, Stephen Fenoglio, 24 Steve Bresnen, Jane Thompson, Knowles Cornwell and 25 Brahm Cornwell. Larry Whittington and Tres Gray 0093 1 indicated an interest in participating but were unable 2 to do so. 3 There was a consensus among the group 4 that a rule is needed. Several people volunteered to 5 work on draft language. Jamie McNally and Stephen 6 Fenoglio prepared draft rules, which were circulated 7 to other workgroup members for comment by April 21 of 8 2006. Two comments were submitted. One workgroup 9 member commented that he preferred the Jamie McNally 10 draft. The only other comment received was from a 11 non-member of the workgroup, Steven Hieronymus, and he 12 commented negatively on the McNally draft. 13 Subsequently the staff reviewed the 14 drafts, the information compiled by the workgroup and 15 sought counsel from the Attorney General's staff with 16 expertise on anti-trust issues. Staff began drafting 17 a rule in June of 2006. The draft rule has been 18 undergoing staff revisions and considerations since 19 that time. Staff did receive additional advice and 20 input from Assistant Attorney Generals Mark Tobey and 21 Kim Van Winkle, who had expertise in the area of 22 anti-trust law, on November 14, 2006. Since that 23 time, drafts of the proposed rule have been provided 24 to the workgroup just during the last few weeks. 25 I recommend that the Commission initiate 0094 1 the formal rulemaking process by publishing the 2 proposal rule in the Texas Register in order to 3 receive public comments. In this case, staff does 4 recommend an extended comment period of 60 days rather 5 than 30, because of the complicated nature and 6 implications of the proposed rule. We do want to have 7 an opportunity to fully seek and address any comments 8 from members of the public. 9 CHAIRMAN CLOWE: Commissioner, we have a 10 number of appearance forms. Would you like to hear 11 from those people now? 12 COMM. COX: Yes, sir. 13 CHAIRMAN CLOWE: Call on Mr. James 14 McNally. Good morning. 15 MR. McNALLY: Good morning. Thank you, 16 Commissioners. My name is Jamie McNally, with Clark, 17 Thomas & Winters. I'm here today representing Game 18 Tech International, Inc. Game Tech is a licensed 19 manufacturer of electronic bingo equipment. 20 We do appreciate the opportunity to be 21 here this morning and comment on this proposed rule. 22 As Sandy mentioned, Game Tech was a participant. I 23 personally participated in the workgroup activities to 24 propose and consider draft language. We did submit 25 draft language early on in the process. I think we're 0095 1 one of the few people, parties to actually do that. 2 And because of that, I have a real 3 appreciation for how difficult and complicated this 4 area is, touching as it does on anti-trust concepts. 5 And I think that the first-cut draft that staff 6 produced, I want to be complimentary of. That was a 7 hard document to produce under such a short time 8 frame. So I would like to say that I appreciate that 9 effort, and I think it's a good first cut of some 10 draft language. 11 Also, as Sandy mentioned, a number of 12 years ago Game Tech was involved in an administrative 13 proceeding, a long, complicated, expensive 14 administrative proceeding. And the fact that the 15 Commission didn't have rules, as we had mentioned, 16 because of a business suit in the proceeding. So Game 17 Tech is very, very supportive of the process and 18 supportive especially of the rule which provides some 19 guidance to the industry so that the industry can look 20 at a set of rules and know how to conduct its business 21 going forward. So I would like to say that. 22 But the working group did not have an 23 opportunity to review this particular draft that you 24 have in your notebooks and comment on this particular 25 draft. This was produced and distributed to the 0096 1 industry. So even though the working group was get 2 constituted, we have not had an opportunity to meet 3 since this draft has been produced, and comment on it. 4 Because of that, Game Tech is continuing its review of 5 having completed its review. If you do decide to 6 publish the rule in the Register, we appreciate and 7 look forward to the opportunity to submit comments on 8 the rule. 9 I would also like to say we appreciate 10 the 60-day comment period as opposed to the 30-day 11 comment period, because of the nature of the rule, 12 No. 1 and, No. 2, the fact that the industry nor the 13 workgroup has had an opportunity to comment on it. 14 As I said, I do think it's a good first 15 draft strawman proposal. We do think that it could be 16 clarified in certain areas. We do think that the 17 language could be tightened in order to give the type 18 of clarify that we had hoped to have received. 19 I won't take your time today to go 20 through a long list, but I would just like to mention 21 one particular item in Section (d). (d)(4) refers to 22 meetings providing an opportunity to discuss pricing. 23 You know, that I think would be an area which could be 24 broadly interpreted to include really sort of any type 25 of meeting between a manufacturer's representative, a 0097 1 distributor's representative, a manufacturer's 2 representative and another manufacturer's 3 representative, any sort of chance meeting, any sort 4 of meeting at a trade show. 5 So I think -- and there are a number of 6 other instances here. But I think that it would be 7 possible to tighten this language and sufficiently 8 focus it so that it would give the industry the 9 clarity that it really is seeking. 10 So I do appreciate the opportunity to 11 comment and look forward to providing comments during 12 the 60-day period, if you decide to go ahead and 13 publish the rule, and appreciate it. 14 Be happy to answer any questions. 15 COMM. COX: No, sir. 16 CHAIRMAN CLOWE: Thank you for your 17 appearance, and we look forward to having you 18 participate if the Commission goes forward with the 19 publishing of this rule. 20 MR. McNALLY: Thank you, Commissioners. 21 CHAIRMAN CLOWE: Amy Tabor, would you 22 come forward, please. 23 MS. TABOR: Good morning, Commissioners. 24 Thanks for inviting me here to comment. I appreciate 25 the opportunity. My name is Amy Tabor. I'm from 0098 1 Baker Botts, and I represent Moore Supplies, a 2 distributor of bingo equipment here in Texas. 3 I have looked over this draft of the 4 rule, and I want to echo one thing Mr. McNally said, 5 which is that the most important thing in this rule 6 should be clarity. I think what everyone wants is a 7 rule that's going to set out clear standards so that 8 everyone in the industry can conform their conduct to 9 the law. And I have some concerns that this draft of 10 the rule is not as clear as it could be. And 11 particularly I think it could be improved in the way 12 it deals with vertical price-fixing issues; that is, 13 the relationship between a manufacturer of bingo 14 equipment and a distributor. 15 I'm going to suggest here today what I 16 think are some good basic principles that the Attorney 17 General has used in interpreting this provision in the 18 past that set out what I hope is a framework for 19 consensus on what vertical price arrangements should 20 be illegal under this rule. And then I want to 21 comment on some specific provisions in the rule that 22 have been drafted that I think could create some 23 uncertainty. 24 Before I go into that, I'll tell you a 25 little bit about my background and how I came into 0099 1 this process. I am an anti-trust lawyer. That's my 2 practice specialty. And I represented Moore Supplies 3 in an investigation by the Commission, which found no 4 investigation of price fixing against Moore Supplies. 5 So I am new to bingo. I'm learning about bingo. I 6 now know a little bit about bingo, but price fixing is 7 something I know a substantial amount about. That's 8 what I normally practice in. So I hope that some of 9 that expertise will be helpful here. 10 In the Attorney General opinions on 11 price fixing, the Attorney General set out two very 12 clear rules which I think everyone can agree on and I 13 think provide a really good framework for addressing 14 vertical price fixing under the Bingo Enabling Act. 15 One, that a manufacturer cannot control 16 the price that a distributor charges to a charity; 17 two, that a manufacturer cannot prevent a distributor 18 from offering discounts, rebates or promotional 19 pricing to a charity. Those are two things that I 20 think clearly ought to be in this rule. 21 Beyond that, I'm not sure that there is 22 anything -- anything else that really needs to be 23 prohibited at this point involving relationships 24 between distributors and suppliers. And I would 25 suggest thinking about whether we could go back to the 0100 1 informal process and come up with a cleaner, simpler 2 rule that would simply embody those two principles and 3 provide some clear standards of conduct. 4 Now, looking at the draft rule, I just 5 want to illustrate for you, without going into too 6 much detail of each specific comment I might have if 7 this rule were published in the official comment 8 period, just tell you some of the things that would 9 concern me if the rule were put forward in its current 10 form. 11 If you look at Subpart (d) of this rule, 12 Subpart (d) lists factors to establish a violation of 13 this section, and it lists five factors. The first is 14 price parallelism, the second is product uniformity. 15 The third is exchange of price information, and the 16 fourth is meetings providing an opportunity to discuss 17 pricing. 18 These are factors that I expect the 19 Commission staff heard from the Attorney General's 20 office, have been used by courts applying the 21 anti-trust laws, as indeed they have. These are 22 factors that I think are appropriate in assessing an 23 issue of horizontal price fixing, but they don't apply 24 well in the context of vertical price fixing. 25 For an example, price parallelism. If 0101 1 you notice that Coke and Pepsi both went from 75 cents 2 for their sodas to a dollar on the same day, it would 3 be suspicious. So in a horizontal context, that's a 4 factor that could raise some suspicion, maybe urge you 5 to take another look at that. In a vertical context, 6 I don't think it's a very relevant factor. 7 Taking the soda distributor example 8 again, if a wholesaler raises his price to the 9 distributor by 25 cents, we would expect that that 10 distributor is going to raise his retail price. 11 That's not because of the price fixing; that's simply 12 because whenever costs go up, businesses tend to raise 13 their prices. It doesn't necessarily raise the 14 inference of any kind of illegal agreement. 15 The second factor is product uniformity. 16 Again, that's a factor that people have looked at in 17 the horizontal price-fixing context. If there is a 18 price-fixing cartel, one thing that cartel 19 conspirators tend to do is ask everyone in the cartel 20 to sell exactly the same product because that makes it 21 easier for the cartel to enforce a price-fixing 22 agreement and make certain that people aren't cheating 23 on the agreement by offering additional services or 24 features on their product. 25 In the vertical price-fixing context, 0102 1 that factor simply doesn't make a lot of sense. If a 2 distributor is distributing one manufacturer's 3 product, those products are going to be uniform 4 because they're all coming from the same manufacturer. 5 That doesn't suggest anything illegal is going on. 6 Third, the exchange of price 7 information. Again, a horizontal price-fixing cartel 8 might agree to exchange price-fixing information to 9 allow the competitors to enforce their cartel 10 agreement. In a vertical relationship, by contrast, 11 there are legitimate reasons why distributors and 12 manufacturers might exchange pricing information and 13 discuss pricing, without fixing prices or violating 14 the statute. 15 And, finally, Mr. McNally addressed the 16 issue of meetings. Again, if we look in the 17 horizontal context, this makes a lot of sense. If I 18 notice that the CEO of Coke and the CEO of Pepsi were 19 playing golf together on every Saturday afternoon, I 20 would kind of wonder what they might be talking about. 21 But if a distributor is doing business with a 22 supplier, they're naturally going to have regular 23 business meetings, and there is no cause for suspicion 24 there. 25 Now, I understand that the staff wants 0103 1 to move forward with this rule, and I'm sure that it 2 could be improved in a comment period, and I would 3 look forward to participating in that process. But I 4 think that the Commission should give some serious 5 consideration to the idea of taking another cut at 6 this draft before it's published. I think the draft 7 could be simpler, could be clearer, especially with 8 regard to the vertical price-fixing issues. And I'm 9 concerned that if we try to do major surgery on this 10 rule during the comment period, the final result might 11 not be as polished as it could be if we take a little 12 more time to have stakeholder input through the 13 workgroup and arrive at a consensus of what the 14 overall shape of the rule should look like before 15 publishing it. 16 And I'm happy to entertain any 17 questions. 18 CHAIRMAN CLOWE: Any questions? 19 COMM. COX: Thank you, Ms. Tabor. 20 That's very instructive. 21 Now, Sandy, having heard that, what are 22 your comments? 23 MS. JOSEPH: Well, first of all, in 24 regards to Paragraph (d), I agree that those factors 25 would apply to horizontal price fixing rather than 0104 1 vertical, in general. That paragraph could be 2 clarified to indicate that. 3 COMM. COX: So the rule is intended to 4 apply to both horizontal and vertical price fixing? 5 MS. JOSEPH: Yes. We're trying to 6 address both situations. 7 COMM. COX: So your fix for this would 8 be to indicate that those apply only in cases of 9 alleged horizontal price fixing? 10 MS. JOSEPH: Yes. As far as not 11 publishing at this time and working on an informal 12 basis with the workgroup and others, I have no 13 objection to that. That is -- whatever the 14 Commission's desire is on that. 15 COMM. COX: Mr. Chairman, we recently 16 appeared before the Licensing and Regulatory 17 Committee. And the members of that committee 18 expressed real concern with the speed of which our 19 Charitable Bingo Division produces rules, and I share 20 that concern and indicated to them that you have to 21 balance speed and inclusion, that if we're going to 22 include the industry and get all their input and 23 effectively reach a consensus on a rule before it's 24 exposed, it's going to take a long time. And if you 25 don't include them, then you're going to be publishing 0105 1 something that's going to get a lot of comment, and 2 that's going to take a long time. 3 What I committed to them was that we 4 would work for the proper balance between speed and 5 inclusion. Now, in this case, I don't know what that 6 is. I know there's already been a lot of inclusion, 7 and I would like to see some speed, but I don't know 8 whether that's appropriate 9 CHAIRMAN CLOWE: Well, let's hear from 10 others who wish to comment before we deal with that, 11 if we may. 12 COMM. COX: Okay. 13 CHAIRMAN CLOWE: Ms. Tabor, do you have 14 anything further? 15 MS. TABOR: No, Commissioners. I've 16 said everything I have to say, and I appreciate you 17 listening to me. Thank you. 18 CHAIRMAN CLOWE: Thank you very much. 19 Jane Thompson, would you come forward, 20 please. 21 MS. THOMPSON: Hi. My name is Jane 22 Thompson. I'm with Thompson Allstate Bingo Supply. 23 And I'm not going to sit here and repeat 24 my thoughts because everything that I'm been sitting 25 there thinking has been discussed previously by the 0106 1 other folks that have talked. 2 I will briefly say I feel very strongly 3 that a rule needs to be made on price fixing, and 4 clarification has got to be made of the price-fixing 5 law. But I'm afraid that this proposed draft here, it 6 creates even more concern and confusion for me. At 7 first I thought, well, the 60 days for the comment 8 period was good. But I tend to agree with Amy. I 9 would like to see -- I would like to see this not 10 published. Let's get it clarified a little bit more 11 before we go into a published rule. 12 The things that cause me concern is that 13 same section in (d) and the clarification of what 14 exactly is -- when you say price parallelism and 15 product uniformity, I have question marks by all of 16 those things, and exchange of price information. And 17 I know that in other parts of the rule, it allows for 18 the manufacturer to have a manufacture's suggested 19 retail price. So, therefore, that contradicts the 20 exchange of price information if you're going to be 21 able to talk with them about that. 22 And, of course, meetings, that's way too 23 broad, because we have meetings all the time. And for 24 those to be factors to establish violation makes me 25 nervous. I think they need to be much more clear than 0107 1 what's here. 2 And then on the very last page about 3 agreements for sale or lease of bingo equipment or 4 supplies between manufacturers and distributors, I'm 5 not sure if that means -- does that mean that you have 6 to have a written contract with your customers or does 7 it mean if you have an agreement, it must be in 8 writing? 9 So I don't know. I'm pretty simple, and 10 sometimes there's a lot of this stuff that just goes 11 right over my head. But I would prefer it to be more 12 clear before we go and publish this particular rule. 13 CHAIRMAN CLOWE: Any questions? 14 COMM. COX: No, sir. 15 CHAIRMAN CLOWE: Thank you, ma'am. 16 Mr. Fenoglio, are you in on this? 17 MR. FENOGLIO: I am, Mr. Chairman. For 18 the record, my name is Stephen Fenoglio. 19 And I have commented extensively on this 20 issue since Day One. And normally I don't think I 21 would agree with Game Tech's counsel on price fixing. 22 And I know in the past, he and I have had 23 disagreements on the intent and meaning of the statute 24 and Game Tech's family of distributors who just spoke. 25 But I think this rule is premature. I 0108 1 think it needs more work. And I think, Commissioner 2 Cox, you can be true to your word with the Legislature 3 about putting us on a short time frame. I know 4 Ms. Joseph's boat is loaded now with some of the other 5 rules, and she's also engaged in the legislative 6 drafting process we discussed earlier. So I don't 7 know, on that side of the table, what the workload is, 8 but I know my side is overloaded now. 9 This is a complicated area. I don't 10 think this Bingo Enabling Act provision is 11 particularly complicated. But how it actually works 12 in industry, be it bingo or car dealerships or office 13 supply products, people talk all the way about 14 pricing, and that's not necessarily a bad thing. 15 And so I would agree that a directive 16 from you to get the group together. We had a series 17 of meetings, but I never felt there was any direction 18 in the meetings. And I had asked, back in November of 19 '05, for some detailed information so I could 20 understand and be on the same plane as far as what 21 problems the staff had identified in the last 22 five-year history of some allegations of price fixing, 23 and we still don't have that. Someone at some point 24 suggested I file an open records request to get that 25 information, and I believe that information is 0109 1 contained in probably 50 boxes of documents, and I 2 don't look forward to that. 3 So I have been advocating for the 4 charities to, "Let's get a handle on this because 5 staff have identified problems that have occurred, and 6 let's prohibit them," because ultimately it's the 7 charities that pay the freight for any prohibitive 8 conduct 9 Phil Sanderson and Sandy were kind 10 enough to take time out of their schedule to meet with 11 me last week for about two hours and go over some of 12 these issues. I had a lot of the same concerns that 13 had been expressed in Moore. And I think it would be 14 better -- and you don't hear me say this often. 15 Especially you've never heard me say this on this 16 issue, that you give us a short time frame to come 17 back together as a group with some recommendations. 18 It won't be unanimous -- I can assure you that, 19 Commissioner Cox -- but I think it will be a better 20 work product that you can then go to publish for 21 public comment on. 22 And I will be happy to answer any 23 questions. 24 CHAIRMAN CLOWE: Mr. Cornwell, I believe 25 you've filed an appearance form. Would you care to 0110 1 comment on this? 2 Thank you, Mr. Fenoglio. 3 MR. CORNWELL: Good morning. My name is 4 Knowles Cornwell. And thank you, gentlemen, for 5 allowing me to speak. 6 The section that this rule covers in the 7 Enabling Act is 2001.556, and that section can be 8 interpreted to cover existing federal and state laws 9 regarding vertical and horizontal price fixing. But I 10 think we're missing the entire intent of this piece of 11 legislation, even though we have no legislative intent 12 here, unfortunately. But I want to call it diagonal 13 price fixing. 14 I think this whole provision here is to 15 ensure that the charities get the fair price and that 16 there is no influence peddling, there is no fixing or 17 collusion that takes place between any parties in the 18 price fixing system we have in this state. And I 19 think we need to address that in this rule and make 20 that rule stronger. I think we've got existing 21 price-fixing legislation on the state and federal 22 level, but I think this rule goes not far enough. 23 Thank you. 24 CHAIRMAN CLOWE: Thank you. 25 Commissioner Cox, do you have any 0111 1 questions? I have some. That's the reason I -- 2 COMM. COX: I would like to hear your 3 questions, Mr. Chairman. 4 CHAIRMAN CLOWE: Sandy, what level of 5 participation did you receive from the Attorney 6 General in the work that you've done here? 7 MS. JOSEPH: Beginning a little over a 8 year ago, we have had several phone conferences with 9 them where they have, before we ever began the 10 workgroup meetings or perhaps at the very beginning of 11 them, we did talk to them about their thoughts on the 12 effort we were undertaking. And at that time, Mark 13 Tobey said he would sure hate to try to rule on price 14 fixing. So that kind of set the difficulty or framed 15 the difficulty of what we were trying to do. 16 Subsequent to that, we worked with the 17 workgroup. And this fall, after we had come up with 18 an initial draft, which was different than what is in 19 your notebook today, somewhat, we have had a couple of 20 other phone conferences with them and received input 21 from them. 22 CHAIRMAN CLOWE: Well, then, it seems to 23 me that you've had some help, but you really haven't 24 had a lot of detailed assistance. Is that a fair 25 characterization? 0112 1 MS. JOSEPH: Well, they have been very 2 willing to look over what we have come up with and 3 provide their comments. They have not drafted 4 anything for us. 5 CHAIRMAN CLOWE: They haven't been in 6 the drafting business? 7 MS. JOSEPH: No, they did not 8 participate in the workgroup. 9 CHAIRMAN CLOWE: Counselor, is this an 10 area where an outside law firm that has a deep 11 experience in this practice of law would be helpful to 12 the staff that you have in writing this kind of rule? 13 MS. KIPLIN: You know, perhaps. And 14 that was what led us to reach over to the Antitrust 15 Division. Mark Tobey is the Division Chief. It's 16 certainly something that we can consider. And I would 17 like to confer with Sandy and see what her thoughts 18 are in terms of obtaining an outside counsel for that 19 advice. 20 CHAIRMAN CLOWE: Commissioner Cox, I 21 would like to try to answer your thoughts, if I may, 22 at this point in time. 23 This issue has been on the table too 24 long, in my opinion. And I think that the way you get 25 results in some situations is to put pressure. And 0113 1 it's the easiest thing in the world to say, "This is 2 no good. Let's stop and go back and start all over 3 again." That question always comes -- the question 4 also comes to my mind: Why didn't you do that in the 5 beginning, instead of saying let's throw this out and 6 start all over again? 7 I'm not convinced that a better product 8 will come as a result of that activity if you give 9 that opportunity, but I'm not dead set opposed to it. 10 I am opposed to letting it go back and sit on the 11 table for another six months or a year. You know, if 12 these people want to take this away and come back in a 13 month and say, "Well, we can come up with a better 14 product," I wouldn't be opposed to that. 15 Now, the response might be, "Oh, well, a 16 month is not time enough. You know, the holidays are 17 on us." Well, you know, we've been looking at this 18 thing for well over a year, and it's not going to get 19 any simpler or any less complex as we view it. We're 20 not going to adopt a bad rule. That goes without 21 saying. And we're not adopting today. We're just in 22 the process. 23 So I'm open to suggestions. And one 24 thing we might do, based on the discussion we've had 25 to this point, is to leave this subject at this time 0114 1 in this meeting and allow the parties that have 2 presented to us to visit over the noon hour and 3 re-call this agenda item for this afternoon and see if 4 they, as a result of all of this conversation and 5 these comments they've made, have a proposal to us. 6 I'm in favor of moving ahead; I'm not in 7 favor of letting them go back and start all over 8 again. I just don't think that's the right answer at 9 this point in time. I'll say that now and hope that 10 motivates them. 11 COMM. COX: Conceptually I'm in total 12 agreement. The only thing I would ask is, Sandy, if 13 we do that, and if the industry representatives agree 14 to work with you and the Bingo staff in the next 30 15 days, or between now and the next meeting, will you 16 get off Christmas? 17 MS. JOSEPH: No, sir -- barely. It 18 would be very difficult, in light of the fact that we 19 need, in order to get your materials to you, would 20 really only have until probably January 4th to get 21 that information provided to you in time for the next 22 meeting. That is -- 23 COMM. COX: That's with Director 24 Sadberry's new requirements for something going on the 25 agenda? 0115 1 MS. JOSEPH: Yes. You know, I agree 2 that pressure helps get things done. We've seen much 3 more interest in this rule since we have come up with 4 this proposed draft that you asked to be provided and 5 placed on the agenda. Last spring when I asked for 6 comments on the drafts that had been offered by 7 Mr. McNally and Mr. Fenoglio, as I mentioned in my 8 opening remarks, I didn't get much response. We're 9 getting a lot of response now, and that's helpful. 10 I would -- you know, I would beg for 11 60 days in any scenario. 12 CHAIRMAN CLOWE: If that would be part 13 of your discussion -- 14 MS. JOSEPH: Yes. 15 CHAIRMAN CLOWE: -- and if you came back 16 and asked for 60 days, that would represent a 17 commitment on your part, and I'm looking for that 18 commitment. I'm not agreeable to just on open end: 19 Okay. Let's trash this and go back and start all over 20 again, and we'll hear from you sometime in the future. 21 I mean, that's not what the licensing committee was 22 talking to you about. 23 COMM. COX: That's correct; that's 24 correct. 25 CHAIRMAN CLOWE: And let's have a 0116 1 commitment from these participants that they'll get 2 together and work together and they'll put this ahead 3 of the other things that are so important. This is 4 important to this Commission. 5 COMM. COX: I like your idea of letting 6 them get together and make a commitment, and then we 7 consider whether that works. 8 CHAIRMAN CLOWE: And, you know, if we 9 don't hear from them, frankly, Commissioner, I'm for 10 going ahead with what we've got -- 11 COMM. COX: Okay. 12 CHAIRMAN CLOWE: -- with the 13 understanding that we're not going to adopt a bad 14 rule. 15 COMM. COX: Right. 16 CHAIRMAN CLOWE: We've never done that 17 knowingly, and we're not going to start now. 18 COMM. COX: We're in total agreement. 19 CHAIRMAN CLOWE: But it requires 20 participation on everybody's part to come up with the 21 best solution. I don't think we've had that so for. 22 Okay. We'll call this later in the day, 23 give y'all over the noon hour to talk about it and see 24 what you can come up with. 25 MS. JOSEPH: All right. I would like to 0117 1 bring forward the T-bar memos on the other four 2 rulemakings. 3 CHAIRMAN CLOWE: We've had motions, and 4 those have been approved. 5 MS. JOSEPH: Yes. 6 CHAIRMAN CLOWE: And we're going to call 7 Item X next, Phil, the report, possible discussion 8 and/or action on instant bingo or pull-tab bingo, when 9 we have executed these. 10 (Brief pause) 11 CHAIRMAN CLOWE: Are you going to make 12 the presentation? 13 MS. SHANKLE: No, sir. 14 MR. SANDERSON: Y'all ready? 15 CHAIRMAN CLOWE: We're ready. 16 MR. SANDERSON: Ms. Terry Shankle is 17 going to run the projection and the slide show for us 18 today. 19 Good morning, Commissioners. I would 20 like to provide you with a presentation and some 21 information on pull-tab bingo in Texas that covers 22 yesterday, today and tomorrow. 23 CHAIRMAN CLOWE: Phil, excuse me just a 24 minute. I've allowed an appearance form from 25 Mr. R. G. Duncan. I was holding this till the end of 0118 1 the rulemaking because general comments were what were 2 specified on the item. And I don't want to pass over 3 Mr. Duncan. Is he here? Would you like to come 4 forward now, Mr. Duncan? 5 MR. DUNCAN: Yes, I would Commissioner. 6 CHAIRMAN CLOWE: Please do so. 7 Phil, I'm sorry. If we can just hold 8 off there for a minute. I didn't want to overlook 9 Mr. Duncan. 10 Good morning, sir. 11 MR. DUNCAN: Good morning, Mr. Chairman 12 and Commissioner. I'll be very brief. I just want -- 13 primarily I wanted to come up before you this morning 14 to compliment you on the great job that you've done. 15 This is not the first time I have been here and it 16 probably will not be the last, but you gentleman have 17 done a magnificent job as far as I'm concerned. 18 As you know, in our group down in 19 Victoria, Texas, we believe in helping those in our 20 community through our charitable contributions, and we 21 have exceeded the amounts of monies, in my opinion, 22 and have done great things with the monies that we 23 have realized as a result of these opportunities to 24 offer bingo, charitable bingo in our community. 25 You don't realize the amount of not only 0119 1 the enjoyment that the people who come to play bingo 2 on a daily basis enjoy and the benefits that they reap 3 in the prizes that they win. And they have been 4 extremely gracious in their contributions in allowing 5 us to do these many things. And I feel that the 6 reason being, that you-all have been extremely kind to 7 charitable bingo and that you will continue to make 8 certain that the rules that are promulgated or the 9 rules that you set forth will be beneficial to 10 charitable bingo. 11 That's all that I want to do, is to tell 12 you how great the job you've done and encourage you to 13 continue to look at rules and develop rules that will 14 be beneficial and be helpful for charitable bingo. 15 Thank you. 16 CHAIRMAN CLOWE: Thank you. 17 (Applause) 18 AGENDA ITEM NO. X 19 CHAIRMAN CLOWE: And now, Phil, we'll 20 take Item X, please. 21 MR. SANDERSON: Commissioners, I would 22 like to present to you a presentation and information 23 on pull-tab bingo in Texas that covers yesterday, 24 today and tomorrow. 25 As you are well aware, Texas voters 0120 1 approved a constitutional amendment authorizing 2 charitable bingo in November of 1980. 3 On August the 14th of 1981, the Bingo 4 Enabling Act was approved by the Texas Legislature and 5 became effective November the 10th. In the spring of 6 1982, the first bingo licenses were issued. 7 In 1982 pull-tabs were introduced into 8 the Texas bingo market, but they are not regulated. 9 The Comptroller responded by forming a task force to 10 determine if pull-tabs were covered by the state's 11 bingo law. The task force recommended that Texas 12 establish pull-tab manufacturing standards to protect 13 against fraud through the manipulation of pull-tab 14 tickets. The instant bingo rule was adopted on May 15 the 16th of 1984. 16 The instant bingo rule did not allow for 17 the use of any symbols other than the traditional 18 bingo card face. The ticket had to display the 19 Comptroller's seal, the word "B I N G O," wording 20 "Authorized by the Texas Bingo Regulation Division," 21 the serial number, the manufacture's name or 22 trademark, the amount and number of prize winners, the 23 number of tickets in the deal and the cost per ticket. 24 The rule allowed for pull-tabs to be only used with 25 concealed numbers on a traditional bingo card face. 0121 1 Instant prize winners were determined by 2 pre-printed appearance of numbers in a prescribed 3 order, according to a winning arrangement that was 4 indicated on the face of the ticket. 5 Additionally, the rule placed limits on 6 how much a pull-tab ticket could cost. It was set at 7 a maximum of 50 cents per ticket. There was a limit 8 on the prize payout per ticket at $500. The total 9 prizes that were paid out for instant bingo had to be 10 included with regular bingo prizes that were awarded 11 and could not exceed $2,500 per occasion. 12 Additionally, the gross receipts for instant bingo 13 could not exceed 50 percent of the total gross 14 receipts for that occasion. 15 In September of 1987, the Bingo Enabling 16 Act was amended, allowing for a separate $1,500 prize 17 limit cap on instant bingo. 18 On January the 1st of 1990, the 19 regulation and administration of charitable bingo was 20 transferred from the Comptroller of Public Accounts to 21 the Texas Alcoholic Beverage Commission. The 22 Comptroller's Instant Bingo Rule 3.554 was adopted as 23 TABC Rule 55.554, with no changes except for the TABC 24 seal replaced the Comptroller's seal on the ticket. 25 In September of 1993, the Act was 0122 1 amended that removed the $1,500 prize limit on 2 instance pull-tab tickets per session. 3 On April the 1st, 1994, the regulation 4 and administration of bingo was transferred to the 5 Texas Lottery Commission. TABC Instant Bingo Rule 6 55.554 was adopted as Lottery Rule 402.554, with no 7 changes by the Lottery, with the exception of the seal 8 is now the Texas Lottery Commission seal, other than 9 the TABC seal. That rule now has been changed to Rule 10 402.300. 11 In 1995, the Bingo Enabling Act was 12 amended by adding Section 11(u), which is now 13 2001.408. And it states, "Bingo may be played using a 14 pull-tab bingo game, a break-open bingo ticket, or an 15 instant bingo ticket subject to the rules of the 16 commission." 17 In 1997, the definition of instant or 18 pull-tab bingo was added to the Bingo Enabling Act, 19 and the definition included the word "symbol." 20 Additionally, the maximum prize payout for a pull-tab 21 ticket was increased to $750. 22 All during the time period from 1984 23 through 1997, pull-tab bingo ticket were designed with 24 the bingo face with predetermined patterns designated 25 as winning tickets. 0123 1 On August 31st of 1998, the Lottery 2 Commission approved 29 pull-tab games that displayed 3 symbols to identify winners in the pull-tab game. 4 Pull-tab games were approved simultaneously for sale 5 in the Texas market. 6 Then in 2002, the pull-tab bingo rule 7 was reviewed and amended to authorize a new style of 8 play for pull-tab bingo, most commonly known as event 9 tickets. The new play styles were a sign-up board 10 ticket, a coin board ticket, the event ticket, the 11 multiple part event ticket, as well as the traditional 12 instant ticket, the multi-part instant ticket and the 13 tip board, of which those three items, we have not had 14 any submissions. 15 On September 25th of 2002, the lottery 16 improved 34 new styles of play for pull-tab games. Of 17 the 34 pull-tabs, 18 were the sign-up board variety 18 and 16 were the event style of play. 19 As we chart the sales and growth of 20 pull-tab sales from 1984 all the way through the third 21 quarter of 2006, we look first at the time period of 22 1984 through '97, when a pull-tab ticket had to 23 contain a bingo face where prize winners were 24 determined by the preprinted appearance of numbers in 25 a prescribed order, according to a winning arrangement 0124 1 indicated on the face of the ticket. 2 Then you have the annual sales from 1998 3 through 2002, when the symbols were approved to be 4 added to the ticket. 5 Now we have the annual sales from 2003 6 through the third quarter of 2006, with the new play 7 styles of play being authorized. 8 As you can see, the trend in pull-tab 9 sales increased up until 1991, then began a steep 10 decrease between '92 and '97, where the decrease was 11 minimized with the introduction of the pull-tab 12 tickets with symbols. Then the trend does a complete 13 reversal after the event tabs were authorized in late 14 2002. Pull-tab sales have increased by 46 percent 15 from 2002 to 2003, and they've increased over 150 16 percent between 2002 and 2005. 17 So, in conclusion, pull-tab tickets have 18 evolved or changed over the years. Originally the 19 pull-tab ticket was a bingo face ticket with 20 predetermined patterns designated as the winning 21 ticket. The prizes you could offer during a single 22 occasion were first limited to the inclusion of $2,500 23 per session, and then the pull-tab sales could not 24 exceed 50 percent of total gross. 25 In 1987, they allowed for a $1,500 prize 0125 1 limit. And in 1993, they removed that $1,500 prize 2 limit. In 1997, the Act was amended to allow for 3 symbols to be used for determining winners. And then 4 in 2002, by rule, the Commission authorized new play 5 styles with different types of event tickets as well 6 as the event tickets that utilized ball draws to 7 determine the winner. 8 Now today is the most recent submission 9 for a pull-tab event ticket which looks like and plays 10 like a regular bingo game. We just bring this to your 11 attention just so you know what the different types of 12 pull-tab tickets that are being authorized or approved 13 today. These three tickets here are in the artwork 14 approval process at this point in time. 15 And that concludes my presentation and 16 hopefully provides you with information on how 17 pull-tab bingo has evolved over the years. I would be 18 glad to answer any questions you may have at this 19 time. 20 CHAIRMAN CLOWE: Thank you, sir. 21 Commissioner, we have now completed all 22 of the bingo items, I believe, on our agenda, and I 23 would propose we take a short break and then go 24 forward with Item No. XI and try to move through all 25 of those items until we get to executive session. 0126 1 COMM. COX: Okay. Mr. Chairman, did you 2 want to consider possibly taking Item XIV out of 3 order? The demographer is here and probably traveled. 4 CHAIRMAN CLOWE: Sure, sure. We'll take 5 that right now before the break? 6 COMM. COX: Or right after the break. 7 CHAIRMAN CLOWE: Very good. We'll take 8 a short break, and then we'll begin with Item XIV. 9 (Off the record: 10:50 a.m. to 10:59 10 a.m.) 11 CHAIRMAN CLOWE: We'll come back to 12 order. We are going to take Item XIV out of order, 13 and then we are going take Item XXXII out of order, 14 and then we're going to go back to Item No. XI. 15 AGENDA ITEM NO. XIV 16 CHAIRMAN CLOWE: So now we'll call item 17 XIV, report, possible discussion and/or action on the 18 2006 Demographic Report on Lottery Players. 19 Mr. Fernandez. 20 MR. FERNANDEZ: Good morning, 21 Mr. Chairman, Commissioner Cox, Director Sadberry. My 22 name is Mike Fernandez. I'm the Director of 23 Administration. 24 As you know, the Executive Director of 25 the Texas Lottery Commission by law is required to 0127 1 perform every two years a demographic study or have 2 conducted a demographic study of Texas lottery 3 players, and that he is also required to provide that 4 report, that demographic study to the Governor and to 5 the Texas Legislature. 6 As you also know, we perform this study 7 or have this study performed every year. This past 8 year, we have engaged the University of North Texas to 9 provide the study. With me this morning I have 10 Dr. Paul Ruggiere who is the Assistant Director of the 11 Survey Research Center at the University of North 12 Texas to present this study. I also have with me a 13 familiar face, Dr. David Sizemore, who is our Chief of 14 Research 15 So with that, I will turn this over to 16 Dr. Ruggiere to present the findings. 17 DR. RUGGIERE: Well, thank you. And I 18 wanted to thank y'all for moving this on the agenda 19 and giving the University of North Texas a chance to 20 work on this survey. We work for other state agencies 21 as well and appreciate this opportunity. 22 To give a brief overview of what we've 23 done, the University of North Texas Survey Research 24 Center conducted a survey of 1,700 Texas residents in 25 September 2006. The purpose of the survey was to 0128 1 measure participation rates in different lottery 2 games, to examine the distribution and frequency of 3 play among the different lottery games and to get a 4 characterization of general player demographics. 5 We conducted a random digit dialing 6 survey of Texas residents. All of our telephone 7 interviews were conducted from the research center's 8 Denton telephone interviewing facility. And we 9 conducted our interviews in English, and Spanish when 10 the household contacted was not speaking English. 11 To give you an overview of how the 12 instrument works, the survey instrument, the first 13 question asked if the respondent has played any 14 lottery game. If they had played a lottery game, they 15 were asked a series of follow-up questions. They were 16 asked if they played -- we go through each of the 17 eight games and we ask them if they've played that 18 game, how often they play and how much they spend per 19 play, or per month. And then non-players were brought 20 directly to the demographic questions. 21 Before going into the results, I wanted 22 to discuss with you considerations for interpreting 23 the results. The first is a sample representation -- 24 I'm also going to talk about sources of error in 25 telephone surveys -- understanding a margin of error, 0129 1 understanding statistical significance -- which is 2 something that will come up in this report -- and then 3 interpreting changes between measurement periods. 4 Regarding sample representation, I 5 looked at our survey demographics compared to the last 6 survey. And education, income, age and Hispanic 7 origin all appear to be similar between -- have 8 similar distributions between the past two years. And 9 that's among the entire sample of 1,700. 10 And then looking back one more survey, 11 the race categories and gender are similar. But going 12 back two years, there appear to be some differences. 13 I don't have all those data sets, so I can't attest 14 for those differences, but these are just some general 15 observations to keep in mind when looking at these 16 results and comparing them to previous years. 17 I also took a comparison of our survey 18 data and compared it to the census data. Looking at 19 the income distribution of our survey sample, and 20 comparing that to the census data, they appear to be 21 very similar. The same thing with households with 22 children; that's also similar between our sample and 23 the census data. 24 But it does look like our Hispanic 25 population is slightly under-represented and that 0130 1 renters are slightly under-represented. Our 2 bachelor's -- our folks with bachelor's degrees who 3 responded to the survey appear to be greater in the 4 survey than in the population as a whole. And less 5 than a high school -- folks with less than a high 6 school diploma are a bit under-represented. And women 7 are over-represented. 8 This is the type of typical response 9 bias that we get from telephone surveys. There is 10 nothing unusual about this. The reason I'm bringing 11 it up is that when we compare -- when we're looking at 12 findings from the survey data and maybe comparing it 13 to hard data, understand that the sample is a bit 14 different from the population as a whole. Typically 15 the way we deal with these kinds of differences is to 16 weight the data. But in previous years, the data has 17 not been weighted. So to maintain consistency with 18 previous years, we did not weight the data for this 19 year. But in looking at the results, that is one 20 potential source of error. 21 Another source of error is human error. 22 And when I refer to human error, we are asking 1,700 23 people over the telephone to recall what they've done 24 in the past year, what their behavior has been in the 25 past year. And they have to calculate and average 0131 1 spending amounts and number of times a week they play. 2 And this is all based on recollection. 3 Some groups, when they try to measure 4 behavior in surveys use other methods like the Nielsen 5 and Arbitron ratings. I mean, they actually have 6 people walk around with their diaries when they 7 actually watch a television show or listen to a radio 8 station. So there's ways to try to reduce that human 9 error. But understand that we're dealing with 1,700 10 people and their recollection of what they've done in 11 the past. There's some unmeasurable human error 12 that's involved in the survey. 13 The third one is sampling error. And 14 whenever you take a sample, even if you do everything 15 completely right, there is some degree of error that 16 is inherent in the nature of sampling, and that's 17 where a margin of error calculation is produced. And 18 y'all are probably somewhat familiar with margin of 19 error calculations. We see them on polls a lot on 20 television. And those are specifically addressing 21 issues of sampling error, but they can't deal -- you 22 can't address human error. 23 So, for example, for margin of error, 24 one of our findings that we'll get into later is that 25 45.4 percent of our 1,700 respondents stated that they 0132 1 had played a lottery game in the past year. So the 2 margin of error on 1,700 respondents is plus or minus 3 2.4 percent of the 95 percent confidence level. And I 4 can elaborate on that if y'all need me to. Basically 5 what that means is that if all Texas residents were 6 surveyed, we would expect that somewhere between 7 43 percent and 47.8 percent would have reported that 8 they had played the lottery game in the past year. 9 I also want to point out that in much of 10 the rest of the survey, we're really dealing with 11 subsets of the 1,700 people. So another finding that 12 we'll discuss later is that 16.2 percent of the 771 13 players in our sample stated that they had played 14 Texas Two Step in the past year. Well, the margin of 15 error on 771 respondents is plus or minus 3.5 percent. 16 So there's a broader margin of error, meaning that if 17 all Texas players were surveyed, we would expect that 18 somewhere between 12.7 and 19.7 would be Texas Two 19 Step players. 20 And as we get into other smaller 21 subsets, understand that these margins of error 22 increase. For example, when we're asking for how 23 much -- when we're asking these players of these games 24 how much they spend per month, for example, some of 25 those error rates are much broader because we're 0133 1 dealing with even smaller subsets of our sample. And 2 I'm bringing those up again just to kind of keep in 3 mind that there is some error regarding -- there are 4 different sources of error when interpreting these 5 survey results. 6 The next item is a test of statistical 7 significance. We often see differences in samples 8 when we break them down by demographic groups, but we 9 want to ask some questions. If we observe a 10 difference in those percentages among demographic 11 groups, does that observed difference represent a true 12 difference in the population or can that difference be 13 attributed to a sampling error? 14 We expect that five out of 100 samples 15 will maybe show some difference that is not 16 attributable to a sample, a true difference in the 17 population. So that's what's referred to as sampling 18 error. So a test of statistical significance can help 19 us, can guide us in figuring out which differences 20 that we observe on the report actually represent 21 what's probably a true difference in the population. 22 Now, in looking at changes among the 23 measurement periods, the findings can be compared to 24 previous periods. But if there is a new finding in 25 this survey that is not seen in previous surveys, that 0134 1 could represent an actual change. At the same time, 2 it may be a sampling error that's just inherent in the 3 random digit dialing process. So when changes are 4 observed, it's best to see if those types of findings 5 are replicated in the future or if it's just a 6 particular blip related to this survey. 7 So this data can be used for -- the best 8 uses of this data are to see the differences in play 9 rates among the games, differences among demographic 10 groups for this year and changes over time. 11 Any questions on the statistical part 12 before we go on? 13 COMM. COX: I have just one. In your 14 telephone samples, did you include blocks of numbers 15 that would represent cell phones? 16 DR. RUGGIERE: We don't call cell 17 phones. It's technically against the law to call cell 18 phones for telephone surveys, unless we somehow 19 compensate the person for the time that's used. And 20 that tends to under-represent lower income people who 21 may not have a landline. It tends to under-represent 22 students as well. That's something that the industry 23 as a whole is exploring and wrestling with, as to how 24 we're going to deal with cell phones in the future. 25 COMM. COX: Did you see anything in your 0135 1 results that would indicate you had that kind of 2 error? 3 DR. RUGGIERE: Well, just looking at 4 the -- not necessarily the result of findings but 5 looking at our sample compared to the census data, we 6 are, you know, under-representing -- under- 7 representing people with less education. And that 8 could potentially involve cell phones, but it's hard 9 to know. 10 COMM. COX: Thank you. 11 DR. RUGGIERE: So looking at the first 12 question, and that's, "Did you participate in any game 13 in the past year?" 45 percent of the respondents 14 reported that they had participate in a game in the 15 past year, and that was a bit of a decrease from the 16 findings of the 2005 survey. 17 Participation was rates were a bit 18 higher in the McAllen and Victoria lottery districts. 19 And this year the participation rates were somewhat 20 higher among black respondents and the respondents of 21 Hispanic origin. This was a statistically significant 22 difference when compared to white respondents. 23 I hadn't seen this before, so I thought 24 I should take a look at the 2005 survey. And while I 25 don't have -- I haven't run any statistical tests, it 0136 1 would be something that staff could look at as they 2 get all the data sets. I thought it would be 3 interesting just take a look and see if there were any 4 changes. 5 And what it appears to me is that, while 6 there is a slight change in the Hispanic population -- 7 but that was really within the margin of error -- what 8 really appears to have happened is that we've had a 9 decrease overall from 51 percent to 45 percent in 10 total lottery play, and that drop was more pronounced 11 among the white respondents and black respondents in 12 this sample. 13 So the Hispanic participation rate 14 pretty much stayed the -- appeared to have stayed the 15 same and then the white and black participation rates 16 appear to have dropped at a rate that accounts for the 17 45 percent change -- or excuse me -- the change from 18 51 percent to 45 percent overall. In looking at this 19 year's data, employed respondents were more likely to 20 be players. 21 Staff had asked me to try to put 22 together an estimate, using the information that we 23 had based on the telephone sample, to compare that to 24 actual sales figures of the Lottery Commission. So we 25 had first started with just an estimate of how many 0137 1 Texans play a lottery game. And using 2005 census 2 figures, there's 22,270,000 people in the Texas 3 population, and 45.4 percent of those would be 4 10,110,654 players of a lottery game. Again, consider 5 that since this data isn't weighted, that's a good 6 ballpark idea, ballpark figure as to how many Texans 7 play. 8 If we take some of the data from the 9 survey and extrapolate that over all games, we show 10 monthly average expenditures of about $51 among 11 players per month. And then when we look at those 12 total sales for the year compared to the sales for -- 13 the actual sales, I mean, it really looks like these 14 monthly figures are a bit of an overestimate. Those 15 are probably -- based on people's recollection, it 16 seems to me that the relevant point to get from this 17 slide is that as you're looking through the report and 18 you're looking at the specific dollar amounts reported 19 having been spent on each of the games, compared to 20 actual sales, it looks like there is a bit of over- 21 estimating going on, based on people's recollection. 22 The remaining slides deal with the 23 individual games that we asked questions about among 24 players. So the percentages that are reported is this 25 subset of the total 1,700 people that we interviewed. 0138 1 So out of the 45.4 percent of the 1,700 who were 2 players, we'll report the percentage of -- the green 3 pie slice who were players of each of these games in 4 the past year. 5 The first is Pick 3 Day. That appears 6 to have been pretty steady over 2005, that 33.9 7 percent of those who play have played a game in the 8 past year, played Pick 3 Day. 9 For Pick 3 Night, there may be a slight 10 increase there. 21.2 percent of those who played a 11 game in the past year played Pick 3 Night. 12 In our survey, Cash Five seemed to have 13 dropped a bit. 33.3 percent of those who have played 14 a game in the past year played Cash Five. 15 Lotto Texas continues to be the most 16 commonly played game among players and has held pretty 17 steady. 87 percent of the players had played Lotto 18 Texas in the past year. 19 Lottery scratch off tickets also has 20 been pretty steady. 67 percent of those who have 21 played a game in the past year had played a lottery 22 scratch off ticket. 23 Texas Two Step as well. It may be 24 upticked a bit. 16.2 percent of those who played a 25 game in the past year played Texas Two Step. 0139 1 Mega Millions seems to have dropped a 2 bit. 53 percent of those who played a game in the 3 past year had played Mega Millions. 4 And then the Megaplier as well appears 5 to have dropped; whereas, 17 percent of those who 6 played a game in the past year had played Megaplier. 7 Those are the findings of our 8 demographic survey. At this point I would be happy to 9 answer any questions you might have. 10 COMM. COX: Mike, what further 11 presentations are y'all going to make? Is this pretty 12 much it? Y'all are there for questions or -- 13 MR. FERNANDEZ: Yes, sir. 14 COMM. COX: There's one question that 15 occurs to me, not necessarily for Dr. Ruggiere, ut for 16 our staff is, how do we explain the increase in Lotto 17 Texas participation from 80 percent two years ago, to 18 86 percent last year, to 87 percent this year, in the 19 face of the significant decline over that period of 20 time in Lotto Texas revenue? 21 CHAIRMAN CLOWE: Let me try to answer 22 that. 23 (Laughter) 24 MR. FERNANDEZ: Please do. 25 CHAIRMAN CLOWE: And that was my 0140 1 question. Your graph shows if people remember playing 2 the game one time. 3 DR. RUGGIERE: Yes, that's correct. 4 CHAIRMAN CLOWE: So it doesn't speak to 5 how often they played it or how much money they put in 6 when they played. And the shift is from the on-line 7 games to the instant games. You've got people playing 8 those games more often and putting more money into 9 those games. There is the shift in revenue or income. 10 COMM. COX: Okay. 11 CHAIRMAN CLOWE: That would be my answer 12 to your question. 13 COMM. COX: Well, in the executive 14 summary of your report, Dr. Ruggiere, you indicate 15 that 85 percent of respondents playing any lotto game 16 in the past year were playing Lotto Texas, over 17 one-third, 35.4 percent, purchased tickets at least 18 once a week, while 27 percent purchased tickets at 19 least once a month. 20 That data is not inconsistent with 21 Chairman Clowe's potential explanation. But it might 22 give us something, Mike, if we had those same 23 participation data, the 35 percent and 27 percent 24 analogs for the two previous years. 25 I suspect you're exactly right. That's 0141 1 the most surprising thing I saw in this report, was 2 that participation going up. 3 CHAIRMAN CLOWE: And my supposition is 4 that when Lotto Texas jackpot goes up to some point, 5 people buy a ticket. Instant tickets are constant. 6 They're out there; they're there waiting. They're not 7 jackpot driven, except for the announced winnings. 8 And that would be my answer to your question. That's 9 what came to my mind when I saw those high figures -- 10 COMM. COX: Yes. 11 CHAIRMAN CLOWE: -- for Lotto Texas. 12 COMM. COX: And the other thing I would 13 suggest, Mike, is that -- well, let me ask this way: 14 Who can help me remember what the Legislature's 15 purpose was when they required us to have a 16 demographic study every year? Do we know what that 17 was addressed as? It wasn't just getting to be 18 getting a report to put in a file someplace. It must 19 have been they were looking for something. 20 MR. FERNANDEZ: Commissioner; I can't 21 answer that question. I don't know if Nelda or -- 22 CHAIRMAN CLOWE: Commissioner Sadberry, 23 can you answer that? 24 MR. SADBERRY: I don't have data that I 25 don't specifically recall. And I don't, quite 0142 1 frankly, know, Commissioner, if it was ever stated. 2 My sense is that one or two know as much about the 3 player population and how the lottery was reaching 4 that population. And certainly in the inception of 5 the lottery, we're talking about on-line games and to 6 possibly look at areas of prohibitions and also areas 7 of encouragement with respect to promoting lottery; 8 that is, that we were not targeting the demographic 9 areas, that we were not unduly finding playership in a 10 segment of the population that would show a 11 disproportionate impact on spending on lottery and 12 probably, as much as anything, to determine the 13 popularity of the game and the extent to which the 14 players -- the population across the board were 15 embracing the game. 16 Again, these are my perceptions, not 17 based on anything that was ever said that I can 18 recall. But in general, as I participated in 19 receiving the results of the survey, those would be 20 the areas of inquiry that we would receive in response 21 to the report that give me the basis of my 22 understanding in that regard. 23 COMM. COX: Well, Mr. Chairman -- and 24 thank you for that, Director Sadberry. I think you're 25 right on -- as I look at the executive summary, I see 0143 1 90 percent, maybe, of it devoted to 25 percent of our 2 product line and four lines devoted to 75 percent of 3 our product line. And I wonder if we need to be 4 thinking about revising -- I know you can only ask so 5 many questions. I don't know what it is, but my 6 threshold for answering questions over the telephone 7 is very low. 8 CHAIRMAN CLOWE: I can imagine. 9 (Laughter) 10 I would hate to be the one trying to ask 11 you the questions. 12 (Laughter) 13 COMM. COX: But it seems like if we 14 could drill down more on the scratch offs, if we're 15 looking for marketing information -- and I don't know 16 whether we are or not -- but if we're using it, doing 17 it and can use it for marketing purposes, so much the 18 better. And it looks to me like the more questions 19 about scratch offs, such as your favorite 20 denomination, your favorite game, et cetera, would be 21 helpful, and some of this other could get lost. 22 MR. FERNANDEZ: I agree. What I would 23 add, Commissioner, is that I think that we want to use 24 every piece of information that we can glean from any 25 survey to support our products. 0144 1 As you know, we are required, by the 2 same statute that requires this demographic study, to 3 request the state demographer to do this study. And, 4 as you know, we have made that request the last few 5 years, and they weren't prepared to go forward. 6 Again, we will go back to them this year 7 to see if they're prepared to do that. And we also 8 have that same request to the Legislative counsel, who 9 also declined to do that. But I think as we go 10 through this process again, whether it is with the 11 state demographer's office or whether it is with the 12 Legislative counsel or with the University, I think 13 that we can sit down with Mr. Anger and his folks and 14 look at those questions, in addition to those 15 questions. Absolutely. 16 COMM. COX: And just one more, 17 Mr. Chairman. 18 Dr. Ruggiere, thank you for addressing 19 the blow-up of your sample times the spending rate. 20 Now that you've done that, what is your speculation as 21 to why the blow-up is so much higher than actual 22 lottery revenue? 23 DR. RUGGIERE: I just have to attribute 24 that to human error. It could be a combination -- 25 it's probably a combination of each of those error 0145 1 sources that we talked about, that first of all the 2 data is not weighted to reflect the population. 3 Secondly, the human error of being on the phone and 4 trying to come up with an average dollar amount of 5 what you've spent over the past year on a monthly 6 average, I mean, that puts somebody on the spot to 7 make that calculation. 8 And their own perception of how much 9 they have spent, it's hard to really be accurate 10 unless you have some sort of diary, some sort of 11 recordkeeping. And I don't know if anyone really 12 keeps records of such things or if they pull them out 13 for the time when our interviewer called. So I just 14 attribute it to a combination of weighting, sampling 15 error, and human error and putting those estimates 16 together. 17 COMM. COX: With the over-reporting that 18 is indicated there, would you be more concerned about 19 that -- we know more or less what the error is there, 20 because we can multiply those two numbers together and 21 subtract lottery sales from that, and we know the 22 error. 23 DR. RUGGIERE: Yes. 24 COMM. COX: There's no other items in 25 there that we can make that kind of sanity check. 0146 1 Would you be equally concerned -- would it be fair for 2 us to conclude that there's that same amount of error 3 or could be that much error in all of the items? 4 DR. RUGGIERE: Well, I think the simpler 5 the question, the less the likelihood of that type of 6 error. So beginning with the very first question, 7 "Have you played a lottery game in the past year?" 8 there can still in error there in terms of: Did I 9 play that game last August or was it in July? you 10 know. So there's still a potential of that 11 recollection error. 12 But I think the simpler the question, 13 the broader the question, the more reliable it is. I 14 think it becomes less reliable as we start really 15 getting down to very detailed questions about how much 16 money they spent per week, per month or that sort of 17 thing. 18 COMM. COX: Do we have any questions 19 where your intuition would tell you they're going to 20 get this one right, a question like, "Have you ever 21 played the lottery"? 22 DR. RUGGIERE: It's hard for me to say. 23 COMM. COX: Thank you very much. 24 DR. RUGGIERE: And it would be hard 25 to -- I'm not sure what you would compare that 0147 1 against. 2 COMM. COX: Well, I guess I would say 3 that if we could find one that we know they're going 4 to get right -- 5 DR. RUGGIERE: Yes. 6 COMM. COX: -- we could maybe see what 7 the error is on that one, as compared to something we 8 know. But there's no way of knowing, is there? 9 DR. RUGGIERE: No. 10 COMM. COX: The only thing we really 11 know is overall sales? 12 DR. RUGGIERE: Right. 13 COMM. COX: So all the rest of them 14 would be guesses. 15 Okay. Thank you. 16 Thank you, Mr. Chairman 17 CHAIRMAN CLOWE: Thank you, gentleman. 18 Thank you very much. 19 AGENDA ITEM NO. XXXII 20 CHAIRMAN CLOWE: Next we'll go to Item 21 No. XXXII, report by the Charitable Bingo Operations 22 Director -- and that will be the Assistant Director -- 23 possible discussion and/or action on Charitable Bingo 24 Operations Division's activities. 25 Mr. Sanderson. 0148 1 MR. SANDERSON: Commissioners, in your 2 notebook, I've provided the report of the status of 3 the division as it relates to vacancies as well as 4 items that have been placed on our website within the 5 last month. One of those items is the nomination 6 forms for the upcoming terms that expire in February. 7 I've also included the note -- the memo 8 showing allocations were disbursed last month and also 9 a chart that is tracking the charitable distributions 10 as they reach the billion dollar mark through the 11 third quarter of 2006, the weekly status report update 12 for activities within the Bingo Division and also 13 spreadsheets that are tracking the recommendations 14 from the Licensing and Administrative Procedures 15 Committee. 16 I will be glad to answer any questions 17 you may have. 18 CHAIRMAN CLOWE: Any questions? 19 COMM. COX: No, sir. 20 CHAIRMAN CLOWE: Under this item, I 21 would like to state the Commission has received a 22 letter of resignation from the Director of the 23 Charitable Bingo Operations Division, Mr. Bill Atkins. 24 I want to thank him for his service and wish him well. 25 0149 1 AGENDA ITEM NO. XI 2 CHAIRMAN CLOWE: And now we'll go to 3 Item No. X1, report and possible discussion and/or 4 action on lottery sales and revenue, game performance, 5 new game opportunities, market research and trends. 6 Ms. Pyka -- whoop! Who is going to make 7 this report? 8 MR. TIRLONI: Good morning, 9 Commissioners. For the record, my name is Robert 10 Tirloni. I'm the Products Manager for the Commission. 11 Ms. Pyka is out of the office today, and Kelly Stuckey 12 will be substituting for her. 13 CHAIRMAN CLOWE: Very good. 14 MS. STUCKEY: Good morning, 15 Commissioners. 16 Okay. Our first chart this morning 17 reflects revenue from sales and net revenues to the 18 state through the week ending December 2, 2006. Total 19 sales through this 14-week period amount to 20 $901.2 million or estimated net revenue to the state 21 for this period was $223.5 million. 22 For Fiscal Year 2007, sales to date 23 reflected a $30.8 million decrease under FY 2006 sales 24 and that revenue to the state reflects a 5.5 percent 25 decrease as compared to the $236.4 million figure for 0150 1 the same time period in '06. Prize expense as a 2 percent of sales is reflected at 63.2 for the current 3 time period, so a slight increase over the same time 4 period last year. 5 I wanted to notice that the 6 $30.8 million decrease in sales from this year can be 7 attributed to the significant decrease in Mega 8 Millions sales. Last year at this time we had quite a 9 few -- quite a few high jackpots in Mega. If you 10 remove the Mega sales or Mega decline, we're at a 11 increase of $6.9 million. 12 MR. TIRLONI: And I have some 13 supplemental stats to supplement what Kelly just 14 talked about. In the first quarter of 2006, a year 15 ago, there were 13 drawings for Mega Millions which 16 had jackpots that were greater than 100, $100 million. 17 Five of those were greater than $200 million, and one 18 was actually over $300 million. And that was a record 19 jackpot advertised at $310 million. It ended up being 20 $315 million after all was said and done in term of 21 sales. 22 In this fiscal year, this first quarter, 23 we have had three draws that were greater than 100. 24 163 -- we reached $163 million back in September. The 25 last time the game was over $200 million was back in 0151 1 April of 2006. So Mega has been struggling in terms 2 of its roll cycles and getting up to those levels 3 that, you know, to become very appealing for the 4 players. 5 CHAIRMAN CLOWE: With Power Ball, they 6 would have a bigger jackpot. 7 COMM. COX: Mr. Chairman, you're still 8 interested in Power Ball, aren't you? 9 CHAIRMAN CLOWE: The combination of the 10 two. 11 COMM. COX: Wouldn't that be wonderful? 12 CHAIRMAN CLOWE: Jackpot-driven. 13 COMM. COX: Yes. 14 MS. STUCKEY: The next slide includes 15 Fiscal Year 2007 year-to-date sales by game. As noted 16 on the slide, 76.7 percent of sales, or $690.9 17 million, was from instant tickets, with 8.5 percent of 18 sales, or $77 million, from Pick 3, followed by 5.7 19 and $51 million from Lotto Texas and, finally, 20 4 percent, with $36.3 million for Mega Millions. 21 Then the following slide -- 22 CHAIRMAN CLOWE: Hold it just a minute, 23 go back. 24 So there is the one that really makes 25 the difference, I mean, the telephone recall. You 0152 1 know, that's just -- you can't take that to the bank. 2 This is what you take to the bank. 3 COMM. COX: Absolutely. 4 CHAIRMAN CLOWE: And it just shows, when 5 you're almost 77 percent on instant tickets, where the 6 market is. 7 Thank you. 8 MS. STUCKEY: And then this slide simply 9 provides a graphical presentation of the 10 $901.2 million, year to date by game. 11 MR. TIRLONI: And, Commissioners, this 12 is just the $690 million in our instant ticket sales 13 broken down by prize point, and we've really seen very 14 little change from what we've looked at over the past 15 few months. The $5.00 prize point continues to be our 16 leader, followed by the two and closely followed by 17 the ten. 18 CHAIRMAN CLOWE: And, Mike, this goes 19 back to Commissioner Cox's questions, you know, about 20 which game do you like the better? I don't know 21 whether you can use a demographic study for a 22 marketing tool or not. That's an interesting 23 question. But these are the kinds of questions that 24 commissioner Cox had in mind. I think you're thinking 25 about what now, a $50 ticket? 0153 1 MR. TIRLONI: Considering that, yes, 2 sir. 3 CHAIRMAN CLOWE: Are you doing any 4 market research on that? 5 MR. TIRLONI: We concluded market 6 research through Ipsos Reid in regards to that prize 7 point. 8 CHAIRMAN CLOWE: That's the kind of 9 questions that I think need to be asked. 10 COMM. COX: Yes. 11 MR. TIRLONI: And, Commissioners, this 12 is a very short presentation for you under this item 13 today. And we would be happy to answer any other 14 questions that you have. 15 COMM. COX: No questions. 16 CHAIRMAN CLOWE: Thank you very much. 17 MR. TIRLONI: Thank you. 18 AGENDA ITEM NO. XII 19 CHAIRMAN CLOWE: The next item I believe 20 you have also, No. XII, report, possible discussion 21 and/or action on transfers to the state. 22 MS. STUCKEY: Yes, sir, good morning. 23 For the record, my name is Kelly Stuckey, in the 24 Office of Controller. 25 Tab XII includes information on the 0154 1 agency's financial status. The first report reflects 2 transfers and allocations to the Foundation School 3 Fund and the allocation of unclaimed prizes 4 transferred as of November 13, 2006. 5 Total transferred to the state amounted 6 to $159.6 million for the two-month period ending 7 October 31st. This represents a 3.6 percent increase 8 over this time November '05. 9 To date there has not been a transfer of 10 unclaimed prizes, as our first quarterly transfer will 11 be made this month, in December of '06. 12 Your next document provides a 13 calculation of the monthly transfer amount. And then 14 your last document in your notebooks is a report of 15 lottery sales, expenditures and transfers from Fiscal 16 Years 1992 to present. 17 Total cash basis transfers to the 18 Foundation School Fund through November of this year 19 total $159.6 million, with a cumulative transfer to 20 the Foundation School Fund of $8.8 billion. 21 Commissioners, this concludes my 22 presentation. May I answer any questions? 23 COMM. COX: No, sir. 24 CHAIRMAN CLOWE: Thank you, ma'am. 25 0155 1 AGENDA ITEM NO. XIII 2 CHAIRMAN CLOWE: You also have the next 3 item, I believe, No. XIII, consideration of and 4 possible discussion and/or action on Lotto Texas 5 procedures. 6 MS. STUCKEY: Yes, sir. This morning I 7 am seeking your approval of the three procedures 8 relating to Lotto Texas. They're procedures 9 OC-JE-002, Lotto Texas jackpot estimation; Procedure 10 OC-WP-003, Lotto Texas jackpot payment and investment; 11 and, finally, Procedure OC-WP-001, processing prize 12 payments. 13 The audit report on Lotto Texas 14 activities performed by the state auditor's office 15 included a recommendation that procedures affecting 16 Lotto Texas players should be presented at a public 17 Commission meeting for approval. Upon approval of 18 these procedures, the audit report recommended that 19 the agency make the procedures available to the public 20 by publishing them in the Texas Register and on its 21 website. 22 Each of the attached procedures has been 23 approved by Commission staff in accordance with our 24 Directive No. MD-001, Agency Policies, Directives And 25 Procedures. If you approve these procedures this 0156 1 morning, we will proceed with publishing them in the 2 Texas Register as well as our own Commission website. 3 Commissioners, I also wanted to add -- 4 Kathy wanted me to add that we will continue to review 5 the Lotto Texas procedure and look for streamlining 6 opportunities, and we expect the procedure we brought 7 back to you in '07, with revisions. 8 COMM. COX: Help me understand that. 9 CHAIRMAN CLOWE: Yes, me too. These are 10 not approved and not published? 11 MS. STUCKEY: These are approved by 12 Commission staff. And I think in the Lotto Texas 13 report, they had requested that we bring them to the 14 Commission for approval. 15 CHAIRMAN CLOWE: Counselor, can you 16 expand on this? 17 MS. KIPLIN: Well, I think that's 18 correct. As I understand -- and I'll ask Ms. Woelk to 19 join if we need to -- but I think there was a 20 recommendation in the State Auditor's Report on Lotto 21 Texas that procedures relating to this game come to 22 your level of attention and that you approve it. This 23 would be documents that would be filed and published 24 in the Register under Miscellaneous Documents For 25 Notice to the Public. 0157 1 CHAIRMAN CLOWE: But we've already 2 perhaps individually examined these procedures and 3 approved them informally, I guess, haven't we? And I 4 thought we wanted to put this on the website and get 5 this out to the public. I think it's surprising 6 Commissioner Cox and myself that it's coming back now 7 to us in the form of a request for a motion. 8 COMM. COX: And I'm surprised a couple 9 of ways. One, I know I've had discussions with Gary 10 and I think perhaps with Director Sadberry about the 11 board's role with respect to procedures. 12 And I know, Gary, that when we did the 13 personnel procedure, that the board just approved the 14 high level principles, without going into the detail 15 of the procedure. And I, frankly, didn't read it I 16 guess carefully enough. I thought this was for 17 information rather than approval. 18 And I would prefer to be briefed by 19 staff before I would like to go forward on approving 20 these, Mr. Chairman. 21 CHAIRMAN CLOWE: I agree with that. And 22 I'm not sure that this is a board approval item. I'm 23 not sure it's not an Executive Director item for 24 approval. But let's not take action on this and ask 25 those questions and leave them to the staff, under 0158 1 Director Sadberry's direction, to clarify for us. 2 COMM. COX: With one question. Director 3 Sadberry, if we don't approve this today, will that 4 throw you behind on your targets with respect to 5 clearing the items on the State Auditor's Reports? 6 MR. SADBERRY: It will not, 7 Commissioner. And I appreciate your questions, and 8 I've asked similar questions. The directive on 9 adoption of procedures within the agency hasn't 10 followed, and these procedures have been adopted 11 within the agency. And the intent of the procedures 12 in significant part is to address the part of the 13 State Auditor's Report saying that the Commission 14 should adopt procedures that conform to the practice 15 of the agency. 16 Two components of that would be the roll 17 forward in $1 million increments that was the subject 18 of some discussion in connection with the Lotto Texas 19 audit phase, and establishing the beginning Lotto 20 Texas jackpot at $4 million. Those two additions have 21 been made, and that procedure has been adopted, 22 according to agency directive. That's in place. 23 And I think you are sensing the sense of 24 staff; that is, that the auditor's office recommended 25 that these procedures be brought to your attention. I 0159 1 do not believe that it's intended that you be 2 participatory in connection with adoption formally of 3 the agency procedures but that you -- perhaps, as you 4 stated, in the same sense as you did with the 5 personnel handbook, adopt policy and indicate that 6 these are consistent with policy, if you agree with 7 that. 8 Now, the participation of the Commission 9 in the jackpot estimation process, however, is part of 10 the procedure. And that is something that, of course, 11 may be subject of discussion by you in terms of the 12 level of participation and the process by which that 13 occurs. That came about because of certain exigent 14 circumstances. 15 We may be in a different phase of agency 16 practice and history on that than we were at the time 17 that happened. But we are not suggesting now that you 18 look at that issue. I think that's the intent of 19 Ms. Pyka's indication that those types of things may 20 be brought before you in due course, to see if you 21 want to stay with that, change it or what have you. 22 Now, Commissioner Cox, we know that 23 you've raised individual questions on that, and you 24 and the internal auditor who coordinate with respect 25 to your participation for the Commission in the 0160 1 estimation process. Our understanding of your 2 comments on that was not to make any changes in that 3 at this time, and we have not done so. But those are 4 the kinds of things we would look at in the future and 5 bring before you. 6 COMM. COX: Okay. Mr. Chairman, the 7 reference there, of course, is to the fact that I 8 usually -- but sometimes you -- sign off on the 9 Tuesday -- or Wednesday and Friday jackpot 10 estimations. I personally don't mind doing it, but I 11 will tell you that I don't believe it's any longer 12 necessary. 13 CHAIRMAN CLOWE: And I understand that. 14 In addition to your comment, let me ask if, in fact, 15 isn't this duplicative of the rule we adopted relative 16 to the estimation of the jackpot? 17 MR. SADBERRY: That's right. 18 CHAIRMAN CLOWE: And it is codifying the 19 policy which Commissioner Cox just spoke to, which the 20 Commission has established not through a motion and a 21 vote but through direction -- 22 MR. SADBERRY: That's correct. 23 CHAIRMAN CLOWE: -- established that 24 policy? 25 MR. SADBERRY: That is correct. 0161 1 CHAIRMAN CLOWE: What you're reaching 2 for here is a public approval by way of a motion to 3 totally satisfy the recommendation from the state 4 auditor? 5 MR. SADBERRY: That is correct. 6 CHAIRMAN CLOWE: And Commissioner Cox is 7 now saying -- and I agree with him -- that it's not 8 necessary. 9 Would you expand on that a little bit, 10 Commissioner? 11 COMM. COX: Well, at the time that was 12 done, I think there was, with good reason, a 13 significant lack of public confidence in our process. 14 I think that with the work of the state auditor, with 15 the work of Director Sadberry and his staff, in large 16 part that confidence has been restored. 17 I don't believe personally that I add 18 one thing to the process, because there has not been a 19 single occasion where I disagreed with the staff. 20 They are very conservative in their roundings; they 21 don't take chances. 22 Part of what I wanted to do was to get a 23 feel for how careful they are, and I've gotten that 24 feel. They're very careful; they're very 25 professional. And if it's believed that having me 0162 1 look at those things with the auditor adds something 2 to public confidence, then by golly I'll be glad to do 3 it. But as a true control, I don't think it has any 4 purpose. 5 CHAIRMAN CLOWE: And I agree with that. 6 I think that my testimony before the House Licensing 7 Committee at that time involved the word "deception." 8 And that perhaps was true -- that was true at the 9 time -- but now the process is so well-known and in 10 place under the direction of Director Sadberry that 11 you and I both share that confidence. 12 And, frankly, it's not my feeling that 13 Commissioners need to be involved in these details at 14 this level. I don't think that's a board member's 15 role. I think it's the Executive Director's role to 16 oversight this. I want to also say that this 17 discussion doesn't get any action on our part of going 18 back to sleep, so to speak, and not being interested 19 and not being involved. 20 But there are moves that you make when 21 there are questions and concerns. And when you feel 22 like procedures and practices are in place, I think 23 it's appropriate to put the responsibility where it 24 properly resides and hold those people to do their 25 duty. 0163 1 And so for that reason, I would agree 2 with you that it's no longer necessary for us to 3 follow the practice of these biweekly approvals. 4 COMM. COX: I would point out also that 5 another significant change that was made after the 6 inflated jackpots were advertised was that Gary Grief 7 was added to the approval process. And, you know, his 8 knowledge and experience also gives me a great deal of 9 confidence. 10 So what I would suggest we might 11 consider here is, given that the state auditor wants 12 us to approve this procedure, by golly, I want to 13 also. But I would like to ask Director Sadberry and 14 his staff to reconsider the need for a commissioner's 15 signature to amend these if they consider it 16 appropriate. Brief at least me before the next 17 meeting, and then I would be prepared to vote. 18 CHAIRMAN CLOWE: Very good. 19 MR. SADBERRY: We will do so. 20 CHAIRMAN CLOWE: We will pass it then 21 and bring it up in January. 22 AGENDA ITEM NO. IX (continued) 23 CHAIRMAN CLOWE: And, Ms. Joseph, I see 24 you're back in the room. Could we go back to the item 25 that we deferred, with the hope that you might come up 0164 1 with some better solution for us? I believe that's 2 Item No. IX. 3 Thank you, Kelly. 4 MS. JOSEPH: Yes, Commissioner. Thank 5 you. And Amy Tabor was appointed spokesman for the 6 group that met outside, and was she would like to 7 express an alternative to you -- 8 CHAIRMAN CLOWE: Very good. 9 MS. JOSEPH: -- that hopefully you would 10 consider. 11 CHAIRMAN CLOWE: Would you come forward, 12 please. 13 MS. TABOR: Commissioners, as we met 14 outside -- and I talked with Ms. Joseph, Mr. McNally, 15 Mr. Cornwell, Mr. Fenoglio, Ms. Thompson -- and we all 16 came to a consensus that we could work together and 17 have a draft of this rule for your consideration at 18 the February meeting that would have stakeholder input 19 and we think would be a good rule to publish. 20 We would recommend that that will be 21 published with a 30-day comment period as opposed to 22 the 60-day comment period that the staff is 23 recommending for the rule today. And we believe that 24 with that shortened comment period, the slight delay 25 in drafting the rule is not going to significantly 0165 1 delay getting the rule enacted. 2 If we present it at the February meeting 3 and it's published in the Register, then after public 4 comment, the rule could be formally adopted by April. 5 And we're all committed to work on that schedule. 6 I believe that that is the best solution 7 here and that that process will lead to the best final 8 product and that the 30-day delay is a worthwhile 9 price to pay for the improvement in the rule, if the 10 Commissioners wish to proceed in that manner. If you 11 prefer to publish the rule as we have it today, then, 12 of course, we'll work together over the next 60 days 13 during the comment period to provide the best comments 14 we can on this rule. 15 CHAIRMAN CLOWE: Don't you love it when 16 everybody wins? 17 COMM. COX: Yes. 18 (Laughter) 19 CHAIRMAN CLOWE: Thank you all. 20 MS. JOSEPH: We'll pledge to bring that 21 back to you at the February meeting. 22 CHAIRMAN CLOWE: Yes. Good work. Thank 23 you-all for coming together. 24 MS. TABOR: Thank you. 25 0166 1 AGENDA ITEM NOS. XV and XVI 2 CHAIRMAN CLOWE: Next, Item XV, 3 consideration of and possible discussion and/or 4 action, including proposal, on new rule 16 TAC 401.316 5 relating "Daily 4" on-line game rule. 6 MS. WOELK: Thank you, Commissioners. 7 I'm Sarah Woelk. I'm the Special Counsel. And we 8 have three rulemaking items for you to consider today. 9 One would be the proposal of a new game 10 called Daily 4, which is a daily numbers game pretty 11 much in the style of Pick 3, although it would also 12 have an add-on feature called Lucky Sum. 13 The other two items would be the repeal 14 of the current Pick 3 rule and the proposal of a new 15 Pick 3 rule. The substance of the Pick 3 rule would 16 remain the same, except that it would have this -- 17 also have this add-on Lucky Sum piece. So we went 18 ahead and drafted a complete new rule to kind of clean 19 up the rule and delete some unnecessary words from the 20 rule. 21 Robert has a PowerPoint that's going to 22 go through the features of the Daily 4 game and the 23 nature of the Lucky Sum feature. I have some T-bar 24 memos that Sandy showed me how to make for you. And 25 on the Pick 4 rule, there is one typo I discovered 0167 1 last night, so I drafted a T-bar asking that you 2 propose the rule with one typo fixed. 3 So unless you have any questions for me 4 about the rulemaking process, I will turn it over to 5 Robert. 6 MR. TIRLONI: Good morning again, 7 Commissioners. For the record, my name is Robert 8 Tirloni. I am the Products Manager for the 9 Commission. And I'll be briefing you on Daily 4 with 10 the Lucky Sum feature and Pick 3 with the Lucky Sum 11 feature. 12 Before we get into that, I'll kind of 13 just give a brief overview of the on-line product mix. 14 Of course, we have our two large multi-million dollar 15 jackpot games, Lotto Texas and Mega Millions. We have 16 Lotto being drawn on Wednesdays and Saturdays and Mega 17 being drawn on Tuesdays and Fridays. 18 And we have our smaller rolling jackpot 19 game, Texas Two Step. Drawings used to be on Tuesdays 20 and Fridays. After Mega started, we moved those to 21 Mondays and Thursdays. That jackpot starts at 22 $200,000 and rolls after that. 23 We have two daily games in existence 24 right now, Pick 3 and Cash 5. Pick 3 is the only game 25 that we draw twice a day every Monday through 0168 1 Saturday. And Cash 5, we draw every Monday through 2 Saturday. That's a nighttime drawing. 3 And our proposal today would be to add 4 Daily 4 to that mix and that would follow a similar 5 drawing schedule to the Pick 3 drawing schedule. That 6 would be twice a day, Monday through Saturday. And I 7 have more information for you about the drawings later 8 on in the PowerPoint. 9 Just some brief history on Pick 3. 10 Pick 3 started in Texas in the fall of 1993, which was 11 our fiscal '94. And as we've discussed many times in 12 these meetings, Pick 3 has seen a sales increase every 13 year since it was introduced, all the way through the 14 end of last fiscal 2006, where we realized sales 15 slightly over $295 million. 16 COMM. COX: Robert -- 17 MR. TIRLONI: Yes, sir. 18 COMM. COX: -- if you looked at the 19 sales on a per capita basis, would they still be 20 increasing? 21 MR. TIRLONI: I don't know that we've 22 ever looked at it in that sense, so I wouldn't be able 23 to answer that for you right now, but I can certainly 24 look at that for you. 25 COMM. COX: Okay. Good. Thank you. 0169 1 MR. TIRLONI: And, Commissioners, this 2 is just a map of the United States illustrating where 3 the numbers games or the daily games, which are Pick 3 4 and Pick 4, where they're played. You see this blue 5 color all along the eastern seaboard. These are both 6 Pick 3 and Pick 4 states. 7 North Carolina, since this map was 8 designed, has launched Pick 3, so they do now have a 9 Pick 3 game. They're a very new lottery. 10 Texas you see in gold, along with some 11 other states that are Pick 3 states only. And then 12 there are some states that have no numbers games and 13 some states that still don't have lottery. So 14 basically our proposal to add Daily 4 is just filling 15 out our existing on-line product portfolio. 16 Daily 4, as I mentioned, is very similar 17 to Pick 3. The player chooses four numbers between 18 zero and 9 -- and I've got a subsequent slide that 19 uses the combination 2-2-9-3, so I'll use that as an 20 example here -- and the player chooses the play type, 21 again very similar to Pick 3. 22 The one difference is the terminology 23 that we're using for the play type for Daily 4. We're 24 using straight and box. On Pick 3, we use the 25 terminology "exact" and "any order." What we found 0170 1 when we were discussing the Daily 4 launch is that 2 we're pretty much in the minority on Pick 3. Most 3 states use straight and box terminology. And we've 4 actually discovered most of our retailers use that 5 terminology, even in relation to the Pick 3 game. And 6 so we've decided to propose that Daily 4 be launched 7 using this terminology. 8 Something different for Daily 4 is 9 pairs, and that's pair play. We don't currently offer 10 that on Pick 3. And that's where the player can opt 11 to wager on the front pair, the back pair or the 12 middle pair. So my example of 2-2-9-3, the player 13 could opt to wager on the front pair and say they 14 think the front pair is going to be 2-2, or 22. 15 Again, the player -- and, you know, 16 again all of these things are what we believe make 17 Pick 3 a successful game, is that there is a great 18 deal of player choice for the Pick 3 game. And 19 Daily 4 offers all those same features for the player. 20 The player gets to choose the base play amount, from 21 50 cents all the way up to $5.00. And the player can 22 multi-draw up to 12 day drawings, 12 night drawings, 23 or they can go in consecutive order and play 24 day/night. 25 COMM. COX: Robert -- 0171 1 MR. TIRLONI: Yes, sir? 2 COMM. COX: -- you indicated that pairs 3 is either the first two, the last two, or two in the 4 middle? 5 MR. TIRLONI: Yes, sir. 6 COMM. COX: Did you consider having a 7 bet that was any pair? 8 MR. TIRLONI: You mean like the first 9 digit and the last digit? 10 COMM. COX: First and four. There are 11 combinations of numbers that you don't allow them to 12 bet on as pairs, is what I think I see. 13 MR. TIRLONI: That's correct. 14 COMM. COX: Was that intentional? 15 MR. TIRLONI: That was not. We did not 16 consider allowing that. 17 COMM. COX: Is that the way the game is 18 traditionally done? 19 MR. TIRLONI: Traditionally, if you 20 allow pairs on a four-digit game, it's front, back or 21 middle. 22 COMM. COX: Thank you. 23 CHAIRMAN CLOWE: You were talking to the 24 ultimate game player? 25 MR. TIRLONI: I know that I am. 0172 1 COMM. COX: That's not quite accurate, 2 Mr. Chairman. You're way too kind. 3 MR. TIRLONI: So using my example of 4 2-2-9-3, the player can choose 2-2-9-3 straight, which 5 means if we, the Lottery, draw 2-2-9-3, the player 6 wins because they match their numbers straight, or in 7 exact order if we want to refer to the terminology we 8 currently use on Pick 3. 9 The box play, the player can choose to 10 play 2-2-9-3, and they can box that number. And then, 11 therefore, they win if we draw any of the following 12 combinations that I've listed below. Of course, the 13 number of combinations depends on the 4-digit number 14 selected. 15 I'm going to give you a brief summary of 16 some research that we did through Ipsos Reid. And 17 then when we get further along in the presentation, we 18 also have what I call researcher data from other 19 states that had 3-digit games and then launched a 20 4-digit game. And that was pretty much what we used 21 in terms of the development of the fiscal note in 22 coming up with our revenue estimates for these game 23 introductions. 24 So we did quantitative research via a 25 link from our website, and we got a sample of 502 past 0173 1 year players of on-line games. We also did 2 qualitative research via focus groups in Houston, and 3 the participants were Pick 3 and Cash Five players. 4 The reason we Pick 3 and Cash 5 players were selected 5 for those groups were because we were looking to 6 receive information from players that were playing 7 daily games that we offered. 8 Overall, the 4-digit game -- we called 9 it Pick 4 during the research. We have since chosen 10 to name it Daily 4 -- but the 4-digit game was 11 positively received in both the qualitative and the 12 quantitative components of the research. 13 Forty percent of the on-line game 14 players indicated they would be very or somewhat 15 likely to purchase a 4-digit game if available. And 16 the greatest support was derived from the current 17 Pick 3 and Cash 5 players. 80 percent and 63 percent, 18 respectively, reported they would be very or somewhat 19 likely to play. And that's not surprising at all, 20 that the current Pick 3 player base is interested in 21 this game. 22 COMM. COX: Robert -- 23 MR. TIRLONI: Yes, sir. 24 COMM. COX: -- on your naming the 25 game -- 0174 1 MR. TIRLONI: Yes, sir. 2 COMM. COX: -- you indicated it was 3 originally Pick 4 and now you've decided to make it 4 Daily 4. 5 MR. TIRLONI: Yes, sir. 6 COMM. COX: Does that mean that not at 7 this time or ever do you plan to have two drawings a 8 day? 9 MR. TIRLONI: We plan to have two 10 drawings a day on Daily 4, just like we have on 11 Pick 3. 12 COMM. COX: Isn't it a little misleading 13 to say daily when you're drawing twice daily? I think 14 it's confusing. Just something to think about. 15 MR. TIRLONI: Okay. Well, I guess the 16 name "daily" goes more to being able to play the game 17 daily as opposed to the draw schedule. 18 COMM. COX: I don't know. I just was 19 thinking, if I had a game that I was playing twice a 20 month, I wouldn't call it monthly. I would call it 21 bi-monthly, weekly, et cetera -- just for y'all to 22 think about. 23 MR. TIRLONI: Okay. 24 CHAIRMAN CLOWE: Twice daily is too 25 long, isn't it? 0175 1 MR. TIRLONI: I think that would be hard 2 for us to put into advertising slogans. 3 (Laughter) 4 14 percent of the past year players 5 reported they would play at least daily, and another 6 19 percent stated they would play at least two to 7 three times a week. Nine percent of the respondents 8 indicated they would play other games less if Daily 4 9 was introduced, and this is very true for Pick 3. And 10 the data that I referred to a few moments ago from 11 other states support that, and that was taken into 12 consideration in our fiscal note development. And in 13 focus groups, the participants perceived the prizes 14 and the number of ways to win as some of the 15 predominant reasons to play. 16 Lucky Sum is a concept. What we're 17 proposing is that we launch the Daily 4 game with the 18 Lucky Sum concept already a part of that game and then 19 to come in about eight weeks later and add Lucky Sum 20 to Pick 3. And the rationale behind that is to 21 differentiate the Daily 4 game from the Pick 3 game, 22 again by offering pair play on Daily 4, having Lucky 23 Sum available on Daily 4. The hope of that we 24 encourage trial and we encourage retailers to 25 encourage their players to try this new game that has 0176 1 this add-on feature available. 2 So I'll explain Lucky Sum to you. And 3 the example that we have is related to Pick 3. So to 4 the left, you see a Pick 3 wager, and it's just a 5 straight wager, 3-0-9. That's the player's numbers. 6 But you see that the player opted to play the Lucky 7 Sum feature. And so basically if we sum the 3, the 8 zero and the 9, the player's Lucky Sum is 12. 9 The lottery has the Pick 3 drawing. And 10 let's just say, for example purposes, we draw the 11 winning numbers as 1, 3 and 8. Well, the player did 12 not win on their base wager, obviously. But 1, 3 and 13 8 also sum to 12, and so the player did win a prize 14 based on the Lucky Sum. 15 You can wager on the Lucky Sum feature 16 in the identical manner that you can wager on the base 17 game. So you can choose to wager from 50 cents on 18 Lucky Sum, all the way up to $5.00. Basically, the 19 player would tell the retailer that they want to play 20 Lucky Sum. And, again, the sum is the sum of the 21 player's Pick 3 or Daily 4 numbers that's printed on 22 the ticket. And, again, we draw the winning numbers. 23 And the player of Lucky Sum wins if his or her sum is 24 equal to the sum of the numbers that we draw. 25 I have provided you copies of this. I 0177 1 thought it might be a little difficult to read. 2 Actually, it's not too bad. But in the example that I 3 just gave you on Pick 3, the number picked was 12. 4 And so if the player wagered 50 cents, they would 5 receive a prize of $3.00 on that Lucky Sum feature. 6 And Lucky Sum works both ways. It works 7 identical, I should say, on Pick 3 and Daily 4. So if 8 we look at Pick 3, there's only one way -- there's 9 only one way to match a sum of zero on Pick 3, and 10 that's to have 0-0-0. And so the odds of that 11 happening are one in 1,000. As you look down the 12 chart, you know, for example, the number 13 or 14, 13 there are 75 different ways that the three numbers can 14 sum up to 13 or 14. So your expected odds are much 15 lower in favor of the player, one in 13. 16 And so all of these tables, they're in a 17 little bit different format, but they're all in the 18 rules for both Pick 3 and for Daily 4. And, as I 19 said, I have provided you copies. This is a 20 continuation of the Pick 3 prize table, and then we 21 get to the Daily 4 prize table. That has a little 22 more combinations. It's a little more difficult to 23 read. But, again, everything holds true. You know, 24 in Daily 4 -- I'll get to the end -- there is only one 25 way to get a sum of 36 in Daily 4, and you have to get 0178 1 four nines. And so there's one way to get that, and 2 the odds of getting that are one in 10,000 3 CHAIRMAN CLOWE: Does this have a quick 4 pick feature? 5 MR. TIRLONI: No, you can't quick pick 6 Lucky Sum. You just ask for Lucky Sum. Now, if you 7 chose quick pick for your base amount, then it sums 8 your three numbers that were quick picked. 9 CHAIRMAN CLOWE: That would be the way 10 you get to it on a quick pick? 11 MR. TIRLONI: Yes, sir. A player could 12 go in and say, "I want a 50-cent straight quick pick 13 on Pick 3, and I want to play Lucky Sum." And 14 whatever the numbers sum up to from the quick pick is 15 the Lucky Sum number that the player has for the 16 drawing. 17 CHAIRMAN CLOWE: That kind of sounds 18 like ordering coffee at Starbucks. You know, you got 19 to really know what you want. 20 (Laughter) 21 COMM. COX: Robert -- 22 MR. TIRLONI: Yes, sir? 23 COMM. COX: -- did you think about 24 offering Lucky Sum as a separate bet, whether that 25 would increase sales or decrease them? 0179 1 MR. TIRLONI: Well, I think you need a 2 base game in order to have numbers to sum. 3 COMM. COX: Well, you could say, "Give 4 me a quick pick Lucky Sum." And if they didn't bet 5 but one dollar, I guess the only number that would 6 apply would be Lucky Sum. 7 MR. TIRLONI: We didn't think about it 8 in those terms. 9 COMM. COX: Thank you. 10 MR. TIRLONI: This is a new concept that 11 GTECH has approached us with. If you-all choose to 12 adopt these rules with this feature, unless somebody 13 beats us to it, we should be the first state to launch 14 this feature. We're excited about that. That is 15 something new and different. And we're excited about 16 this play style, and we believe this play style will 17 appeal to the type of player, that we consider the 18 Pick 3 player to be one of our more sophisticated 19 players because they understand the dynamics of the 20 game, and we believe they're going to understand this 21 add-on feature as well. 22 COMM. COX: Just to be sure that we've 23 covered all the bases, would you do something to try 24 to satisfy yourself that -- say this will be higher -- 25 requiring them to buy the basic bet before they can 0180 1 get the Lucky Sum, as opposed to offering them as 2 independent possibilities? 3 MR. TIRLONI: Yes. 4 COMM. COX: I know GTECH can fix the 5 mechanics of it if you find that revenue would be 6 greater under one versus the other. 7 MR. TIRLONI: We can look into that. 8 I have some information for you on the 9 drawings, Commissioners. As I said, we plan to draw 10 Daily 4 twice a day, following the exact same Pick 3 11 schedule that's in place at 12:27 and 10:12 p.m. 12 We do not currently have drawing 13 machines to conduct the Daily 4 game. So a 14 procurement timeline has been developed. And when you 15 include the bid process that we go through and then 16 the building and the delivery of the machines, that 17 would push us out six to seven months after the 18 Commission chose to adopt the rule, if you choose to 19 adopt the rule. 20 So we've identified a short-term and a 21 long-term solution to this issue, and there's two 22 options for the short-term solution. The first is 23 that we can lease drawing machines and conduct the 24 Daily 4 drawings. And the second option is, we can 25 actually utilize two of our Pick 3 drawing machines to 0181 1 construct this drawing. 2 And basically you have two Pick 3 3 machines side-by-side, and you would draw the first 4 two digits from one machine and the last two digits 5 from the second Pick 3 machine. Both of these options 6 give us the ability, based on timelines that have been 7 developed, to start the game in late May of 2007. 8 The long-term solution would be, if you 9 choose to adopt the rule, we would then start the 10 procurement process award, have the machines built, 11 delivered and actually start the game after the 12 machines are received and they go through all their 13 formal statistical testing. And that would push our 14 start date out to September of 2007. And the fiscal 15 notes that Kelly is going to talk to in a minute have 16 been developed considering both of these options. 17 MS. STUCKEY: Thanks, Robert. 18 In order to protect the revenue 19 estimates, we would use sales data from GTECH from 10 20 different states that have Pick 3 games, followed by 21 the introduction of the Pick 4 game. Of the 10 states 22 we looked at, 104 weeks of data from Louisiana, 23 Wisconsin and Missouri was selected ned for sales 24 comparison. The remaining states weren't utilized for 25 various reasons. Some state didn't have enough weeks 0182 1 of Pick 4 sales data that we could use in our 2 analysis. Other states added a mid-day Pick 3 draw 3 that resulted in incomparable data, while other states 4 contained anomalies, creating inconsistent sales data. 5 So following a review of the data, we 6 estimated that there would be a 15 percent decline in 7 Pick 3 sales as a result of the launch of the Daily 4 8 game and that we would generate additional sales of 9 20 percent of Pick 3 sales with the Daily 4 game. We 10 also estimated an additional 5 percent of Daily 4 11 sales would be resulting from the Lucky Sum feature. 12 So on the next slide -- 13 MR. TIRLONI: I'm just going to add one 14 comment here. When you look at this at first, you 15 might look at it and say, "Well, you really didn't 16 consider very many states. But most of the states 17 that I showed you on the map that have a 4-digit game, 18 some of those games have been in existence for well 19 over 25 or 30 years, especially in the northeast, 20 states like New York, New Jersey. Those games have 21 been around for so long that we really couldn't make a 22 good comparison to those states. 23 MS. STUCKEY: So looking at the next 24 slide, we're currently averaging $5.6 million a week 25 in Pick 3 sales; therefore, when we applied our 0183 1 decrease of 15 percent in Pick 3, we're down to 2 $4.8 million a week. And then we expect Daily 4 sales 3 to be $1.2 million a week, estimating that they would 4 come in around the 20 percent that I mentioned earlier 5 of Pick 3 sales. This gives combined weekly sales of 6 $6 million and an incremental increase of 7.1 percent. 7 And we go to the next slide. 8 By launching the Daily 4 game in late 9 May, as Robert mentioned, and leasing the Daily 4 10 machines they are using as current Pick 3 machines, we 11 estimate that the game will result in approximately 12 $28.4 million in additional revenue to the state from 13 Fiscal Years 2007 through '11. 14 The other scenario are the longer term 15 where the launch date is late September '07, until the 16 Daily 4 machines can be purchased. This alternative 17 suggests we estimate approximately $26 million in 18 additional revenue from Fiscal Years 2008 through '11. 19 The earlier launch date was estimated to 20 produce an additional $2.4 million in revenue to the 21 state for the first five years. And we used our 22 standard revenue assumptions of 5 percent to retailer 23 commissions, 50 percent prizes, 7 percent admin, with 24 a resulting 38 percent to transfer to the Foundation 25 School Fund. 0184 1 And then this next slide just represents 2 the revenue impact as a result of the Pick 3 with the 3 Lucky Sum feature. We estimate that the Lucky Sum 4 feature will average $239,000 a week, or 5 percent of 5 Pick 3 sales, for an incremental annual increase of 6 $12.4 million. 7 Two scenarios were reviewed for the 8 fiscal impact of the Lucky Sum feature. The first 9 scenario, the launch date of July '07, which is a two- 10 month delay that Robert mentioned earlier from the 11 Daily 4 launch if it was launched in early May -- or 12 late May -- and estimates $19.3 million in additional 13 revenue for Fiscal Years 2007 through '11. 14 And then the second scenario that began 15 on a two-month delay from the later launch date, we 16 estimate $17.6 million additional revenue from '08 to 17 '11. And so the earlier launch date we estimate to 18 produce an additional $1.7 million in revenue for the 19 first five years. 20 MS. WOELK: If you should vote to 21 propose these three different rule actions today, they 22 would end up being actually published in the 23 December 29th issue of the Texas Register. We've 24 already scheduled a public comment hearing for 25 January 11th. That's not necessarily required, but 0185 1 that's been the practice of the Lottery Commission. 2 And a rule has to be published for 30 days before you 3 can adopt it. So we would be at the end of January 4 before those 30 days passed. You would meet 5 presumably sometime in September and in -- I mean 6 February; excuse me -- and in February you could 7 finally adopt any of these three items. 8 The rules become effective 20 days after 9 adoption. What we did in both of these game rules was 10 provide the Commission Executive Director to begin the 11 game, in the case of Pick 4 or the add-on feature in 12 the case of Pick 3, no later than December 31, 2007. 13 So the rule allows some flexibility on actual start of 14 the game, depending on the various things that have to 15 happen to set the games in motion. 16 MR. TIRLONI: And that concludes our 17 presentation on these rules for you today. I'll be 18 happy to answer any questions that you might have. 19 CHAIRMAN CLOWE: Robert, if you're the 20 correct person to ask -- maybe it's Sarah -- does this 21 fall within the legislative statutes that authorize 22 the games for this agency? 23 MS. WOELK: Yes, I think it does. The 24 play style? Is that the question, the play style? 25 Yes. Our statute is actually quite broad. It's the 0186 1 type of games that couple specific prohibitions. And 2 then there's some Attorney General's opinions that 3 conclude that the constitutional amendments didn't 4 authorize the state to operate slot machines or video 5 lottery terminals and casino style games. 6 But these games are within the more 7 traditional range of state lottery games. In fact, 8 one of the Attorney General opinions gives, by way of 9 example, of the kinds of games the voters had in mind 10 when they approved the state lottery, were daily 11 numbers -- maybe not daily -- numbers games. And all 12 our games are, in broad sense, numbers. All the 13 on-line games are numbers games. 14 But traditionally the term "numbers 15 games" has been to refer to these kind of daily number 16 games where you could choose the same number more than 17 once. So numbers games are actually identified in the 18 Attorney General opinion as a type of permissible game 19 for the state lottery. 20 CHAIRMAN CLOWE: Let me try again. 21 MS. WOELK: Okay. I didn't answer that 22 question. Okay. 23 CHAIRMAN CLOWE: Is this game within the 24 statutes that the agency must observe? "Yes" or "No"? 25 MS. WOELK: Yes. 0187 1 CHAIRMAN CLOWE: Was that hard? 2 MS. WOELK: Any specifics -- well, are 3 you talking about the rulemaking procedures more than 4 the -- 5 CHAIRMAN CLOWE: No. Is this a legal 6 thing for us to do? 7 MS. WOELK: Okay. Just a general 8 certification of -- 9 CHAIRMAN CLOWE: Just yes. 10 MS. WOELK: Yes. 11 CHAIRMAN CLOWE: Do the retailers have 12 the equipment in their terminals to stock this paper 13 and print these tickets as they are now set up? 14 MR. TIRLONI: Yes. If adopted, there 15 will be software developed to actually run the game. 16 But the terminals that generate all of our on-line 17 tickets are the same terminals that will generate 18 these tickets, and the roll stock will be the same. 19 MS. WOELK: The play slips for Daily 4 20 are fairly complex. 21 MR. TIRLONI: There will be new play 22 slips anytime we introduce a brand-new game. There is 23 no equipment change to launch this game. 24 CHAIRMAN CLOWE: The hardware is good to 25 go? 0188 1 MR. TIRLONI: Yes, sir. Absolutely. 2 CHAIRMAN CLOWE: Has anybody talked to 3 the retailers about their reaction to the introduction 4 of this game? 5 MR. TIRLONI: Yes. Michael Anger and 6 representatives from GTECH met with two different or 7 three different retail groups to discuss this. In 8 addition to that, myself and some of my staff members 9 go to retailer meetings around the state. We go to 10 about one a month, and we have been talking about the 11 Daily 4 concept to get their feedback for some time 12 now. 13 CHAIRMAN CLOWE: So if somebody comes in 14 and goes through the litany to order their ticket and 15 they bet 50 cents, the retailer gets two and a half 16 cents? 17 MR. TIRLONI: They get 5 percent. Yes, 18 that's right, two and a half cents. 19 CHAIRMAN CLOWE: And the retailers are 20 satisfied to deal with those kinds of transactions? 21 MR. TIRLONI: I believe they are. With 22 Pick 3 being the best selling on-line game that we 23 have right now, Daily 4 should just be -- if anything, 24 should boost the foot traffic because of the two draws 25 a day. And if it's anything similar to Pick 3, I 0189 1 think the retail base would be very satisfied with the 2 additional commissions that they could earn off of 3 this game. 4 CHAIRMAN CLOWE: Okay. I'm going to 5 remember that, because if the Commission moves ahead 6 on this, I hope in six months or a year, we don't hear 7 complaints from the retailers saying, "You introduced 8 that game and now we've got these people that want to 9 make these complicated wagers. And, you know, people 10 can't get in here to buy something that's of greater 11 value, and we just hate that game." 12 MR. TIRLONI: The only thing I would 13 say, Chairman, in response to that is, you know, 14 Daily 4 is basically, other than the pairs play, it's 15 Pick 3 with an additional digit. So they're already 16 making these transactions in their locations right now 17 on a day-to-day basis. I mean, you're right in saying 18 that it's adding to that. But the retailers that we 19 go out to and talk to in these meetings on a regular 20 basis, they're looking for products that are going to 21 boost their sales and boost their commissions, 22 especially on the on-line side and especially with the 23 lack of Mega Millions jackpots that we talked about 24 earlier. 25 CHAIRMAN CLOWE: Okay. What do the 0190 1 anti-gaming people in this state say about this game? 2 MR. TIRLONI: I believe I'm going to 3 have to defer to the people that did the outreach for 4 the agency on that issue. 5 MS. TREVINO: Good morning, 6 Commissioners. For the record, I'm Nelda Trevino, the 7 Director of Governmental Affairs. 8 And, Chairman Clowe, to your comment, 9 well, first of all, we did do some outreach with some 10 legislative offices to inform them and notify them 11 what the staff was looking to present at this 12 Commission meeting. We also make attempts to reach 13 out to Ms. Suzii Paynter. We were not successful in 14 actually having a thorough discussion with her. I 15 believe she was at least aware that we were wanting to 16 discuss with her the items that we were looking to 17 present today. 18 I can't -- you know, I'm certainly not 19 going to speak for her, and I don't know if she, you 20 know, would have any sort of specific reaction to 21 these games. I believe there's someone in the 22 audience that works with Ms. Paynter, and he might 23 want to offer some comment to you in regards to that. 24 Again, I will just conclude by saying 25 that the outreach that we did do with the legislative 0191 1 offices I believe were very positive. And I'll be 2 happy to answer any other questions. 3 CHAIRMAN CLOWE: And you answered my 4 next question, that you have done outreach to other 5 individuals in the legislature and the leadership 6 about the introduction of this game? 7 MS. TREVINO: That's correct. 8 CHAIRMAN CLOWE: And the responses were 9 affirmative? 10 MS. TREVINO: Yes, sir. 11 CHAIRMAN CLOWE: Thank you. 12 Any questions? 13 COMM. COX: No, sir. 14 CHAIRMAN CLOWE: Ms. Nettles is in the 15 audience. Ms. Nettles, do you have a comment on this 16 proposal? 17 MS. NETTLES: No, sir, not at this time. 18 CHAIRMAN CLOWE: Thank you. 19 Anything further, Commissioner? 20 COMM. COX: Robert, one thing that seems 21 to be hanging is Scenario 1 versus Scenario 2. Do you 22 need guidance on that today from us? 23 MR. TIRLONI: We would welcome any 24 guidance that you would like to offer. 25 COMM. COX: Is that a decision that 0192 1 y'all plan to make at some point or are you going to 2 be bringing it to us at some point or -- 3 MR. TIRLONI: The staff would -- our 4 first preference would be to lease drawing machines 5 and be able to start the game in May, as that has 6 sales and revenue impact to the state. That would be 7 our first preference. The issue with that is, there's 8 about two to three manufacturers worldwide that 9 actually manufacturer this type of drawing equipment. 10 So we're dependent on, once the rule is adopted, we're 11 dependent on one of those manufactures actually having 12 those drawing machines available to lease to us. 13 So if those were not available, I think 14 our second preference would be to utilize the second 15 short-term solution, which would be to utilize two of 16 the Pick 3 drawing machines again, in an attempt to be 17 able to start the game in May as opposed to September. 18 But we would welcome any feedback or 19 concerns or comments that you have about any of those 20 options. 21 COMM. COX: My question, Mr. Chairman, 22 went to why is that open? If that's a question that 23 the staff has the authority to make, I would think 24 they would be presenting their decision. If they need 25 guidance from us, I think they would be asking for it. 0193 1 CHAIRMAN CLOWE: Well, and I think 2 that's exactly right. And Robert is, I think, looking 3 for some indications from us. He's laid out the 4 options. And I think if you have a thought, he would 5 be glad to have it. 6 COMM. COX: And I think Michael wants to 7 say something. 8 (Laughter) 9 MR. ANGER: Commissioners, I'm available 10 at this time. And just to add to Robert's comments, 11 this is not an item that we have to make a decision on 12 at this time. The reality is, is until such time as 13 you consider the public comment and consider actually 14 going forward with adoption of the rule, we can defer 15 this discussion until such time that we would be at 16 that point. 17 Now, as Kelly has laid out in the fiscal 18 noting, there's some revenue implications for which 19 decision we would choose. So the staff did work 20 through the various different scenarios, how we might 21 go forward in a more immediate basis in getting the 22 game launched. And so we've identified the options 23 that Robert laid out. 24 We also evaluated a time on there as 25 well for what we have done in the past with the 0194 1 procurement of new drawings equipment. It just so 2 happens that with this game, as Robert talked about 3 during his presentation, because of the very common 4 similarities between this game and the Pick 3 game, we 5 have equipment that would allow us to conduct the 6 drawings on-site, and we could conduct those using 7 existing equipment. 8 So it makes this game somewhat unique 9 from some of the games that have been proposed and 10 considered in the past for launch. 11 CHAIRMAN CLOWE: Do you want to make a 12 comment? 13 COMM. COX: No. I guess when I was 14 briefed earlier on this, I think my conclusion was, it 15 would be better if we had machines custom made for the 16 game, but I don't believe we should leave $2 million 17 on the table. 18 CHAIRMAN CLOWE: I agree with that. And 19 I don't see anything wrong with using those beautiful 20 Pick 3 machines over there in the gorgeous drawing 21 studio. And, actually, you can put Daily 4 on the 22 front of those two machines and make it very 23 attractive. They're ours. They're under our control. 24 We've got them. Why lease or, you know, have to get 25 new machines in and calibrate them and adjust them? 0195 1 You've got the hardware right here. Kind of like a 2 backhaul in the trucking business, let's use them. 3 MR. TIRLONI: We can certainly use the 4 Pick 3 machines. I believe eventually we would need 5 to procure new machines for Daily 4 for back-up 6 machine purposes. 7 MR. ANGER: It would be our intent to 8 still go forward and procure machines specifically for 9 the conduct of the Daily 4 game. But in the interim 10 period of time, the staff concurs with exactly your 11 comments, Mr. Chairman, that we believe that there's 12 an effective, secure, you know, operationally sound 13 approach to conducting these drawings in the interim 14 period while our procurement is taking place. 15 CHAIRMAN CLOWE: You know if you ask the 16 question, Robert, you get an answer. 17 MR. TIRLONI: Yes, sir. We appreciate 18 that. 19 CHAIRMAN CLOWE: Any further questions? 20 COMM. COX: No, sir. 21 CHAIRMAN CLOWE: Move the adoption of 22 the staff recommendation. 23 COMM. COX: Second. 24 CHAIRMAN CLOWE: All in favor, please 25 say "Aye." 0196 1 COMM. COX: Aye. 2 CHAIRMAN CLOWE: Aye. 3 2-0 in favor. 4 Thank you. 5 Sorry. I didn't hear you. 6 MS. WOELK: There is a -- I made this 7 T-bar that points out that one place is supposed to 8 refer to Subsection (c) -- should actually refer to 9 Subsection (d), and I would like it to be published 10 correctly so if there is actually anyone who wants to 11 analyze and read the rule, they would get the right 12 reference. And so I drafted a T-bar, a new T-bar that 13 says you adopt what's in your notebook, with that one 14 change of (c) to (d), so if we can get a motion that 15 accepts to publish it with this one type of change. 16 CHAIRMAN CLOWE: So move. 17 COMM. COX: Second. 18 CHAIRMAN CLOWE: All in favor, please 19 say "Aye." 20 COMM. COX: Aye. 21 CHAIRMAN CLOWE: Aye. 22 2-0 in favor. 23 MR. ANGER: Thank you, Commissioners. 24 CHAIRMAN CLOWE: Thank you. 25 Now, Sarah, do you want to go to Item 0197 1 XVI relating to Pick 3? 2 MS. WOELK: No, we did -- 3 CHAIRMAN CLOWE: We've done that. 4 MS. WOELK: We combined those two. 5 CHAIRMAN CLOWE: We've covered that. 6 All right. 7 MS. KIPLIN: You've got three T-bar 8 motions coming to you -- just to put it on the 9 record -- one for the proposed repeal of the existing 10 Pick 3, one for the new Pick 3 and one for the new 11 Daily 4. 12 CHAIRMAN CLOWE: Okay. Did my motion 13 cover that adequately when I moved to adopt the staff 14 recommendation? 15 MS. KIPLIN: Yes, I believe it did if 16 all three were related. 17 AGENDA ITEM NO. XVII 18 CHAIRMAN CLOWE: Ms. Melvin, we're going 19 to go to your item, then No. XVII, consideration of, 20 possible discussion and/or action on external and 21 internal audits and/or reviews relating to the Texas 22 Lottery Commission and/or the Internal Audit 23 Department's activities and/or internal Audit Charter. 24 MS. MELVIN: Good afternoon, 25 Commissioners. For the record again, my name is 0198 1 Catherine Melvin, Director of the Internal Audit 2 Division. 3 In your notebooks today is a copy of the 4 Internal Audit Charter. I am asking you this 5 afternoon for your approval to update that charter. 6 This charter was last approved in December 2003. This 7 charter is in need of update to reflect the signature 8 of the current Executive Director. Other than the 9 updating of the signature lines and dates, no other 10 changes to the charter are proposed at this time. 11 And I'm happy to answer any questions 12 you might have. 13 COMM. COX: No, sir. 14 CHAIRMAN CLOWE: Thank you, ma'am. 15 Next Item XVIII, report, possible 16 discussion and/or action on the agency's contracts. 17 Mr. Fernandez, Mr. Jackson. 18 COMM. COX: Mr. Chairman? 19 CHAIRMAN CLOWE: Sir? 20 COMM. COX: Ms. Melvin appears to be 21 asking for something. 22 CHAIRMAN CLOWE: Did you have another 23 item? 24 MS. MELVIN: No, sir. I do need your 25 approval of that charter. 0199 1 CHAIRMAN CLOWE: You are asking for a 2 motion on that? 3 MS. MELVIN: Yes, sir. 4 CHAIRMAN CLOWE: So move. 5 COMM. COX: Second. 6 CHAIRMAN CLOWE: All in favor, please 7 say "Aye." 8 Aye. 9 Opposed "No." 10 The vote is 2-0. Do you have a -- 11 COMM. COX: I didn't vote. I was 12 waiting for you to do that. 13 CHAIRMAN CLOWE: The vote is 2-0. 14 Do you have a document for us to sign? 15 MS. MELVIN: I do. I'll bring that 16 forward at a later time. Thank you, sir. 17 CHAIRMAN CLOWE: Bring it right now. 18 We're ready to sign. 19 AGENDA ITEM NO. XVIII 20 CHAIRMAN CLOWE: Who is going to make 21 this report? Mr. Jackson or -- 22 MR. FERNANDEZ: I think this is 23 Mr. Jackson, gentlemen. 24 CHAIRMAN CLOWE: All right. 25 Mr. Jackson, we're ready for you. 0200 1 MR. JACKSON: Good afternoon, 2 Commissioners. For the record, my name is Tom 3 Jackson. I'm the Purchasing and Contracts Manager for 4 the agency. 5 Commissioners, in your notebooks under 6 Tab No. XVIII is a report on prime contracts that has 7 been updated for your review. Several of the 8 contracts were placed on this report on the agenda for 9 today's discussion or possible discussion. 10 But I would be happy to respond to any 11 comments or questions you might have. 12 COMM. COX: Thank you. 13 CHAIRMAN CLOWE: Thank you, sir. 14 AGENDA ITEM NOS. XIX AND XX 15 CHAIRMAN CLOWE: Next, consideration of 16 and possible discussion and/or audit services 17 procurement. 18 MR. FERNANDEZ: Yes, sir. My name is 19 Mike Fernandez. I'm the Director of Administration. 20 Mr. Chairman, if you would like, we can 21 take the next item, or the next two items are both 22 identical. 23 CHAIRMAN CLOWE: Items XX and XXI? 24 MR. FERNANDEZ: Yes, sir. 25 CHAIRMAN CLOWE: Let's do that, please, 0201 1 sir. 2 MR. FERNANDEZ: Both the items -- 3 MR. JACKSON: XIX and XX. 4 MR. FERNANDEZ: XIX and XX. I'm sorry. 5 CHAIRMAN CLOWE: XIX and XX. Okay. 6 MR. FERNANDEZ: I apologize. Both of 7 these are related to audit services, the first of 8 which is lottery drawing audit services, and the 9 second is financial audit and Mega Millions audits. 10 And, as you know, the agency -- all 11 agencies are required to provide information regarding 12 any audits that they are going to conduct to the state 13 auditor's office. Then the state auditor's office 14 reviews those and decides whether they will delegate 15 that duty back to the agency or conduct the audit 16 themselves. 17 And in both of these cases, Ms. Melvin 18 has contacted the state auditor's office, and the 19 state auditor's office has delegated both the audits 20 back to the agency, and the letter of delegation is in 21 your notebook. So this is to advise you that we are 22 going to move forward on a solicitation to garner 23 audit services in both those instances. 24 CHAIRMAN CLOWE: Thank you, gentlemen. 25 0202 1 AGENDA ITEM NO. XXI 2 CHAIRMAN CLOWE: Item XXI, report, 3 possible discussion and/or action, including 4 amendments and/or extension, on the agency's instant 5 tickets manufacturing and services contract. 6 Mr. Jackson. 7 MR. JACKSON: Commissioners, the 8 contract with Scientific Games International has been 9 prepared -- an amendment has been prepared and 10 included in your notebooks. This amendment was issued 11 to further enhance the services provided by Scientific 12 Games and improve efficiencies, increasing the level 13 of security integrity of the instant games and 14 resulting in a better value to the state and to the 15 Texas Lottery Commission. 16 Since the time the amendment was 17 submitted in your notebooks, very minor changes have 18 been made. And if you have any questions about those, 19 Mike will be happy to respond to that. In addition, 20 the current contract for the instant ticket 21 manufacturing with SciGames expires on August 31, 22 2007, and may be extended for five one-year intervals. 23 Staff has recommended that we extend the 24 contract, beginning September 1, 2007, through 25 August 31, 2008. I would be happy to answer any 0203 1 questions. 2 COMM. COX: Mr. Chairman, I don't know 3 whether this is an appropriate question or not, but 4 let me see if I can lay it out there and see. 5 Scientific Games was given an 6 opportunity to sweeten the pot, if you will. Were the 7 other instant ticket vendors offered the same 8 opportunity to sweeten the pot? 9 MR. FERNANDEZ: Absolutely. Some of the 10 services that are being addressed here may very well 11 be unique to SciGames, but we will come back in front 12 of you next month with an amendment regarding Pollard. 13 That's absolutely correct. 14 COMM. COX: So everyone is getting a 15 chance to try again? 16 MR. FERNANDEZ: Absolutely. And when we 17 look at ticket costs, depending on the ticket size, 18 we're having those discussions with both of those 19 ticket manufacturers. Absolutely. 20 COMM. COX: Thank you, Mr. Chairman. 21 CHAIRMAN CLOWE: This is a one-year 22 extension? 23 MR. FERNANDEZ: Yes, sir. 24 MR. JACKSON: Yes, sir. 25 CHAIRMAN CLOWE: So more. 0204 1 COMM. COX: Second. 2 CHAIRMAN CLOWE: All in favor, please 3 say "Aye." 4 COMM. COX: Aye. 5 CHAIRMAN CLOWE: Aye. 6 The vote is 2-0. 7 Do you have that document? 8 MR. JACKSON: I don't believe we had 9 a -- 10 CHAIRMAN CLOWE: Doesn't require any 11 signature on that? 12 MR. JACKSON: Doesn't require anything. 13 It's just information to you; yes, sir. 14 CHAIRMAN CLOWE: Just the record. Very 15 good. 16 AGENDA ITEM NO. XXII 17 CHAIRMAN CLOWE: Then next will be 18 Item XXII, report, possible discussion and/or action, 19 including amendments and/or extension, on the agency's 20 advertising contract. 21 MR. JACKSON: Amendment No. 1 to the DDB 22 contract for advertising services has been prepared to 23 further clarify the process for submitting invoices, 24 notices, reports, et cetera. This amendment is simply 25 a clarification. And we just bring that to you this 0205 1 afternoon to let you know of this amendment, and it is 2 very minor change to the original contract. 3 CHAIRMAN CLOWE: Any questions? 4 COMM. COX: No, sir. 5 CHAIRMAN CLOWE: Thank you, Mr. Jackson. 6 AGENDA ITEM NO. XXIII 7 CHAIRMAN CLOWE: Next, Item XXIII, 8 report, possible discussion and/or action, including 9 amendments and/or extension, on the agency's market 10 research contract. 11 MR. FERNANDEZ: The agency, as you know, 12 has a contract currently with Ipsos Reid to conduct 13 market research services. This contract was an 14 initial one-year term and had three one-year options. 15 And after review, the staff intends to execute the 16 final year option. 17 CHAIRMAN CLOWE: Is this for 18 information? 19 MR. FERNANDEZ: Yes, sir. 20 CHAIRMAN CLOWE: Any questions, 21 Commissioner? 22 COMM. COX: No. 23 CHAIRMAN CLOWE: Thank you, gentleman. 24 25 0206 1 AGENDA ITEM NO. XXIV 2 CHAIRMAN CLOWE: Next, Item XXIV, 3 report, possible discussion and/or action on the 4 agency's HUB, including agency's performance on the 5 Fiscal Year 2006 Annual HUB Report. 6 Joyce, how are you today? 7 MS. BERTOLACINI: I am fine. Good 8 afternoon, Commissioners. For the record, my name is 9 Joyce Bertolacini, coordinator of the TLC's 10 historically under-utilized business program. 11 And included in your notebooks today is 12 the October HUB minority contracting activity report. 13 This report includes all Fiscal Year 2007 expenditures 14 paid from September 1, 2006, through October 31st of 15 2006. 16 Our total qualifying expenditures as of 17 October 31st were approximately $19.6 million and our 18 estimated HUB minority utilization was $10.8 million, 19 which currently equates to 55.43 percent. Please note 20 that this overall HUB percentage is currently 21 escalated due to subcontracting payments made by 22 several of our large contractors during the first two 23 months of the fiscal year, and this figure should 24 begin to level out within the next several months. 25 Also included in your notebooks is a 0207 1 series of summary reports which analyze the 2 Commission's HUB performance for Fiscal Year 2006, 3 based on the Texas Building and Procurement 4 Commission's annual statewide HUB report. And I would 5 like to highlight some of the key points of these 6 reports. 7 The Commission's overall HUB utilization 8 decreased from 24 percent in Fiscal Year 2005 to 9 23 percent in Fiscal Year 2006. During Fiscal Year 10 2006, the agency continued to exceed the goal for 11 professional services. And, in addition, our HUB 12 participation did increase, both in dollars and 13 percentage in three of the four report categories that 14 apply to the agency. During this report period, 15 direct spending with HUBs declined somewhat. However, 16 subcontracting payments made to HUB vendors increased 17 in FY 2006. Subcontracting with minority-owned HUBs 18 increased slightly as well. 19 The TLC ranked No. 11 in total 20 expenditures captured by the TBPC HUB report. 21 Therefore, due to lower overall spending in 2006, the 22 TLC was not one of the top 10 largest spending 23 agencies. However, if we're included with the 10 24 largest spending agencies, the TLC ranked No. 2 by 25 overall HUB percentage. 0208 1 And I also wanted to mention that work 2 is progressing on the agency's FY 2006 minority 3 business participation report, and I hope to be able 4 to present the report for your approval at the 5 February Commission meeting. 6 But I would be happy to answer any 7 questions you may have at this time? 8 COMM. COX: No, sir. 9 CHAIRMAN CLOWE: And will you talk to us 10 about the mentor protege program, then, as well? 11 MS. BERTOLACINI: Yes, I will. 12 CHAIRMAN CLOWE: Good. Thank you. 13 MS. BERTOLACINI: Thank you. 14 COMM. COX: Mr. Chairman, I'm going to 15 have to ask you for a break. 16 CHAIRMAN CLOWE: All right. We're going 17 to take a short break, and then we're going to call on 18 Ms. Trevino and Mr. Heith and Director Sadberry, and 19 then we're going to go to executive session. And we 20 may just do these cases while we're at it. 21 (Off the record: 12:47 p.m. to 12:56 22 p.m.) 23 AGENDA ITEM NO. XXV 24 CHAIRMAN CLOWE: We'll come back to 25 order and we will take up Item XXV, report, possible 0209 1 discussion and/or action on the 80th Legislature. 2 Ms. Trevino. 3 MS. TREVINO: Good afternoon, 4 Commissioners. Again, for the record, I'm Nelda 5 Trevino, the Director of Governmental Affairs. And I 6 have a brief report to provide you today. 7 As you are aware, prefiling of 8 legislation for the 80th Legislature began on November 9 the 13th. We have provided you an updated tracking 10 report this morning listing bills filed to date with 11 potential impact to the agency. I would like to note 12 bills with specific impact to either charitable bingo, 13 the lottery or the agency. And these include: 14 House Bill 97 by Rep. Armando Martinez 15 relating to the use of the net proceeds by bingo by a 16 veteran's organization; 17 House Bill 378 by Rep. Tony Goolsby 18 relating to the compensation and duties of Texas 19 Lottery Commission members; 20 HJR 26 by Rep. Richard Raymond relating 21 to an amendment to the constitution to dedicate net 22 revenue from the state lottery to certain public 23 schools to offset other revenue used for that purpose; 24 Senate Bill 42, by Sen. Jane Nelson 25 relating to the development of consumer information 0210 1 and protection policies and to purchasing by the 2 Lottery Commission; and 3 SJR 8 by Sen. Rodney Ellis relating to a 4 constitutional amendment authorizing casino gambling 5 and requiring the creation of a Texas Gaming 6 Commission. 7 The other item I wanted to report on 8 relates to the House Licensing and Administrative 9 Procedures Committee. 10 COMM. COX: Nelda, we talked about this, 11 but I can't remember what you told me. As to 12 Sen. Nelson's bill, which addresses consumer 13 information as well as I think our procurement 14 authority -- 15 MS. TREVINO: That's correct. 16 COMM. COX: -- have we communicated to 17 her office the criticism that we have received from 18 certain public representatives for advertising that 19 the odds of winning a given -- any prize are one in 20 71, let's say, when that's required by statute, so we 21 have to do that? Does she know or have you made them 22 aware that we have had that criticism? 23 MS. TREVINO: We have not done that as 24 of yet, Commissioner Cox, but we certainly will do 25 that. And based on the input and analysis that we 0211 1 have received from staff, that is something that we 2 well certainly follow up with her staff on. 3 COMM. COX: Thank you. 4 MS. TREVINO: The agency appeared before 5 the House Licensing and Procedures Committee on 6 November the 15th to discuss the Internal Audit Report 7 on Bingo Audit Services. We are providing regular 8 updates to the committee on the progress of 9 implementing the recommendations contained in the 10 Internal Audit Report, and we're also providing 11 progress reports on various matters that were 12 discussed at that hearing. 13 The committee also adopted interim 14 charge recommendations at their November 15th hearing. 15 And in your notebook are your minutes from the hearing 16 which contain all the adopted recommendations. Those 17 related to the agency are Recommendations No. 5 and 18 Recommendations No. 9 through 22. 19 Lastly, a bingo legislative workgroup 20 has been formed at the request of Rep. Kino Flores. 21 And included in your notebook is a copy of the letter 22 from Rep. Flores and Chairman Clowe's response to his 23 letter. 24 As you are aware, the workgroup is 25 comprised of staff members from Chairman Flores' 0212 1 office, representatives from the bingo industry, which 2 includes Steve Bresnen, Steve Fenoglio and Sharon Ives 3 and staff members from our agency. The first meeting 4 of the workgroup was held on December the 7th, and the 5 group is scheduled to meet again tomorrow, on December 6 the 14th, and we will certainly keep you informed on 7 the progress of the workgroup. 8 This concludes my report, and I'll be 9 happy to answer any other questions. 10 COMM. COX: No, sir. 11 CHAIRMAN CLOWE: Thank you, ma'am. 12 AGENDA ITEM NO. XXVI 13 CHAIRMAN CLOWE: Next, Item XXVI, 14 report, possible discussion and/or action on the 15 terminal validation the tickets. 16 Mr. Heith. 17 MR. HEITH: Good afternoon, 18 Commissioners. For the record, my name is Bobby 19 Heith. I am the Media Relations Director at the 20 Lottery Commission. I have with me today Michael 21 Anger, who is the Lottery Operations Director, and Ed 22 Rogers, who is Retailer Service Manager. 23 I was called to come before the 24 Commission today to talk about a story that was run on 25 November 9th on Channel 2, KPRC in Houston, regarding 0213 1 ticket validation. As I've looked at this and had 2 some further discussions, it's really not so much 3 about the story as it is about the criticism of our 4 processes and procedures and the way we handle these 5 type of claims. 6 So I'll be very brief. When I worked at 7 the railroad Commission, any time I went to the table, 8 I was asked to be brief, so that's always stuck in the 9 back of my head. So I'll be brief today. And then 10 Michael and Ed are available for any follow-up 11 questioning regarding retailer training or the process 12 we follow when we receive claims such as this. 13 We were contacted by a reporter with 14 KPRC in Houston regarding a story that he was working 15 on. There were three winners -- and I'm going to look 16 at Kim now and say, "I understand that there's no 17 winners or winning ticket until they pass the 18 validation process." So I just want to let you know 19 that before you start squirming in your chair. But it 20 centered around three people that said they had 21 winning tickets. 22 CHAIRMAN CLOWE: They're called 23 claimants. 24 MR. HEITH: Claimants. There you go. 25 Better? 0214 1 And it really centered on one that had a 2 ticket that was worth -- I think a $3.00 Lotto Texas 3 ticket that was having trouble getting his prize. In 4 the story, as broadcast on KPRC, they used a hidden 5 camera, following the reporter to four different 6 stores, lottery retailers, in an attempt to claim a 7 ticket. They used a hidden camera to go with the main 8 claimant in the story, to the claim center in Houston 9 to talk about the claim. They also recorded a 10 conversation with a lottery employee, and all this was 11 presented in the broadcast version. I have inserted 12 in your notebooks a transcript of that that has 13 appeared on the website. 14 One thing that concerned me in the story 15 was the quote the reporter had in the very beginning 16 of the story where he says, "We have been talking with 17 frustrated lottery winners and went to the Lottery 18 Commission in Austin. And while officials there know 19 about this problem, we discovered little is being done 20 to prevent winning tickets from turning up as losers." 21 And that was really the comment that he 22 made in the story that concerned me. And hopefully 23 this discussion today will show that we are vigilant 24 and take all of our -- in preventing these things from 25 happening and also we address every concern and claim 0215 1 in a very expedient manner. 2 So he did file three open records 3 requests in a very general nature. He also conducted 4 an on-camera interview here at lottery headquarters 5 with Leticia Vasquez who had been working with him on 6 behalf of the Media Relations Division in his 7 preparation for the story. 8 So at this time again, this will give 9 you a summary of this broadcast story. And, again, I 10 put the written version in your notebooks. And Ed and 11 Michael and myself will be available for any 12 questions. 13 COMM. COX: Well, I guess my first 14 concern when I read this article was looking at the 15 same words that Bobby looked at, I was kind of upset, 16 because I know that we don't take these things 17 lightly, and he was saying we took them lightly. 18 But as I read it the second time, I 19 think he lays out some pretty important issues, 20 because it talks about the diligence of our retailers, 21 the fact that some of them don't send their people to 22 our training, the fact that apparently we don't or 23 can't require people to come to our training before 24 they're out there selling lottery tickets, the fact 25 that I've always believed that the barriers to entry 0216 1 here were awfully low. The requirements to get a 2 license are very low relative to the kinds of licenses 3 you often have to obtain -- or licensing process you 4 often have to go through to get in the gaming 5 business. 6 So I would really like to hear from 7 Michael, Ed, or however y'all would like to do it, on 8 just what you would have said if the reporter had come 9 to you and said, "Hey, here are my concerns. Help me 10 with these." 11 MR. ANGER: Commissioner, to your 12 comments, I think it might be helpful for Ed to lay 13 out for you the process that's in place for training 14 of retailers. And then from there, I would be happy 15 to walk through the process when we receive one of 16 these claims or a complaint from an interested 17 claimant who has had a problem in claiming their prize 18 from a retailer and what steps we take with regard to 19 those transactions. 20 COMM. COX: That would be good for me, 21 Mr. Chairman. 22 CHAIRMAN CLOWE: Sure. 23 MR. ROGERS: Good morning, 24 Commissioners. For the record, my name is Ed Rogers. 25 I'm the Retailer Services Manager in the Lottery 0217 1 Operations Division. 2 I guess to start, I would like to say 3 that the Lottery Commission can and does require 4 retailers to attend training as a condition of being 5 licensed. We can also require that retailers attend 6 training, general broad training or specific training, 7 whenever we deem it's necessary for them to do so. 8 The Lottery Commission, through the 9 lottery operator, provides a comprehensive -- provides 10 comprehensive training to new applicants and to 11 approved retailers. The training options take various 12 forms. We offer new retailers our applicant training, 13 refresher training, training whenever we convert to 14 new equipment, and also training for promotions and 15 new games. 16 The training is presented in both a 17 classroom setting and in some instances in an indoor 18 setting where the equipment is set up in a store and 19 we're able to conduct some training there with the 20 management and the employees. 21 As part of the training, printed 22 reference material is provided to the retailer. The 23 two main reference tools, although there are others, 24 are a retailer manual which focuses on terminal 25 operations for all the equipment that we deploy and a 0218 1 retailer guide which covers a broad range of lottery 2 licensee and general business issues. These materials 3 are available in hard copy and are provided to 4 retailers. And, in addition, the retailer guide is 5 available for downloading off the TLC website. 6 Retailers are required to attend 7 training as a condition of being licensed. Retailers 8 that -- applicants that come to us that have never 9 attended a training before for the most part are 10 required to attend classroom training. In a state 11 this large and with some of our rural retailers, it's 12 not practical for them to drive to a classroom to 13 attend training. So in some instances, new applicant 14 or retailer training will take place in the store, in 15 a store setting. 16 Retailers with past experience selling 17 lottery tickets who have withheld licenses at other 18 locations have a choice. They can go to the 19 classroom, but we're happy to provide that training 20 for them in the store, in the store setting. 21 There are some larger corporation, some 22 of our larger accounts, that have their own in-house 23 trainers. Those training staff have been trained by 24 lottery operation staff. And then they'll conduct 25 either classroom training within their company 0219 1 facilities or training in their stores and especially 2 when new stores are opening where lottery tickets have 3 not been sold before. 4 In addition, there are special 5 situations where we can require a retailer to attend a 6 classroom setting or to ask a lottery operator sales 7 rep to go to a store to address a specific situation. 8 If we find and get reports that a particular issue has 9 arisen in the conduct of the sale of lottery tickets 10 in a store, then we can and have in the past directed 11 GTECH to go out and cover a specific topic or a range 12 of topics, with a retailer in their store to help get 13 the retailer up to speed on whatever issue we were 14 concerned about. 15 In 2003 and 2004, the Lottery 16 Commission, working with the lottery operator, made 17 some changes to the lottery management system to help 18 us with this issue, to enhance the tracking and 19 training for new applicants and to improve 20 communication between Retailer Services staff and 21 lottery operator staff in their district offices on 22 various training issues. 23 Just for example, when a new applicant 24 comes in and we process their application, we're 25 looking at all their eligibility requirements. Once 0220 1 we have determined the basic eligibility issues have 2 been addressed, we have a special status that we put 3 their records in, in our lottery management system. 4 GTECH, on a daily basis in the district 5 offices, monitors applicants that are in that status. 6 There is communication between Retailer Services and 7 the lottery operator staff on what kind of training is 8 required for that applicant. That Applicants attends 9 the training. And then GTECH updates this lottery 10 management system. And on a daily basis, Retailer 11 Services staff print reports that let us know who has 12 now had the required training. And if they've met the 13 other eligibility requirements, we'll approve them for 14 a license. 15 In general that covers our training 16 program for retailers. I would be glad to answer any 17 questions you may have. 18 COMM. COX: I do have a question, 19 Mr. Chairman. 20 Ed, let me read you something here and 21 you tell me how I can reconcile this with what you 22 just said. This is a spokesman from Bobby Heith's 23 department, blames the complaints on store employees. 24 She says, "They aren't trained on how to use the 25 machines," but says "The Lottery Commission can't 0221 1 force the retailer to take the state's training. As a 2 result, only about 20 percent of retailers ever bother 3 to get their employees trained on the machine." Would 4 you agree with that? 5 MR. ROGERS: No, sir, I wouldn't. We do 6 actually have an administrative rule that addresses 7 requirements for retailer training. It is a part of 8 our general practice, you know, to -- it's a basic 9 part of the approval for application. 10 One of the things that we try to do is 11 let retailers know that this refresher training is 12 available to them. You know, I'm not sure where the 13 20 percent statistic was derived from. 14 COMM. COX: Okay. 15 MR. ROGERS: Thank you. 16 MR. HEITH: And I can probably speak to 17 the 20 percent. After talking to Ed and to Leticia 18 and I believe also Gary, I went back and looked at his 19 open records request -- and I'm making an assumption 20 here, so -- but it looks as though he took total 21 amount of retailers and divided into the number of 22 trainings that were included in his open records 23 request. So it was something that he came up with on 24 his own. 25 COMM. COX: Okay. But it says that, 0222 1 "She says they aren't trained on how to use the 2 machines." But you're saying that that -- 3 MR. HEITH: No. I'm talking towards the 4 20 percent. 5 COMM. COX: Okay. So are they trained 6 on how to use the machines or are they not? 7 MR. HEITH: They are trained, sir. 8 COMM. COX: Okay. 9 MR. HEITH: And I would also add, since 10 this story came about, that I have been through 11 retailer training. And I can concur with that, that 12 they taught me how to use the machines and was very 13 thorough on their explanation of ticket validation and 14 what should take place in those instances. 15 COMM. COX: Okay. Now, when I go to a 16 convenience store, I usually don't see anyone that 17 looks like the owner. I usually don't see anyone that 18 really looks like a manager. I usually see people 19 that look like they hold the same function as the 20 check-out people at the grocery store have, not people 21 that are highly trained but typically people that are 22 able to take something and put it in front of a 23 scanner and see what the number is and collect that 24 amount and give change. Those people are all trained? 25 MR. ROGERS: No, sir, I can't say that 0223 1 that's the case. That is one of the challenges that 2 we face in making -- in providing training to 3 retailers. Our largest group of retailers are 4 convenience stores or convenience stores with gas, and 5 they do have significant a turnover in those 6 positions. 7 COMM. COX: Yes. 8 MR. ROGERS: One of the things that we 9 try to do is make sure that an owner or a manager, 10 somebody in a management position that, whether there 11 might not be such a high degree of turnover, is 12 trained and that that person can train the other 13 employees in the store that come and go. 14 The sales rep is also available to 15 conduct refresher training whenever that turnover does 16 occur. So I can't say emphatically that every single 17 one of those people has been trained by the lottery 18 operator. We do make refresher training or ongoing 19 training available and encourage retailers to take 20 advantage of it. 21 COMM. COX: Is there a set of written, 22 easily understood, simple written procedures that 23 those people can read through as some kind of 24 orientation? 25 MR. ROGERS: Yes, sir. That would be 0224 1 the retailer manual that I referenced earlier. It is 2 a comprehensive step-by-step instruction on really how 3 to operate every aspect of the equipment that we offer 4 in the store. And the focus would be on the ISYS 5 terminal where is the main terminal deployed where you 6 have clerk-assisted sales. This manual runs players 7 through how to sell all the games, how to validate 8 tickets and how to generate reports. In addition, I 9 believe that there are quick reference cards that 10 we've made available to retailers for that same 11 purpose. 12 COMM. COX: So it sounds like the system 13 is not necessarily designed to have every employee 14 attend a training session; it's designed to, through 15 training trainers, and working with the 16 representatives from the lottery operator, to try to 17 get people trained the best way we can? 18 MR. ROGERS: Yes, that's true, 19 especially for the corporate accounts. To your 20 comment earlier about when you walk into a convenience 21 store and you don't see the person who appears to be 22 the owner, that's accurate. You know, I will say that 23 with our independent retailers, those owners or those 24 managers do spend quite a bit of time in the daily 25 management of their businesses. And if we're training 0225 1 those people, I think that there is a reasonable 2 expectation that the information that's provided for 3 training is passed on to the employees that are 4 actually running the terminals. 5 One of the things that we try to 6 emphasize to the people who attend these training is 7 how important the training is for them to be 8 successful in selling lottery tickets. If somebody 9 knows how to operate that terminal and knows the game, 10 they can do it quickly and efficiently. They can 11 provide better service to their customers. They can 12 help reduce the opportunity for any kind of negative 13 financial impact by generating a ticket in error or 14 paying a prize improperly for that business owner. 15 And so we do try to reinforce to them how important it 16 is that their employees are informed on really all 17 aspects of selling lottery tickets, paying lottery 18 prizes, in the operation of that equipment. 19 CHAIRMAN CLOWE: I haven't gotten to the 20 point, which is important to me, in the case of this 21 claimed winning, was it deception or was it bad 22 training? What were the facts in this? 23 MR. ANGER: Chairman, I can probably 24 respond to that. I think it might be helpful for me 25 to kind of give a broad overview of the category of 0226 1 claims that the -- 2 CHAIRMAN CLOWE: Before you do that -- 3 MR. ANGER: Yes, sir. 4 CHAIRMAN CLOWE: -- just tell us the 5 three claimants, were they valid claims or were they 6 not? 7 MR. ANGER: There were three claims that 8 were cited specifically in the story. And upon 9 receiving appropriate information -- and I can get 10 into more detail about that -- from two of the 11 claimants, we have since made payment on two of the 12 three claims. An inquiry for additional information 13 was sent to a third claimant who was cited in the 14 story, and the claimant has come forward with no 15 further information. And so that claim at this time 16 has not been paid. 17 CHAIRMAN CLOWE: But we've paid two of 18 the three, because they had valid claims? 19 MR. ANGER: Yes, sir, that is correct. 20 CHAIRMAN CLOWE: And they went to a 21 number of retailers and were told they did not have a 22 valid claim? 23 MR. ANGER: They were told that the 24 ticket was not a winning ticket at the location. And 25 these claims -- 0227 1 CHAIRMAN CLOWE: But that's not a valid 2 claim, is it? 3 MR. ANGER: These claims fall into a 4 category that we refer to as previously paid tickets. 5 And it's maybe helpful for me to walk through the 6 scenario that takes place and the type of situation 7 where this occurs. 8 CHAIRMAN CLOWE: Now, that's to me the 9 point of this whole discussion. It may not be 10 training at all; it may be a previously paid ticket 11 problem. 12 MR. ANGER: And, in fact, sometimes that 13 can be caused by a training issue or a clerk 14 operational issue, but it can also occur for a number 15 of other reasons, too. And I would be happy to talk 16 to that and walk through that. 17 CHAIRMAN CLOWE: To me, that's the heart 18 of the issue. 19 MR. ANGER: Yes, sir. 20 CHAIRMAN CLOWE: At least we know that's 21 two out of three that this reporter has brought to our 22 attention. Okay. Let's hear about that. 23 MR. ANGER: Well, and for purposes of 24 not getting into the individual specifics of a 25 particular person's claim, I'll walk through a generic 0228 1 scenario. 2 But in rare cases, we have claimants who 3 come forward who either, by mail or coming into a 4 claim center, come forward and present a ticket that 5 on its face has a winning combination of numbers for a 6 particular game drawing for one of the games, either 7 on-line or instant. And we review that ticket -- and 8 the story is very typical -- but the player will say, 9 "I've taken this ticket to a number of stores. I was 10 unable to get the ticket validated and receive payment 11 for that ticket." 12 And when we researched the ticket, what 13 it shows is, is the ticket has been validated at a 14 retail location. And, of course, the agency's issue 15 is, is that we can only pay one party for any given 16 ticket. And so we've issued payment to a retailer 17 because, presumably, the ticket has been taken into a 18 retail location, swiped and validated at the retail 19 location, and that money was credited to the 20 retailer's account. And in good faith, that retailer 21 went forward in paying the prize out to the claimant. 22 So the disconnect here, though, however, 23 is that we've got a person coming forward saying, "I 24 have this good and valid picket. I'm a claimant, and 25 I was never paid for it." And the disconnect is, is 0229 1 that retailers who validate tickets are supposed to 2 take those tickets and destroy those tickets and not 3 allow them back out into circulation. So there is a 4 conflict. There is, you know, an obvious conflict on 5 its face that something is not right. 6 So in these circumstances, what the 7 agency does is, it essentially researches or 8 investigates each of these individual claims. And 9 there's good reason for that, and I'll explain why in 10 a moment. But essentially what we're balancing is, 11 we're balancing the fact that we have a retailer who 12 has scanned and validated this ticket and received 13 credit for it in the past, and then we've got someone 14 coming forward saying that they have the ticket, it's 15 their ticket, it rightfully belongs to them, and they 16 haven't been paid for it. 17 So we try to gather information from the 18 claimant to confirm that they're the rightful owner of 19 that ticket, and we do that by asking them information 20 about where they purchased the ticket, the places 21 where they attempted to go to cash the ticket in and 22 the dates and times when they attempted to collect the 23 monies for that ticket at the particular locations 24 they went to, all of which is information that's 25 recorded on the lottery operator's central computer 0230 1 system. So we can go back and we can research the 2 entire history of that ticket, and we can see every 3 validation attempt that took place on that ticket, 4 where it occurred, what time it occurred. All of that 5 information is available to us. 6 And so what we're trying to do is, we're 7 trying to reconcile that information and match it up. 8 And in the cases where we can, we believe that we have 9 the person in front of us who is the rightful owner of 10 the ticket and that they must not have gotten paid or 11 they wouldn't have the ticket in their possession. 12 And in those cases, we go forward in paying the 13 claimant for the face value of that prize, and we 14 debit the monies or take the monies away from the 15 retailer account who received those monies in the 16 first place. 17 And so we're creating a balance there. 18 You know, we don't want to just, you know, headlong 19 just immediately on its face take monies away from 20 retailers who it appears conducted a proper, valid 21 transaction. So we're trying to balance that in 22 conducting the research. 23 Now, it may be helpful at this time to 24 kind of cite some statistics for you and give you some 25 background information about these claims and the 0231 1 number of them and things like that. 2 We received 867 of what we call 3 previously paid ticket claims over the course of last 4 year. Of those claims, 349 of those claims were 5 submitted by one individual. And when we receive 6 these claims and they don't have information 7 associated with them, we send a standard letter that 8 asks for the information I just outlined to you: 9 Where did you purchase it? Where did you try to cash 10 in it? When did you go to those locations? 11 In the case of this one individual, this 12 person has never replied. And I will just tell you 13 that there are individuals out there who go and dig 14 through the trash behind convenience store locations 15 and gather and collect tickets and submit them to us 16 as claims. And they don't necessarily check those 17 tickets to see if they're winners. You know, 18 sometimes they're non-winning tickets; sometimes 19 they're winning tickets that they found or come into 20 possession of that weren't fully destroyed by a 21 retailer at their location. 22 And so this is also why we research and 23 try to validate that someone is a rightful claimant, 24 because we're trying to be fair and not just carte 25 blanche taking monies away from retailers in 0232 1 illegitimate situations. I would have to say that in 2 the case of one individual submitting 349 of these 3 tickets for payment last year, that's an indication 4 that that person is probably not the original and 5 rightful owner of those tickets. 6 So if you set those aside, we had a 7 total of 518 of these claims that came into the agency 8 last year. And to put that into perspective, the 9 agency conducted over 232 million validation 10 transactions statewide during last fiscal year. So 11 these transactions as a whole, at least the ones that 12 have been submitted to us as claims that we've had an 13 opportunity to try to work with the claimants to 14 properly investigate and, in those cases where it's 15 appropriate, make statement, represent about two ten- 16 thousandths of one percent of all the transactions 17 that we conduct. So it is a very small body of all 18 the transactions that we do. 19 Essentially, that's the process that we 20 go through in handling these claims. But, you know, 21 we take these matters very seriously. When the 22 tickets come in and they show to be previously paid 23 and there is no information provided by the claimant, 24 we do outreach to those claimants to try to get 25 information from them. There is often back and forth 0233 1 that takes place between claim center staff and/or 2 security or enforcement staff involving these tickets, 3 to try to gather more information from claimants to 4 fully evaluate them and make a proper determination as 5 to who should be ultimately paid or where the credit 6 should remain with regard to these transactions. 7 CHAIRMAN CLOWE: Now, you see, that's 8 very helpful. That's information that, unfortunately, 9 the reporter apparently didn't get. 10 MR. ANGER: Yes, sir. 11 CHAIRMAN CLOWE: And the procedure is, 12 according to what you've told us, that when a claimant 13 presents a ticket and it's paid, the retailer should 14 pick that ticket up. We're dealing with dollars here. 15 These valid tickets are the same thing as money. And 16 the review that you make, that you described and the 17 number of cases, which is very, very small, it seems 18 to me are being properly handled by virtue of the fact 19 that you charge back to the retailer when you make a 20 payment. So when you took these two out of three and 21 made the payments, you charged the retailer for not 22 following proper procedure? 23 MR. ANGER: Yes, sir. 24 CHAIRMAN CLOWE: And that seems correct 25 to me. 0234 1 MR. ANGER: Yes, sir. 2 CHAIRMAN CLOWE: Now, how often do you 3 get a claimant who presents a winning ticket and says, 4 "I want my money, but I want to keep my ticket"? Is 5 that a common occurrence? 6 MR. ANGER: We do have claimants who 7 request to keep their ticket, and we explain to them 8 that in order to file and submit a claim, they must 9 present and provide to the agency the original 10 physical ticket. We welcome them to make copies. 11 Often in the case of claimants who show up at the 12 claim center, we make copies of the tickets for them. 13 A lot of times they want to keep it as a souvenir, 14 particularly if it's a significant winning. 15 But we explain to them that we must keep 16 and maintain the original ticket. In accordance with 17 our rules, after we've concluded all work on the 18 claim, we maintain them for a period of five years 19 before they actually are destroyed under our records 20 retention schedule. 21 CHAIRMAN CLOWE: That's very helpful, 22 Michael. 23 So, Bobby, can you get this information 24 back to the reporter? 25 MR. HEITH: I sure can. 0235 1 CHAIRMAN CLOWE: I mean, it seems like 2 here is the other part of the story that needs to be 3 known and told. And I'm impressed by the percentage 4 of claimants that we're dealing with and the even 5 smaller percentage of what appear to be individual or 6 infrequent claimants. That one block of over 300 is 7 certainly suspect. 8 I wonder how many claimants present a 9 ticket and it's run through the machine and they're 10 told that's not a winner, and they throw it away or 11 they take the clerk at the word of it not being a 12 winner and just walk away. Is that a problem for us? 13 MR. ANGER: That certainly could happen, 14 Mr. Chairman. And with regard to these previously 15 paid tickets, I mean, the possibility exists that 16 someone could take a clerk at face value and not 17 question the transaction. And that's a situation 18 where we try to make available to players, you know, 19 numerous means to check tickets on their own. 20 Obviously, instant tickets they check on their face. 21 With regard to the on-line games, we try to make 22 winning numbers results available to players. In 23 fact, they are available at the retail location. 24 Players can request the winning numbers from any past 25 drawing be generated so that they can check the ticket 0236 1 themselves, if they so choose. 2 Is there, you know, ever situations 3 where a clerk might conduct -- you know, might try to, 4 you know, cheat a player out of their money? Yes, 5 certainly that could happen. What I will tell you is, 6 is when we receive reports of that, the agency, 7 through its complaint process, takes those in and 8 considers those very seriously and pursues those 9 matters and investigates those matters fully. 10 You know, the fact is, is that it is in 11 the interest of this agency and the state and our 12 players to make sure that every rightful winner gets 13 paid. And I believe the processes that we have in 14 place are focused toward that end, to try to make sure 15 that every player who wins a prize does get paid. 16 These transactions can occur through 17 simple transactional error on the part of the player 18 or on the part of the clerk. They can happen because 19 of the nature of the communications that take place. 20 What happens is, is the ticket, at the terminal, at 21 the location, is scanned by the clerk and the message 22 is sent off to the central computer system. And the 23 central computer system checks the serial number 24 associated with that transaction against a table of 25 winning tickets that are out there on the system. And 0237 1 if it is indeed a winner, it records it and logs it as 2 a winning transaction and sends a message back down to 3 the terminal that generates as a slip at the retail 4 location, telling the clerk how much to pay out for 5 that particular ticket. 6 But problems can occur, because that 7 data does transfer across a telecommunications line. 8 And so if for some reason the return message coming 9 back telling the retailer to pay is interrupted for 10 some reason -- maybe there is a power surge on the 11 communications line, the line connection gets 12 interrupted due to some sort of telecom situation that 13 just occurs out there, or -- and this is the potential 14 clerk situation where there could be an error -- it 15 can happen where the clerk scans the ticket and it 16 sends the information off to the central computer 17 system to validate the ticket. That message is coming 18 back down to the terminal to print out to tell the 19 clerk to pay. 20 And maybe the transaction takes a little 21 longer than normal or the clerk has a line of people 22 and they're antsy and they're not -- you know, they 23 think maybe something has gone wrong and they scan the 24 ticket a second time. When they scan that ticket the 25 second time, it interrupts the first message coming 0238 1 back, telling the retailer to pay out on the ticket, 2 sends the information to the central computer system 3 again. The second time that the central computer 4 system sees it, it says, "Well, this is a validated 5 ticket," and it sends back a message telling the clerk 6 that the ticket is previously paid. 7 CHAIRMAN CLOWE: That's the ghost 8 ticket. 9 MR. ANGER: Well, it's not a ghost 10 ticket. It's just that the transaction has been 11 logged twice against the system and the message to pay 12 never ever comes back. Now, what happens is, is that 13 the clerk gets only the second message that says that 14 the ticket is previously paid. 15 CHAIRMAN CLOWE: Doesn't get the winner 16 message. 17 MR. ANGER: And, you know, it will often 18 say "Previously paid by you," potentially because of 19 the training situation or just because of a lack of 20 general understanding, that the clerk gets back this 21 message and they -- you know, it says -- it doesn't 22 say to pay and they just hand it all back to the 23 player and say, you know, "Your ticket has been 24 previously paid. I can't help you with this. You 25 need go to the claim center." And those are the types 0239 1 of situations that I enumerated here that often end up 2 with us, and we're able to work through that with the 3 player and see that yes, indeed, that retailer that 4 they went to did get the credit, and get those people 5 paid and get them their monies. 6 Now, there is one other situation I'll 7 you throw out. Sometimes it happens with players that 8 in the course of conducting business, often when 9 players go in to have tickets checked or have tickets 10 validated, they're also purchasing tickets, too. And 11 so what happens from time to time in the exchange of 12 those tickets back and forth across the counter in the 13 transaction is, is that the tickets that were 14 validated that the retailer was supposed to keep 15 inadvertently gets stuck back in a stack of tickets 16 that the player was buying and end up back in the 17 player's hands. 18 They set them aside, you know, for two, 19 three, four weeks, a period of time, and they go back 20 later and check those tickets, not noticing that one 21 of those tickets is one that they had already taken in 22 and validated previously, and they see it is a winner, 23 they go to re-present it for payment and the retailer 24 says, "Well, you know, this ticket is not a valid 25 winner. You know, I can't pay you for it." 0240 1 And often in the course of receiving 2 these claims and talking to these players and working 3 through the questions that we ask them about this, 4 sometimes in those conversations it will come back to 5 them and they will say, "Oh, yes, I do remember. You 6 know, I did take that ticket to that store at that 7 time." And, you know, it's just an innocent mistake 8 that happens. 9 CHAIRMAN CLOWE: But all of those 10 instances would be included in the 518 occurrences 11 that you mentioned to us? 12 MR. ANGER: Yes, sir. 13 CHAIRMAN CLOWE: That we know about? 14 MR. ANGER: Yes, sir. And, you know, 15 those are the people who came forward and, you know, 16 submitted a complaint and filed a claim with us, and 17 we have pursued each and every one of those. 18 CHAIRMAN CLOWE: I like what you told us 19 about the process of dealing with these claimants, and 20 I like the idea of an appeal that is listening to the 21 claimant and is acting in an even-handed manner. 22 Mistakes do occur, although big financial institutions 23 today are amazingly error-free. But when I checked 24 out of the hotel this morning, there was a $250 25 restaurant charge on my bill from last night, and I 0241 1 didn't have dinner at the hotel last night. And it 2 just shows you that mistakes can occur. So I went to 3 the office and I appealed, and I got satisfaction. 4 The charge was taken off of my bill. 5 And so we can't ever expect to be error- 6 free, but we can expect to have an appeal process that 7 is very fair. And, you know, if you had 10 percent of 8 the tickets we sold end up in this kind of a 9 situation, I would say we've got a terrible problem. 10 But it is a matter of dealing with a small percentage 11 that is attractive to those who are critical of the 12 operation, and we want to do everything we can. 13 First of all, Bobby, if the information 14 that Commissioner Cox quoted from the article came 15 from your office, that wasn't a good job. That was a 16 misquote. I mean, our people didn't give that 17 reporter correct information. And you and I have been 18 in on enough interviews together that you know we work 19 hard on getting our data straight and making sure the 20 reporter understands what we're saying, to the point 21 of giving a fact sheet sometimes where it's written 22 down so that the reporter gets every chance to get 23 correct information. 24 And then when something like this occurs 25 where there's clearly something wrong about the 0242 1 information on training, based on what Ed has told us, 2 we ought to go back to that reporter and say, "We're 3 concerned about this. We want to get the record 4 straight with you," and then try to get this 5 information that Michael has given to us that puts the 6 problem in perspective. 7 And then when we get down to the 518 8 claimants that we will go beyond, I think, what's just 9 a yes/no answer and really try to verify if this is 10 one of these errors that Michael has described and 11 make a payment. I think we ought to bend over to try 12 to be very fair to these people, because it goes to 13 our perception of fairness and honesty. And it's not 14 10 percent of all of our sales. But when you get in 15 the newspaper like this and people perceive you as 16 being a cheater, that's not good, not good at all. So 17 I think you ought to backtrack on some of this and get 18 it back on track if you can. 19 Commissioner Cox? 20 COMM. COX: A couple more questions, 21 Mr. Chairman. 22 Probably, Michael, before you were born, 23 I went on a train trip and I gave the conductor my 24 ticket and he punched it, and that kept me from 25 passing it out the window to someone else who could 0243 1 then use it to get on the train. Now, there are 2 hundreds if not thousands of ways of canceling 3 tickets, and some of them are electronic. When I go 4 on American Airlines, I give them by boarding pass, 5 they run it through a machine that says it's valid, 6 lets me on but voids it for anybody else to use. 7 Now, has there been any consideration to 8 incorporating something like this in the lottery 9 operator's machine or doing something like the 10 University Co-op does? I go over there to buy my 11 orange T-shirt and I go up to check out and they run 12 something across a demagnetizer, and it thus lets me 13 out of the store without setting off the alarm. Are 14 there any kinds of mechanical devices like that, that 15 would read the ticket to determine whether it is a 16 winner, and void it for future use, then you don't 17 have to worry about whether the player gets it back or 18 not? 19 MR. ANGER: In a sense, that's -- 20 CHAIRMAN CLOWE: And what Commissioner 21 Cox is getting at -- just let me chime in -- a 22 physical manifestation on the ticket at that time. 23 You're going to say you've got that information in the 24 computer, but he wants the player to see that on his 25 ticket. 0244 1 COMM. COX: Or for the system to be such 2 that it's automatically, at the time it's paid, it's 3 voided. I don't care whether you punch it, whether 4 you demagnetize it, what you do, but you eliminate 5 this possibility. 6 MR. ANGER: In regard to the system and 7 the second part of what you're saying, the system in a 8 sense is doing that. It is voiding that ticket, 9 because it only allows it to be validated one time. 10 You know, that serial number that's in the system -- 11 COMM. COX: It's in the software; it's 12 in the software. I'm talking about something the 13 customer can see. 14 MR. ANGER: Yes, yes. 15 COMM. COX: When that conductor punched 16 my tickets, I knew. 17 CHAIRMAN CLOWE: A visible 18 manifestation. 19 MR. ANGER: Yes. Now, on the physical 20 aspect of that -- and we can certainly visit with the 21 lottery operator -- I'm not aware of anything 22 currently in the industry that's being used that's 23 capable of doing that, but that doesn't mean that it's 24 not something that we can't explore. We're always 25 looking for, you know, a better way to do that. 0245 1 One of the things that is communicated 2 to the retailers through the training and the retailer 3 manual is, you know, the importance of properly 4 defacing these tickets. You know, we also get in 5 claims from claimants where the ticket is torn up, the 6 bar code has been punched out and the retailer hasn't 7 essentially properly defaced the ticket; yet, somebody 8 still found this ticket or it's come into their 9 possession, and they have still tried to present it 10 for payment, you know. 11 So we encourage it on the retailer's 12 side. But as far as something that technically 13 inherent in the equipment that we have today, it 14 doesn't exist today on our equipment. But we will 15 certainly, you know, raise this issue to the lottery 16 operator and see what -- you know, what technology 17 might be either out there now or that might be on the 18 horizon in that regard. 19 COMM. COX: Well, when I go to a UT 20 game, they take half of my ticket. That's pretty 21 effective. They just tear the stub off, and that's 22 the only time I'm going to get in. After that, that 23 ticket is no good. I have to get a pass-out option or 24 a ticket if I want to go across to the ex-students' 25 association. So it could be just as simple as 0246 1 perforating the tickets and having them tear off the 2 stub when they pay it. 3 MR. ANGER: We'll certainly evaluate any 4 possible options in that regard. 5 CHAIRMAN CLOWE: Come back to us on 6 that. 7 MR. ANGER: Yes, sir. 8 COMM. COX: Then, mr. Chairman, I have 9 one more quote here that I'm concerned about. And 10 this is in a quote. I don't know whether it was a 11 quote, but it's in quotation marks. "We don't have 12 any control over the integrity of our retailers. We 13 can't control whether they're going to be honest or 14 not with our players." 15 Director Sadberry, do you agree with 16 that? 17 MR. SADBERRY: Commissioner, not in the 18 sense of my understanding and certainly not having 19 heard the presentation. 20 COMM. COX: I don't agree with that. 21 MR. SADBERRY: And I don't agree with 22 that -- 23 COMM. COX: I don't know that we have 24 the number of controls that I would like to have, 25 because I would like for the licensing requirements to 0247 1 be more stringent, but they aren't. The Legislature 2 has made its choice. But I think we do have some 3 control over the integrity of our retailers, and I 4 believe we can control to some extent whether they're 5 going to be honest with the players or not. 6 Michael, what do you think? 7 MR. ANGER: I completely share your 8 view, Commissioner. And I believe that we do have 9 control, and I believe that we do exercise control. 10 In circumstances where these investigations, when 11 these claims, if they're investigated and it appears 12 that there is one either some sort of pattern of 13 activity or there are some specific facts that lead us 14 to the conclusion that someone has -- you know, a 15 clerk, either at the store, or the licensee themselves 16 have conducted inappropriate or illegal activity, the 17 agency pursues those matters. So I believe we are 18 doing that. I believe that that statement, that quote 19 is an inaccurate quote and it's not representative of 20 what level of control we have. 21 Now, do we have a full awareness to what 22 I was speaking with the Chairman about earlier? Could 23 a clerk, you know, try to pull a fast one on someone 24 and that person takes the clerk at face value and, you 25 know, says it's not a winner, could that happen? Yes. 0248 1 And could we not be aware of it? Yes, that could 2 happen. 3 But in any of those circumstances where 4 a complaint is raised by a player or facts are brought 5 to light through the investigation of these claims 6 that give us cause or concern with regard to the 7 licensee or the actions of their personnel, we pursue 8 those matters. 9 COMM. COX: Thank you. 10 MR. ROGERS: Commissioners, I would like 11 to add one thing, and it goes back to what you were 12 meanings regarding the defacing of tickets. And to 13 Michael's point, there is no technology currently 14 available that we're aware of that will do that 15 automatically when the ticket is scanned. 16 But we do have an administrative rule 17 that requires the retailers to physically deface 18 tickets once they have run them through the validation 19 processes and paid a prize. And through all the 20 different processes that Michael was referring to, 21 when we do these investigations, if we do find that 22 there was a prize-winning ticket that was validated at 23 a store but came back to us and, you know, got to the 24 claim center and it wasn't defaced, that will work its 25 way back up. 0249 1 And we'll do a couple of things: Send a 2 warning letter, if it's the first offense, to advise 3 the retailer that they have this responsibility to 4 deface these tickets so that they can't be claimed a 5 second time. And then in some cases -- again, as I 6 say, this is one of those special situations I was 7 talking about -- talk to the sales rep that supports 8 that store and have them go in there and talk to the 9 folks in the business to reinforce the importance of 10 defacing those tickets when they have paid those 11 prizes. 12 COMM. COX: Thank you, Mr. Chairman. 13 That helps me. 14 CHAIRMAN CLOWE: Bobby, I want to come 15 back to one other thing that I mentioned earlier. You 16 know, it's tough when you get misquoted in the media. 17 And it's happened to me; it's happened to you. And, 18 you know, sometimes I read something and I say, "Oh, I 19 didn't say that." And, you know, it's just the 20 business we're in. And so we're got to do the best we 21 can. And I'm not being critical -- 22 MR. HEITH: Oh, I know. 23 CHAIRMAN CLOWE: -- but, you know, you 24 and I have done interviews together and we try so hard 25 to get the correct information to the person who is 0250 1 interviewing. It's not easy, but you've just got to 2 go back and keep working on it. 3 And I don't want to create a feeling of 4 lack of confidence at all. It's just that, you know, 5 we've got to be sensitive in these things. Just 6 you're working hard on getting the facts out; we need 7 to keep working hard on it. 8 MR. HEITH: And, if I may, I concur 9 completely with what you say. And in this particular 10 case, he was provided -- because I have complete 11 confidence in Katelind Powers and what she does 12 through open records. And one thing you said, that we 13 can't always control it. We can give them the best 14 and accurate information we have. And once they start 15 drawing their own conclusions and assumptions from 16 that information -- 17 CHAIRMAN CLOWE: Yes. 18 MR. HEITH: -- it comes back not on 19 them, but it comes back on us. And I think this is a 20 good example of that. 21 CHAIRMAN CLOWE: It's tough. You know, 22 it's not what I learned at the School of Journalism at 23 The University of Texas. I was taught a different set 24 of practices there. And it's scary; it's scary. 25 COMM. COX: Now, I didn't get to go to 0251 1 that place, so let me ask Bobby a question about his 2 procedures. 3 When your people answer questions and 4 they get quoted -- and sometimes they get misquoted -- 5 what do you do when you see something that looks like 6 a misquote, either that we told them the wrong data or 7 that they misquoted, perhaps because they 8 misunderstood what we said? 9 MR. HEITH: We first discuss it in-house 10 within my group. We'll contact the editor, you know, 11 or we'll contact the reporter directly to let them 12 know we are going to talk to their editor. There are 13 some people out there that misquote us from time to 14 time that don't have editors, and we try to correct 15 the problem with them directly. It's basically when 16 they take our information and misuse it or maybe 17 formulate their own opinions and print that as the 18 truth. 19 COMM. COX: Okay. And inevitably there 20 are going to be mistakes on our cite. If you read 21 something in the paper that is wrong, yet it was 22 properly quoted, do you follow up with the reporter to 23 let them know that we gave them bad information and, 24 "Here is our correct information"? 25 MR. HEITH: Oh, yes, yes. And I think 0252 1 that's a big part of what I do. It's just not sitting 2 and waiting for telephone calls to come in or 3 questions about anything. It's being proactive and 4 building relationships with those people so you can 5 have a business discussion and talk about shortfalls 6 and mistakes, and do it in a professional manner so we 7 both where the problem lies and do our best to correct 8 it, whether it be on their part or my part to correct 9 it so it doesn't happen again. 10 COMM. COX: Thank you, Mr. Chairman. 11 CHAIRMAN CLOWE: Thank you. Thank you, 12 gentlemen. 13 Ms. Nettles, did you have a comment on 14 this subject? 15 MS. NETTLES: Good afternoon, 16 Commissioners. For the record, my name is Dawn 17 Nettles, and I'm with the Lotto Report out of Dallas. 18 And I am thrilled to see you-all discussing the 19 validation problems up here today. This has been a 20 very major concern of mine for a number of years. 21 The Houston story -- and I just now 22 found out the outcome of it. Two of them said that 23 they had been previously paid. But you have to ask 24 yourself: Why do those players have that ticket back? 25 Okay. 0253 1 Now I've run these stores. I've tested 2 tickets. I've seen the tricks. In fact, I caught it 3 right here in Austin. And the first time I caught it, 4 it caught me off guard to where I gave myself away, 5 because I was with a Lotto Texas winner. He bought 6 lots of tickets. We set one afternoon after this 7 meeting to go run stores and to see -- we were testing 8 SSTs and clerks, and we had made like seven or eight 9 stores. 10 We finally came to a store, our last 11 one. We had all winning tickets. You know, we would 12 go in with $30 or $40 worth of winning tickets, or 13 $100. And it was a combination of on-line and scratch 14 tickets. And we finally came to a store out on 35, 15 our very last stop. We had caught mistakes, both our 16 mistakes and clerks' mistakes, but everything had been 17 resolved until we got to the last store. 18 And not expecting it and not really 19 planning to catch somebody, we saw the smartest clerk 20 of all, because we had $78 in winning tickets. We 21 handed them to the clerk, except it wasn't "we." I 22 was the witness. In this case, I was the witness. 23 The winner was collecting the tickets on this store. 24 What the clerk did, the clerk took the 25 ticket. One by one he stuck it in the terminal and it 0254 1 came out. And he pulled it out immediately and he 2 torn it shreds and dumped it in the trash can, stuck 3 the next ticket it. It bounced out. He tore the 4 ticket up and in the trash can. 5 And I was thinking, "Wait a minute; what 6 a minute. Don't do that," you know. But I kept my 7 mouth shut. We were just going to wait and see. We 8 had like seven or eight tickets left. It was our last 9 stop. And that's what he did with every ticket. And 10 then he turned and he looked at the winner that was 11 standing there and he said, "Sorry. You don't have 12 any winners." 13 And we just dropped our teeth. I mean, 14 we're not very good crooks -- okay? -- because we 15 really messed up, because we had him. And the guy 16 didn't even know that I was with the winner until he 17 looked over and glanced. I was pretending to be 18 looking at gum and candy, you know, in front of the 19 counter. And I guess our faces were a dead giveaway. 20 And the clerk says, "Just kidding." But 21 he was serious. Okay? And at that point, he reached 22 over to his machine and he pulled out the pay slips, 23 you know, because when you run a ticket through, the 24 machine prints out a receipt that tells you how much 25 the ticket is for. And it added up to $78, and he 0255 1 paid us the $78. But I guarandamtee you that man was 2 going to keep that $78, and he had it down pat. Okay? 3 And so when I heard him talking about 4 have them tear up the tickets, yes, that is precisely 5 what the clerks are supposed to do. But there's a 6 problem with that because that is also the way the 7 clerks steal the people's moneys. Okay? You've got 8 to be able to see that. 9 The truth is, is that machine prints out 10 a receipt. It either says you owe them $10 or it's 11 not a winner. What the rule needs to be is that it 12 should be mandatory that the player get a receipt for 13 each ticket he is giving them. If he gives them five 14 tickets, he ought to get five receipts back showing 15 that they're all not winners. Okay? And to get 16 clerks to hole punch or do whatever to these tickets, 17 those tickets are a nightmare to the store clerks. 18 But I also want to point out something 19 else to you-all. Did you-all see The Luck of the 20 Draw, the documentary that was done out of Canada? 21 CHAIRMAN CLOWE: Ms. Nettles, we can't 22 answer questions. 23 MS. NETTLES: If you did not see that, 24 you really should. But the Lottery Act or the 25 administrative rule or whatever makes it very clear 0256 1 that you cannot be a licensed lottery retailer and 2 sell lottery products to the public if you're a 3 convicted felon. That's in the Act. You cannot sell 4 lottery products if you're a convicted felon. 5 Well, I grant you that the owner of 6 7-Eleven or the owner of Albertsons or the person's 7 name who holds that license is will probably not a 8 conflicted felon. However, those are the people that 9 are not selling the tickets. The clerks are. And I 10 have begun a study in Dallas County as to how many 11 convicted felons are working in these convenience 12 stores that are selling lottery products. 13 A store clerk doesn't have to be a 14 convicted felon to steal the players' money. It is a 15 great scam, because you don't have to be a convicted 16 felon to see that you can make a whole lot of extra 17 money because all these people do not check their 18 tickets and bring them in by the handloads to have 19 them checked. They see easy, easy target, easy money. 20 Nobody ever knows any difference because the people 21 expect to lose anyway. 22 The solution to the problem is 23 sincerely, truly to stop clerks from checking winning 24 tickets. That would satisfy the retailers, because 25 the retailers are having to spend their time on these 0257 1 transactions without being paid. The people, if 2 they're big enough to buy a lottery ticket, they ought 3 to be big enough to check their tickets themselves. 4 This is what I have really been saying to you-all for 5 years. 6 If store clerks are forbidden and the 7 only way a person can collect on their money, you 8 would cut out 98 percent of your problems on your 9 collections -- or on your validations because the 10 people would walk in the store and say, "This is a 11 $300 ticket. Can I collect on it, please" and you 12 wouldn't have that problem. 13 Store clerks see people that go buy 14 scratch tickets and do nothing but scratch off the bar 15 code, and they know exactly where it is, and just have 16 the clerks type in those numbers or scan those numbers 17 in to see if it's a winning ticket or not. They don't 18 even bother to scratch the tickets off. I think 19 that's pretty bad. That's not your problem; that's 20 the players' problem. That's his own stupidity. 21 The clerks -- when Michael was talking 22 about the turnover of the clerks, there is a huge 23 turnover. Those clerks do not know how to work the 24 terminals. I personally teach them how to use the 25 repeat key for the Pick 3 game. I'll actually take 0258 1 calls in my office from stores asking how to use them. 2 The clerks hate the Pick 3 game. They don't 3 understand it. And that's going to be real 4 interesting when you do a Pick 4. Test it. Go 5 into -- 6 CHAIRMAN CLOWE: We need stay on the 7 subject, Ms. Nettles. 8 MS. NETTLES: I know. Well, it is; it's 9 store clerks. Okay? 10 You know, I have several notes here. 11 And you-all said a lot. You covered a whole lot more 12 whenever I filled that out. And I don't remember 13 exactly where I was going. But I would like to 14 encourage the Commission to stop -- to protect the 15 people of Texas, to protect the players and to stop 16 checking tickets and make players walk in the store 17 and say, "This ticket is worth so much." 18 One of the things in the validation 19 process, I understand that you have to be hard and you 20 have to do all of that. I personally sent in tickets 21 last week that's been discussed with me today. And I 22 have tickets, probably not going to get paid, because 23 they've asked me one question, and I have to answer 24 that question: When do I think I might have cashed it 25 in? And I told them exactly when I took it. But 0259 1 they're saying it was previously paid at an earlier, 2 long before it was. 3 And unless I give them a date, they're 4 not going to call me and say, "Well, Dawn, it looks 5 like that ticket went in in August. Do you recall 6 being in this store in August?" They're not going to 7 give me a clue as to when I might have taken the 8 ticket in. I have to tell them or they're simply 9 going to write me a letter and tell me, "Sorry. It 10 was already paid." 11 That's wrong. You got salesmen out 12 there that stop for coffee, travel all over the state, 13 buy tickets at all their stops. You can't expect 14 somebody to remember where they bought all their 15 lottery tickets. People buy them and hand on to them 16 for six months and then go run them and see if they're 17 good or not. 18 But, anyway, thank you for taking this 19 subjected today. I'm glad to hear that it -- I'm 20 sorry it took what it did out of Houston to get 21 y'all's attention to really discuss it. It's a 22 serious issue, and it really does need to be fixed, 23 because you have these honest mistakes, but you also 24 have all these clerks stealing. And you've got the 25 problem with all these people out there selling 0260 1 lottery tickets that are convicted felons. And 2 there's a whole bunch of store clerks that are 3 convicted felons that are selling those tickets. So I 4 hope you-all will address that somehow, too. 5 Thank you and Merry Christmas. 6 CHAIRMAN CLOWE: Anything? 7 COMM. COX: No, sir. 8 CHAIRMAN CLOWE: Thank you. 9 Thank you, Ms. Nettles. 10 AGENDA ITEM NO. XXVII 11 CHAIRMAN CLOWE: Next, report, possible 12 discussion and/or action on Mega Millions games and/or 13 contract, Item XXVII. 14 Director Sadberry. 15 MR. SADBERRY: Commissioners, good 16 afternoon. For the record, my name is Anthony 17 Sadberry, Executive Director. 18 I attended the Mega Millions MUSL 19 meeting. It was a joint group of Mega Millions and 20 Power Ball directors and resource persons that was 21 conducted in New York on December 6, 2006. The 22 Development Committee associated with that group 23 presented for discussion four concepts. The Mega 24 Millions and Power Ball party lotteries, potentially 25 selling tickets for each other's games, the Mega 0261 1 Millions and Power Ball lotteries beginning an 2 additional on-line game together, the Mega Millions 3 and Power Ball lotteries offering a raffle game 4 together, the Mega Millions and Power Ball lotteries 5 partnering with international lotteries to offer a 6 global game. 7 Dr. Stanek, who was in attendance at the 8 meeting, requested Director Sullivan, who is the Mega 9 Millions Director out of Massachusetts lottery, to put 10 together a Mega Millions group to join with this 11 Development Committee members in forming a new joint 12 committee. 13 At Director Sullivan's request, an 14 e-mail was sent to the Mega Millions directors to 15 solicit interest as to whether they desire to serve on 16 the Mega Millions side of the joint committee. And 17 Director Sullivan indicated that geographic 18 representation of the Mega Millions states was an 19 important consideration. 20 I queried within our agency staff who 21 works with me in the Mega Millions initiative and 22 related matters whether Texas would be in a position 23 to express interest in participating and received 24 affirmative and supportive responses. And I sent an 25 e-mail to Director Sullivan, informing him that Texas 0262 1 did appreciate the opportunity to be a part of the 2 effort and would be interested in the opportunity to 3 serve on the Mega Millions side of this joint 4 committee. 5 I received an e-mail Tuesday informing 6 me that Texas was recognized to be a part of the joint 7 committee and is appointed as one of the six Mega 8 Millions member states to be named to this joint 9 committee. The other Mega Millions states in the 10 study group are New York, Maryland, Georgia, 11 California and Virginia. 12 I have formed a Texas Lottery Mega 13 Millions Committee to coordinate this project with me, 14 and I've named Robert Tirloni as chair of our agency 15 committee, with the membership, in addition to Robert, 16 consisting of Michael Anger, Kathy Pyka and Andy 17 Marker. It is the stated hope of Director Sullivan to 18 plan for a meeting of the Mega Millions group in the 19 early part of 2007, to further consider these matters. 20 I'll keep you advised of the progress of 21 this initiative and would be happy to answer any 22 questions. 23 CHAIRMAN CLOWE: Very good. 24 COMM. COX: They're not going to make 25 you go to Massachusetts in the winter, are they? 0263 1 MR. SADBERRY: California has offered to 2 host the next meeting. 3 CHAIRMAN CLOWE: Commissioner, does it 4 please you to go into executive session? 5 COMM. COX: What have we got left? 6 CHAIRMAN CLOWE: The Executive 7 Director's reports and the cases. That's all. 8 COMM. COX: The cases. The cases are 9 all routine? 10 MS. KIPLIN: Yes. 11 CHAIRMAN CLOWE: They're going to be 12 with us in executive session anyway. I think 13 everybody else is finished. 14 COMM. COX: It's your choice, sir. 15 AGENDA ITEM NO. XXVIII 16 CHAIRMAN CLOWE: Let's go into executive 17 session. 18 At this time I move that the Texas 19 Lottery Commission go into an executive session to 20 deliberate the duties and evaluation of the Executive 21 Director, Deputy Executive Director and/or Internal 22 Audit Director, to deliberate the duties and 23 appointment and/or employment of the Charitable Bingo 24 Operations Director, to deliberate the duties and/or 25 reassignment of the Assistant Charitable Bingo 0264 1 Operations Director, to deliberate the duties, 2 appointment and/or employment of an Acting Charitable 3 Bingo Operations Director and to deliberate the duties 4 of the General Counsel pursuant to Section 551.074 of 5 the Texas Government Code, to receive legal advice 6 regarding pending or contemplated litigation and/or to 7 receive legal advice pursuant to Section 551.071(1)(A) 8 or (B) of the Texas Government Code and/or to receive 9 legal advice pursuant to Section 551.071(2) of the 10 Texas Government Code regarding employment law, 11 personnel law, procurement and contract law, 12 evidentiary and procedural law, general government 13 law. 14 Is there a second? 15 COMM. COX: Second. 16 CHAIRMAN CLOWE: All in favor, please 17 say "Aye." 18 COMM. COX: Aye. 19 CHAIRMAN CLOWE: Aye. 20 The vote is 2-0 in favor. The Texas 21 Lottery Commission will go into executive session. 22 The time is 2:07 p.m. Today is December 13, 2006. 23 (Off the record: 2:07 p.m. to 2:50 24 p.m.) 25 0265 1 AGENDA ITEM NO. XXIX 2 CHAIRMAN CLOWE: The Texas Lottery 3 Commission is out of executive session. The time is 4 2:50 p.m. 5 Is there any action to be taken as a 6 result of the executive session? 7 I believe not. 8 Returning to -- moving on to Item -- 9 COMM. COX: Just a moment, Mr. Chairman. 10 CHAIRMAN CLOWE: Yes, sir. 11 (Brief pause) 12 CHAIRMAN CLOWE: We're going to move on 13 to Item XXX. But before we do that, Phil, I want to 14 tell you that the Commission is satisfied in your role 15 as Assistant Director of the Charitable Bingo 16 Division, that you are properly established to carry 17 on the role of the Assistant Director in that 18 division. And the Commission wishes you to do that 19 and to see that the duties and functions and the 20 performance of the Division is carried on. 21 And are you comfortable in that role? 22 MR. SANDERSON: Yes, sir, I am. 23 CHAIRMAN CLOWE: Great! We are 24 examining a job description for the Director of the 25 Charitable Bingo Division, and we are hopeful that 0266 1 that can be firmed up and we can move forward with 2 that. As part of that program, the Commission is 3 going to ask Director Sadberry to serve as the chair 4 of a search committee and to designate members and 5 form that committee and have them play a part in 6 casting a wide net for a well-qualified person. 7 Will you accept that responsibility, 8 Mr. Sadberry? 9 MR. SADBERRY: Chairman, I will. I will 10 be happy to serve in that capacity. 11 CHAIRMAN CLOWE: Very good. 12 Anything further, Commissioner Cox? 13 COMM. COX: No, sir. 14 AGENDA ITEM NO. XXX 15 CHAIRMAN CLOWE: Then let's move to Item 16 XXX, consideration of the status and possible entry of 17 orders in those dockets represented by the Letters A 18 through J. 19 Ms. Kiplin. 20 MS. KIPLIN: Commissioners, all but the 21 last case, which I believe is J, are lottery cases 22 that are all for insufficient funds at the time that 23 the Lottery swept the accounts of those retailers. 24 Staff is recommending that you adopt the 25 Administrative Law Judge's recommendation to revoke 0267 1 those licenses in each one of those matters. 2 In Letter J, that is a registry of 3 approved bingo worker's case. It is a refusal to add 4 to the registry the respondent in this matter. She 5 had a crime of moral turpitude. Ten years has not 6 passed. She is not eligible. And the staff 7 recommends that you also adopt the Administrative Law 8 Judge's recommendation in that case. 9 CHAIRMAN CLOWE: Any questions, 10 Commissioner? 11 COMM. COX: No, sir. 12 CHAIRMAN CLOWE: Move the adoption of 13 the staff recommendation in dockets represented by the 14 Letters A through J. 15 COMM. COX: Second. 16 CHAIRMAN CLOWE: All in favor, please 17 say "Aye." 18 COMM. COX: Aye. 19 CHAIRMAN CLOWE: Aye. 20 The vote is 2-0 in favor. We'll sign 21 those orders now. 22 AGENDA ITEM NO. XXXI 23 CHAIRMAN CLOWE: And then we'll move to 24 Item XXXI, director Sadberry's report. 25 MR. SADBERRY: Commissioners, good 0268 1 afternoon. Again, Anthony Sadberry, Executive 2 Director. What I have done by way of my report is a 3 format that I wanted to see if it's pleasing to you in 4 terms of an efficient way of getting information 5 concerning what I consider to be material activities 6 of my office in the month interim between Commission 7 meetings, and that is to give you a report divided by 8 sections and to have that available to you in your 9 books as you have before you. And rather than read 10 those reports to you, is identify each report by topic 11 or section to indicate in the public record what the 12 areas covered are. And then the documents would be 13 available for you to discuss with me or ask me to 14 elaborate further or on otherwise be available for 15 public knowledge. 16 And in so doing, I would like to 17 indicate what is included in the report for this 18 meeting, is the data that's provided monthly to you on 19 the status of positions as of 12/01/06. And the items 20 covered in the separate sections of the report include 21 the following: 22 The Enforcement Division Director 23 position process and selection; 24 Equity adjustments procedure, which is a 25 work in progress at this time; 0269 1 Weapons policies and procedures update, 2 which reflects the conclusion of the study on this 3 issue and the adoption of procedures relating to that 4 study; 5 Use of the building surveillance cameras 6 by law enforcement authorities; 7 A continuation of what was presented to 8 you earlier -- KPRC story, Winners Can't Get Paid -- 9 and an additional piece of information provided 10 regarding the Ontario lottery game; 11 Incorporation of seven-point action 12 plan, a matter of which I requested to be brought 13 before the agency's business committee by Bobby Heith, 14 the Director of Media Relations, regarding some of the 15 issues you've already heard about and additionally 16 indicating the initiatives that are under 17 consideration in response to those matters; 18 The random number generator report 19 reflecting a meeting that was had with Dr. Eubank. 20 And underneath that report is his article that was 21 prepared to respond to the interest that was expressed 22 concerning the significant risk level analysis that he 23 had discussed previously before the Commission; 24 And, finally, in keeping with your 25 direction to me to have a standing committee to vet 0270 1 significant activities involving GTECH and to have 2 that committee review materials and to be in a 3 position to address to the Commission any concerns or 4 issues that may arise, this is an indication of 5 additional materials regarding GTECH and the 6 California lottery that was provided to that 7 committee, consisting of David Mattax from the 8 Attorney General's office, Gary Stone on behalf of 9 DPS, and Ed Rogers in terms of the agency. And now it 10 would be Jim Carney, the standing Enforcement Division 11 Director is part of that committee, in lieu of 12 Mr. Rogers. The article in itself raises no 13 particular concerns and appears more of an 14 informational nature, but we continue to monitor that 15 matter. 16 That's the sum and substance of my 17 report to you, Commissioners. I would be happy to 18 answer any questions or address any of these specific 19 items in greater detail, should you wish. 20 CHAIRMAN CLOWE: Are there any 21 questions? 22 COMM. COX: Mr. Chairman, I would just 23 like to thank Director Sadberry for that report. I 24 think that's an excellent report and an excellent way 25 to make that report. 0271 1 CHAIRMAN CLOWE: It is indeed. 2 MR. SADBERRY: Thank you. 3 CHAIRMAN CLOWE: Thank you. 4 AGENDA ITEM NO. XXXIII 5 CHAIRMAN CLOWE: Is there anyone wishing 6 to make public comment to the Commission at this time? 7 Director Sadberry, our next meeting will 8 be in January. And do you have that date? 9 MR. SADBERRY: Yes, we do. 10 MS. KIPLIN: That date is January 17th, 11 the third Wednesday of the month. 12 CHAIRMAN CLOWE: January 17th. Very 13 good. 14 At this time, relative to a comment I 15 made earlier in the meeting regarding the resignation 16 of Charitable Bingo Operations Division Director Billy 17 Atkins, I would like to move that he be retained on 18 the payroll of this Commission through January 2, 19 2007. Is there a second? 20 COMM. COX: Second. 21 CHAIRMAN CLOWE: All in favor, please 22 say "Aye." 23 COMM. COX: Aye. 24 CHAIRMAN CLOWE: Aye. 25 The vote is 2-0 in favor. 0272 1 Is there any other business to come 2 before this Commission? 3 AGENDA ITEM NO. XXXIV 4 Then we are adjourned at 2:58 p.m. 5 COMM. COX: Excellent. 6 (Meeting adjourned: 2:58 p.m.) 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0273 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 27th day of December 2006. 15 16 ________________________________ 17 Aloma J. Kennedy Certified Shorthand Reporter 18 CSR No. 494 - Expires 12/31/08 19 Firm Certification No. 276 Kennedy Reporting Service, Inc. 20 Cambridge Tower 1801 Lavaca Street, Suite 115 21 Austin, Texas 78701 512.474.2233 22 23 24 25