0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 6 WEDNESDAY, JULY 30, 2008 § 7 8 COMMISSION MEETING 9 WEDNESDAY, JULY 30, 2008 10 11 BE IT REMEMBERED THAT on Wednesday, 12 the 30th day of July 2008, the Texas Lottery 13 Commission meeting was held from 9:10 a.m. to 14 p.m., at the Offices of the Texas Lottery 15 Commission, 611 East 6th Street, Austin, Texas 78701, 16 before CHAIRMAN JAMES A. COX, JR., and COMMISSIONER 17 DAVID SCHENCK. The following proceedings were 18 reported via machine shorthand by Aloma J. Kennedy, a 19 Certified Shorthand Reporter of the State of Texas, 20 and the following proceedings were had: 21 22 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Mr. James A. Cox, Jr. 4 COMMISSIONER Mr. David Schenck 5 GENERAL COUNSEL: 6 Ms. Kimberly L. Kiplin 7 EXECUTIVE DIRECTOR: Mr. Anthony J. Sadberry 8 DIRECTOR, CHARITABLE BINGO OPERATIONS: 9 Mr. Philip D. Sanderson 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE 3 AGENDA ITEM NO. I - Meeting Called to Order..... 8 4 AGENDA ITEM NO. II - Report, possible discussion and/or action on calendar year 5 2008 1st quarter conductor information.......... 8 6 AGENDA ITEM NO. III - Consideration of and possible discussion and/or action, including 7 proposal, on amendments to 16 TAC §402.200 relating to General Restrictions on Conduct 8 of Bingo........................................ 20 9 AGENDA ITEM NO. IV - Consideration of and possible discussion and/or action, including 10 proposal, on new rule 16 TAC §402.205 relating to Unit Agreements..................... 26 11 AGENDA ITEM NO. V - Consideration of and 12 possible discussion and/or action, including proposal, on amendments to 16 TAC §402.400 13 relating to General Licensing Provisions........ 27 14 AGENDA ITEM NO. VI - Consideration of and possible discussion and/or action, including 15 proposal, on new rule 16 TAC §402.442 relating to Amendment to Commercial 16 Lessor License.................................. 28 17 AGENDA ITEM NO. VII - Consideration of and possible discussion and/or action, including 18 withdrawal, on proposed amendments to 16 TAC §402.100 relating to Definitions................ 31 19 AGENDA ITEM NO. VIII - Report by the 20 Charitable Bingo Operations Director and possible discussion and/or action on the 21 Charitable Bingo Operations Division’s activities...................................... 33 22 AGENDA ITEM NO. IX - Report, possible 23 discussion and/or action on lottery sales and revenue, game performance, new game 24 opportunities, advertising, market research, and trends...................................... 35 25 0004 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. X - Report, possible discussion and/or action on transfers 4 to the State and the agency’s budget............ 48 5 AGENDA ITEM NO. XI - Report, possible discussion and/or action on Lottery 6 Operations and Services Contract Amendment No. 8 credit calculation........................ 56 7 AGENDA ITEM NO. XII - Report, possible 8 discussion and/or action on the 80th Legislature................................ 58 9 AGENDA ITEM NO. XIII - Report, possible 10 discussion and/or action on the agency’s contracts....................................... 77 11 AGENDA ITEM NO. XIV - Report, possible 12 discussion and/or action, including extension, on the agency’s instant ticket 13 manufacturing and services contracts............ 101 14 AGENDA ITEM NO. XV - Consideration of and possible discussion and/or action on 15 external and internal audits and/or reviews relating to the Texas Lottery Commission 16 and/or on the Internal Audit Department's activities...................................... 105 17 AGENDA ITEM NO. XVI - Report, possible 18 discussion and/or action on the Mega Millions game and/or contract................... 107 19 AGENDA ITEM NO. XVII - Report, possible 20 discussion and/or action on GTECH Corporation... 108 21 AGENDA ITEM NO. XVIII - Report by the Executive Director and/or possible 22 discussion and/or action on the agency’s operational status, agency procedures, 23 and FTE status.................................. 109 24 25 0005 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XIX - Consideration of and possible discussion and/or action, including 4 proposal, on amendments to rule 16 TAC §401.362 relating to Retailer's Financial 5 Responsibility for Lottery Tickets Received and Subsequently Damaged or Rendered 6 Unsaleable, for Winning Lottery Tickets Paid and for Lottery-Related Property................ 113 7 AGENDA ITEM NO. XX - Consideration of the 8 status and possible entry of orders in: A. Docket No. 362-08-2754 – Handy Plus 9 B. Docket No. 362-08-2755 – Donafaria USA C. Docket No. 362-08-2756 – St. Joseph 10 Food Store D. Docket No. 362-08-2757 – Boyd Pit Stop 11 E. Case No. 2008-817 – In the Matter of Deepwood Exxon 12 F. Case No. 2008-528 – In the Matter of City Wide Club Chapter 4 Job & Youth 13 Education G. Case No. 2008-18 – In the Matter of 14 International Gamco, Inc................. 128 15 AGENDA ITEM NO. XXI - Public comment............ 152 16 17 18 19 20 21 22 23 24 25 0006 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XXII - Commission may meet in Executive Session: 4 A. To deliberate the duties and evaluation of the Executive Director pursuant to 5 Section 551.074 of the Texas Government Code 6 B. To deliberate the duties and evaluation of the Deputy Executive Director pursuant 7 to Section 551.074 of the Texas Government Code 8 C. To deliberate the duties and evaluation of the Internal Audit Director pursuant 9 to Section 551.074 of the Texas Government Code 10 D. To deliberate the duties and evaluation of the Charitable Bingo Operations 11 Director pursuant to Section 551.074 of the Texas Government Code 12 E. To deliberate the duties of the General Counsel pursuant to Section 551.074 of 13 the Texas Government Code F. To receive legal advice regarding pending 14 or contemplated litigation pursuant to Section 551.071(1)(A) and/or to receive 15 legal advice regarding settlement offers pursuant to Section 551.071(1)(B) of 16 the Texas Government Code and/or to receive legal advice pursuant to Section 17 551.071(2) of the Texas Government Code, including but not limited to: 18 First State Bank of DeQueen, et al., v. Texas Lottery Commission 19 James T. Jongebloed v. Texas Lottery Commission 20 Employment law, personnel law, procurement and contract law, 21 evidentiary and procedural law, and general government law 22 Lottery Operations and Services contract 23 Mega Millions game and/or contract............................ 153 24 25 0007 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XXIII - Return to open 4 session for further deliberation and possible action on any matter discussed 5 in Executive Session............................ 154 6 AGENDA ITEM NO. XXIV - Adjournment.............. 156 7 REPORTER'S CERTIFICATE.......................... 157 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0008 1 P R O C E E D I N G S 2 WEDNESDAY, JULY 30, 2008 3 (9:10 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN COX: Good morning. It's 6 Wednesday, July 30, 2008. It's 9:10 a m. 7 Commissioner Schenck is here. I'm Jim Cox. Let's 8 call this meeting of the Texas Lottery Commission to 9 order. 10 AGENDA ITEM NO. II 11 CHAIRMAN COX: Agenda Item No. II, 12 report, possible discussion and/or action on Calendar 13 Year 2008 first quarter conductor information. 14 Mr. Miner. 15 MR. MINER: Good morning, 16 Commissioners. For the record, my name is Bruce 17 Miner, and I'm the Manager of the Texas Bingo Taxpayer 18 Services Department, and I'm here to present you the 19 first quarter 2008 information as reported by our 20 licensed authorized organizations. 21 Prize payout for regular bingo in the 22 first quarter of 2008 was 74.2 percent of gross 23 receipts, and the prize payout percentages for instant 24 bingo were 72.8 percent of gross receipts. 25 This pie chart reflects what percent 0009 1 each expense is as it relates to total expenses. 2 These expenses do not include prize payouts for 3 charitable distributions. And the blue box 4 indicates -- sets out all the salaries, which include 5 janitorial services, callers, cashiers, ushers, 6 security, legal and accounting, and it accounts for 7 over 39 percent of total expenses, while rent payments 8 account for just under 29 percent. 9 The pie chart shows that instant bingo 10 sales continue to exceed regular bingo card sales. In 11 the first quarter of 2008, instant sales represent 12 almost 45 percent of the total sales, while regular 13 card sales represent 32.1 percent and electronics was 14 23.3 percent. 15 This quarter shows a comparison of 16 gross receipts for the first quarter of each year from 17 2004 through 2008. As you can see, gross receipts 18 from instant bingo sales shown here by the yellow line 19 have increased each year since 2004, while at the same 20 time gross receipts from regular bingo sales, which is 21 made up of paper and electronic bingo, shown here by 22 the red line, continue to decline. 23 This chart shows a comparison of net 24 receipts for the first quarter of each year for 2004 25 through 2008. Net receipts are gross receipts minus 0010 1 prizes. And as you can see, net receipts for instant 2 bingo has increased each year from 2004 to the 3 present, while the net receipts for regular bingo 4 continue to decrease for the same period. 5 This slide compares the gross receipts 6 for regular and electronic bingo sales and the prize 7 payout reported for each of the past five years. It 8 shows the trend of gross receipts shown here in blue 9 and the prize payout for regular bingo shown in 10 yellow. As you can see, the gross receipts for 11 regular electronic bingo have dropped $16 million and 12 prize payouts have dropped $6.5 million. 13 This next slide -- 14 CHAIRMAN COX: Bruce, let's take 15 another look at that one, if he we could, please. 16 Sorry. 17 Okay. We've got a decline. Top line 18 is gross receipts. And although we can't really tell 19 what kind of percentage decline it is, it looks like 20 the yellow line, which is regular bingo, is declining 21 at a lower rate. But it says up there regular and 22 electronic. 23 MR. MINER: The gross receipts is the 24 top line and the regular prizes. 25 CHAIRMAN COX: Well, what does one have 0011 1 to do with the other? 2 MR. SANDERSON: Chairman, this chart 3 indicates the -- like the gross receipts has declined 4 $16 million. 5 CHAIRMAN COX: Okay. That's all 6 receipts, regular and electronic? 7 MR. SANDERSON: Regular and electronic 8 bingo, yes, sir -- 9 CHAIRMAN COX: Okay. 10 MR. SANDERSON: -- excluding instant 11 pull-tabs. 12 CHAIRMAN COX: Okay. 13 MR. SANDERSON: So the regular bingo 14 sales -- 15 CHAIRMAN COX: Oh, no, wait. We're 16 talking about regular paper -- 17 MR. SANDERSON: The paper. 18 CHAIRMAN COX: -- and machines that 19 replicate paper? 20 MR. SANDERSON: Yes, sir. 21 CHAIRMAN COX: Thank you. Thank you. 22 MR. SANDERSON: The slide shows where 23 it's dropped $16 million. Prizes have only dropped 24 $6.5 million, thus causing the higher prize payout 25 percentage and a greater reduction in the net receipts 0012 1 as it relates to regular bingo. 2 MR. MINER: And the title kind of 3 indicated for the blue line versus regular being the 4 blue and electronic being the yellow. 5 MR. SANDERSON: We can adjust the 6 title. 7 CHAIRMAN COX: Okay. Now, regular 8 prizes, let's go back to that one if we could. 9 MR. MINER: I can do that. 10 CHAIRMAN COX: Regular prizes -- 11 MR. SANDERSON: Go back. You're 12 hitting "next." 13 MR. MINER: We want to be at 6. Right? 14 CHAIRMAN COX: Yes. There we are. 15 Okay. So the percent of prize payouts is going down? 16 MR. SANDERSON: This is dollar payouts. 17 CHAIRMAN COX: Okay. These are 18 dollars. The dollars in payouts are going down at a 19 slower rate than sales is going down? 20 MR. SANDERSON: Yes, sir. 21 CHAIRMAN COX: So that means that 22 that's having a positive effect on margin but not 23 positive enough to make it be trending upward? 24 MR. MINER: People are looking for the 25 prize -- to bring them into the hall, they want 0013 1 confidence that the prizes will be paid out. So there 2 might not be the amount of money taken in that would 3 warrant paying max prizes. But when possible, they 4 try to continue to pay max prizes. 5 CHAIRMAN COX: Well, I hear that, but I 6 don't see that chart necessarily supporting it. 7 Okay. Let's go on. Maybe it will 8 clear up for me. 9 MR. MINER: This slide shows that 10 instant bingo has had an increase of $35.9 million in 11 gross receipts over the past five years and an 12 increase of $26.1 million in prize payouts for the 13 same period. 14 CHAIRMAN COX: Okay. I tell you what 15 I'm going to ask you to do for me next time, Bruce -- 16 MR. MINER: Okay. 17 CHAIRMAN COX: -- and that is, let's 18 put the gross receipts -- and if you need to put 19 prizes on there, fine -- but let's also put the net 20 receipts -- I think that will help me understand it -- 21 net receipts being, of course, gross receipts less 22 prizes. 23 MR. MINER: That's fine. 24 MR. SANDERSON: And that might be on 25 the next slide, I believe. 0014 1 CHAIRMAN COX: If I can get them on 2 one, I may be able to relate to it. 3 MR. MINER: Okay. 4 MR. SANDERSON: Okay. 5 MR. MINER: This slide charts the prize 6 payout percentage for regular and instant bingo for 7 the past five years. The payout percentage for 8 regular bingo has increased from 70.4 to 74.2, while 9 the payout percentage for instant bingo has averaged 10 around 72 percent for the five years from '04 to '08. 11 CHAIRMAN COX: Now, that one shows the 12 phenomenon that we were describing. 13 MR. MINER: Yes, sir. 14 CHAIRMAN COX: It would pay the prize 15 advertised regardless of whether the receipts are 16 going to be covered or not. 17 MR. MINER: And this slide shows a 18 continued decline of the number of occasions per year, 19 from over 38,000 to just over 33,000, for this five- 20 year period, as compared to the average number of 21 players per occasion, which dropped from 149 to 138. 22 This slide shows the average players 23 per occasion as compared to the average spend per 24 player. And this shows that even though the average 25 attendance has declined 7.4 percent since 2004, there 0015 1 has, however, been a 37.6 percent increase in the 2 average spend rate over the same five years. 3 COMMISSIONER SCHENCK: Bruce, is this 4 attributable, do you think, to lack of advertising? 5 MR. MINER: That's what the industry 6 comments on routinely. I don't have the figures to 7 back that up, but that's their belief. 8 And this slide illustrates a comparison 9 between reported charitable distribution or opposed to 10 the minimum amount required to be distributed by the 11 Bingo Enabling Act. As you can see, the actual 12 reported charitable distributions have consistently 13 been more than three to four times the required 14 distribution amount. 15 COMMISSIONER SCHENCK: Not necessarily 16 before costs, though -- right? -- before all costs? 17 MR. MINER: Well, it's after costs. 18 COMMISSIONER SCHENCK: Is it a true 19 net? 20 MR. MINER: It's the adjusted gross 21 times 35 percent. 22 COMMISSIONER SCHENCK: Right. I know. 23 I understand what the minimum is. I'm talking about 24 the distribution. We're talking about a distribution. 25 It's not necessarily nettable expenses. 0016 1 MR. SANDERSON: Yes. That's the 2 distribution that they make for their charitable 3 purposes. So this would be the net receipts that 4 they've reported for the quarter. 5 CHAIRMAN COX: Commissioner, there's an 6 invisible thing that I call the operating account, 7 between the operations of bingo and the charity. And 8 what this means -- correct me if I'm wrong, Phil and 9 Bruce -- is that they've distributed money out of 10 their operating account from accumulated earnings. 11 MR. SANDERSON: Our of their bingo -- 12 yes. Out of their bingo account, they've distributed 13 that into their general account for their own 14 charitable operations or they've donated it to other 15 non-profits for their charitable activities. 16 CHAIRMAN COX: So this is kind of like 17 you can pay dividends out of current earnings or 18 retained earnings, and they're paying dividends here 19 out of both, and they're paying more than the current 20 earnings -- 21 COMMISSIONER SCHENCK: Yes. 22 CHAIRMAN COX: -- that are currently 23 required, because they're paying out of the operating 24 account. 25 COMMISSIONER SCHENCK: Yes. But I'm 0017 1 asking in sort of the antecedent and accounting 2 question of whether this is necessarily netted of all 3 expenses if the charities are being charged for rent 4 and for other things in all cases. 5 CHAIRMAN COX: Well, I think if we 6 start with the receipts less expenses, that money goes 7 into the operating account. And from the operating 8 account, they distribute it into the -- 9 COMMISSIONER SCHENCK: Okay. Then that 10 would be a "Yes." 11 CHAIRMAN COX: But this bottom line is 12 a construct. 13 COMMISSIONER SCHENCK: Yes, that's 14 statutory. 15 CHAIRMAN COX: It's not necessarily 16 income, representation income. 17 COMMISSIONER SCHENCK: Right. Right. 18 CHAIRMAN COX: Tell me exactly what it 19 is, that bottom line. 20 MR. MINER: That's the calculated based 21 on the Bingo Enabling Act. You know, the formula -- 22 CHAIRMAN COX: What are the principal 23 components? 24 MR. MINER: Well, it's what we talk 25 about, 35 percent, but it's 35 -- 0018 1 CHAIRMAN COX: So it is a percentage of 2 something? 3 MR. MINER: It's 35 percent of the 4 adjusted gross, and then it's minus the authorized 5 expenses. So that's what they should be required to 6 disburse, and the green is what they're actually 7 disbursing. 8 CHAIRMAN COX: Got that part of it. 9 But the bottom line is 35 percent of adjusted gross 10 minus expenses? 11 MR. MINER: Yes, sir. 12 CHAIRMAN COX: Thank you. 13 So to go back and close that one more 14 time -- 15 MR. MINER: Okay. 16 CHAIRMAN COX: -- either they're 17 distributing money out of accumulated earnings or 18 they're operating more efficiently than the law would 19 have contemplated? 20 MR. SANDERSON: Let me try to see if 21 that one -- 22 MR. MINER: I think it's related -- 23 MR. SANDERSON: They added to the 24 statute a minimum required distribution to ensure 25 organizations were making money playing bingo and 0019 1 making a distribution. And the formula that they've 2 started with has been revised over time. And 3 currently if you take their gross receipts minus their 4 prizes and give them their credits for cost of goods 5 sold and expenses, times the percentage, statutorily 6 they're only required to distribute $2 million for the 7 fourth quarter here in this example. However, they 8 distributed $8 million, which means they're actually 9 operating a little bit better than what the statute 10 requires as far as the minimum distribution. 11 CHAIRMAN COX: Or they're paying it out 12 of accumulated earnings? 13 MR. SANDERSON: Since it's pretty 14 consistent, there's some of it out of accumulated 15 earnings, yes, sir. 16 COMMISSIONER SCHENCK: Got you! 17 CHAIRMAN COX: Those are the 18 possibilities, not necessarily what's actually 19 happening? 20 MR. SANDERSON: Yes, sir. 21 CHAIRMAN COX: Okay. 22 MR. MINER: And this slide illustrates 23 the comparison between the reported charitable 24 distribution and the total net receipts, which is the 25 gross receipts less prizes awarded. And on average 0020 1 the charitable distribution runs about 17 percent of 2 the net receipts. 3 In your notebook is additional 4 information from the analysis performed by Susan 5 Beasley, Program Specialist for the Office of the 6 Controller, and includes some additional spreadsheets. 7 And that concludes my report, and I'll 8 be glad to try to answer any questions you might have. 9 CHAIRMAN COX: Commissioner? 10 COMMISSIONER SCHENCK: Well, I think 11 you've answered my questions. Thanks, Bruce. 12 MR. MINER: Okay. Thank you. 13 CHAIRMAN COX: Thank you, Bruce. 14 AGENDA ITEM NO. III 15 CHAIRMAN COX: Agenda Item No. III, 16 consideration of and possible discussion and/or 17 action, including proposal, on amendments to 16 TAC 18 §402.200 relating to general restrictions on conduct 19 of bingo. 20 Ms. Joseph. 21 MS. JOSEPH: Good morning, 22 Commissioners. For the record, my name is Sandy 23 Joseph, Special Counsel, Legal Division. 24 This Item III is a submission prepared 25 for the Texas Register in order to propose amendments 0021 1 to Rule 16 TAC §402.200 regarding general restrictions 2 on the conduct of bingo. The purpose of the 3 amendments is to set out requirements for 4 organizations to follow in order to ensure the fair 5 conduct of a bingo game. 6 The amendments provide that a fairly 7 conducted bingo occasion is one that is impartial, 8 honest and free from prejudice or favoritism, one that 9 is free of corrupt and criminal influences and follows 10 the applicable provisions of the statute and rules. 11 The amendments provide clarification 12 and specific information on inspection and use of 13 bingo equipment, awarding of prizes, prize fees, sales 14 of pull-tab bingo, event tickets and information that 15 must be displayed or announced during a bingo 16 occasion. It also includes requirements for bingo 17 callers, workers, verification and dispute resolution. 18 The staff recommends that the proposed 19 amendments be published in the Texas Register for a 20 period of 30 days in order to receive public comments. 21 A public hearing will be held. It is planned for 22 Tuesday, September 9, 2008, at 10:00 a.m. 23 Do you have any questions? 24 CHAIRMAN COX: Commissioner? 25 COMMISSIONER SCHENCK: I have looked at 0022 1 this rule. We are changing "licensee" to "worker." 2 Is worker a defined term in our regs somewhere? 3 MR. SANDERSON: Which -- 4 COMMISSIONER SCHENCK: I'm looking at 5 Paragraph (1), Subsection (b) " . . . subject to 6 inspection at any time by a representative of the 7 Commission." 8 CHAIRMAN COX: Page 4? 9 COMMISSIONER SCHENCK: "No worker of a 10 licensed authorize authorization . . ." Is "worker" 11 defined? 12 MR. SANDERSON: "Worker" is defined in 13 the worker registry rule, I believe. 14 COMMISSIONER SCHENCK: Okay. The 15 theory here, I guess, is that the licensee will almost 16 always be either a worker or an incorporeal entity 17 that will require a worker to be present? 18 MR. SANDERSON: The licensee is, as 19 it's used in this rule, or previously used in this 20 rule, is the organization that's licensed to conduct 21 bingo. 22 COMMISSIONER SCHENCK: Okay. 23 MR. SANDERSON: And -- 24 COMMISSIONER SCHENCK: It's not 25 possible to be a licensee and not a worker? 0023 1 MR. SANDERSON: A worker does not hold 2 a license. 3 MS. KIPLIN: That's the issue that has 4 been presented in a couple of cases. And, really, I 5 think the Commission has not yet resolved that, 6 whether being on the registry of the bingo workers is 7 the same as holding a license. Licensee is the 8 authorized organization licensed to conduct bingo. 9 The worker is -- 10 COMMISSIONER SCHENCK: Okay. If there 11 is a potential distinction between the two terms, I 12 mean, a strict construction of what we're proposing 13 here would not apply necessarily to a licensee unless 14 they were also a worker? So if a licensee were to 15 tamper with or modify bingo equipment but is not a 16 worker, the prohibition, at least as stated here, 17 wouldn't apply to it? 18 CHAIRMAN COX: My understanding of what 19 Phil said was that a licensee is, as you said, an 20 incorporeal entity and a worker is a human being. 21 MR. SANDERSON: Yes. We have tried to 22 substitute the term "licensee" in the rules with 23 "licensed authorized organization," if it relates to a 24 conductor organization, just to be clear that the 25 entity that we license is an organization. 0024 1 COMMISSIONER SCHENCK: I think that 2 there needs to be some consistency between the 3 position we're going to end up confronting that we've 4 dealt with in the past with respect to. 5 MS. JOSEPH: We could say "no licensee 6 or worker." 7 COMMISSIONER SCHENCK: Well, that's 8 what I was going to come to. And I would suggest, if 9 we're going to make that change, to say -- where we 10 say "may tamper," et cetera, et cetera, et cetera, or 11 "allow others to do so." I mean, I don't want my 12 cousin to walk in the back door and tamper with it 13 while I turn my back and allow the same thing to 14 happen. 15 I ask that, because I can recall this 16 debate in the past. And I think there is not 17 necessarily a uniform understanding at this point of 18 whether these two terms are co-terminus. 19 MS. JOSEPH: We could, with your 20 permission, modify that language to read "No licensee 21 or worker of a licensed authorized organization may 22 tamper with or modify or allow others . . ." And I 23 didn't put that quite in the right place, but we could 24 insert that. 25 COMMISSIONER SCHENCK: Or knowingly 0025 1 permit. 2 MS. KIPLIN: Or allows others to tamper 3 with it. 4 CHAIRMAN COX: Would you rather have 5 "knowingly permit"? 6 COMMISSIONER SCHENCK: Probably not. I 7 think "allow others "would be a little potentially 8 broader. 9 CHAIRMAN COX: Okay. 10 COMMISSIONER SCHENCK: Get into an 11 argument with somebody about whether they did or 12 didn't. And I think that would be helpful. 13 MS. JOSEPH: All right. 14 COMMISSIONER SCHENCK: It seems a very 15 thorough revision and I think very helpful. 16 CHAIRMAN COX: Any others, 17 Commissioner? 18 COMMISSIONER SCHENCK: No. Thank you. 19 CHAIRMAN COX: And I have none. 20 What action are you requesting, Sandy? 21 MS. JOSEPH: I would suggest that the 22 Commission consider approving publication of this rule 23 for public comments, with the changes as outlined by 24 Commissioner Schenck. 25 COMMISSIONER SCHENCK: And I would 0026 1 propose, subject to that revision, that we adopt this 2 recommendation. 3 CHAIRMAN COX: Second. 4 All in favor, say "Aye." 5 COMMISSIONER SCHENCK: Aye. 6 CHAIRMAN COX: Aye. 7 Motion carries 2-0. 8 MS. JOSEPH: All right. I have a 9 number of possible T-bar memos for y'all, withhold 10 those till we're through. 11 CHAIRMAN COX: Do you want to do that? 12 MS. JOSEPH: Okay. 13 AGENDA ITEM NO. IV 14 CHAIRMAN COX: Okay. Agenda Item 15 No. IV, consideration of and possible discussion 16 and/or action, including proposal, on new rule 16 TAC 17 402.205 relating to unit agreements. 18 Ms. Joseph. 19 MS. JOSEPH: Commissioners, this item 20 is a proposed new rule, 402.205, related to unit 21 accounting agreements. The proposed new rule would 22 clarify what is required in a unit accounting 23 agreement or trust agreement forming a unit and how to 24 notify the Commission of any changes to those 25 agreements. 0027 1 The submission prepared for the Texas 2 Register includes a notice of public hearing, also to 3 be held on Tuesday, September 9, 2008. Staff 4 recommends that the Commission initiate the rulemaking 5 process by publishing the proposed rule in the Texas 6 Register in order to receive public comments. 7 CHAIRMAN COX: Commissioner? 8 COMMISSIONER SCHENCK: This has been 9 through the BAC? 10 MR. SANDERSON: Yes. 11 MS. JOSEPH: Yes. 12 CHAIRMAN COX: Move approval of the 13 staff recommendation. 14 COMMISSIONER SCHENCK: I second. 15 CHAIRMAN COX: All in favor, say "Aye." 16 COMMISSIONER SCHENCK: Aye. 17 CHAIRMAN COX: Aye. 18 Motion carries 2-0. 19 AGENDA ITEM NO. V 20 CHAIRMAN COX: Agenda Item No. V, 21 consideration of and possible discussion and/or 22 action, including proposal, on amendments to 16 TAC 23 402.400 relating to general licensing provisions. 24 Ms. Joseph. 25 MS. JOSEPH: The purpose of the 0028 1 proposed amendments to 16 TAC §402.400 regarding 2 general licensing provisions is to clearly set forth 3 for organizations certain requirements and timelines 4 for the application process. 5 This submission also includes notice of 6 a public hearing to be held on Tuesday, September 9, 7 2008. And staff recommends that the Commission 8 approve initiation of formal rulemaking proceedings by 9 publishing the proposed rule in the Texas Register for 10 public comment. 11 CHAIRMAN COX: Commissioner? 12 COMMISSIONER SCHENCK: I have no 13 questions. 14 CHAIRMAN COX: Move approval of the 15 staff recommendation. 16 COMMISSIONER SCHENCK: Second the 17 motion. 18 CHAIRMAN COX: All in favor, say "Aye." 19 COMMISSIONER SCHENCK: Aye. 20 CHAIRMAN COX: Aye. 21 Motion carries 2-0. 22 AGENDA ITEM NO. VI 23 CHAIRMAN COX: Agenda Item No. VI, 24 consideration of and possible discussion and/or 25 action, including proposal, on new rule 16 TAC 402.442 0029 1 relating to amendment to commercial lessor license. 2 Ms. Joseph. 3 MS. JOSEPH: Commissioners, this rule 4 is a new rule proposed potentially to amend -- to 5 provide information on amending a commercial lessor 6 license. It would provide clarification and 7 information on requirements for amendment of a 8 commercial lessor license. Again, this also would be 9 subject to a public hearing on Tuesday, September 9th. 10 And staff recommends that the Commission initiate the 11 rulemaking process to receive public comments. 12 CHAIRMAN COX: Commissioner? 13 COMMISSIONER SCHENCK: One question. I 14 see there is a $10.00 fee for this. Do we think this 15 is going to be adequate on average to recoup the costs 16 involved, particularly if we expect to inspect 17 premises? 18 MR. SANDERSON: The $10.00 fee is 19 statutorily set. 20 COMMISSIONER SCHENCK: Okay. Well, 21 then, I think that it doesn't matter, does it? 22 CHAIRMAN COX: Commissioner, you raise 23 an excellent point. 24 We have a number of fees, Phil, that we 25 can set based on costs and a number that are set by 0030 1 statute. Is that correct? 2 MR. SANDERSON: That is correct. 3 CHAIRMAN COX: Do we from time to time 4 review those set by statute for the purpose that 5 Commissioner Schenck outlined and consider reporting 6 to the Legislature that they are not adequate to cover 7 our costs? Are we able to do that and do we do it? 8 MR. SANDERSON: We have not done that 9 on the fees that are set by statute. 10 CHAIRMAN COX: Would it be a good idea 11 to do that? $10 seems like a drop in the bucket 12 compared to what it would cost to do this. 13 MR. SANDERSON: And I agree. And I 14 think that that's the -- I mean, there's other 15 amendments that are filed where $10.00 is probably 16 sufficient. So I think that we could -- you know, we 17 could address that and look at the options that we may 18 have with the -- 19 COMMISSIONER SCHENCK: I would suggest 20 that we not address it as an aggregate and try to rob 21 Paul to pay Peter. I think for each one of these 22 functions that we're supposed to be collecting a fee, 23 it's sensible to consider whether or not the fee is 24 reasonably related to the cost of the regulatory 25 activity. 0031 1 MR. SANDERSON: And in a case like this 2 where we're going out and inspecting premises, there 3 may be a way to recoup the costs associated with that 4 inspection as it relates to just certain instances and 5 not -- 6 CHAIRMAN COX: One in Austin and one in 7 El Paso, it would be very different? 8 MR. SANDERSON: Yes, sir. 9 CHAIRMAN COX: Okay. Take a look at 10 that, Phil, if you will. 11 Thank you for that point, David. 12 That's a good one. 13 MR. SANDERSON: Thank you. 14 COMMISSIONER SCHENCK: I have no 15 further questions. Thank you, Sandy. 16 CHAIRMAN COX: Move approval of the 17 staff recommendation. 18 COMMISSIONER SCHENCK: Second the 19 motion. 20 CHAIRMAN COX: All in favor, say "Aye." 21 COMMISSIONER SCHENCK: Aye. 22 CHAIRMAN COX: Aye. 23 Motion carries 2-0. 24 AGENDA ITEM NO. VII 25 CHAIRMAN COX: Agenda Item No. VII, 0032 1 consideration of and possible discussion and/or 2 action, including withdrawal, on proposed amendments 3 to 16 TAC 402.100 relating to definitions. 4 Ms. Joseph. 5 MS. JOSEPH: Commissioners, this item 6 concerns proposed amendments to 16 TAC §402.100 7 relating to definitions that were published in the 8 Texas Register on February 1, 2008. A public hearing 9 was held and comments were received. Several comments 10 in favor of the proposal were received. In addition, 11 the staff received comments opposing the proposal. 12 In response to the comments, the staff 13 recommends that the proposed amendments to the rule be 14 withdrawn. 15 CHAIRMAN COX: Commissioner? 16 COMMISSIONER SCHENCK: I have no 17 questions. 18 CHAIRMAN COX: Sandy, withdrawn and 19 then what? 20 MS. JOSEPH: My understanding from 21 Mr. Sanderson is that there are revisions being 22 considered to the card-minding rule, which also 23 contains a definition. And it's felt that at that 24 time that those revisions are brought forth, this 25 matter might be further clarified. 0033 1 CHAIRMAN COX: Okay. And we could take 2 no action on this and this result would be the same. 3 But you're recommending that we take action to make it 4 clear that we have considered it and decided to 5 withdraw it. 6 MS. JOSEPH: That's correct. 7 CHAIRMAN COX: Okay. 8 COMMISSIONER SCHENCK: I prefer that. 9 CHAIRMAN COX: Yes, as do I. 10 COMMISSIONER SCHENCK: I move that we 11 adopt staff recommendation. 12 CHAIRMAN COX: All in favor? 13 COMMISSIONER SCHENCK: Aye. 14 CHAIRMAN COX: Second, first, before -- 15 COMMISSIONER SCHENCK: I'm sorry. 16 CHAIRMAN COX: All in favor, say "Aye. 17 COMMISSIONER SCHENCK: Aye. 18 CHAIRMAN COX: Motion carries. 19 Okay. Got a little out of sync there. 20 AGENDA ITEM NO. VIII 21 CHAIRMAN COX: Phil, you've got a 22 report? 23 MR. SANDERSON: Yes, sir. For the 24 record, Phil Sanderson Director of the Charitable 25 Bingo Operations Division. 0034 1 In your notebook is the report of the 2 monthly bingo activities within the Bingo Division. I 3 would like to highlight a few items. We have now 4 received 28 applications for the three Inspector 5 5 positions and are reviewing those right now to begin 6 scheduling interviews. 7 The Bingo Advisory Committee is 8 scheduled for next Wednesday at 10:00 a.m. And I'll 9 be working with the two Commissioners to schedule time 10 appropriate for your attendance if you so desire. 11 Also the 2007 annual report has been 12 finalized and was put on the website yesterday. I've 13 got a hard copy to give each of you after this 14 meeting. 15 And then I would like to thank Donna 16 Rose in our department for putting it together, as 17 well as the graphics department and Administration for 18 their support in getting this annual report developed 19 and put on the Internet. 20 And then finally, last Commission 21 meeting I announced that we were going live with our 22 online operator training program. It's been five 23 weeks now, and we've had 30 individuals take the class 24 online, and we're receiving very positive feedback on 25 the online training. 0035 1 CHAIRMAN COX: Excellent. 2 MR. SANDERSON: That concludes my 3 report. 4 CHAIRMAN COX: Okay. Thank you, Phil. 5 Any questions? 6 COMMISSIONER SCHENCK: No. Thank you, 7 Phil. 8 AGENDA ITEM NO. XIX 9 CHAIRMAN COX: Okay. Item No. IX, 10 report, possible discussion and/or action on lottery 11 sales and revenue, game performance, new game 12 opportunities, advertising, market research and 13 trends. 14 Ms. Pyka. 15 MS. PYKA: Good morning, Commissioners. 16 For the record, my name is Kathy Pyka, Controller for 17 the agency. 18 Our first chart that we have for you 19 this morning reflects revenue from sales and net 20 revenue to the state through the week ending July 19th 21 of 2008. Total sales for this 47-week period amounted 22 to three billion 26 million dollars, which is a 23 decline of $90.1 million, or 2.7 percent as compared 24 to Fiscal Year 2007 sales. 25 Prize expense through this period is 0036 1 $2.1 billion, which is a $33.9 million decline from 2 Fiscal Year 2007. And our sales contribution right 3 now is at $1.19 billion. 4 Net revenue to the state reflects a 5 $62.1 million decrease, as compared to the 6 $892.7 million figure for the same period in Fiscal 7 Year 2007. And our prize expense at this point is 8 63.6 percent, as compared to 62.9 percent for the same 9 period last fiscal year. 10 CHAIRMAN COX: Kathy, we talked at one 11 point about a volume-watching analysis so we could see 12 how much of that decline in the sales contribution is 13 attributable to sales and how much is attributable to 14 margin. Have you thought any more about that? 15 MS. PYKA: I have, Mr. Chairman. And 16 it's something that we need to spend more time on in 17 looking at the different factors that arrive at that 18 calculation. It's a very comprehensive and detailed 19 analysis. 20 CHAIRMAN COX: Okay. I'm thinking of 21 something very simple, so maybe we should talk -- 22 MS. PYKA: Okay. 23 CHAIRMAN COX: -- because I think 24 it's -- what I'm asking for is simple, so we may not 25 be communicating perfectly. 0037 1 MS. PYKA: All right. We'll visit 2 further. 3 CHAIRMAN COX: Okay. Now, sales are 4 down about -- what percentage would you say that is? 5 MS. PYKA: It's 2.7 percent. 6 CHAIRMAN COX: Is that up there or is 7 that going to be on another one? 8 MS. PYKA: It will be on the next 9 slide. 10 CHAIRMAN COX: Okay. Let's go to the 11 next one, then. 12 MS. PYKA: Okay. The next slide 13 includes the change in sales from game from Fiscal 14 Year 2007 to Fiscal Year 2008. As noted on the 15 previous slide, the total decline is 2.7 percent, or 16 $90.1 million. And this includes a $15 million, or 17 1.9 percent decrease in online games and a 18 $75.1 million decline, or 2.9 percent decline in 19 instant ticket sales. 20 Our jackpot games are portrayed with 21 the white font, reflecting a $31.8 million year-over- 22 year decline. The daily games are portrayed with the 23 green font, reflecting a $16.8 million gain compared 24 to Fiscal Year 2007 sales. 25 As we've noted before, if you combined 0038 1 the new Daily 4, Daily 4-Sum It Up and Pick 3-Sum It 2 Up and compare that to our Pick 3 Fiscal Year 2007 3 sales, we do still continue to reflect an overall gain 4 which is now at $16.8 million, as compared to our '07 5 Pick 3 sales -- excuse me. That's $26.8 million. 6 That didn't look quite right -- gain over Pick 3 sales 7 for Fiscal Year 2007. 8 The next slide includes our Fiscal Year 9 2008 year-to-date sales by game. As noted on this 10 slide, the green area of the pie chart reflects 11 75.9 percent of sales, or $2.5 billion from instant 12 tickets. 7.8 percent of sales, or $254.3 million from 13 Pick 3, followed by 5.5 percent and $179.6 million 14 from Lotto Texas. Mega Millions reflects 4.7 percent 15 of total sales and $153.9 million. Daily 4 is at 16 $37.5 million, and Daily 4-Sum It Up is as 17 $7.7 million, followed by Pick 3-Sum It Up at 18 $5.8 million. 19 And the next slide includes our Fiscal 20 Year 2008 year-to-date prize point sales for the 21 instant product. The $5.00 price points reflects the 22 greatest share of year-to-date sales, at 27.5 percent, 23 followed by the $2.00 price point. In comparison, the 24 ranking of the price points for this period as 25 compared to the previous period, there is a very 0039 1 insignificant change in overall percentage by prize 2 point. 3 This concludes my presentation. I 4 would be happy to answer any questions. 5 COMMISSIONER SCHENCK: Kathy, I have a 6 couple of questions. Can you go back at one slide? 7 MS. PYKA: Yes. 8 COMMISSIONER SCHENCK: I may have asked 9 this before. And if I have, forgive me for asking it 10 again. Have we ever done an analysis of the cost -- I 11 mean, we're going to be rebidding the GTECH contract 12 in what, two years? 13 MS. PYKA: Correct. 14 COMMISSIONER SCHENCK: -- what our 15 incremental costs are, each one of these games, 16 respective to our income, with respect to each one of 17 these games? As I look at, even in the short time 18 I've been here, it seems to me that instants are 19 creeping into a larger and larger proportional share 20 of our overall revenue picture. And we have that 21 under one contract. 22 We're printing tickets. And then, of 23 course, we're distributing them, which is a very 24 substantial effort. And I've seen that, and I'm very 25 impressed with it. 0040 1 But Lotto Texas is probably a difficult 2 and expensive game to administer and an important part 3 of the GTECH contract. But we're now down to 4 5.5 percent of our revenue, and I'm wondering what 5 that would cost us to continue operating and whether 6 it would be useful to consider the same question with 7 respect to the other games. 8 Mega Millions is at 4.7 percent, is 9 largely I would think a comparable game from the 10 standpoint of a lot of our players. And I'm wondering 11 over time whether that 4.7 percent is going to move to 12 5.5 and whether that 5.5 for Lotto Texas will move 13 down to 4.7? 14 MS. PYKA: And we certainly continue to 15 monitor this overall sales share by game, as you look 16 at the historical data and you look at the prize 17 expense associated with that. And you make a good 18 point. Like, for example, on Mega Millions, we had 19 one of our top years in Mega Millions last year, as 20 compared to when we had been introduced into the game 21 or Texas had joined the game. And so a lot of those 22 are definitely driven by jackpot and where our 23 jackpots have landed throughout the year. 24 Back to your inquiry, though, about 25 looking at the costs. We certainly are tracking 0041 1 closely the prize expense and the prize payout 2 associated with each individual product, driving that 3 down further to look at the instant ticket costs 4 associated with the contract which SciGames are 5 printing. I mean, certainly we have all of that data 6 that outlines what it costs for each item. 7 And I would expect as we go through our 8 lottery operator RFP consultant proposal, which is 9 under Mike's leadership, and we begin doing the 10 business case study and analyzing the cost of each of 11 those functions, we'll certainly get into many of 12 these details. But the individual game costs -- I 13 mean, we're looking at it at a very high level at this 14 point. 15 COMMISSIONER SCHENCK: Yes, I 16 understand that. And I'm thinking at a lower level -- 17 I mean, you could see sending out the RFP in two 18 different ways. I mean, you could say, "Price it with 19 Lotto Texas and price it just with Mega Millions." 20 The costs associated with the development and 21 management of Mega Millions are shared. 22 MS. PYKA: They are shared with our -- 23 there's 12 states total, and we have an agreement to 24 shares the administrative cost of that game with those 25 other states, and we do a quarterly billing on that 0042 1 item. 2 COMMISSIONER SCHENCK: And I don't know 3 if we could tell right now what share of the GTECH 4 contract is -- for instance, I'm just picking Lotto 5 Texas, not because I am, for example, proposing we do 6 anything specific with it. But I think this kind of 7 analysis might be helpful, certainly before we decide 8 on what to do with that RFP. 9 It looks to me like we're increasingly 10 getting less return out of Lotto Texas. We might get 11 95 percent of that revenue if we were just, for 12 instance, operating Mega Millions, and spare ourselves 13 I don't know how much in the price of the contract 14 with GTECH or any other bidder. 15 CHAIRMAN COX: Well, Commissioner, if 16 we're looking at $179.6 million in revenue and 2.7 17 percent, if we took 5 million away from that, we're 18 still at 164, to cover other expenses and go to the 19 bottom line. 20 COMMISSIONER SCHENCK: Yes. 21 CHAIRMAN COX: I've had this discussion 22 within Gary, having some of those same questions. And 23 he's on vacation today. But I think we will find that 24 all of them contribute to the bottom line. 25 COMMISSIONER SCHENCK: I suspect that's 0043 1 right. 2 CHAIRMAN COX: And I think we will find 3 as well with Lotto Texas, and perhaps even with the 4 Mega Millions -- and some of those other games at a 5 very small percentage -- that they're kind of 6 something you've got to do to be in the lottery 7 business, because you're not really a lottery operator 8 if you don't have those core products. 9 General Motors may not make money on 10 cars, but you've got to have cars. I think there may 11 be some of that. But I think it's a very good point, 12 and we should always be looking at: Are these things 13 contributing to the bottom line? 14 COMMISSIONER SCHENCK: Thank you. 15 MS. PYKA: You're welcome. 16 CHAIRMAN COX: Now let's go back to 17 Page 1, Kathy. So if we've got a -- what did you 18 say? -- 2.7 percent decrease in sales? 19 MS. PYKA: Correct. 20 CHAIRMAN COX: -- and you've got a 21 small increase -- is that correct? -- in prize 22 expense, or is that a decrease? 23 MS. PYKA: It's actually -- it's a 24 decrease of $33.9 million. 25 CHAIRMAN COX: Okay. That looks like a 0044 1 smaller percentage. 2 MS. PYKA: It is a smaller percentage. 3 CHAIRMAN COX: Okay. Now, that 4 obviously says that we've got a shift from the online 5 games, which are about a 50 percent kind of thing, to 6 the instant games, which are starting at -- what? -- 7 something in the sixties? 8 MS. PYKA: Right. 9 CHAIRMAN COX: Does it also say or 10 would it say on analysis that there is a shift from 11 the lower price points in instants, which have a lower 12 payback, to the higher price points which have a 13 higher payback? 14 MS. PYKA: It certainly does. And I'm 15 just going to focus on our sales data through this 16 previous week, through the week ending 7/26, which is 17 the analysis that's before you. 18 As we look at that -- and let me focus 19 on -- or maybe I should go back to this week's data -- 20 but focusing -- let me just do last week's. The 21 overall decline in instant ticket sales was 22 $77 million last week. But as we look at where the 23 decline is, the decline in the one to $7.00 price 24 point was $113 million, but the decline in the $10 to 25 $50 price point was not a decline but it was an 0045 1 overall gain of $36 million. 2 CHAIRMAN COX: Say that again. One to 3 $7.00 -- 4 MS. PYKA: One to $7.00 was 5 $113 million decline. But focusing on the $10 to $50, 6 we have a gain of $36 million. So as you look at that 7 shift in prize expense, certainly we're seeing an 8 increase in prize expenses. We're seeing an increase 9 in sales and the higher price points and a decline in 10 sales. 11 CHAIRMAN COX: So you might say this -- 12 and this is another discussion I've had with Gary -- 13 I've talked about should we still have a $1.00 ticket? 14 And that's the same idea as Lotto Texas, because 15 that's a $1.00 ticket. 16 COMMISSIONER SCHENCK: Well, I remember 17 asking him about whether the cost of printing the 18 $1.00 ticket justified having the game at all. And I 19 believe the answer I got was the cost per ticket was 20 something like two cents. 21 MS. PYKA: It's quite insignificant. 22 COMMISSIONER SCHENCK: But your point 23 is that it may be cannibalizing from more profitable 24 sales? 25 CHAIRMAN COX: Well, I think my point 0046 1 is a couple of things. One is that the $1.00 price 2 point will not live forever. It has died in Las 3 Vegas. I think the $2.00 price point is dead and the 4 $3.00 price point is dead. And probably on the Strip, 5 it's five or maybe more. I haven't gambled out there 6 in so long that I don't remember. And so I think what 7 we need to be looking at is both the profitability of 8 individual games and the profitability of individual 9 price points. 10 COMMISSIONER SCHENCK: I agree. 11 MS. PYKA: The $1.00 price point 12 through that same week, looking at sales contribution, 13 which I'm defining as sales less prize expense, the 14 sales contribution is $82.9 million. Even though 15 we're seeing a decline, I mean, it's still providing a 16 positive contribution to the Foundation School Fund. 17 So, you know, that's the data that we look at so 18 closely each week as we're monitoring where these 19 price points are falling. 20 The other thing that I'll speak to as 21 it relates to prize expense is that as we look at 22 Megaplier this fiscal year, we have seen a slight 23 increase in prize expense for Megaplier. That's got 24 an overall gain right now of $6.6 million as compared 25 to last fiscal year, while sales on Megaplier are 0047 1 about even. So there is one online game that's 2 contributing a bit to that decline in prize expense 3 percentage that we're seeing. 4 CHAIRMAN COX: Okay. That would be 5 because while we know what the theoretical percentage 6 on that is, it's kind of a small pool and it can vary 7 fairly significantly from that on a given draw? 8 MS. PYKA: Right. But over time you 9 expect it to even out. But right now we've 10 experienced a larger number than normal winnings in 11 that particular game. 12 CHAIRMAN COX: And in defense of the 13 $1.00 ticket, I would say that Gary would also say, 14 "Yeah, but that's where we started." And it's going 15 to be very hard to give up that product, because it 16 has a lot of customers. So there are lots of factors 17 that are involved in these things, and we know y'all 18 consider all of those. 19 MS. PYKA: Certainly. 20 CHAIRMAN COX: Anything further 21 Commissioner? 22 COMMISSIONER SCHENCK: No. We're going 23 to get to transfers to the state in a minute? 24 MS. PYKA: Yes, we are. 25 CHAIRMAN COX: Is that the next agenda 0048 1 item? 2 COMMISSIONER SCHENCK: I think it's X. 3 AGENDA ITEM NO. X 4 CHAIRMAN COX: Okay. X is transfers to 5 the state and the agency's budget. 6 Ms. Pyka. 7 MS. PYKA: Again for the record, my 8 name is Kathy Pyka, Controller for the agency. 9 The first report in your notebook 10 reflects transfers and allocations to the Foundation 11 School Fund and the allocation of unclaimed prizes for 12 the period ending June 30, 2008. Total cash transfers 13 to the state amounted to $837.8 million for the first 14 10 months of the fiscal year. 15 The second page in your notebook 16 includes the detailed information -- 17 CHAIRMAN COX: How much was that, 18 Kathy? 19 MS. PYKA: $837.8 million. 20 CHAIRMAN COX: 837. And we've gone 21 through five-sixths of the year. 22 MS. PYKA: We've gone through 23 five-sixths of the year. 24 CHAIRMAN COX: And 83.7 is -- what's 25 five-sixths? 83 and a third? 0049 1 MS. PYKA: Yes, sir. 2 CHAIRMAN COX: It looks like we're 3 going to get to a billion. 4 MS. PYKA: It will be possibly right 5 under it, and let me tell you why. 6 CHAIRMAN COX: Okay. 7 MS. PYKA: The way that the fiscal year 8 ends this year, August 31st ends on a Sunday. So cash 9 transfers for the 29th, the 30th and the 31st will be 10 made on Monday, September the 1st, as an accrued 11 transfer. 12 CHAIRMAN COX: Okay. It's going to be 13 that close? 14 MS. PYKA: It's that close. I mean, 15 we've looked at this backwards and forwards. You get 16 the extra day of sales because of leap year. We've 17 looked at every possible factor there. It's going to 18 be very close. 19 CHAIRMAN COX: Thank you. 20 MS. PYKA: Yes. Looking at the second 21 page of your notebook, of the $837.8 million transfer 22 to the state, $790.5 million was the amount 23 transferred to the Foundation School Fund, with the 24 balance of $47.2 million transferred from unclaimed 25 lottery prizes. The amount transferred to the 0050 1 Foundation School Fund is a 6.3 percent decline, or 2 $51.5 million for the amount that we had transferred 3 through this period in June of 2007. 4 Your notebook also includes a document 5 that reports on the lottery sales, expenditures and 6 transfers from Fiscal Year 1992 to date. Total 7 cumulative transfers to the Foundation School Fund 8 through May of this fiscal year totaled $10.5 billion. 9 The final item under this tab is our 10 agency's Fiscal Year 2008 method of finance summary 11 for the third quarter ending May 31 of 2008. Our 12 Commission's lottery account budget for Fiscal Year 13 2008 is $193.6 million. Of this amount, 90.4 percent 14 was expended and encumbered through the end of the 15 third quarter. And our bingo operations budget funded 16 by general revenue is $15.2 million, with 73 percent 17 expended and encumbered through the third quarter. 18 Commissioners, I also wanted to note 19 that we have wrapped up the Fiscal Year 2009 draft 20 operating budget, and we'll be bringing that to you at 21 the next Commission meeting, as well as the Fiscal 22 Year 2010, Fiscal Year 2011 legislative appropriation 23 request. 24 I would be happy to answer any 25 questions that you might have. 0051 1 CHAIRMAN COX: Commissioner? 2 COMMISSIONER SCHENCK: We are going to 3 be seeing a reduction in our advertising budget as a 4 result of increased prize payouts. Right? 5 MS. PYKA: You are correct, 6 Commissioner. We anticipate that the prize payout 7 will range between 62 percent and 62.99 percent, which 8 will require an additional one million dollar 9 reduction in the advertising budget. And at this 10 point in time, we have reflected that budget at 11 $30 million in Fiscal Year 2009, while the base 12 appropriation was $32 million. 13 COMMISSIONER SCHENCK: So we're going 14 to have even more of a challenge next year trying to 15 get to this billion dollar figure? 16 MS. PYKA: That is correct. And I'm 17 very well aware that Mr. Anger has communicated those 18 issues to the advertising vendor. 19 COMMISSIONER SCHENCK: To who? 20 MS. PYKA: To the advertising vendor. 21 COMMISSIONER SCHENCK: Yes. And what 22 about the Legislature? 23 MS. PYKA: The Legislature at this 24 point in time, we've had communication about the 25 status of the operating budget and what amount is 0052 1 budgeted, via a hearing that we just had. Certainly 2 the Comptroller's office is very well aware and is 3 communicating with the Legislative Budget Board on 4 where we are with that budget. They're very much 5 aware that we're looking at a million dollar 6 reduction. 7 COMMISSIONER SCHENCK: Okay. 8 CHAIRMAN COX: Are we doing everything 9 we can to let the folks over there know that we have 10 studies that would show that if we had more money for 11 advertising, that we could, net of that, produce more 12 money for the school children of Texas? 13 MS. PYKA: I believe that we are. We 14 distributed that study with our last legislative 15 appropriation request when we focused on the need to 16 restore our advertising budget. And it was 17 distributed at the most recent hearing attended by 18 Commission staff. And we certainly are referencing it 19 in an exceptional item that we are proposing for your 20 attention at the Commission meeting next month. So -- 21 CHAIRMAN COX: So we're going to ask in 22 our budget for more advertising money? 23 MS. PYKA: That is the staff 24 recommendation, that at this point in time we're 25 working on. It has not been finalized. 0053 1 CHAIRMAN COX: Okay. Now, do you 2 intend that you will have a briefing for Commissioner 3 Schenck and for me separately on the budget before 4 that meeting? 5 MS. PYKA: Yes. 6 CHAIRMAN COX: Okay. When do you think 7 that will be Kathy, about? 8 MS. PYKA: I would expect -- we are 9 ready to brief on the Fiscal Year 2009 budget at any 10 point. I would expect on the legislative 11 appropriation request, within the next two weeks. 12 CHAIRMAN COX: Okay. Now, one 13 discussion that we've had, Kathy, I would like for you 14 to share with Commissioner Schenck, and that is how 15 we -- notwithstanding the fact that our revenue, net 16 revenue is down -- are able to possibly maintain about 17 the same level of distributions to the Foundation 18 School Fund as we did last year, with higher income. 19 MS. PYKA: Yes. Commissioner Schenck, 20 one of the components of the transfers to the 21 Foundation School Fund, outside of sales, is unspent 22 administrative funds. And we are closely monitoring 23 our Fiscal Year 2008 operating budget to determine 24 exactly how much in unspent administrative funds we 25 will have that can be also transferred to the 0054 1 Foundation School Fund. 2 One area in which we expect -- I 3 believe it's $13 million. Let me make certain of that 4 before -- yes. We expect to have about $13 million in 5 unspent administrative funds on the lottery operator 6 contract strategy. And the reason for that is the 7 appropriation bill was set at a higher sales factor 8 that was set by the Comptroller's office. 9 And so all of that unspent money will 10 be returned, based on what we've actually paid the 11 lottery operator, as well as any liquidated damages 12 that may have been assessed or any of our GTECH 13 credits that we've had through Amendment No. 8. So 14 that's one component, in addition to just our regular 15 administrative funds, whether it be salaries or 16 contractual, anything that's unspent from there. 17 CHAIRMAN COX: So in effect, they give 18 us the $200 million they appropriate for us, and then 19 we give back any of it that we don't spend, and that's 20 transferred out of the general fund where it came to 21 us, into the Foundation School Fund? 22 MS. PYKA: Right. That was something, 23 Commissioner Schenck -- the Chairman had asked me 24 recently the mechanism of doing that, and I explained 25 to him that Mr. Navarro actually prepares a journal 0055 1 entry that physically moves the cash from our account 2 into the Foundation School Fund. So, I mean, it's a 3 very detailed process that we do each year with that. 4 COMMISSIONER SCHENCK: Well, I commend 5 you for promoting that effort and, Kathy, for looking 6 into that. And I would obviously encourage us to do 7 whatever we can to save money, including turning off 8 lights, air conditioning, whatever we need to do the 9 next couple of months. 10 Kim, I believe we have -- well, we have 11 a case that is actually bringing some money in, as I'm 12 recalling. 13 MS. KIPLIN: You're talking about the 14 intellectual property lawsuit? 15 COMMISSIONER SCHENCK: Yes. 16 MS. KIPLIN: I think that money was 17 recovered. 18 COMMISSIONER SCHENCK: Have we gotten 19 it yet? 20 MS. KIPLIN: Yes, I believe we did 21 receive the settlement amount, and that's been 22 deposited. 23 MS. PYKA: It was deposited about a 24 week and a half ago. 25 COMMISSIONER SCHENCK: Well, that's 0056 1 good. If we can find -- if we can be a plaintiff more 2 often, maybe (Laughter). 3 MS. KIPLIN: Well, I will continue to 4 search for those opportunities. 5 COMMISSIONER SCHENCK: Mine for those 6 opportunities, yes. 7 CHAIRMAN COX: Anything else? 8 COMMISSIONER SCHENCK: No, thank you. 9 CHAIRMAN COX: Thank you, Ms. Pyka. 10 Are you next also? 11 MS. PYKA: I am. This is my final 12 item. 13 AGENDA ITEM NO. XI 14 CHAIRMAN COX: Okay. Report, possible 15 discussion and/or action on Lottery Operations and 16 Services Contract Amendment No. 8 credit calculation. 17 MS. PYKA: Again for the record, Kathy 18 Pyka, Controller for the Commission. 19 This morning I want to provide you an 20 update on Amendment No. 8 of the Lottery Operations 21 and Services Contract and the amount due to the 22 Commission for the third quarter of Fiscal Year 2008. 23 Section 10.3.3 of our contract amendment provides an 24 annual credit to the Commission equal to 12 percent of 25 GTECH's annual incremental revenue from sales over the 0057 1 previous fiscal year for every tenth of a percent of 2 increase in overall prize payout. 3 For the third quarter of Fiscal Year 4 2008, we did not have a credit under this section of 5 the contract. However, Section 10.3.4 of the 6 amendment requires GTECH provide an annual credit to 7 the Commission equal to four and a half percent of the 8 year-over-year decline in dollar returns to the state 9 if sales remain flat and the weighted prize payout 10 increases by a tenth of a percent. 11 Commissioners, this section of the 12 contract did result in a credit of $1.2 million during 13 the third quarter of Fiscal Year 2008, as there was a 14 decline in transfers to the state and an increase in 15 the prize payout. While the calculation resulted in a 16 credit of $1.7 million, we were only able to obtain a 17 credit of $1.2 million as there is a contract 18 limitation on this credit within the amendment. 19 I also wanted to note that in the 20 memorandum that I provided in your notebooks, I do 21 have a typographical error in the last paragraph, or 22 second to last paragraph, in which I had stated second 23 quarter and that should have included third quarter. 24 I apologize for that. 25 I've included a copy of the credit 0058 1 calculation in your notebook. And I would be happy to 2 answer any questions that you might have. 3 CHAIRMAN COX: Commissioner? 4 COMMISSIONER SCHENCK: I don't have 5 questions. Thank you, Kathy. 6 CHAIRMAN COX: Commissioner, do you 7 have the background of Amendment 8? 8 COMMISSIONER SCHENCK: I do, actually. 9 We discussed this at length the other day. 10 CHAIRMAN COX: Good. 11 COMMISSIONER SCHENCK: And we have two 12 mechanisms for these payments. 13 CHAIRMAN COX: This was, of course -- 14 among other things, Amendment 8 provided for better 15 aligning GTECH's interest with ours, by concentrating 16 on the net after prize expense rather than gross 17 sales. And this is attributable to the excellent work 18 of Mr. Grief and Mr. Fernandez and Ms. Pyka and 19 Mr. Anger, and we appreciate that. 20 MS. PYKA: Thank you, Commissioners. 21 AGENDA ITEM NO. XII 22 CHAIRMAN COX: Okay. Report, possible 23 discussion and/or action on the 80th Legislature. 24 Ms. Trevino. 25 0059 1 Been waiting for your entrance, huh? 2 MS. TREVINO: Those chairs aren't the 3 most comfortable. 4 Good morning, Commissioners. For the 5 record, I'm Nelda Trevino, the Director of 6 Governmental Affairs. 7 I have a brief report regarding some 8 legislative interim committee activities. Included in 9 your Commission meeting notebook is a copy of the 10 July 18, 2008, hearing notice for the House State 11 Affairs Committee and a copy of the informational 12 packet the agency provided to the committee. 13 At the request of the committee, the 14 agency was invited to present testimony on the 15 lottery's advertising program. Executive Director 16 Sadberry and Lottery Operations Director Michael Anger 17 provided the agency's testimony. 18 Additionally, the agency is providing 19 the committee a response to the additional information 20 requested at the hearing. Subsequent to the House 21 State Affairs Committee hearing, the agency received a 22 letter from Vice Chairman, Rep. Ken Paxton, requesting 23 the agency's participation and response to a survey 24 related to the interim charge on state-funded 25 advertising assigned to the committee. Responses to 0060 1 the survey are due to Rep Paxton no later than August 2 the 11th, and the agency is in the process of 3 finalizing responses to the survey. And we anticipate 4 submitting the responses prior to the deadline. 5 The agency also received a request from 6 the Senate Committee on Transportation and Homeland 7 Security, asking the agency's participation and 8 response to a survey related to one of their interim 9 charges to study the issue and amount of state agency 10 expenditures on media activities and the legal 11 authority for those expenditures. The agency is also 12 in the process of finalizing responses to this survey. 13 Additionally, the House Licensing and 14 Administrative Procedures Committee held a hearing on 15 July the 9th of 2008, and one of the agenda items was 16 invited testimony related to amusement with prize 17 gaming devices. 18 Testimony was provided by Stephen 19 Fenoglio who was there representing the company, Aces 20 Wired. Phil Sanderson was in attendance to serve as 21 an agency resource to the committee. However, no 22 questions were asked of Phil. 23 And lastly, last month I reported a 24 joint hearing of the Senate State Affairs Committee 25 and the Senate Finance Subcommittee on General 0061 1 Government Issues. It's scheduled for August 27, 2 2008, to consider the Joint Senate interim charge to 3 study the privatization of the lottery. 4 Earlier this week, staff with the 5 Senate State Affairs Committee contacted our office to 6 reconfirm the committee's request to have the agency 7 serve as a resource at that hearing. 8 This concludes my report, and I'll be 9 glad to answer any questions that you might have. 10 CHAIRMAN COX: Commissioner? 11 COMMISSIONER SCHENCK: I have a few. 12 This is the most detailed report I can remember your 13 giving. 14 MS. TREVINO: Okay. 15 COMMISSIONER SCHENCK: Could you remind 16 me what the committee was that Mr. Fenoglio, I 17 believe, was testifying to. 18 MS. TREVINO: That was the House 19 Licensing and Administrative Procedures Committee 20 that's chaired by Rep. Keno Flores. 21 COMMISSIONER SCHENCK: And what was the 22 inquiry there? 23 MS. TREVINO: It was a follow-up, 24 Commissioner Schenck, to some comments that Chairman 25 Flores had made at a prior hearing, I believe, that 0062 1 was held in May where he had requested that this 2 company, Aces Wired, come to the committee and provide 3 some information on their amusement with prize gaming 4 devices. So it was pretty much a follow-up to, again, 5 those comments that were made. 6 The primary purpose of the hearing on 7 July the 9th was related to other agencies, and this 8 was just one agenda item that was taken up at that 9 hearing. 10 COMMISSIONER SCHENCK: Okay. Lastly, 11 with respect to the forthcoming meeting -- the request 12 to discuss the privatization initiative, or the 13 potential privatization initiative, we don't see any 14 obstacles to our responding in full as the Legislature 15 or the Governor's office is seeking information from 16 us? 17 MS. TREVINO: I will say from a 18 governmental relations perspective, that I think when 19 the agency is asked to be a resource at a committee, 20 that we've always certainly been responsive to that 21 request. The agency is also very mindful of the rider 22 that's included in the agency's bill pattern. And I 23 believe Executive Director Sadberry has asked 24 Ms. Kiplin for some advice in regards to that. 25 COMMISSIONER SCHENCK: I asked, because 0063 1 I would like to know before we feel that there is some 2 obstruction to our not giving an answer, that we've 3 alerted the Commissioners to that barrier before we 4 not respond. 5 CHAIRMAN COX: I think that is my 6 wishful presumption, too, that we respond unless we 7 have notified the Commissioners and the Commissioners 8 have agreed, in whatever appropriate way, that we not 9 respond. The presumption is, I think we will respond. 10 As I understand, Ms. Kiplin, your 11 advice in the past has been that unless we are 12 required to do additional significant outside work -- 13 not staff work but outside work like hiring 14 consultants -- that you don't see much limitation on 15 what we can do? 16 MS. KIPLIN: I wouldn't limit it to 17 outside work. I think it's the use of appropriated 18 funds. And my specific advice has been, we have to 19 look at each request on its face and then analyze that 20 request and determine whether it triggers the 21 application of the provisions of Rider 15. 22 With this particular request, I'm not 23 really concerned. I think we've been requested to 24 come and be a resource. And I think, as I understand 25 it, we're being asked to provide information. I think 0064 1 we should, as best we can, stick to factual 2 information. 3 CHAIRMAN COX: Absolutely. 4 MS. KIPLIN: That's what we're there to 5 do in terms of being a resource. 6 CHAIRMAN COX: They're not asking us 7 for our opinions. I don't think they will. 8 MS. KIPLIN: I don't know. I mean, 9 there may be a request on, "Well, what is your opinion 10 or what's occurring?" or whatever the hypothetical 11 might be or the proposal might be, and I think that's 12 pretty challenging in terms of this agency. We know 13 what we do here factually on a day-to-day basis, and I 14 think we'll need to address those as those issues may 15 arise. 16 But as a state agency, part of state 17 government, we respond to requests to come and testify 18 before legislation, provide and act as a response in 19 providing responsive information. 20 CHAIRMAN COX: Okay. I think that one 21 thing, Ms. Kiplin, that you might do is to prepare 22 those presenters, those who plan to be there to answer 23 the questions, on how to answer a question that they 24 don't have the answer to, because typically we say, 25 "We don't know, but we'll get you that information." 0065 1 And this time we may not be able to get them that 2 information, so you may want to help them with a 3 response to that, that "We will get you that 4 information if we can do so consistent with Rider 15," 5 or something of that nature. 6 MS. KIPLIN: Yes, sir, I'll be glad to 7 do that. 8 CHAIRMAN COX: Commissioner, any more? 9 COMMISSIONER SCHENCK: Well, I was just 10 going to comment. I assume the exhibits that you've 11 given us are exhibits that were shared with the 12 legislative committee, on advertising? 13 MS. TREVINO: That's correct. 14 COMMISSIONER SCHENCK: And this 15 advertising question, was that coming from -- I see 16 here that the Chair is David Swinford. But . . . 17 MS. TREVINO: You're right, 18 Commissioner Schenck. David Swinford is the chair of 19 the House State Affairs Committee. However, it was 20 Vice Chairman Ken Paxton -- 21 COMMISSIONER SCHENCK: Okay. 22 MS. TREVINO: -- who had a special 23 interest in this particular issue and what we 24 understand was the member who requested the speaker to 25 assign the committee this particular interim charge. 0066 1 COMMISSIONER SCHENCK: Did we have the 2 opportunity to walk through these exhibits during the 3 meeting, with Rep. Paxton? 4 MS. TREVINO: We didn't walk through 5 each of the individual exhibits. 6 COMMISSIONER SCHENCK: Well, I find 7 this exhibit that's our Exhibit 4, which is, as I 8 understand it, taken from our Strategic Plan, which 9 now I think is no longer a draft, Strategic Plan -- 10 MS. TREVINO: Correct. 11 COMMISSIONER SCHENCK: -- is a very 12 effective tool. And I would hope that, given the 13 opportunity to present this issue, we would be 14 pointing them to this. 15 MS. TREVINO: Absolutely. And we -- 16 COMMISSIONER SCHENCK: It's back to the 17 issue we were just discussing a few minutes ago. 18 MS. TREVINO: Absolutely. And just as 19 Kathy Pyka reported, as the agency prepares for the 20 legislative appropriations request and as the agency 21 moves forward with communicating that appropriations 22 request with various legislative offices, this is 23 certainly a document that we would want to use to 24 address the advertising challenge that the agency 25 faces. 0067 1 COMMISSIONER SCHENCK: Thank you. 2 CHAIRMAN COX: Nelda, further to the 3 appearance of Aces Wired before the Licensing 4 Regulatory Committee, can you tell us generally what 5 happened? I wasn't able to watch the program. 6 MS. TREVINO: I'm going to ask Phil to 7 help with my recollection. Again, Chairman Cox, it 8 was one of the agenda items for that committee 9 hearing. It was only invited testimony, so it was 10 only Mr. Fenoglio who provided testimony. There was 11 no public testimony taken at that hearing on any of 12 the agenda items, is my recollection. 13 So again, I think Mr. Fenoglio was 14 trying to be responsive to what had been requested in 15 presenting some information in regards to these gaming 16 devices. 17 CHAIRMAN COX: Now, are these the 18 gaming devices that DPS seized at several locations? 19 MS. TREVINO: That's my understanding. 20 MR. SANDERSON: And I would just like 21 to add, I guess for the purposes of the timeline, when 22 we had our hearing -- when I appeared at the hearing 23 in May -- I believe the 14th -- they asked Knowles 24 Cornwell of Aces Wired to have some item of 25 preparation for the next hearing that they were going 0068 1 to hold, and so that was in response to that. 2 The hearing on May the 14th was prior 3 to these devices being seized throughout the state. 4 And so Mr. Fenoglio's responses about the devices was 5 very narrow and limited because of pending, I guess, 6 litigation in cases. 7 So he just explained how the devices 8 kind of worked. He explained that, you know, they had 9 been seized. And I think he talked about some 10 forfeiture proceedings going on. And then he prepared 11 a notebook to give each member as far as the standard 12 materials that he's handed out in the past as it 13 relates to arbitration rulings that they've got and 14 their reasoning why they feel like the devices are not 15 gambling devices. 16 CHAIRMAN COX: Okay. So he just laid 17 out what's happened and why they think these are not 18 gambling devices? 19 MR. SANDERSON: Yes, sir. 20 CHAIRMAN COX: Okay. 21 Anything further, Nelda, on that one? 22 MS. TREVINO: No, sir. 23 CHAIRMAN COX: Okay. Secondly, on the 24 Exhibit 5 here, Estimated Impacts on Lottery Sales 25 From Changes in Advertising Expenditures, the Huff 0069 1 report, Huff and Jarrett report, I know that was 2 presented to one of those hearings that you went to. 3 Which one was that, the one on advertising? 4 MS. TREVINO: The House State Affairs 5 Committee hearing. 6 CHAIRMAN COX: State Affairs Committee. 7 And it's my understanding that there was comment to 8 this study about, "Well, if we spent a billion dollar" 9 kind of thing, "If we spent a billion dollars, we 10 could make two billion," or something like that. Can 11 you tell me -- I think Rep. Van Arsdale may have made 12 a comment. 13 MS. TREVINO: Yes. He was making some 14 comments in regards to some of the information that is 15 contained in this report. If you look on the last 16 page of the report, I think he -- Michael Anger had 17 summarized the conclusions of the report. And I think 18 what Rep. Van Arsdale was focused on was, the report 19 was indicating that if you increase your advertising 20 expenditures, you would see an increase in sales. 21 And Rep. Van Arsdale was also looking 22 at Exhibit 1 that the agency had provided and was 23 noting that based on the information that's noted on 24 this exhibit, that there was an increase in sales over 25 the last several fiscal years, while our ad budget had 0070 1 decreased. So he was trying to get I guess an 2 understanding as to the conclusion from the UT report 3 versus what the actual data from the agency was. 4 CHAIRMAN COX: Okay. And would part of 5 the explanation be that this report would say that had 6 we been advertising more, sales would have increased 7 even more, because that's what it says? 8 MS. TREVINO: Right. And I think I 9 would feel more comfortable deferring you -- and I 10 know they're not here -- to either Mike Anger or Gary 11 about that question, Chairman Cox. 12 CHAIRMAN COX: Okay. I think that one 13 of the things I understood Rep. Van Arsdale to say 14 is -- and I'll put it in my words -- this can't happen 15 all the way up. There has to be a point at which 16 there's diminishing returns. 17 And I talked to David about that before 18 he issued this report, David Huff, because clearly 19 that is the case. And he told me really that is -- 20 you didn't ask me the question of, "Where would we 21 optimize advertising expenditures?" You asked the 22 question, "Can you, within some range of present 23 advertising expenditure, profit by spending more?" 24 And on the last page of his report, he 25 says, "The findings are more credible than under a 0071 1 restricted set of conditions and that generalizing, 2 all state lotteries appear to be under-investing 3 currently in advertising." 4 I would suggest if we could have the 5 opportunity to present this again, that we in our 6 presentation set out that we don't know yet what would 7 be an optimal amount of advertising, because since we 8 have a statutory limit on it, we aren't expending 9 resources finding out how to optimize this. We have 10 just determined that we should study it. 11 And then, Kathy, I think you said 12 you're going have a recommendation for an amount. Is 13 that correct? 14 MS. PYKA: (Nods head) 15 CHAIRMAN COX: What is that going to 16 be? 17 MS. PYKA: For the record again, Kathy 18 Pyka. 19 Chairman, at this point in time we have 20 not finalized the actual dollar amount. The data that 21 we've utilized is the document that Commissioner 22 Schenck referenced. And we've looked at everything 23 from per cap to economic factors related to growth, 24 back to the study. 25 So it is something that we're currently 0072 1 working through: What is a realistic amount that we 2 believe we should see in the overall increase in the 3 advertising budget? You know, you can go back and 4 look at the per cap information and you can look at 5 the -- just the fact that when that original 6 $40 million budget was set, we had many fewer options 7 that we were looking at game-wise. And we've added a 8 large number of games since that $40 million 9 advertising budget was set. 10 CHAIRMAN COX: And $40 million ain't 11 exactly what it was in '93? 12 MS. PYKA: Exactly. I mean, obviously, 13 we, you know, prepared that document with all of those 14 calculation. And so that's something that -- it's a 15 difficult question that you're asking, and we've got 16 to land on a number and then the realistic target of 17 we know we have to have a de-linking of the strategy 18 from the prize payout. 19 CHAIRMAN COX: Well -- 20 MS. PYKA: It will be contingent upon 21 modification to the Government Code. 22 CHAIRMAN COX: And it seems like it 23 would be reasonable to think that it should at least 24 be -- go back to the 40, because you didn't 25 contemplate the products that we have -- and adjust it 0073 1 for inflation. I mean, that's just a thought. 2 MS. PYKA: Right. And we did do that 3 here. And -- 4 CHAIRMAN COX: Pretty big number. 5 MS. PYKA: It is a pretty big number. 6 CHAIRMAN COX: But it just gives people 7 an idea of where we would be if we were operating with 8 a price-adjusted base -- 9 MS. PYKA: Right. 10 CHAIRMAN COX: -- and knowledge of the 11 games and the direction the industry would take in 12 payout percentages -- 13 MS. PYKA: Right. 14 CHAIRMAN COX: -- that we have to take 15 with them. 16 Okay. I think the important thing is 17 that our ultimate goal is, "Could you let us make this 18 as a business decision and propose it to you each 19 year, supported by our rationale and then you tell us 20 each year whether that's something you will 21 appropriate or not?" 22 MS. PYKA: Right. 23 CHAIRMAN COX: Just like other 24 expenditures. 25 MS. PYKA: Right. 0074 1 CHAIRMAN COX: Okay. Thank you, Ms. 2 Trevino. 3 Did you have another question? 4 COMMISSIONER SCHENCK: I have one more 5 question. The interim charge is worded in such a way 6 as to be asking the question of whether legislation 7 will ensure these dollars are not spent to coerce 8 rather than benefit the public. Was there any 9 suggestion that any of our existing advertising is 10 coercive, Nelda, to your recollection? 11 MS. TREVINO: I don't believe so, 12 Commissioner Schenck. There were some questions that 13 Anthony responded to that, you know, goes to the 14 statutory provision about being able to promote the 15 games but not unduly influence and trying to find that 16 balance of promoting and not unduly influence. 17 You know, I think the way this interim 18 charge is written and based on, you know, some 19 previous media articles, I think a lot of this was 20 centered on the Department of Transportation and some 21 of the efforts that that agency had made in regards to 22 the Trans Corridor, you know, their advertising 23 efforts related to the Trans Corridor. 24 But to answer your question, I don't 25 believe that any one -- 0075 1 COMMISSIONER SCHENCK: I don't think I 2 want to touch anything relating to that. But I just 3 want to make sure -- no one is suggesting that our 4 existing advertising has been coercive in any way, to 5 your knowledge? 6 MS. TREVINO: I didn't get that sense. 7 I don't know, Anthony if you want to add to that. 8 MR. SADBERRY: I would concur with what 9 Nelda said. We were not the only agency called before 10 this hearing. And I believe the interim charge was 11 drafted globally. Nothing that I heard suggested 12 there is any focus on the Lottery Commission with this 13 wording in mind, of course. 14 And the nature of the various 15 presentations made by the different agencies would 16 suggest their response to their invitation to attend 17 and give invited testimony, as well as the public, is 18 consistent with what Nelda had described, that it's 19 likely that it's addressed to another agency. 20 But, obviously, because of, if no more 21 than the amount of money we're talking about from the 22 lottery, can't be summarily dismissed. I think the 23 point we were making is that part of, of course, what 24 the Interim Charge Committee does is recommend 25 proposed legislation based upon their findings, should 0076 1 they elect to do so, is to indicate that we already 2 have these counterbalancing considerations as part of 3 our enabling statute in which we've operated under for 4 some period of time; thus, we've lived with it, 5 whereas possibly other agencies may not have. And so 6 that was, I think, the point being addressed to the 7 balance and the unduly influenced language and what 8 have you. 9 But nothing would suggest to me that 10 any member of the panel or otherwise held any opinion 11 or concern about any coercive practices. They did 12 want to know more about the part that the vendors play 13 as opposed to the agency. My sense of that was that 14 they didn't just want us to write a blank check to the 15 vendor, the advertising vendors, and leave it to their 16 interpretation of what we should be doing as an 17 agency, that we be a participant in that process. 18 They also requested the amount of 19 funding for the UT study as well as a copy of the 20 entire report, along with other information, and 21 that's separate from the survey. And I signed the 22 letter with the attachments yesterday, responsive to 23 the specific requests that they made, which included 24 billboard charges in the Dallas-Fort Worth metroplex 25 area, the cost of the UT study, the entire copy of the 0077 1 UT study, as well as some other things that are 2 involved there. 3 And I think we in my mind have been 4 responsive to those requests. And, of course, we'll 5 be responsive to the survey as well in my estimation. 6 COMMISSIONER SCHENCK: Thank you. 7 Appreciate that. 8 CHAIRMAN COX: Nelda, anything further? 9 MS. TREVINO: No, sir. 10 CHAIRMAN COX: Thank you. 11 Why don't we take about a 10-minute 12 break. 13 (Recess: 10:29 a.m. to 10:40 a m.) 14 CHAIRMAN COX: Okay. Let's come back 15 to order. 16 AGENDA ITEM NO. XIII 17 CHAIRMAN COX: Agenda Item No. XIII, 18 report, possible discussion and/or action on the 19 agency's contracts. Mr. Fernandez. 20 MR. FERNANDEZ: Good morning, 21 Mr. Chairman, Commissioner Schenck. My name is Mike 22 Fernandez. I'm the Director of Administrative 23 Services. 24 With me this morning I have Toni 25 Erickson. I asked her to join us. And as you may 0078 1 know, she is the Manager of Support Services. And I 2 asked her to join us because of the topic that we've 3 been discussing in I think the last two Commission 4 meetings regarding prime contracts and other contracts 5 and perhaps how we could better categorize them and 6 bring them forward and make them more meaningful to 7 the Commission in terms of their information. 8 By way of information, Toni's job is 9 the oversight of contracts and procurement in the 10 Administration Division. And as that manager, she 11 sees these contracts on a day-to-day basis. But as 12 importantly, perhaps more importantly, she has the 13 opportunity to go through the risk process as they 14 risk-rank those contracts and then start looking at 15 the background checks and how we're going to deal with 16 that contract internally and how we're going to 17 monitor that contract on an ongoing or go-forward 18 basis. So I asked her to join us so in the event we 19 get into more discussion about that, that she would 20 have the opportunity to hear it firsthand. 21 So with that, what we have placed in 22 your binders for this Commission meeting is our staff 23 recommendation. And what that recommendation centers 24 on are two distinct list of contracts, the first being 25 what we define as the prime contract, and we show what 0079 1 the definition of that is. And what we consider prime 2 contracts are those contracts that directly support 3 the agency's core gaming business function. And what 4 I would say to you, it is my understanding, is that we 5 go through the process and risk-rank those contracts. 6 All of those prime contracts are risk-ranked as high 7 risk contracts. And as you can see in the first 8 spreadsheet are those contracts that we have defined 9 as prime contracts. 10 Now, they do not have to have any 11 particular monetary value because of the importance, 12 perhaps, or the importance and criticality of those to 13 the agency. 14 CHAIRMAN COX: Mike, can I interrupt 15 you at this point? 16 MR. FERNANDEZ: Yes, sir. 17 CHAIRMAN COX: Did you find -- is this 18 a classification that you are setting out, or did you 19 find that that was the criterion that we've been using 20 all along? 21 MR. FERNANDEZ: No, I would say -- 22 well, that's a tough question. I would say that this 23 is not a classification that we found. However, it's 24 my understanding in going through this when Toni and I 25 sat down and went through it, when you take a look at 0080 1 the prime contracts, really, there were two that were 2 added -- 3 CHAIRMAN COX: Okay. 4 MR. FERNANDEZ: -- from the previous 5 report that you used to see and one that we removed. 6 CHAIRMAN COX: So the answer is, 7 "Pretty much"? 8 MS. ERICKSON: It was a combination of 9 both. 10 CHAIRMAN COX: Great! 11 MR. FERNANDEZ: The second spreadsheet 12 that we provided for you is what we have defined as 13 high risk contracts. And again, I would go back and 14 say to you that the criteria is predicated on how we 15 risk-rank our procurements. And we again have lined 16 out for you what the definition of high risk contracts 17 are. 18 And what you see on the second 19 spreadsheet, then, are those that are high risk 20 contracts. When we had discussed listing contracts at 21 a half a million dollars or more and we showed you 22 that spreadsheet, on that particular spreadsheet to 23 this spreadsheet, there have been four contracts that 24 have been removed, two of which are lease contracts 25 for the Dallas and Houston office and two others are 0081 1 for computer hardware. And there's two new contracts 2 that have been added to this particular list. 3 What the staff is recommending -- and 4 what I would also say in dealing with contracts for 5 the past three years or three and a half years is that 6 we believe -- or these contracts we believe are very, 7 very critical, not to minimize others. But we do 8 believe, you know, these are the contracts that we 9 want to monitor, we want to look at, we're watching 10 closely, and that certainly we're cognizant of what's 11 occurring with them. 12 What the staff is recommending is that 13 for the prime contracts, that we bring these back in 14 front of the Commission any time there is a change to 15 the contract. On the high risk contracts, what we're 16 proposing is that we bring the high risk contracts, 17 along with the prime contracts, into the Commission 18 book every quarter, just as an information item. 19 CHAIRMAN COX: Every quarter? 20 MR. FERNANDEZ: Every quarter. But 21 again, we believe these are important contracts. We 22 believe that they're applicable to core services to 23 the agency, that they're high risk because of one of 24 the items contained in the definition. But again, you 25 know, it's for your benefit; it's for your 0082 1 edification. And certainly we're open to showing 2 y'all 72 contracts or reducing this number or bringing 3 it more frequently. It's your pleasure. 4 CHAIRMAN COX: Okay. 5 MR. FERNANDEZ: But that's our 6 proposal. 7 COMMISSIONER SCHENCK: I think your 8 proposal makes sense, and I appreciate your looking 9 into this. And I'm seeing on here I think some 10 contracts that I'm not used to seeing that are 11 interesting under the high risk category. 12 The outside counsel contract, that's a 13 retainer agreement that we have with these people 14 or -- 15 MS. KIPLIN: The outside counsel 16 contract is a three-party contract. All outside 17 counsel contracts go through the Office of the 18 Attorney General and must be approved before you can 19 even retain outside counsel -- must be approved by the 20 Office of the Attorney General. It's based on 21 billables. It's a not-to-exceed amount, contract 22 amount, but it's an hourly rate. 23 COMMISSIONER SCHENCK: So if we don't 24 use them, we don't pay it? 25 MS. KIPLIN: Exactly. 0083 1 COMMISSIONER SCHENCK: Okay. 2 CHAIRMAN COX: Who are they? I've 3 never heard of them. 4 COMMISSIONER SCHENCK: I haven't 5 either. 6 MS. KIPLIN: They're an intellectual 7 property -- 8 CHAIRMAN COX: Oh, that's who they are. 9 Okay. 10 MS. KIPLIN: Right. 11 CHAIRMAN COX: I didn't know them by 12 name, but I know they've done work for us. 13 MS. KIPLIN: And all they do is 14 intellectual property transactional litigation work. 15 Any litigation that would be initiated must be 16 approved beforehand by the Office of the Attorney 17 General. 18 CHAIRMAN COX: Okay. So the AG sets a 19 maximum on it and then approves each individual charge 20 as well? 21 MS. KIPLIN: The agency actually sets 22 the cap. The Office of the Attorney General is the 23 entity that approves all aspects of the contract. The 24 terms of the contract go through the Office of the 25 Attorney General. 0084 1 COMMISSIONER SCHENCK: What are the 2 circumstances that would require us to use outside 3 counsel as opposed to our own counsel or the Attorney 4 General's office? 5 MS. KIPLIN: On intellectual property 6 matters? 7 COMMISSIONER SCHENCK: On any matter. 8 MS. KIPLIN: On any matter. Well, we 9 don't have the expertise in-house, nor does the Office 10 of the Attorney General, or we don't have sufficient 11 resources. 12 COMMISSIONER SCHENCK: Okay. Very 13 good. And the lease agreement for the Austin 14 warehouse, I believe that's the facility I toured 15 recently? 16 MR. FERNANDEZ: That's correct. 17 COMMISSIONER SCHENCK: Okay. That 18 lease is a five-year lease, and the total amount is 19 $4 million -- 3.7 -- lease agreement for Austin 20 warehouse under your high risk category? 21 MR. FERNANDEZ: Yes. 22 COMMISSIONER SCHENCK: I would add that 23 to my -- you know my feelings on renters -- 24 MR. FERNANDEZ: Yes, sir, we certainly 25 do. 0085 1 COMMISSIONER SCHENCK: -- versus 2 owners. 3 MR. FERNANDEZ: We certainly do, yes. 4 COMMISSIONER SCHENCK: Do we get 5 utilities with that or is that just the rent for the 6 space, if you know? 7 MS. ERICKSON: That's just the rent for 8 the space. 9 COMMISSIONER SCHENCK: Okay. That's 10 for a box, we're paying $4 million for five years. 11 Okay. Well, I think it's helpful to have this data in 12 this form. That's just my view. 13 CHAIRMAN COX: I think so, too. I'm, 14 as well, surprised by some of these. What does ADT do 15 for us for $2 million? 16 MS. ERICKSON: ADT -- for the record, 17 Toni Erickson, Support Services Manager. 18 ADT provides building, monitoring and 19 badge access for our headquarters, and then they have 20 the panic alarms for all of our field offices 21 statewide. And so the badge access systems -- 22 CHAIRMAN COX: I don't feel so bad 23 about the 33 bucks a month I pay, after that. That's 24 incredible. 25 MS. ERICKSON: It includes all of the 0086 1 system. They provide all of the badge access, the 2 badges themselves. 3 CHAIRMAN COX: The whole -- so it's 4 hardware and services? 5 MS. ERICKSON: Oh, absolutely. 6 COMMISSIONER SCHENCK: We own the 7 hardware, though, don't we? 8 MS. ERICKSON: No. It's all leased, 9 sir. It includes the servers that are at the front 10 desk there and all of the cameras, everything. It 11 includes the studio surveillance system that's in the 12 drawing studio that video tapes all of the drawings 13 and all of the pre-test activities. It's a quite 14 comprehensive contract. 15 CHAIRMAN COX: Okay. Well, when I was 16 Commissioner on the General Services Commission, I 17 learned that the state leadership has great resistance 18 to acquisition of things like this. Is there any 19 appetite for acquisition of these property- -- I share 20 his concern, as I did when I was there. But I found 21 that the leadership just has no appetite whatever for 22 buying this stuff. 23 MR. FERNANDEZ: Well, what we can tell 24 you is that there's an ebb and flow in terms of 25 hardware. And when you start talking about buying 0087 1 that hardware -- because the cost of that is a 2 one-time cost, the life of which may be four years -- 3 that puts it out in a different procurement category. 4 What that's going to do, it's going to now move you 5 into an appropriations process, that you're going to 6 have to include that in your legislative 7 appropriations request, because it's more than 8 $25,000. 9 And then it's going to have to go in -- 10 today the way that process is working, it's going to 11 have to go into the appropriations process as an 12 exceptional item. And historically in the last I 13 guess four or five processes, they zero out capital to 14 begin with. And I have seen -- 15 CHAIRMAN COX: Just to have a place to 16 start? 17 MR. FERNANDEZ: Just right out of the 18 gate. So if you've got a capital procurement in 19 there, their practice has been in the last four or 20 five sessions is just to zero out capital out of the 21 gate, and then you try to get it back in. And in some 22 instances I've seen them, in agencies where they were 23 particularly concerned about things, remove it 24 completely out of the bill pattern. 25 So it can be very difficult. And the 0088 1 risk that you begin to run over time is that now 2 you've got antiquated equipment and you miss this 3 appropriations process. So now -- it was three years 4 old, now it's six years old and you're taking it back 5 in. 6 So those are things that you look at 7 and try to balance in terms of what that cost is and 8 what the likelihood of lining that up with other 9 hardware or software procurements that you're going to 10 go in with as exceptional items. 11 CHAIRMAN COX: So you've got to not 12 only get it approved once, you've got to get it 13 approved four years later. And the expense of the 14 lease is just right there in operating expenses and 15 kind of no questions asked. 16 MR. FERNANDEZ: That's correct. 17 MS. ERICKSON: And can I add just one 18 more thing on that particular one? The lease cost is 19 just one piece of that total cost that you're seeing. 20 We have 24-hour monitoring services, where if an alarm 21 goes off in any of our claim centers due to, you know, 22 somebody trying to break in or anything like that, it 23 goes straight to ADT and they call the police and then 24 they call us, for all of our claim centers as well as 25 the headquarters. So there is a monthly monitoring 0089 1 cost associated with all of that. 2 And then there is also a digital 3 storage cost associated with all that, because we 4 capture all of the activity that occurs in the 5 headquarters, all of the badge -- every time you badge 6 a card reader, we capture all of that and keep it for 7 a period of time. And so it stores that data, makes 8 it available to us to retrieve it for any kind of 9 informational purposes, as well as the storage costs 10 for all of the drawings, the video taping that we're 11 doing of all of our drawings. 12 So that bill is three separate 13 components. It's the lease of the equipment but then 14 there's also two service components in there that 15 we're being billed for that would continue, even if 16 you were to buy the equipment. 17 CHAIRMAN COX: Okay. That's very 18 helpful. Let me see what else here catches my eye. 19 Website hosting, $2 million. That's 20 over five years, though, so that's only $400,000 a 21 year. 22 COMMISSIONER SCHENCK: I would think we 23 could get a kid in a basement to do that, but maybe I 24 just don't understand it. 25 MR. FERNANDEZ: Kathy was pointing out 0090 1 that was a 15-year lease contract on the warehouse. 2 Thank you. 3 COMMISSIONER SCHENCK: Fifteen years? 4 MR. FERNANDEZ: Yes. That's the total 5 value. 6 MS. PYKA: $284,000 a month -- 7 MR. FERNANDEZ: Yes. I thought that we 8 talked about that. 9 MS. PYKA: -- or a year. 10 COMMISSIONER SCHENCK: What. 11 MS. PYKA: It's $23,000 a month. 12 MR. FERNANDEZ: I thought that we had 13 had that conversation the last time, that that 14 wasn't -- or maybe it was with the parking garage, I 15 think is where we had the previous conversation. 16 COMMISSIONER SCHENCK: And the website 17 hosting, that's another big one. 18 MR. FERNANDEZ: Well, that's an 19 interesting -- that's another interesting 20 conversation, I guess. The issue you get into there, 21 when I began working here, that was an outsourced 22 deal. It wasn't run in-house. I came from an agency 23 that we did all our own -- all our connectivity. All 24 our communications was done internally. 25 The issue now that you step into when 0091 1 you move out to that -- and we're certainly open to 2 looking at that and bringing you comparative costs. 3 But then the issue you start to move towards is, you 4 start to move towards additional -- some additional 5 hardware services, so that takes you into -- that 6 perhaps takes you into a capital issue. 7 But the other side of that is, is FTEs. 8 Okay? Because now when we start to move, whatever the 9 support requirement on that -- and that's not to say 10 that some you may have will also support that, but I 11 can almost promise that there will be additional FTEs. 12 Now, whether that's three or four, I don't know. But 13 then again, you're getting that played against other 14 divisions, other operations in terms of caps. 15 COMMISSIONER SCHENCK: UT must be full 16 of people that do this all the time. I mean, what are 17 other agencies doing? Are they all outsourcing this? 18 MR. FERNANDEZ: I would say probably 19 the mid-range and small agencies are outsourced. Big 20 agencies do their own. They're going to do their own 21 because they've got 200, 300 IT guys, and they're 22 going to have -- 23 COMMISSIONER SCHENCK: Why can't they 24 do it for us for free, since we're -- 25 MR. FERNANDEZ: Well, we bid this. 0092 1 Historically, Commissioner, that's really not been a 2 service that's been provided by other agencies. Where 3 that's been provided by, here about, oh, 10 years ago, 4 the Department of Information Resources moved to Texas 5 Online. And what they did is, they went out and 6 sourced a deal to bring in a service provider to run 7 portals into government, which was Governor Perry's 8 effort. And what that did was provided online 9 services to agencies. 10 What we did is that we opened talks 11 with them on two separate occasions, asking them to 12 come in and take a look at this, because that would 13 have been an easy -- I say an easy -- that would have 14 been a very propitious way and perhaps a financially 15 beneficial way for the agency to move in terms of 16 website services. 17 Both times we found that that 18 particular organization, for whatever reason, was not 19 interested in this particular operation. It may be 20 because of the costs, related costs. Again, we bid 21 this out. This is competitively bid. And what we did 22 the last time, prior to the bid, is that we asked them 23 to come in. Our technology folks and Ms. Coal 24 (phonetic) and I sat down and met with them at length 25 about it. And our sense then was that they were going 0093 1 to bid it, and they chose not to. 2 So we don't know if -- truly we don't 3 know if it was a cost issue or what the implication 4 was on that, but they have not chosen to do it. 5 That's where we would turn. We would not turn to the 6 Workforce Commission or to the Comptroller. We would 7 have gone to Texas Online. 8 CHAIRMAN COX: So by policy, the 9 Legislature has told us, "It's okay to open branch 10 offices, because we're going put a cap on your travel, 11 and you have to open branch offices if you're going to 12 serve remote parts of the state"? 13 MR. FERNANDEZ: Yes. 14 CHAIRMAN COX: They've told us that, 15 "If you think you're going to get more FTEs, look the 16 other way. You're going to fewer FTEs." And if you 17 look at this security, uniformed security guard 18 services -- one of the things I wanted to do when we 19 first got here was either put uniformed Lottery 20 Commission officers in there or get DPS to provide 21 that service. And what I learned is, we couldn't get 22 the FTEs to do it ourselves and DPS couldn't get the 23 FTEs to provide us that service. 24 MR. FERNANDEZ: Well, DPS didn't have 25 the FTEs. Ms. Kiplin and I went and met with one of 0094 1 the commanders at DPS, with a multiple item agenda, 2 one of which was that very -- from my side of the 3 house was that very issue: Could we not secure and 4 pay the cost of that FTE? 5 CHAIRMAN COX: Yes. 6 MR. FERNANDEZ: And the response was 7 that would be taken up the chain of command to review. 8 But the sense that we had -- or certainly I had, and I 9 believe Ms. Kiplin did also when we left -- is that 10 they really had no interest in doing that. 11 Subsequent to that, we again approached 12 them, because they also have a subcontractor, I guess 13 you would call them -- I call them brownshirts -- but 14 they're a security service, and you'll see them in 15 state buildings, and they wear brown uniforms. 16 They're not DPS officers, but they're trained by DPS 17 officers, and they ultimately report up to an area 18 supervisor that is a DPS trooper. 19 So secondly, we thought, "Well, not 20 having a DPS officer, that would be the next best 21 thing. And we went back again and tried to open that 22 conversation, and ultimately it was met with a 23 negative response, is that they didn't have the staff 24 and the time and a variety of different issues. But 25 those would be the things that we would want to do. 0095 1 Previously, we were -- I had the same 2 responsibility at the Workforce Commission. And, as 3 you know, they sit on the backgrounds of the Capitol. 4 So in the Capitol, those are all DPS troopers. And 5 although we did have the ability to let them monitor 6 some of our doors that had access to the underground, 7 access to the Capitol, we could not get them to 8 provide DPS -- we tried to do the same thing there, 9 because we were right there with them. I mean, it 10 wasn't like they were shipping troops, you know, 11 off-site. And again, we could not get an approval or 12 a positive response to even doing that. So that's 13 what we've been met with. 14 COMMISSIONER SCHENCK: I think you're 15 doing a fine job, Mike. I just think from a global 16 perspective, this is kind of silly. I mean, it seems 17 to me DPS could hire -- I've done the calculation, and 18 we're spending $400,000 -- about $400,000 a year on 19 uniformed security. I suspect, given the proper 20 budget, that would probably pay for at least five FTEs 21 over wherever you want to put them. It's up to the 22 Legislature, not up to you. 23 MR. FERNANDEZ: That's correct. 24 COMMISSIONER SCHENCK: But the three 25 contracts we've just been talking about are all 0096 1 scheduled to expire 8/31 of this year. 2 MR. FERNANDEZ: That will be extended. 3 MS. ERICKSON: And they're being -- 4 COMMISSIONER SCHENCK: For one year, 5 year-by-year, or for another like period? 6 MS. ERICKSON: I'm going to address 7 them individually. 8 COMMISSIONER SCHENCK: Let's start with 9 the ADT contract. 10 MS. ERICKSON: Okay. ADT will be 11 extended for one year. And we are in the development 12 stages of the RFP and hope to post it probably within 13 the next 30 days. 14 CHAIRMAN COX: And you've got, then, 15 switching costs, if you bring anyone -- 16 MS. ERICKSON: The transition costs, 17 yes, sir. 18 CHAIRMAN COX: And I bet that could be 19 huge on something like the security system. 20 COMMISSIONER SCHENCK: I would hope 21 not, given that we're paying to lease all this stuff 22 from them anyway. The next guy would -- 23 MS. ERICKSON: Well, it's the 24 installation of all the equipment that's currently in 25 the building, all of the badge readers, all of the 0097 1 badge-making system, the -- sir, it's all the cameras 2 that are on the perimeter of the building as well as 3 all of the monitors. 4 COMMISSIONER SCHENCK: But we don't own 5 any of that stuff? 6 MS. ERICKSON: We don't own any of that 7 stuff. 8 CHAIRMAN COX: Well, they would just 9 take it out if we changed contracts. 10 MS. ERICKSON: Yes. 11 CHAIRMAN COX: So we've got 12 technological lock-in, not only with out lottery 13 operator but with other folks. 14 MR. FERNANDEZ: Well, you have two 15 things going on there. You have obsolescence going 16 on. So the chance you would have at the end of a 17 four-year contract is that many of those or a number 18 of those components are going to be, the shelf life is 19 over, so they're going to be replacing that. That 20 technology, obviously not unlike any others, changes. 21 So you're going to see some replacement costs, I 22 suspect, coming in in any contract, but it won't be as 23 drastic probably, because everything won't have to be 24 replaced. 25 COMMISSIONER SCHENCK: Then the bid 0098 1 from ADT ought to be lower, because the equipment in 2 place, they're not having to replace every year? 3 MS. ERICKSON: Well, the equipment 4 that's in place has been in place for a number of 5 years. 6 CHAIRMAN COX: Don't they replace it on 7 a rotating basis kind of as it's needed? 8 MS. ERICKSON: It depends on how you 9 write your contract. At this point in time, it hasn't 10 been. 11 CHAIRMAN COX: Oh, so we just -- 12 MS. ERICKSON: That's a cost built into 13 the contract. If you request to refresh every three 14 years or whatever, they build that cost into the 15 contract of, you know, every three years providing you 16 newer equipment. And so the equipment that we have in 17 here is the original equipment that was at the start 18 of the contract, unless something breaks. 19 CHAIRMAN COX: Okay. So if something 20 breaks, we have to pay for it? 21 MS. ERICKSON: No. If something breaks 22 down, they do have to replace it. 23 CHAIRMAN COX: If we want something 24 better, we have to pay for it? 25 MS. ERICKSON: Absolutely. Yes. 0099 1 CHAIRMAN COX: Okay. 2 MS. ERICKSON: So in answer to your 3 question, it would be a transition and there would 4 be -- you know, a new vendor would come in. It's 5 competitively bid. And so ADT has the opportunity to 6 bid on it and award to them or, you know, based on 7 best value. 8 The next one was the website hosting. 9 Website hosting was out for bid. All I can tell you 10 is, we are going through that procurement process 11 right now. We did receive proposals. We're 12 evaluating those proposals now and hope to announce an 13 apparent successful proposer. 14 COMMISSIONER SCHENCK: How many people 15 have responded to the -- 16 MS. ERICKSON: We're in the middle of a 17 procurement process and we try not to release that 18 information. 19 COMMISSIONER SCHENCK: Okay. That's 20 fine. 21 MS. KIPLIN: No, I support that. We 22 want to work toward the competitive. 23 COMMISSIONER SCHENCK: Let me ask 24 another question. 25 MS. ERICKSON: Sure. 0100 1 COMMISSIONER SCHENCK: We are making 2 sure that viable potential bidders are aware of the 3 RFP, other than just putting it on a website 4 someplace? 5 MS. ERICKSON: Oh, absolutely. We send 6 it to all vendors that are listed on the CMBL that's 7 maintained by the Comptroller. So if there's 500 8 vendors listed for that class of item, all 500 get the 9 notice of the solicitation. 10 CHAIRMAN COX: And then we publish it 11 as well? 12 MS. ERICKSON: And then we post it on 13 our website; we post it on the marketplace, yes. 14 CHAIRMAN COX: Okay. 15 MS. ERICKSON: And then the last one 16 was uniformed security guard. We are in the middle of 17 that procurement process also. We do not anticipate 18 extending that contract. We expect to award a 19 contract and transition by August 31st. 20 CHAIRMAN COX: Okay. Anything further, 21 Commissioner? 22 COMMISSIONER SCHENCK: No thanks. 23 CHAIRMAN COX: I think this has been 24 very helpful, and I commend you on this. This is 25 excellent work. And I have learned a lot in the last 0101 1 half an hour. 2 I would like to ask you to consider 3 putting a couple of other things on here, which in 4 addition to the estimated total value before that, 5 would you put annual cost so that when we look at 6 this, we don't have to do the ineffective dividing 7 that I do. 8 MS. ERICKSON: We will do annual cost. 9 CHAIRMAN COX: And then the other 10 thing, would you also list what options there are, if 11 any? 12 MS. ERICKSON: Sure. Certainly. 13 MR. FERNANDEZ: And just mirror that on 14 both reports, both spreadsheets. 15 CHAIRMAN COX: Anything else, Mike? 16 MR. FERNANDEZ: No, sir. 17 CHAIRMAN COX: Commissioner? 18 COMMISSIONER SCHENCK: No, thank you. 19 CHAIRMAN COX: Thank you very much. 20 It's an excellent report. 21 MS. ERICKSON: Thank you. 22 MR. FERNANDEZ: Thank you. 23 AGENDA ITEM NO. XIV 24 CHAIRMAN COX: Okay. Extension of the 25 agency's instant ticket manufacturing and services 0102 1 contracts. 2 Mike Fernandez. 3 MR. FERNANDEZ: Yes, sir. Again, good 4 morning. My name is Mike Fernandez. I'm the 5 Administration Director. 6 And what I have on this particular 7 agenda item is for informational purposes and 8 discussion, if it's your pleasure, is a proposal to 9 amend our instant ticket manufacturer's contracts, and 10 that's two amendments. 11 We're going to amend the Pollard 12 contract, and that amendment will affect two things. 13 One, it will exercise an extension, a one-year 14 extension of the contract, through August 31, '09, and 15 it will also change the recommended business 16 subcontracting plan language to now include, in 17 accordance with the HUB requirements set forth by the 18 Comptroller of Public Accounts, which is a change in 19 our operating status. 20 So I wanted to inform you that that 21 contract will be amended, Amendment No. 5 to the 22 Pollard contract. And we are also going to amend 23 SciGames. As you may recall, in April we brought 24 information about a proposed amendment to SciGames, 25 and that would be for the extension of the contract, 0103 1 the one-year extension on the contract, through 2 August 31, '09. We didn't execute that because at 3 that time we had some dialogue or conversations with 4 Michael Anger's staff, Dale Bowersock of the instant 5 ticket folks. And what they were looking at, they 6 were looking at additional options for printing that 7 SciGames had brought to the table. And there were 8 discussions at that time about the options and about 9 the pricing. 10 A number of those options and 11 production methodologies were available and were being 12 used under a term of the contract that said other 13 types of printing. And I believe that as they saw 14 additional options, there was a sense that they wanted 15 to formalize so those prices wouldn't fluctuate. 16 So in this particular contract, we 17 intend to add three things under the amendment, which 18 is Amendment No. 4, and that will be the extension, 19 the additional options, print possessing options, and 20 also the change to the HUB subcontracting language. 21 And I wanted to advise you that the agency and the 22 staff intends to move forward with those. 23 And if you have any question, I would 24 be happy to answer them. 25 COMMISSIONER SCHENCK: I don't have any 0104 1 questions. Thank you, Mike. 2 CHAIRMAN COX: Okay. Mike, do we buy 3 anything from Pollard? 4 MR. FERNANDEZ: Well, we have done, I 5 believe, one or two coupons -- I'm looking at Dale. 6 Is it two coupons? 7 Two coupons in the last year. 8 CHAIRMAN COX: Okay. And I'm assuming 9 that you wouldn't be renewing this if it wasn't worth 10 the processing cost. I don't hear much about Pollard. 11 MR. FERNANDEZ: Well, there are not 12 very many ticket printers out there. 13 CHAIRMAN COX: Yes. So this is our 14 attempt to have a secondary source? 15 MR. FERNANDEZ: That's correct. 16 CHAIRMAN COX: Okay. And these 17 reports, these are within the authority of the 18 Executive Director? 19 MR. FERNANDEZ: Yes, sir. 20 CHAIRMAN COX: Okay. Thank you, Mike. 21 MR. FERNANDEZ: Yes, sir. 22 CHAIRMAN COX: Okay. Oh, Mike, I have 23 one more question. This is under contracts, I think. 24 And, Ms. Kiplin, I hope I can ask this 25 question. 0105 1 I read an article in the paper about 2 maybe Health and Human Services that had a building 3 that hadn't been inspected in years and didn't conform 4 with the disabilities requirement. Is our building in 5 conformity with all the provisions of the various 6 regulations? 7 MR. FERNANDEZ: Yes, sir. 8 CHAIRMAN COX: And that's true for all 9 of our facilities, this one and the remote facilities? 10 MR. FERNANDEZ: To my understanding it 11 is for this building and it is for all of our other 12 buildings. 13 CHAIRMAN COX: Great! Thank you. 14 AGENDA ITEM NO. XV 15 CHAIRMAN COX: Okay. Ms. Melvin. 16 Consideration of and possible discussion and/or action 17 on the external and internal audit reports and/or 18 reviews relating to the Texas Lottery Commission 19 and/or on the Internal Audit Department's activities. 20 MS. MELVIN: Thank you. For the 21 record, Catherine Melvin, Director of the Internal 22 Audit Division. 23 Commissioners, this morning I have one 24 item of update. Internal Audit is currently in the 25 midst of its annual risk assessment efforts. As 0106 1 you're aware, the performance of a comprehensive 2 agency risk assessment forms the basis upon which we 3 will bill the proposed annual audit plan. 4 We have solicited and received input 5 from agency management in this process, and our intent 6 is to bring the proposed Fiscal Year '09 internal 7 audit plan before you for your approval in the 8 September meeting. 9 CHAIRMAN COX: In September? 10 MS. MELVIN: Yes, sir. 11 CHAIRMAN COX: Okay. You're receiving 12 full cooperation from the staff? 13 MS. MELVIN: I am, absolutely. 14 CHAIRMAN COX: Excellent. 15 COMMISSIONER SCHENCK: Thank you. 16 CHAIRMAN COX: Catherine, what are the 17 major audits that you've got in progress right now? 18 MS. MELVIN: I have two in the 19 pipeline, so to speak. We are concluding an audit on 20 background investigations conducted by our agency and 21 another large audit of the bingo licensing process. 22 CHAIRMAN COX: Okay. Now, I know the 23 licensing process was identified by your risk 24 assessment. Is that true also of the other audit? 25 MS. MELVIN: Yes, sir. 0107 1 CHAIRMAN COX: Okay. So these are not 2 special requests? 3 MS. MELVIN: No, sir. 4 CHAIRMAN COX: Do you have any special 5 requests outstanding? 6 MS. MELVIN: No, I don't believe we do. 7 CHAIRMAN COX: Okay. 8 COMMISSIONER SCHENCK: Thank you. 9 MS. MELVIN: Thank you. 10 AGENDA ITEM NO. XVI 11 CHAIRMAN COX: Okay. Item No. XVI, 12 Report, possible discussion and/or action on the Mega 13 Millions game and/or contract. 14 Director Sadberry. 15 MR. SADBERRY: Commissioners, good 16 morning. For the record, my name is Anthony Sadberry, 17 Executive Director. 18 I reported to you at the last meeting 19 the possibility of proposed changes based upon a study 20 that's undergoing the process now regarding the Mega 21 Millions game that would, if proposed, required review 22 and discussion and action, if any, according to the 23 contract provisions. 24 As of this date, we have not received 25 anything specific in that regard, and so there is 0108 1 nothing to discuss or advise you of, except to 2 indicate that we will continue to monitor the 3 situation and will inform you if there are any 4 proposed changes in the game or the contract. 5 CHAIRMAN COX: Thank you. 6 Any questions, Commissioner? 7 COMMISSIONER SCHENCK: No, thank you. 8 AGENDA ITEM NO. XVII 9 CHAIRMAN COX: Item No. VII, report, 10 possible discussion and/or action on GTECH 11 Corporation. 12 Director Sadberry. 13 MR. SADBERRY: Commissioners, again, 14 Anthony Sadberry, Executive Director. 15 You have in your folders the background 16 information that we provided to you on a monthly basis 17 regarding GTECH Corporation, which I refer you for 18 your reading. I would be happy to answer any 19 questions along those lines. Other than that, I have 20 no particular information to report to you regarding 21 GTECH. 22 COMMISSIONER SCHENCK: Thank you, 23 Anthony. I read the materials. I appreciate it. 24 CHAIRMAN COX: Thank you. 25 0109 1 AGENDA ITEM NO. XVIII 2 CHAIRMAN COX: Okay. Executive 3 Director's report. Director Sadberry. 4 MR. SADBERRY: Commissioners, in your 5 folders are the data regarding the FTE status of the 6 agency. And I have no additional information to 7 provide to you at this time under my report but would 8 be happy to respond to any questions you might have. 9 COMMISSIONER SCHENCK: A quick 10 question, Anthony. I see under lottery -- we've dealt 11 with bingo, and I'm hopeful we're going to fill those 12 positions as soon as we can -- that we have nine 13 vacant positions, four we're recruiting screening and 14 four that are listed as vacant. 15 Are we likely to -- and one that's 16 selection acceptance pending. Are we likely to fill 17 any of those positions before the end of the fiscal 18 year? 19 MR. SADBERRY: We have two in Legal or 20 three, Kim? 21 COMMISSIONER SCHENCK: And the 22 follow-up question will be, those expenditures will 23 not probably be helpful toward a reduction in costs? 24 MS. KIPLIN: With regard to the 25 positions that are in Legal, this is a (inaudible) of 0110 1 positions as of July 17th. There's actually three 2 open positions in Legal. I think it is likely that at 3 least one, if not two, will be filled by the end of 4 the fiscal year. It's dependent on process. We are 5 currently interviewing two of those. One is up. 6 We're soliciting applications. They're all up until 7 filled, but we're currently interviewing on two of 8 those. 9 COMMISSIONER SCHENCK: Are there 10 substation start-up costs with a new employee like 11 that, with dental or insurance or things of that 12 nature? 13 MS. KIPLIN: I can take a stab at it. 14 I think the same costs are with any employee that is 15 here in terms of benefits. I know there is a -- 16 COMMISSIONER SCHENCK: My question is, 17 are they front-loaded? 18 MS. PYKA: The actual benefit/costs are 19 funded through the Employee's Retirement System. And 20 so -- 21 COMMISSIONER SCHENCK: They wouldn't be 22 reflected in our bottom line? 23 MS. PYKA: That is correct. That 24 includes retirement, insurance and all the OASI. We 25 get a special appropriation from the Comptroller for 0111 1 the OASI, as well as the retirement and insurance. 2 Back to your question about the 3 vacancies. With the nine vacancies, that reflects 4 probably about a one month share of about 27 to 5 $36,000 that we would consider lapsed salary funds 6 that would be returned as part of that unspent 7 administration that we spoke of earlier. So we track 8 all these vacancies on a monthly basis and consider 9 that to be sweep of unspent admin funds. 10 COMMISSIONER SCHENCK: My suggestion 11 is, just to the extent it's feasible, if somebody is 12 willing to start September 1st versus August 15th, 13 apparently it would save us 30,000 or so dollars, 14 which may be the $30,000 that -- the difference 15 between 9 million 960 something thousand, yes. 16 CHAIRMAN COX: On the other side of 17 that, Kathy, does the Legislature look at your numbers 18 as of August 31 and say, "If you have unfilled 19 positions, you probably don't need those FTEs"? 20 MS. PYKA: They do. That's a valid 21 point. They call them phantom positions. They look 22 at any variance between what we actually have on the 23 books budgeted versus what we have filled. So we do 24 the quarterly reports at the end of each quarter. And 25 the August 31 FTE counts that we have will be the 0112 1 counts that we're judged against when we go before the 2 Legislature for our 2010 and '11 legislative 3 appropriations request. 4 CHAIRMAN COX: So this is another 5 two-edged sword. 6 COMMISSIONER SCHENCK: Yes. 7 MS. PYKA: It is. 8 COMMISSIONER SCHENCK: On the other 9 hand, I mean, the number of vacancies we've got here, 10 at least in lottery, is less than 5 percent workforce. 11 MS. PYKA: Correct. And the other key 12 that I'll point out is, while our budget is at 331, 13 our FTE cap, per the Legislature, is 318.5. So we're 14 really only carrying about a 9 FTE vacancy against our 15 authorized FTE count. And we do that in our budgeting 16 process to make sure that we're always right there 17 where that FTE cap is. 18 COMMISSIONER SCHENCK: Okay. I think 19 that answers my questions. 20 MS. PYKA: Good. 21 CHAIRMAN COX: Okay. 22 Anthony? 23 MR. SADBERRY: Does that answer your 24 question, Commissioner Schenck? 25 COMMISSIONER SCHENCK: Yes, sir. Thank 0113 1 you. 2 MR. SADBERRY: That concludes my 3 report, unless you have additional questions. 4 CHAIRMAN COX: Okay. Any questions, 5 Commissioner? 6 COMMISSIONER SCHENCK: No, thank you. 7 CHAIRMAN COX: Thank you, Director 8 Sadberry. 9 AGENDA ITEM NO. XIX 10 CHAIRMAN COX: Item No. XIX, 11 consideration of and possible discussion and/or 12 action, including proposal, on amendments to Rule 16 13 TAC §401.362 relating to Retailer's Financial 14 Responsibility for Lottery Tickets Received and 15 Subsequently Damaged or Rendered Unsaleable, for 16 winning lottery tickets paid and for lottery-related 17 property. 18 I hope the report is shorter than the 19 description. Ms. Rienstra and Mr. Rogers. 20 MS. RIENSTRA: Deanne Rienstra, 21 Assistant General Counsel. 22 Commissioners, in your notebook for 23 your consideration are proposed amendments to 16 Texas 24 Administrative Code §401.362, which governs the 25 financial responsibility for lottery tickets that have 0114 1 been delivered to a retailer. This rule was 2 previously presented to you with proposed amendments 3 at the May Commission meeting. After discussion at 4 that meeting, the suggested revisions have been 5 incorporated into the proposed amendments before you 6 today. 7 Both the current rule and the proposed 8 amendments state that a retailer is financially 9 responsible for tickets delivered to the retailer. 10 The current rule allows the retailer to receive credit 11 for a complete pack of damaged tickets if there have 12 been no winning tickets validated from the pack but 13 damage has left the tickets unsaleable and the 14 retailer reports the damage with 24 hours of 15 discovering the damage. 16 The proposed amendments allow the 17 retailer to receive credit, not only for a complete 18 pack of tickets but also for a range of tickets within 19 a pack. The proposed amendments also define that the 20 damage or destruction is due to circumstances not the 21 fault of the retailer, sets out additional 22 requirements, including reporting the evidence -- 23 reporting evidencing the loss -- a report evidencing 24 the loss. 25 The reporting period would also be 0115 1 amended to "as soon as reasonably practical under the 2 circumstances but no later than three weeks from the 3 occurrence." 4 Finally, the rule also provided that 5 the director may waive the administrative fee if the 6 damage is caused by an overwhelming unpreventable 7 event caused exclusively by the forces of nature and 8 the retailer has complied with the reporting 9 requirement. 10 Ed Rogers is also here to provide 11 additional information or answer any questions. 12 CHAIRMAN COX: Commissioner? 13 COMMISSIONER SCHENCK: I appreciate 14 your amendments to this proposed rule, and I think 15 they're all very good. I just have two quick 16 questions. I may have asked this before and forgotten 17 the answer, so forgive me if I'm asking it again. But 18 what do we do if someone has returned a pack of 19 tickets -- I asked this. I can remember Gary 20 answering this -- claim destruction of a pack of 21 tickets and then later we get a winning ticket showing 22 up for redemption somewhere else? 23 MS. RIENSTRA: Do you want to answer 24 that? 25 MR. ROGERS: Yes, sir. When -- 0116 1 COMMISSIONER SCHENCK: Is the ticket 2 canceled at that point and it won't be paid? 3 MR. ROGERS: The ticket is canceled in 4 our system, which would require it to be presented at 5 a claim center for payment. In those situations where 6 we have those tickets show up, we do conduct inquiries 7 to determine when the ticket was sold in relation to 8 when the damages occurred. And if it turns out that 9 it's appropriate for us to pay the player the prize, 10 we have a mechanism for feedback from our claim center 11 so that we can go and make an adjustment to the 12 retailer's account, to charge them for that ticket 13 that they sold. 14 COMMISSIONER SCHENCK: At that point 15 they're only getting charged for winning tickets 16 instead of tickets -- 17 MR. ROGERS: We make an adjustment for 18 the range. 19 COMMISSIONER SCHENCK: The whole range? 20 MR. ROGERS: Well, you know, what could 21 happen is, because we track instant tickets for sale 22 by the pack, and for instant tickets, they're not 23 tracked as they're sold individually in our system. 24 There is an opportunity for a ticket to be sold to a 25 player and then some damage to occur in short order to 0117 1 a pack of tickets. 2 The retailer may or may not know 3 exactly -- and let's say in a case of a fire where it 4 was destroyed completely, the remainder of the pack 5 was destroyed completely, the retailer may or may not 6 know exactly what was destroyed versus what was sold. 7 So when they make their report, we look at the 8 validation -- we look at their inventory, we look at 9 the tickets that we have paid prizes on. And with 10 some controls on our system, we make a call as to what 11 is reasonable to think that they had in their 12 possession unsold at the time the damage occurred, so 13 we'll credit them for that range. 14 If it turns out that that range was 15 incorrect because a ticket does show up with a player 16 who says, "I purchased this ticket prior to the 17 damage," again using our systems and some feedback 18 loops we have between the claims process and our 19 retailer accounting process, we would charge the 20 retailer -- we would look at that and say, "Okay. 21 Maybe you sold 10 more tickets than you thought you 22 did when you made the report, and we will charge you 23 for that range of tickets up to where that validation 24 occurred." 25 So it could be one ticket; it could be 0118 1 more. But the expectation is, because most retailers 2 sell tickets in order, if you sold that ticket and it 3 was in the hands of a player prior to the damage, you 4 sold the other tickets associated with it. And these 5 are evaluated on a case-by-case basis. 6 COMMISSIONER SCHENCK: Okay. And as 7 I'm recalling our conversation last time, if we have 8 something like a complete destruction, we'll have at 9 least somebody from GTECH to verify that there has 10 been a substantial fire and it wasn't confined to what 11 they claim was a pack of tickets? 12 MR. ROGERS: Yes, sir. It's our common 13 practice to send GTECH sales reps to assess at the 14 store level any damaged ticket situations that we run 15 across. In the case of a fire, we are also looking at 16 the fire marshal report to get formal documentation 17 that it occurred. 18 COMMISSIONER SCHENCK: Would GTECH 19 normally take pictures of a large group of tickets 20 that's been destroyed? 21 MR. ROGERS: We haven't asked them to 22 do that in the past. But again, typically, if the -- 23 you know, we do send them out to the stores. They do 24 an evaluation. We do ask for the documentation from 25 the local fire officials. We haven't had a need in 0119 1 the past to have documentation such to balance out the 2 payment of prizes versus the charging of retailers for 3 these tickets or if a retailer had a question about 4 whether or not our charges were appropriate. We could 5 ask for additional documentation. 6 COMMISSIONER SCHENCK: But from our 7 side of it, we're not doing much legwork beyond what 8 GTECH is doing for us regularly? 9 MR. ROGERS: Yes, sir. In general, 10 that's true. 11 COMMISSIONER SCHENCK: And so the $25 12 fee that we're looking for to replace the pack is 13 largely to recoup the administrative costs that we 14 have here and not for any investigative -- 15 MR. ROGERS: In general there is some 16 work that has to be done internally. We're looking at 17 the cost of the tickets, some of the costs associated 18 with paying for GTECH for the warehousing and 19 distribution of the tickets through our lottery 20 operator contract. And then typically there is staff 21 time where we spend time, you know, on the phone 22 reviewing system reports and the like, doing some of 23 the analysis that I was talking about. 24 COMMISSIONER SCHENCK: But we're not 25 physically inspecting the tickets most of the time, or 0120 1 are we, that have claimed to be destroyed? 2 MR. ROGERS: For tickets that are 3 completely destroyed, no, because typically there is 4 nothing to return. We do have a process where tickets 5 that are physically damaged, you know, and just 6 considered unsaleable, so maybe they've got extensive 7 water damage or partially burned, those tickets are 8 returned on our instant ticket warehouse, and the 9 Lottery Commission staff that work out there actually 10 do review those in conjunction with the report. And 11 we work real closely with them to manage the overall 12 process. 13 COMMISSIONER SCHENCK: Thank you. 14 CHAIRMAN COX: Ed, is this a small 15 deal, a medium-sized deal or a big deal? 16 MR. ROGERS: I think, you know, 17 overall, in comparison to the overall operation of our 18 instant ticket games, it's a very small deal. 19 CHAIRMAN COX: Okay. 20 MR. ROGERS: For individual retailers 21 that are impacted by these kinds of events, it can be 22 a very big deal. 23 CHAIRMAN COX: Okay. Good answer. 24 Good answer. 25 You've got a double standard for 0121 1 timeliness. I think you said reasonably practical or 2 not later than three weeks. I have a little problem 3 with that. One, I don't know what "reasonably 4 practical" means. There's a word "practicable" that I 5 think means reasonably practical. 6 But what you're doing is putting in a 7 subjective standard and an objective standard. Are 8 you ever going to go in and determine whether it's 9 reasonably practical and say, "Well, it was reasonably 10 practical to do it in two weeks, six days, and you 11 only did it in three weeks. So, sorry, you're out of 12 here"? 13 MR. ROGERS: Well, I think what we're 14 trying to balance, sir, is some of the situations, as 15 was mentioned by Commissioner Schenck in the last 16 meeting, where people are dealing with a crisis in 17 their business and maybe they can't get the report to 18 us as quickly -- you know, get it to us right away. 19 We want to give them some time to recover, to do the 20 evaluation necessary to determine what the impact was 21 on their lottery business. 22 I think we're asking our retailers to 23 do it as quickly as reasonably practical so that we 24 can, you know, stay on top of these issues from a 25 day-to-day business administrative perspective and get 0122 1 them closed out as quickly as possible. My experience 2 has been that when retailers have these problems, they 3 are quick to get with us, because they want to -- 4 CHAIRMAN COX: Because it's in their 5 interest to be quick. 6 MR. ROGERS: Yes, sir, it is. And it 7 is in our interest, too, not to have these things 8 linger. But my experience has been that they get with 9 us very quickly, barring -- for example, during 10 Hurricane Rita, we had some retailer that didn't have 11 access to their businesses for weeks. But for the 12 most part -- 13 CHAIRMAN COX: So in that case, you 14 would probably even waive the three-week requirement? 15 MR. ROGERS: Yes, sir, we would 16 consider that. Typically when we do that, we set it 17 out in a formal process, making it clear that we're 18 making an exception and why we're making the 19 exception. But most retailers, they want to get this 20 stuff taken care of. They want to, you know, get 21 these tickets that they can't sell out of their hands 22 and they want to get their credits as appropriate. 23 CHAIRMAN COX: Okay. Commissioner, do 24 you share any of my concern about that? 25 COMMISSIONER SCHENCK: I do share your 0123 1 concern. On the other hand, I think that the 2 flexibility there is useful. I think it's a statement 3 to the retailers that we don't want these things 4 hanging open and having a claim show up six months 5 later. I was concerned that I think -- what was 6 it? -- we had three business days before -- 7 MS. RIENSTRA: It was within 24 hours 8 of the occurrence. 9 CHAIRMAN COX: From discovery of the 10 occurrence? 11 MS. RIENSTRA: Or discovery of the 12 occurrence, right. 13 COMMISSIONER SCHENCK: I thought for a 14 guy who just walked up to a smoldering business that 15 the first thought in his mind is probably not going to 16 be the lottery tickets, and I think we might have been 17 unfair. So I think this is a fairly common thing to 18 see in other statutory settings where you set a 19 subjective and objective outside limit. 20 And it's interesting to hear that 21 despite putting this in the rule, we think that there 22 would be safety valve presumably somewhere else in our 23 rule to allow for the waiver of the operation of a 24 rule under extraordinary circumstances which, you 25 know, like "Astroid Strikes Corpus Christi" or 0124 1 something, I guess, we would find a way to modify our 2 rules. 3 MR. ROGERS: I think that we would look 4 to the other portion of the rule that in the current 5 rule uses the phrase "act of God," but where we've 6 changed it in this rule to be -- 7 COMMISSIONER SCHENCK: Well, no. I'm 8 just trying to think of a circumstance where -- what 9 have we now got it to be? Fourteen days or how many 10 business days are we saying is the outside -- 11 MS. RIENSTRA: Three weeks. 12 COMMISSIONER SCHENCK: Okay. After 21 13 days. I'm trying to think of what the circumstance 14 would be that would cause us to say, "Okay. Your 15 application for a credit four weeks later, it's going 16 to be something really extraordinary I would expect. 17 MR. ROGERS: Yes. And we did see that 18 in real limited instances. You know, with Hurricane 19 Rita, most retailers were back -- we were in 20 communication with them within a week or so of the 21 City of Beaumont, for example, being opened up. But 22 there were some places where, in East Texas and along 23 the coast, where retailers couldn't get back into 24 their businesses or the damage was so extensive that 25 it just took more time. But typically we do set a 0125 1 limit, you know. 2 COMMISSIONER SCHENCK: I think you need 3 to have that limit or the stragglers will come in God 4 knows when. And the longer the time goes out, the 5 bigger the potential claim for credit can be and the 6 more difficult the administrative task is of 7 determining the validity of it. So I'm for setting an 8 outside limit. But I think this is fairer that the 9 24-hour provision we had before. 10 CHAIRMAN COX: I was fine with the 11 outside limit. I didn't understand the value of the 12 reasonably practical. But if y'all think it's 13 valuable, well, that's fine. 14 Is the manner of notification clear -- 15 MR. ROGERS: Yes, sir. 16 CHAIRMAN COX: -- how they have to 17 notify us? 18 MR. ROGERS: Yes, sir, I believe it is. 19 We require them to notify us through the lottery 20 operator hotline. We use the lottery operator hotline 21 because -- 22 CHAIRMAN COX: So is that clear with 23 some other part of a contract, of their contract with 24 us, as to what is considered to be notice? 25 MR. ROGERS: From the retailer? 0126 1 CHAIRMAN COX: Yes. Is it in here or 2 is it just understood? 3 MR. ROGERS: Well, yes. They just need 4 to make a phone call to our hotline and make that 5 report. 6 CHAIRMAN COX: Okay. But does it say 7 that here? 8 MS. KIPLIN: Yes. 9 MR. ROGERS: Yes. 10 CHAIRMAN COX: Okay. Thank you. 11 MR. ROGERS: Yes. I'm sorry. 12 CHAIRMAN COX: That's okay. And I 13 guess that does it for me. How about you? 14 COMMISSIONER SCHENCK: I'm happy with 15 this. And I would propose we adopt staff's 16 recommendation. 17 CHAIRMAN COX: Okay. Second. 18 All in favor, say "Aye." 19 COMMISSIONER SCHENCK: Aye. 20 CHAIRMAN COX: Aye. 21 Motion carries 2-0. 22 COMMISSIONER SCHENCK: Thank you. 23 CHAIRMAN COX: Thank you. 24 COMMISSIONER SCHENCK: Does someone 25 have the T-bar? 0127 1 MS. KIPLIN: Ms. Rienstra has it. 2 MS. RIENSTRA: I have it. 3 CHAIRMAN COX: Ms. Kiplin, if I could 4 comment on one provision of that. 5 MS. KIPLIN: Yes, sir. 6 CHAIRMAN COX: I think we've had this 7 discussion before, but this says three weeks, and 8 we've had a discussion before about business days 9 versus calendar days. And I would hope that at some 10 point, we would decide uniformly whether we're going 11 to say calendar days or business days. And I have no 12 preference. I just would like us to be consistent. 13 MS. KIPLIN: Throughout all the rules, 14 wherever there is -- 15 CHAIRMAN COX: And I'm not saying amend 16 it, but just as new ones come up. 17 MS. KIPLIN: Okay. We will keep that 18 in mind and we will do so. 19 CHAIRMAN COX: I will just say this: 20 Calendar has the advantage of, we don't have to argue 21 about whose business days. 22 COMMISSIONER SCHENCK: I always prefer 23 calendar days. And my understanding is, generally you 24 do not count the day of the event but you do count the 25 last day. 0128 1 MS. KIPLIN: And if that's the 2 Commission's preference, that's what we'll move to. 3 We'll move to calendar days. 4 CHAIRMAN COX: I think I've stated the 5 opposite preference before, but it has occurred to me 6 that that's probably preferable, to do it -- 7 COMMISSIONER SCHENCK: Even in law 8 practice, you get debates about what's a legal 9 holiday, what isn't a legal holiday. If the court is 10 closed, the building isn't accessible. 11 MS. KIPLIN: It's the Commission's 12 prerogative. And as of today, when we bring forward 13 rules, either new or proposed amendments that have 14 deadlines, we'll move towards calendar days. 15 CHAIRMAN COX: Excellent. 16 AGENDA ITEM NO. XX 17 CHAIRMAN COX: Agenda Item No. XX, 18 consideration of the status and entry of possible 19 orders. 20 Ms. Kiplin. 21 MS. KIPLIN: Commissioners, I would 22 like to pass the first docket on Case A. That's Handy 23 Plus. We have been notified that that retailer is in 24 bankruptcy. It's a chapter 7. It is a corporation. 25 We do have the ability to, so long as the individuals 0129 1 behind the corporation haven't filed bankruptcy, to 2 proceed against them for whatever funds we are out. 3 So I would like to pass that item, with your 4 permission. 5 I would like to take up Letters B, C 6 and D. Those are all lottery retail cases. They're 7 all insufficient funds that were available at the time 8 that we swept. The State Office of Administrative 9 Hearings and Administrative Law Judge has recommended 10 revocation of the license. Staff supports that and 11 recommends that you vote to revoke the licenses in 12 each of these cases. 13 CHAIRMAN COX: Move approval of the 14 staff recommendation. 15 COMMISSIONER SCHENCK: I second the 16 motion. 17 CHAIRMAN COX: All in favor, say "Aye." 18 COMMISSIONER SCHENCK: Aye. 19 CHAIRMAN COX: Aye. 20 Motion carries 2-0. 21 MS. KIPLIN: Commissioners, I have 22 orders. 23 Commissioners, the next matter is the 24 matter of Deepwood Exxon, is a lottery agreed order. 25 Commissioners, this is a case of an employee in a 0130 1 retail location in Williamson County pin-pricking. 2 This particular individual has been indicted on 18 3 counts of influencing the selection of a winner, which 4 is a second degree felony. 5 The lottery moved forward to summarily 6 suspend this retailer's license, and that did occur. 7 The suspension was for 14 days. The show-cause 8 hearing was dismissed due to the fact that the 9 employee is no longer employed there. 10 Like I said, it's a corporation. The 11 investigation did not indicate or reveal that any of 12 the principals in this corporation were involved in 13 the activity. Consistent with the way in which 14 you-all have voted on these cases, similar cases, we 15 are recommending an additional 20-day suspension for 16 this particular retailer. The retailer has agreed to 17 it. So has the Lottery Operations Division. Staff 18 recommends that you approve that order. 19 COMMISSIONER SCHENCK: Kim, my 20 understanding of this matter is that we've also 21 satisfied ourself not only the principals were not 22 involved but that there was no familial or other 23 relationship between the principals and the employee 24 at issue here? 25 MS. KIPLIN: That's my understanding. 0131 1 Mr. Rogers is here, and he can correct me if I'm 2 wrong, but that's my understanding, that there was no 3 relationship. This employee is gone. 4 MR. ROGERS: For the record, Ed Rogers, 5 Retailer Services Manager for the agency. 6 Yes, sir, that's correct. The 7 individual that was engaged in this activity was 8 simply an employee. He was actually the store manager 9 but was simply an employee of the company that owned 10 the store and did not have a family relationship with 11 the owners. 12 COMMISSIONER SCHENCK: Or any other 13 relationship that would give rise to probable cause to 14 believe, in the absence of actual proof, that anyone 15 involved in the ownership would have had foreknowledge 16 of the activities he was engaged in? 17 MR. ROGERS: That was not seen in the 18 facts gathered in the investigation. 19 COMMISSIONER SCHENCK: Okay. I 20 appreciate that. 21 I would recommend we adopt the staff's 22 recommendation. 23 CHAIRMAN COX: I'm going to second 24 that, but I have a comment first. 25 MS. KIPLIN: Yes, sir. 0132 1 CHAIRMAN COX: Ms. Kiplin, you and I 2 discussed -- and I think we've talked about it at a 3 previous meeting -- the fact that as we assess 20-day 4 closures against the stores, we're shooting the school 5 children of Texas in the foot, along with the operator 6 of the store, at least potentially. And you told me, 7 I think, that we have no statutory authority to assess 8 monetary damages. Is that correct? 9 MS. KIPLIN: That's correct. And the 10 State Lottery Act provides for no authority to impose 11 monetary forfeitures. I do think that we can explore, 12 in the form of an agreed order -- 13 COMMISSIONER SCHENCK: A settlement, 14 yes. 15 MS. KIPLIN: -- on imposition of a 16 monetary forfeiture. But to the extent that we 17 actually were to have to proceed to take somebody to 18 hearing, you would not have the discretion to impose a 19 monetary forfeiture. You would have no authority to 20 do so. 21 CHAIRMAN COX: Okay. It seems that two 22 things are indicated. One, in these kinds of cases, 23 we should pursue a settlement that involves monetary 24 damages rather than closing down the shop. And 25 secondly, we should inform the Legislature that this 0133 1 is a counter-productive provision and that we would 2 sure appreciate some help on it. 3 MS. KIPLIN: We will proceed in that 4 regard. 5 CHAIRMAN COX: All in favor, say "Aye." 6 COMMISSIONER SCHENCK: Aye. 7 CHAIRMAN COX: Aye. 8 Motion carries 2-0. 9 COMMISSIONER SCHENCK: That's a great 10 point. 11 MS. KIPLIN: Commissioners, if I could 12 take up the next case, this is the matter of City Wide 13 Club Chapter 4 Job and Youth Education. 14 Commissioners, this is an agreed order between the 15 conductor in the Bingo Operations Division. It's for 16 the club playing outside of its licensed time. It did 17 have an application amendment pending to move the days 18 and the times. It wasn't approved at the time. 19 Staff recommends a payment of an 20 administrative penalty in the amount of $200. That 21 would be consistent with how you have disposed of 22 similar cases. Staff recommends that. 23 COMMISSIONER SCHENCK: I have no 24 questions. 25 CHAIRMAN COX: Kim, so we would be able 0134 1 to say, if we asked somebody in the Legislature to 2 help us with this, that it's already set up this way 3 in bingo? 4 MS. KIPLIN: Oh, yes. And "set up this 5 way," what you're talking about is the imposition of 6 monetary forfeitures? 7 CHAIRMAN COX: Yes. 8 MS. KIPLIN: Yes. As a matter of fact, 9 it's pretty standard language in a regulatory agency's 10 statutory authority in imposing disciplinary actions 11 against licensees to be able to impose monetary 12 forfeitures. And it's generally not a flat rate; it's 13 an up-to amount. You take in a bunch of different 14 factors. So I was pretty surprised when I started 15 reviewing the State Lottery Act years ago that it did 16 not have that authority. 17 CHAIRMAN COX: Okay. Move for approval 18 of the staff recommendation. 19 COMMISSIONER SCHENCK: I second the 20 motion. 21 CHAIRMAN COX: All in favor, say "Aye." 22 COMMISSIONER SCHENCK: Aye. 23 CHAIRMAN COX: Aye. 24 And the motion carries 2-0. 25 MS. KIPLIN: Commissioners, the last 0135 1 case is an agreed order between a manufacturer, 2 International Gameco, and the staff. This is a case 3 in which the manufacturer I think inadvertently sold a 4 deal that had two form numbers of pull-tab bingo 5 tickets, to a conductor. And even though -- and the 6 facts, as you consider agreed findings of fact, are 7 really set out in 2 and 3. 8 What it ultimately ended up being was a 9 violation of a rule provision that selling pull-tabs 10 that had not been approved in the state for sale, and 11 it had to do with the combination in an error in terms 12 of packing slip. 13 There has been no history of violations 14 by this particular manufacturer in the past. And the 15 staff is recommending a monetary forfeiture. As I 16 understand it, there were three incidences. 17 Mr. Sanderson can step on me if I'm wrong on that. 18 And we're recommending a monetary forfeiture of $750 19 against this manufacturer for the violation. No 20 history. Cooperation by the manufacturer led to that 21 amount. 22 Staff recommends approval. 23 COMMISSIONER SCHENCK: I just have a 24 quick question, Phil, on how we count what a violation 25 is. When we say there's three violations here, they 0136 1 sent out three packages to conductors? 2 MR. SANDERSON: In our investigation, 3 there were three deals that had this production error 4 noted in it, the combination of two different form 5 numbers. So that's counted as, each one as a separate 6 violation. 7 COMMISSIONER SCHENCK: But we're 8 talking about ranges of pull tickets. Right? This is 9 a packet of them -- 10 MR. SANDERSON: Yes, sir. 11 COMMISSIONER SCHENCK: -- not each 12 individual? Okay. And they all went to one 13 conductor -- 14 MR. SANDERSON: They -- 15 COMMISSIONER SCHENCK: -- if you 16 recall? 17 MR. SANDERSON: If I recall, I think 18 maybe two of the deals were at the bingo location 19 where the conductor plays, and the other deal was at 20 the distributor's quarters. 21 COMMISSIONER SCHENCK: Well, I think 22 your position is logical. I just want to understand 23 how it is, because this comes up from time to time in 24 all kinds of contexts. And you could have 3,000 25 violations for each ticket or you could have three, 0137 1 and I think it makes sense to have three. Thank you. 2 CHAIRMAN COX: Phil, the Bingo Enabling 3 Act enables us to impose a penalty of $1,000 for each 4 violation, and you're recommends $750 for all three. 5 So we got from $3,000 that we could have imposed to 6 $750 that you've suggested we impose? 7 MR. SANDERSON: Yes, sir. 8 CHAIRMAN COX: Is there any kind of 9 consistency on that? Can you show precedent for that? 10 Do you just -- do people just make that decision on an 11 ad hoc basis? 12 MR. SANDERSON: We have historically 13 looked at the violations. And, you know, the statute 14 allows us up to $1,000 per violation. We start with 15 the determination of $1,000 per violation, and then 16 reduce that amount based on the mitigating factors of 17 cooperation. Most of the violations that we have 18 noted as it relates against manufacturers historically 19 have been anywhere between $100 and $200 per 20 violation, depending on the severity of the violation. 21 CHAIRMAN COX: Okay. So why in this 22 case would it be $250? 23 MR. SANDERSON: I think this one here 24 is because in this case, it was a potential pull-tab 25 error that could have harmed the charity had they paid 0138 1 those amounts out that were incorrect within the deal 2 itself, and so we felt like it was a little bit more 3 important that we try to increase it just a hair over 4 that. 5 CHAIRMAN COX: Boy, I'm having real 6 trouble with how you draw that fine a line. 7 COMMISSIONER SCHENCK: Well, there is 8 another thing here. The error here was not identified 9 by the manufacturer but by the conductor, wasn't it? 10 MR. SANDERSON: By the conductor, yes. 11 COMMISSIONER SCHENCK: Okay. So this 12 wasn't self-reported? 13 MR. SANDERSON: The conductor notified 14 us when they realized that they had a deal that they 15 were selling that had incorrect tickets in it, and 16 that's when we notified the manufacturer. They gave 17 us the timeline of when the production of these deals 18 had occurred. They pulled their records and they 19 noted that there was an instance of possibly -- i want 20 to say a range of six to ten deals that came out at 21 that time that may have had that error. 22 We have recalled all of those deals and 23 went through each one individually and ended up with 24 the three as the ones that actually had the error 25 occur. 0139 1 CHAIRMAN COX: Well, I don't know 2 exactly how this should be done, but I think we should 3 have objective standards for penalties. And the only 4 objective standard I see is the $1,000. The rest of 5 it seems to be subjective, based on how you like the 6 guys and the like. And I just have a little problem 7 with that, because I think that we should -- I know 8 you try to be fair to everybody. But can you produce 9 evidence that you were fair to everybody when you 10 don't have any objective standards for deciding what 11 to do? 12 MR. SANDERSON: Historically the other 13 violations that we've noted against manufacturers as 14 it relates to utilizing the $1,000, the way it's word 15 is $1,000 per violation and each day that that 16 violation had occurred. And the other violations that 17 we had dealt with notification of officers or 18 notifying us of a change in their Board of Directors, 19 that they're required to notify us of these certain 20 changes. And so those incorporated $1,000 each day 21 that they had failed to notify us. 22 CHAIRMAN COX: Right. 23 MR. SANDERSON: And that's where the 24 reduction in the penalty from $1,000 down began to 25 occur. This is the first instance or the second 0140 1 instance, I believe, of a product being put into the 2 market that had a discrepancy. The other instance I 3 can think of is a bingo paper that did not have the 4 state seal on it that was put into the market. And 5 the calculation of the penalty in that case was 6 similar to the calculation of the penalty in this 7 case. 8 CHAIRMAN COX: Well, this goes to the 9 integrity of the game. And when you're in the 10 gambling business, all you're selling is integrity. 11 And whether it was carelessness, whether they will 12 never do it again, they promise, whether they've never 13 done it before, they did it, and it affects the 14 integrity of the game. Now, I understand that the 15 lottery -- I mean the bingo operators were reimbursed 16 for the extra costs they had because they had to pay 17 out too much. 18 MR. SANDERSON: Yes, sir. 19 CHAIRMAN COX: But I don't see any 20 mitigation here of -- you know, $1,000 to me for a 21 violation like this seems like a pittance. These 22 people need to be more careful. 23 MR. SANDERSON: Yes, sir. 24 COMMISSIONER SCHENCK: I think I agree 25 with that. It's interesting, though. I think we -- 0141 1 this is an important philosophical question of how we 2 decide - or how, Phil, your decide it, because your 3 discretion is being exercised here -- when you're 4 moving down from $1,000, what factors you look at, 5 take in favor of aggravating or mitigating 6 circumstances. And, you know, this is a problem all 7 over the place. 8 I mean, the federal sentencing 9 guidelines are all about this so you can put together 10 a history score and, you know, there are -- but 11 ultimately somebody has got to make a call about where 12 the line needs to be drawn. 13 But I think that the Chairman's point 14 about the integrity of the game is important. And I 15 agree, I don't see a whole lot of mitigation here, 16 other than that they agreed to pay for the losses 17 which, frankly, they would have been liable for in any 18 event it seems to me. 19 So if what we're thinking about 20 suggesting is going back and maybe reconsidering the 21 amount of this fine, I think I would support that. 22 CHAIRMAN COX: Kim, now tell us where 23 we are on this. What would that process be and would 24 it cost us more than we're going to gain by posing an 25 additional penalty? 0142 1 MS. KIPLIN: Well, first of all, these 2 are your orders and you're setting, you know, policy 3 through the entry of your orders. And you're free to 4 reject a staff proposal and staff recommendation and 5 say, "I can't live with that." 6 Then you would direct the staff to 7 work -- I guess a couple of things. One, you could 8 say, "I'm not going to enter into any kind of agreed 9 order short of, you know, surrendering the license." 10 That might cause a contested case proceeding. 11 Somebody may decide that that's a little too 12 excessive. 13 CHAIRMAN COX: Is that one of the 14 potential -- 15 MS. KIPLIN: You could. You could say, 16 "This is such a serious violation, you know, the 17 disciplinary action, you know, I'm not willing to 18 agree to anything, you know, below that." 19 You could direct the Bingo Director to 20 go back to the respondent, carry to the respondent the 21 concerns of the Commission and see if there's another 22 amount of a penalty that would be what you would 23 consider to be appropriate, given the facts and 24 circumstances. 25 So you can do whatever you really want 0143 1 to do when these are brought to you, so long as 2 they're supported by statutory authority. 3 Now, can I go to another in terms of a 4 framework or would you like me to stop? 5 CHAIRMAN COX: I want you to stop for 6 just a second. 7 Did they manufacture these products, 8 Phil, or did they buy them from some third party? 9 MR. SANDERSON: They manufactured them. 10 CHAIRMAN COX: Okay. So we're talking 11 about manufacturing negligence? 12 MR. SANDERSON: Yes. 13 CHAIRMAN COX: Okay. Go ahead, Kim. 14 MS. KIPLIN: I wouldn't want you left 15 with the impression that there is no framework for the 16 imposition of monetary forfeitures. There is both in 17 statute and both by the rules that you've adopted, the 18 administrative penalty guideline rules. I would say 19 that with the administrative penalty guideline rules, 20 I think the focus was primarily on conductor. 21 You know, if you look at the framework, 22 I think we acknowledge that it was focused primarily 23 on conductor violations. This might be a good 24 opportunity to go back, look at that rule and consider 25 revising that rule to incorporate violations or 0144 1 conduct by manufacturers, distributors and the like. 2 But you do have an administrative 3 penalty subchapter that's set out in the Bingo 4 Enabling Act, and it does require taking into 5 consideration different elements. You've hit on some 6 already, you know, in terms of mitigating and 7 aggravating. I'll just put some on the record, 8 because I wouldn't want the record -- somebody to 9 construe the record that decisions are made that might 10 be ad hoc, arbitrary and the like; in other words, 11 there is consideration and there is due deliberation. 12 The seriousness of the violation -- 13 that includes the nature, circumstances, extent and 14 gravity of the prohibited acts -- the history of the 15 previous violations, the amount necessary to deter 16 future violations, efforts to correct the violation. 17 And then this is the catch-all: Any other matter that 18 justice may require. That's your statutory -- 19 CHAIRMAN COX: Okay. Well, I would say 20 from the standpoint of 1 and 3, read 1 and 3 again. 21 MS. KIPLIN: Sure. 22 COMMISSIONER SCHENCK: The seriousness 23 of the violation and -- 24 MS. KIPLIN: And then the amount 25 necessary to deter a future violation. And then there 0145 1 is any other matter that justice may require. 2 When you adopted your rules, you picked 3 up the statutory language. And then in term of trying 4 to give more meat on the bones, if you would, on what 5 "any other matter that justice may require," you've 6 got "including," which is considered to be a term of 7 enlargement so, you know, we do our best to think, but 8 there may be something else that justice may require 9 that is not part of a laundry list when we go to reach 10 that. 11 But for purposes of this, whether the 12 violation was intentional, inadvertent, simple 13 negligence, gross negligence or the unavoidable result 14 of a related violation, cooperation with the 15 Commission, length of time the licensee has held a 16 license, risk to the public or state, whether the 17 organization or person has acknowledged the violation 18 and agreed to comply with the terms and conditions, 19 and the cost of investigation, examination or audit 20 that was associated with the violation. 21 So you do have a framework. Obviously, 22 in taking into consideration the amounts imposed, 23 there is discretion that occurs. 24 CHAIRMAN COX: Well, I think what we've 25 got here is a maximum penalty that is grossly low, 0146 1 considering that this could be an integrity-of-the- 2 game kind of issue which I take very seriously and 3 that our only alternative is to shoot them. 4 MS. KIPLIN: You could suspend their 5 license. There are ramifications on, obviously, the 6 imposition of those penalties. 7 CHAIRMAN COX: That hurts the 8 charities, too. 9 COMMISSIONER SCHENCK: But it's 10 interesting. We had a nice presentation from Bruce 11 earlier on the charts for the paper bingo is going 12 down. Instant tickets are becoming the game in Texas. 13 I mean, that's it. And we don't manufacture them; the 14 charities don't manufacture them. The conductors 15 don't have an opportunity to know what it is that 16 they're opening in a pack. 17 And if the word gets around that, you 18 know, sometimes these guys are printing multiple 19 winners or they're doing something that they shouldn't 20 be doing, that's potentially extremely harmful. The 21 more I think about this, I think the more I agree with 22 you that this is -- the seriousness of the offense 23 here is substantial, though I agree there is no 24 evidence that there is anything other than negligence 25 involved here and that some of these factors trip in 0147 1 our favor, which is why I understand, Phil, that you 2 were recommending something under the maximum. But 3 this is the game. I mean, for charitable bingo, this 4 is it. 5 CHAIRMAN COX: Yes. The investigation 6 you made, Phil, did it include finding out why this 7 happened and whether steps have been taken to ensure 8 that it will not happen again? 9 MR. SANDERSON: They did investigate 10 that? 11 CHAIRMAN COX: "They" is who? 12 MR. SANDERSON: Our investigators and 13 our audit staff. And also in discussion with the 14 manufacturer, what happened in this particular case is 15 that both of these two games are similar -- the exact 16 game, which is different payout structures. And when 17 they had the stack of winning sheets when they were 18 manufacturing the tickets, the worker inadvertently 19 picked up three sheets and put them in the wrong 20 place, and they have since moved those to where 21 they're separate, completely separate now, to where 22 they won't be stacked together. 23 CHAIRMAN COX: Okay. 24 MR. SANDERSON: They've taken that -- 25 and also I think the other -- you know, the other 0148 1 thing that I was looking at is whenever they have 2 these production run on tickets, they're usually 3 printing about, you know, a million or more tickets. 4 And three deals in this particular case I think is 5 like 2,000 tickets. 6 COMMISSIONER SCHENCK: The problem I 7 think is that the $1,000 fine makes sense to me for, 8 you know, the Elks Club or somebody else. But the 9 manufacturer, it doesn't -- 10 CHAIRMAN COX: -- pocket, or it should 11 be, because if they're providing services to our 12 charities, they should be financially sound. And I 13 think $3,000 is a slap on the wrist, or less. 14 So, Commissioner, I would recommend 15 that we instruct staff to do whatever to assess the 16 maximum penalties for each instance here and either 17 amend this today or bring it back to us next time. 18 COMMISSIONER SCHENCK: Or consider 19 suspension, whether suspension should come back as a 20 possible alternative, but one of those two 21 alternatives. 22 CHAIRMAN COX: And suspension again, if 23 it's bad enough, we've got to send that message. If 24 it isn't, that hurts the charities because it reduces 25 their supply of product. So, you know, the two-edged 0149 1 sword there is something we should consider as well. 2 But if this in your opinion affects the integrity of 3 the game in any serious way, we should consider it, 4 absolutely, Commissioner. 5 MR. SANDERSON: Yes, sir. 6 CHAIRMAN COX: What else do we need to 7 do, Ms. Kiplin? 8 MS. KIPLIN: I think that's it. You've 9 rejected this proposed settlement agreement. Now, I 10 do need to make sure you-all know, this was the form 11 of an agreement. And the licensee is free to say, 12 "I'm not going to agree to that." 13 CHAIRMAN COX: That's fine. 14 MS. KIPLIN: Then this would proceed to 15 an administrative hearing. 16 CHAIRMAN COX: America is a wonderful 17 country. 18 MS. KIPLIN: And in terms of findings 19 and conclusions of law, you know, there are 20 limitations that are imposed. It would go over to the 21 State Office of Administrative Hearings, and it would 22 come back in the form of a proposal for a decision. 23 CHAIRMAN COX: So would it be your 24 recommendation that we go ahead and approve this, 25 based on the potential cost of imposing a higher 0150 1 penalty? 2 MS. KIPLIN: Well, you know, that's a 3 tough one because -- 4 COMMISSIONER SCHENCK: I don't like 5 that. 6 MS. KIPLIN: Yes, because you're 7 looking at two different principles. You know, you're 8 looking at cost to litigate, which I think in the 9 past, you know, that's not something that you've 10 really been -- 11 CHAIRMAN COX: If the Commissioner is 12 not happy with it, I'm not either. 13 COMMISSIONER SCHENCK: No. I don't 14 think as a matter of policy we would ever let the idea 15 or even the -- which these people have not suggested 16 at all -- or the threat that someone would litigate 17 with us as a reason to cow. Forget it. We do what I 18 think we feel is best and move on. 19 CHAIRMAN COX: I have a cost-benefit 20 relationship kind of framework for things. And, 21 obviously you have a different one, and it's 22 appropriate here. 23 One other thing I think we ought to do, 24 Phil, is I think, with the help of the Legal staff, 25 you ought to go through these administrative penalties 0151 1 that are set by statute and see if they're 2 ridiculously low like this one is, and consider asking 3 the Legislature to give us more authority to impose 4 something meaningful but not suspension, which hurts 5 the operators, or shooting them, which again hurts the 6 operators. I don't think this is one where either 7 suspension or revocation is appropriate, but this 8 isn't enough money. 9 MR. SANDERSON: And I think the -- of 10 course, I wasn't around when they wrote the statute as 11 it relates to the penalties. But there again, it 12 addresses broadly, you know, a violation of the 13 statute, up to $1,000. And there again, I think the 14 statute is written mainly for organizations that 15 conduct bingo. 16 CHAIRMAN COX: Exactly. And maybe we 17 need to look for another category, or maybe we need to 18 look how old that was and seek an inflation adjustment 19 or those kinds of things that you periodically do with 20 these things in which the Legislature probably doesn't 21 have a mechanism to do, and we need to inform them. 22 Obviously, we're going to act as a 23 resource and not advocate anything but just let them 24 know, "Hey, this thing is 15 years old. It wasn't 25 enough to start with. It didn't take into account the 0152 1 fact that we're talking about a charity or a 2 commercial lessor or a manufacturer." So we need to 3 just do some work on these things so that they can 4 give us appropriate tools to do our job with. 5 COMMISSIONER SCHENCK: I think the 6 highway sign in Texas says up to -- what was it? -- 7 $100 or $500 fine for littering, you know. I just got 8 back from California. It said up to $10,000 fine for 9 littering. I know people in Texas that would 10 rather -- well, they're not litterers, but for whom a 11 $500 fine wouldn't change the difference between 12 filling up their ash tray and not. 13 CHAIRMAN COX: Okay. Is that all we 14 need to do, Ms. Kiplin? 15 MS. KIPLIN: Yes, I think so. 16 CHAIRMAN COX: Okay. 17 MS. KIPLIN: You-all have rejected this 18 proposed settlement agreement and are directing the 19 Bingo Director to make contact with the licensee. 20 CHAIRMAN COX: Excellent. 21 COMMISSIONER SCHENCK: Yes. 22 AGENDA ITEM NO. XXI 23 CHAIRMAN COX: Okay. Item XXI, public 24 comment. Is there any public comment? 25 (No response) 0153 1 CHAIRMAN COX: All right. With your 2 permission, Commissioner, we'll go into executive 3 session. 4 COMMISSIONER SCHENCK: Yes. Thank you. 5 AGENDA ITEM NO. XXII 6 CHAIRMAN COX: At this time I move the 7 Texas Lottery Commission go into executive session: 8 A. To deliberate the duties and 9 evaluation of the Executive Director, the Deputy 10 Executive Director, Internal Audit Director and 11 Charitable Bingo Operations Director and to deliberate 12 the duties of the General Counsel, pursuant to 13 Section 551.074 of the Texas Government Code; 14 B. To receive legal advice regarding 15 pending or contemplated litigation pursuant to 16 Section 551.071(1)(A) and/or to receive legal advice 17 regarding the settlement offers, pursuant to Section 18 551.071(1)(B) of the Texas Government Code and/or to 19 receive legal advice pursuant to Section 551.071(2) of 20 the Texas Government Code, including but not limited 21 to: 22 First State Bank of DeQueen, et al., 23 versus Texas Lottery Commission; 24 James T. Jongebloed versus Texas 25 Lottery Commission; 0154 1 Employment law, personnel law, 2 procurement and contract law, evidentiary and 3 procedural law and general government law; Lottery 4 Operations and Services contract; Mega Millions game 5 and/or contract. 6 Is that a second? 7 COMMISSIONER SCHENCK: There is a 8 second. 9 CHAIRMAN COX: All in favor, say "Aye." 10 COMMISSIONER SCHENCK: Aye. 11 CHAIRMAN COX: Aye. 12 The vote is 2-0. The Texas Lottery 13 Commission will go into executive session. The time 14 is -- 15 COMMISSIONER SCHENCK: 12:04. 16 CHAIRMAN COX: -- 12:04 p.m. Today is 17 July 30, 2008. 18 (Executive session: 12:04 p.m. to 19 2:29 p.m.) 20 AGENDA ITEM NO. XXIII 21 CHAIRMAN COX: The Texas Lottery 22 Commission is out of executive session. The time is 23 2:29 p.m. 24 Is there any action to be taken as a 25 result of the executive session? 0155 1 COMMISSIONER SCHENCK: No. 2 CHAIRMAN COX: Okay. I have some. I 3 move to approve the annual evaluation of the Internal 4 Audit Director. Is there a second? 5 COMMISSIONER SCHENCK: There is a 6 second. 7 CHAIRMAN COX: Okay. All in favor, say 8 "Aye." 9 COMMISSIONER SCHENCK: Aye. 10 CHAIRMAN COX: Aye. 11 The vote is 2-0. 12 And, secondly, I move to increase the 13 Internal Audit Director's salary by 7.231 percent, 14 effective at the earliest possible date. 15 COMMISSIONER SCHENCK: I second the 16 motion. 17 CHAIRMAN COX: All in favor, say "Aye." 18 COMMISSIONER SCHENCK: Aye. 19 CHAIRMAN COX: Aye. 20 The vote the 2-0. 21 Is there any other action to be taken 22 as a result of executive session? 23 I don't believe so, do you? 24 COMMISSIONER SCHENCK: I'll say no. 25 0156 1 AGENDA ITEM NO. XXIV 2 CHAIRMAN COX: Okay. If not, the 3 meeting is adjourned. 4 COMMISSIONER SCHENCK: Thank you, 5 Mr. Chairman. 6 CHAIRMAN COX: Thank you, Commissioner. 7 (Meeting adjourned: 2:30 p.m.) 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0157 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 13th day of August 2008. 15 16 17 ________________________________ 18 Aloma J. Kennedy Certified Shorthand Reporter 19 CSR No. 494 - Expires 12/31/08 20 Firm Certification No. 276 Kennedy Reporting Service, Inc. 21 Cambridge Tower 1801 Lavaca Street, Suite 115 22 Austin, Texas 78701 512.474.2233 23 24 25