TRANSCRIPT OF PROCEEDINGS

Transcription

1 STATE OF CALIFORNIA LOTTERY COMMISSION --ooo-- CALIFORNIA STATE LOTTERY COMMISSION MEETING TIME: 0:00 a.m. DATE: Thursday, June, PLACE: California State Lottery Commission Headquarters 00 North Tenth Street Sacramento, California --ooo-- TRANSCRIPT OF PROCEEDINGS --ooo-- Transcribed By: Cathy S. Dizon Daniel P. Feldhaus, C.S.R., Inc. Certified Shorthand Reporters Yermo Way, Sacramento, California Telephone.. Fax..0 Daniel P. Feldhaus, CSR, Inc...

2 A P P E A R A N C E S California State Lottery Commission NATHANIEL KIRTMAN Chair of the Commission GREGORY AHERN Vice Chair of the Commission CONNIE PEREZ Commissioner --o0o-- Participating Lottery Commission Staff PAULA LaBRIE Acting Director (Appearing via teleconference) NICOLE SOLURI Chief Legal Counsel NICHOLAS BUCHEN Deputy Director Finance Division DAVID COLE Deputy Director Sales Division KIM CRESTELO Recording Secretary JIM HASEGAWA Deputy Director Business Planning Division ED FONG Chief Product Marketing and Promotions Division Daniel P. Feldhaus, CSR, Inc...

3 A P P E A R A N C E S Participating Lottery Commission Staff continued TERRY MURPHY Deputy Director Operations Division CHRISTOPHER RIESEN Deputy Director Information Technology Services Division ELISA S. TOPETE Assistant to the Commission --o0o-- Daniel P. Feldhaus, CSR, Inc...

4 I N D E X Description Page. Call to Order. Pledge of Allegiance. Roll Call of Commissioners. Closed Session - [no closed session scheduled]. Election of Chair and Vice Chair of the California State Lottery Commission -. Consider Approval of the Agenda 0. Approval of the Minutes of the May,, Commission Meeting 0. Director s Report [None]. Consent Calendar [None] 0. Action Items a. Amended Lottery Regulations - Powerball b. Amended Lottery Regulations - Fantasy c. Amended Lottery Regulations - Fuel Pump Sales Program d. Route Service Model e. Vehicle Purchase for Fiscal Year - f. Purchase of Real Property to Replace East Bay District Office Daniel P. Feldhaus, CSR, Inc...

5 I N D E X Description Page 0. Action Items continued g. Purchase of Real Property to Replace San Francisco District Office 0 h. Advertising Research Contract Amendment i. Fiscal Year - Budget. Commissioner General Discussion. Scheduling Next Meetings. Public Discussion. Adjournment --o0o-- Daniel P. Feldhaus, CSR, Inc...

6 California State Lottery Commission Meeting June, Thursday, June, Sacramento, California --o0o-- (Ms. LaBrie appeared via teleconference) CHAIR KIRTMAN: We ll call the meeting to order. 0 Start with the Pledge of Allegiance. (The Pledge of Allegiance was recited.) CHAIR KIRTMAN: Before we get started with the roll, I just want to acknowledge Acting Director Paula LaBrie is joining us by phone. Paula, are you there? ACTING DIRECTOR LaBRIE: Yes, I m here. Good morning, Commissioners. CHAIR KIRTMAN: Hey, good morning. Let s start with the roll. MS. TOPETE: Commissioner Smolin? (No response) MS. TOPETE: Commissioner Ahern? VICE CHAIR AHERN: Here. MS. TOPETE: Commissioner Perez? COMMISSIONER PEREZ: Here. MS. TOPETE: Commissioner Libang-Bobila? (No response) MS. TOPETE: Chairman Kirtman? Daniel P. Feldhaus, CSR, Inc...

7 California State Lottery Commission Meeting June, 0 CHAIR KIRTMAN: Present. No closed session scheduled, so we ll proceed to Item. Item is election of chair and vice chair of the California State Lottery Commission for -. I d like to introduce Nicole Soluri, the Lottery s chief counsel. Nicole, can you review the rules? MS. SOLURI: I sure can. Thank you, Chair Kirtman. The California State Lottery Act provides that the Commission shall elect annually from its membership a chairperson. The Commission may also elect a vice chair of the Commission. Any commissioner can put the name of any commissioner into nomination, and a commissioner can nominate himself or herself to serve as chair or vice chair. The Lottery Act does not require a particular method of making nominations. Once nominations have been made, Chair Kirtman shall declare the nominations closed. The votes are asked of each commissioner on nomination; and as with all Commission votes under the Lottery Act, it takes three votes to take an action. Daniel P. Feldhaus, CSR, Inc...

8 California State Lottery Commission Meeting June, 0 Chair Kirtman will then declare the results of the election. CHAIR KIRTMAN: We ll have open nominations for the position of chairperson and vice chairperson. I do want to state for the record, that I am interested in continuing to serve as chair of the Commission for the upcoming year; and I d like to nominate Commissioner Ahern for reelection of vice chair of the Commission. MS. SOLURI: Thank you, Chair Kirtman. I would like to note for the record that the Lottery has received from Chair Kirtman the self-nomination for Commission chair. And Mr. Kirtman has nominated Mr. Ahern as Commission vice chairperson. Now, other than Mr. Kirtman, are there any other nominations for the position of Commission chair? VICE CHAIR AHERN: None. MS. SOLURI: Okay. CHAIR KIRTMAN: I declare the nominations closed. Can we please have a vote by roll call? MS. TOPETE: Commissioner Ahern? VICE CHAIR AHERN: Yes. MS. TOPETE: Commissioner Perez? COMMISSIONER PEREZ: Yes. Daniel P. Feldhaus, CSR, Inc...

9 California State Lottery Commission Meeting June, MS. TOPETE: Chairman Kirtman? CHAIR KIRTMAN: Yes. VICE CHAIR AHERN: I prepared a short speech for the 0 CHAIR KIRTMAN: Reelection as chairperson of the California State Lottery Commission is approved. MS. SOLURI: Other than Mr. Ahern, are there any other nominations for the position of Commission vice chairperson? COMMISSIONER PEREZ: None. CHAIR KIRTMAN: Nominations are closed. Can we please have a vote by roll call? MS. TOPETE: Commissioner Ahern? VICE CHAIR AHERN: Yes. MS. TOPETE: Commissioner Perez? COMMISSIONER PEREZ: Yes. MS. TOPETE: Chairman Kirtman? CHAIR KIRTMAN: Yes. Reelection of Vice Chair Ahern is approved. MS. SOLURI: And with the reelection from Mr. Kirtman taking effect immediately, and because he has been reelected, you can hold onto the gavel, Chair Kirtman. CHAIR KIRTMAN: Woo-hoo. Thank you. Daniel P. Feldhaus, CSR, Inc...

10 California State Lottery Commission Meeting June, 0 CHAIR KIRTMAN: Thank you. MS. SOLURI: Thank you. CHAIR KIRTMAN: Congratulations, Sheriff. VICE CHAIR AHERN: Thank you. CHAIR KIRTMAN: We ll get on with the approval of the agenda. Commissioners, does anyone want to suggest any changes to today s agenda? VICE CHAIR AHERN: None. CHAIR KIRTMAN: Do I hear a motion to adopt? VICE CHAIR AHERN: Motion to adopt. CHAIR KIRTMAN: Please take roll, Secretary. COMMISSIONER PEREZ: I ll second. CHAIR KIRTMAN: Thank you. MS. TOPETE: Commissioner Ahern? VICE CHAIR AHERN: Yes. MS. TOPETE: Commissioner Perez? COMMISSIONER PEREZ: Yes. MS. TOPETE: Chairman Kirtman? CHAIR KIRTMAN: Yes. The next item on the agenda is Item, approval of the minutes. Are there any corrections to the minutes? (No response) CHAIR KIRTMAN: Do I hear a motion to approve Daniel P. Feldhaus, CSR, Inc... 0

11 California State Lottery Commission Meeting June, 0 the minutes? VICE CHAIR AHERN: Motion to approve. COMMISSIONER PEREZ: Second. MS. TOPETE: Commissioner Ahern? VICE CHAIR AHERN: Yes. MS. TOPETE: Commissioner Perez? COMMISSIONER PEREZ: Yes. MS. TOPETE: Chairman Kirtman? CHAIR KIRTMAN: Yes. Given Paula is out-of-state at a meeting, there will not be a Director s report for this meeting. The next item on the agenda is the consent calendar -- ACTING DIRECTOR LaBRIE: Commissioner Kirtman? CHAIR KIRTMAN: Yes? Is that Paula? ACTING DIRECTOR LaBRIE: Okay, yes, I m here. Yes, I won t be able to [unintelligible]. CHAIR KIRTMAN: I didn t hear her. ACTING DIRECTOR LaBRIE: [Unintelligible]. Okay, I won t be able to [unintelligible]. CHAIR KIRTMAN: Got it. Quite a fascinating Director s report. I thought we weren t having one. We ll continue. Daniel P. Feldhaus, CSR, Inc...

12 California State Lottery Commission Meeting June, 0 Sorry, Paula, we just aren t able to hear you at this time. But chime in when you can. All right, let s go to action items. Action Item 0.a, amended Lottery regulations, Powerball. Ed? VICE CHAIR AHERN: Consent calendar? CHAIR KIRTMAN: Yes, we didn t have any items. VICE CHAIR AHERN: Okay. MR. FONG: Good morning, Commissioners. VICE CHAIR AHERN: Good morning. MR. FONG: First -- actually, I have two action items for you this morning. The first one is Item 0.a, which is: Should the Lottery amend regulation changes for Powerball, update existing claim procedures, initiate a matrix change, and to continue sales of Powerball here in California. Some background: Since May of, Powerball sales for lower-level jackpots have declined about, percent. Recently, MUSL adopted changes to the core Powerball game to create faster-growing and higher average jackpots. California Powerball sales for fiscal year - represent about 0 percent of our total jackpot game sales here in California. In terms of comparisons Daniel P. Feldhaus, CSR, Inc...

13 California State Lottery Commission Meeting June, 0 with other jurisdictions, California has the highest percent of sales over every jurisdiction that sells Powerball -- and, yes, even New York. California is also the top-performing state for MEGA Millions as well, too. The biggest Powerball jackpot to date has been $0 million, which was in. So the key challenge that we have for this game is this: How do we create some freshness for this game and make it more attractive to players? The second thing is, how do we increase the frequency of larger jackpots and a player s propensity to play more? So let s discuss first what is not being proposed, what is not changing. The cost of play is still $, the starting jackpot is still $0 million, and we ll roll at a minimum of $0 million if it s not hit. The average second-tier prize is still about $ million. And we have pari-mutuel prizes. So what is changing? The matrix. It will go for -in- plus -in-, to -in- and -in-. The annuity payment will change from percent to percent, graduated over 0 years. The overall odds of winning will also change, from -in-., to -in-., which gives players a Daniel P. Feldhaus, CSR, Inc...

14 California State Lottery Commission Meeting June, 0 better chance to win a prize. CHAIR KIRTMAN: Could I ask a quick question, if you don t mind? MR. FONG: Yes. CHAIR KIRTMAN: Did those odds change the chances of the big jackpots, or not really? MR. FONG: It does change the odds of winning a top prize, which is the jackpot of the game. Yes, it does. CHAIR KIRTMAN: So does that decrease the chances of, like, a $0 million jackpot in Powerball, do you think, or -- MR. FONG: It will probably -- with the potential for rolls, there will probably be more propensity to actually roll faster. CHAIR KIRTMAN: Ah, gotcha. Right on. Thank you. MR. FONG: And with our other in-state games, if a player presents the Lottery with substantial proof of a winning ticket, they can claim a prize without the actual game ticket. MUSL adopted this change; and California would like to adopt this change also here in California for Powerball. If the Commission approves this, amendments Daniel P. Feldhaus, CSR, Inc...

15 California State Lottery Commission Meeting June, 0 to the regulations related to the prize-claim process will become effective immediately. All other proposed amendments will take place when MUSL launches the new Powerball matrix, currently scheduled to be on October th, ; and hopefully it won t change at that point. Are there any questions on this action item? COMMISSIONER PEREZ: I know we re going to hopefully approve the budget for fiscal year. Is that reflected already in the $ million increase in the Powerball? Do you know if that was considered? MR. FONG: Yes, it does. Yes. COMMISSIONER PEREZ: Okay, thank you. CHAIR KIRTMAN: Thank you. Okay. Any other questions? (No response) CHAIR KIRTMAN: Does any member of the public want to address the Commission in regards to Action Item 0.a? (No response) CHAIR KIRTMAN: Do I hear a motion to approve? VICE CHAIR AHERN: Motion to approve. COMMISSIONER PEREZ: Second. MS. TOPETE: Commissioner Ahern? Daniel P. Feldhaus, CSR, Inc...

16 California State Lottery Commission Meeting June, 0 VICE CHAIR AHERN: Yes. MS. TOPETE: Commissioner Perez? COMMISSIONER PEREZ: Yes. MS. TOPETE: Chairman Kirtman? CHAIR KIRTMAN: Yes. MR. FONG: Great. The second action item, 0.b. This one is, should the Lottery amend regulations for Fantasy to increase the amount of the estimated top prize? Staff recommends adopting these changes which become effective on October th,. Some background to refresh your memories on this game: Fantasy is a daily Lotto game, with a drawing every day of the week. Players have a chance of winning a starting top prize of $0,000, which can grow to several hundred thousand dollars if not hit. The cost of play is $, and there are four distinct prize levels in this game. One being, a player can actually win a free ticket in this game. The highest top prize for this game so far has been $0,000, which was won in June of. This game generated $ million in fiscal year -. It s on pace to deliver the same. However, the sales goal for next fiscal year is to deliver percent more, or $ million. What s the interesting thing about this game, Daniel P. Feldhaus, CSR, Inc...

17 California State Lottery Commission Meeting June, 0 is that the advertising of the top prize appears to be a very keen key driver in terms of sales for this game. With the recent installation of electronic signs at retail that advertises the top prize for Fantasy, we saw a positive lift of about to percent in sales. So the key challenges for this first game is this: How can we achieve this higher sales level for next fiscal year, number one; number two, with a smaller game, the use of traditional media or broad-based kind of promotional efforts may not deliver the type of game efficiencies that we want to see. And if the key driver to this game is a top prize, how can we leverage this opportunity to our players? So let s discuss the proposed changes. We would like to boost the top prize and modify the prize allocations without severely impacting the other prize levels. The reallocation of the top three prize levels will provide funds that support a higher starting top prize without increasing the total prize expense. This redistribution essentially maximizes the potential sales that this game can garner without increasing the total prize pay-out, which is key here. Are there any questions? CHAIR KIRTMAN: Questions? Daniel P. Feldhaus, CSR, Inc...

18 California State Lottery Commission Meeting June, 0 (No response) CHAIR KIRTMAN: Does any member of the public want to address the Commission at this time regarding action Item 0.b? (No response) CHAIR KIRTMAN: Do I hear a motion to approve? VICE CHAIR AHERN: Motion to approve. COMMISSIONER PEREZ: Second. CHAIR KIRTMAN: Roll? MS. TOPETE: Commissioner Ahern? VICE CHAIR AHERN: Yes. MS. TOPETE: Commissioner Perez? COMMISSIONER PEREZ: Yes. MS. TOPETE: Chairman Kirtman? CHAIR KIRTMAN: Yes. Next up, Action Item 0.c. How are you doing? MR. RIESEN: Good morning, Commissioners. I m doing well. Thank you. So 0.c, the issue is, should the California Lottery Commission adopt the proposed amended regulations, enhancing the fuel-pump sales program? So some background to begin with. As you are all aware, we adopted the original regulations for this program back on June th,, almost a year ago today. Daniel P. Feldhaus, CSR, Inc...

19 California State Lottery Commission Meeting June, 0 And since then, we ve worked with Linq to develop and put in place the Play at the Pump system. We went live in December of with a single location in Sacramento. And as of today, we have locations that are up and running. We have 0 in Northern California, two in Central California, and in Southern California. In addition, we have another locations that are waiting to go live, and about additional locations that have expressed interest in the program. We re averaging about,00 in sales weekly. However, we re still in pilot. We are waiting for additional locations, so we can perform additional research on the effectiveness of the program. And we have improvements that we re expecting in terms of process and enhancements to the system itself. But we ve been operational now for about seven months. And so there are some regulations -- some regular maintenance updates to the regulations that we would like to put in place. The updates are focused in two primary areas. The first is to ensure clarity, that any plays that result in a prize but cannot be awarded or treated as unclaimed prizes and, hence, that money will ultimately go to education. And the reasons for that could be -- or could include the purchaser does not meet qualifications Daniel P. Feldhaus, CSR, Inc...

20 California State Lottery Commission Meeting June, 0 for buying Lottery products, the transaction was not completed and the purchaser did not receive any boards, or the winner fails to submit a claim form within the appropriate claim period. The second set of changes are really around clarity of how compensation and retailer incentives are handled between the sales that occur within the gas station -- so the brick-and-mortar portion, as opposed to sales that happen at the pump itself. And so the clarity on this is that compensation for the sales within the brick-and-mortar come from the contract directly with the Lottery, and the compensation to the gas station retailer from the pump sales is based upon their contract with Linq itself. And the recommendation from staff is to adopt these changes. (No response) MR. RIESEN: Any questions? VICE CHAIR AHERN: I do have one question. I know when you buy a SuperLotto ticket or Powerball, it can be read at the counter with the automatic reader. MR. RIESEN: Uh-huh. VICE CHAIR AHERN: Can these receipts also be read at that same reader? Or does it have to be Daniel P. Feldhaus, CSR, Inc...

21 California State Lottery Commission Meeting June, 0 physically checked by the purchaser? MR. RIESEN: So, they receive both -- they can receive a receipt electronically; and they also have the receipt that s printed out as well. They cannot be read? Okay. So they cannot be read. CHAIR KIRTMAN: So you have to physically check it because it s a little bit different format than the bar code. Okay. I just wondered for questions. MR. RIESEN: Okay. Great. Any other questions? CHAIR KIRTMAN: Any other questions? COMMISSIONER PEREZ: No. CHAIR KIRTMAN: Does any member of the public wish to address the Commission at this time regarding Action Item 0.c? (No response) CHAIR KIRTMAN: Do I hear a motion to approve? VICE CHAIR AHERN: Motion to approve. COMMISSIONER PEREZ: Second. CHAIR KIRTMAN: Roll? MS. TOPETE: Commissioner Ahern? VICE CHAIR AHERN: Yes. MS. TOPETE: Commissioner Perez? COMMISSIONER PEREZ: Yes. Daniel P. Feldhaus, CSR, Inc...

22 California State Lottery Commission Meeting June, MS. TOPETE: Chairman Kirtman? CHAIR KIRTMAN: Yes. Next up, Action Item 0.d. MR. COLE: Good morning, Commission. CHAIR KIRTMAN: Good morning. VICE CHAIR AHERN: Good morning. MR. COLE: I m David Cole, deputy director of Sales. 0 Before I get started, I just wanted to congratulate you on the fastest election I ve ever seen. That was really quick. I m going to nominate myself -- no, I m kidding. Okay, 0.d, really quickly is, we would recommend that the Commission approve the route service business model. And I want to give you a little background on that. In 0, we started a pilot program with locations of CVS; and we grew that in 0 to stores. And after a lot of negotiations with CVS, we moved it to a full roll-out of 00 locations in. And then based on that, we ve had a lot of retailers inquire and want to know more about it and be a part of it. So the discussion is, is the Lottery -- the route service business model Lottery retailers has Daniel P. Feldhaus, CSR, Inc...

23 California State Lottery Commission Meeting June, 0 significantly less responsibility compared to those operating under the Lottery s traditional business model. So we re coming before you today to ask you to approve this. And the reason is, is because the compensation is less than the percent. And that s required under a Lottery regulation.0..(b), that we would get your approval. The reason the compensation is less is because the retailer does not have to stock inventory; they do not have to stock the machines; and they don t have to do the most important thing, is count the cash. That s all done by our staff. So the Lottery would recommend the Commission approve the route service business model and the associated compensation structure which results in an overall compensation to the retailer of less than percent of tickets or shares sold, so that the Lottery may pursue the route service business model relationships with appropriate retailers. The route service business model compensation structure is unique, in that it s a fixed weekly placement fee of the machine; and select retail locations will receive a bonus for receiving specific weekly sales levels as mutually agreed upon by the retailer and the Lottery. Daniel P. Feldhaus, CSR, Inc...

24 California State Lottery Commission Meeting June, 0 The continued growth of the Lottery s retailer network through use of the route business model is essential for the Lottery to achieve its sales goals and its retailer growth. What questions do you have about the route service business model? CHAIR KIRTMAN: Any questions? VICE CHAIR AHERN: No questions. CHAIR KIRTMAN: Any member of the public want to address the Commission at this time regarding this action item? (No response) CHAIR KIRTMAN: Do I hear a motion to approve? VICE CHAIR AHERN: Motion to approve. COMMISSIONER PEREZ: Second. MS. TOPETE: Commissioner Ahern? VICE CHAIR AHERN: Yes. MS. TOPETE: Commissioner Perez? COMMISSIONER PEREZ: Yes. MS. TOPETE: Chairman Kirtman? CHAIR KIRTMAN: Yes. MR. COLE: Thank you. CHAIR KIRTMAN: Thank you. MR. MURPHY: Good morning. CHAIR KIRTMAN: Good morning. Daniel P. Feldhaus, CSR, Inc...

25 California State Lottery Commission Meeting June, 0 VICE CHAIR AHERN: Good morning. MR. MURPHY: Terry Murphy, Deputy Director of operations, here to present Items 0.e, f, and g. I ll start out with 0.e, vehicle purchases for fiscal year -. The Lottery currently has vehicles; and as you can imagine, we, from time to time, need to get rid of some and get new ones to replace them. That s primarily what this item is. We do follow the Department of General Services criteria on mileage on vehicles, which is 0,000 miles. We have vehicles that are projected to reach that threshold during next fiscal year, looking to replace those. And additionally, we have two vehicles that would be new to our fleet, assigned to newly reclassified positions. In other words, they were positions that didn t have a vehicle, got reclassified to probably be a sales rep. The vehicles are a combination of cargo vans, minivans, sedans, and then of course law-enforcement vehicles that are equipped specially for that. Total estimated cost for the procurement would not exceed $,0. That does include a contingency. Essentially, we re basing that on an estimate on prior pricing of not only the vehicles, but the retrofit kits Daniel P. Feldhaus, CSR, Inc...

26 California State Lottery Commission Meeting June, 0 and things like that. So it s a not-to-exceed amount. Cost of vehicles would be capitalized over five years. That amount does not hit our budget all at once next year. Also, worth pointing out, the Governor s Executive Order B--. The Governor is obviously pushing green items, one of which is electrifying fleets. And so he has challenged us to have 0 percent of our purchases be electric vehicles or some version of that. We are looking at the utilization of four electric vehicles for district sales supervisors; and that would be included in that group of vehicles. So we would meet the Governor s executive order. And then finally, certainly if the budget, which is the last item on this agenda, doesn t happen, this procurement won t happen. That s all. Any questions on vehicles? CHAIR KIRTMAN: Questions, Commissioners? (No response) CHAIR KIRTMAN: Does any member of the public want to address the Commission at this time regarding Action Item 0.e? (No response) CHAIR KIRTMAN: Do I hear a motion to approve? Daniel P. Feldhaus, CSR, Inc...

27 California State Lottery Commission Meeting June, 0 VICE CHAIR AHERN: Motion to approve. COMMISSIONER PEREZ: Second. CHAIR KIRTMAN: Roll? MS. TOPETE: Commissioner Ahern? VICE CHAIR AHERN: Yes. MS. TOPETE: Commissioner Perez? COMMISSIONER PEREZ: Yes. MS. TOPETE: Chairman Kirtman? CHAIR KIRTMAN: Yes. MR. MURPHY: Okay, onto Action Items 0.f and 0.g. These are to replace the Bay Area District offices. Both these items are part of the facilities master plan, where we are going around the state and replacing our leased facilities with owned ones. As a reminder, the Commission has previously approved four property purchases to date, including Santa Fe Springs, Van Nuys, and Santa Ana District offices, along with the Southern Distribution Center. We did purchase a property in Santa Fe Springs, where the Commission had approved up to $ million. The final price being just under $. million. The Southern Distribution Center, we ve also purchased a property there, just north of Ontario, in Rancho Cucamonga, near the existing Southern Distribution Daniel P. Feldhaus, CSR, Inc...

28 California State Lottery Commission Meeting June, 0 Center. Again, the Commission there approved up to $ million, and we spent just over $ million to procure that facility. The Santa Fe Springs property is currently under construction, moving along fine. We ll be moving into that facility in October. And the Southern Distribution Center is just starting the design phase, and hoping to start getting into construction later this calendar year on that. We are in -- well, I guess we re -- well, we re still in negotiation for a purchase agreement for a property in Van Nuys. It s looking like we re going to get to that. And we ll start due diligence on a property there. And in the Santa Ana market, we are continuing to search for a suitable property. So now we re at the Bay Area, and the need to replace those two district offices. Currently, the two offices down there essentially sit east and west of each other, across the Bay. One is in Hayward. One is in South San Francisco. Division of Sales and Marketing has been looking at the Bay Area in particular, and is proposing we do some shifting when we go from the leased to the owned facilities, and getting those two districts more Daniel P. Feldhaus, CSR, Inc...

29 California State Lottery Commission Meeting June, 0 to a north-and-south orientation of each other, moving the East Bay office, what s currently in Hayward, more south toward San José; and the San Francisco office, north, across the Bay, actually, on the north side. In particular -- so Item 0.f, which is the replacement of the East Bay District office, we have had Colliers International, our realtor, looking at the market. We have gone down and viewed a few properties, and find a wide range. We are looking at everything from bare land, to property with existing used buildings, if you will; and then property with brand-new cold shell buildings, similar to the distribution center we bought. So we re looking at a fairly wide range of pricing, everywhere from $ million to $ million. We are looking for the Commission to approve a purchase of up to $ million to replace the East Bay District office. Questions? CHAIR KIRTMAN: Any questions? (No response) CHAIR KIRTMAN: Does any member of the public wish to address the Commission at this time regarding Action Item 0.f? (No response) CHAIR KIRTMAN: Do I hear a motion to approve Action Item 0.f? Daniel P. Feldhaus, CSR, Inc...

30 California State Lottery Commission Meeting June, 0 VICE CHAIR AHERN: Motion to approve. COMMISSIONER PEREZ: Second. MS. TOPETE: Commissioner Ahern? VICE CHAIR AHERN: Yes. MS. TOPETE: Commissioner Perez? COMMISSIONER PEREZ: Yes. MS. TOPETE: Chairman Kirtman? CHAIR KIRTMAN: Yes. MR. MURPHY: Item 0.g, purchase to replace the San Francisco District office, similar to the last item exactly, really, Colliers is out, looked at the market. The price range varied, up to about $. million. We re looking for approval to not exceed that amount in the procurement of a property. Any questions? CHAIR KIRTMAN: Any questions? COMMISSIONER PEREZ: No. CHAIR KIRTMAN: Does any member of the public want to address the Commission at this time regarding Action Item 0.g? (No response) CHAIR KIRTMAN: Do I hear a motion to approve? VICE CHAIR AHERN: Motion to approve. COMMISSIONER PEREZ: Second. MS. TOPETE: Commissioner Ahern? Daniel P. Feldhaus, CSR, Inc... 0

31 California State Lottery Commission Meeting June, 0 VICE CHAIR AHERN: Yes. MS. TOPETE: Commissioner Perez? COMMISSIONER PEREZ: Yes. MS. TOPETE: Chairman Kirtman? CHAIR KIRTMAN: Yes. Thank you, Terry. MR. HASEGAWA: Good morning, Mr. Chairman, Commissioners. CHAIR KIRTMAN: Good morning. MR. HASEGAWA: Jim Hasegawa, here to present Item 0.h. It s an advertising research contract amendment. We do advertising research to kind of measure the effectiveness of our advertising. The specific research services pertain to this contract. Test television spots, with respect to their recall -- consumer s recall of the advertising, their ability to identify the proper product being advertised, as well as other attitudinal-type measures. These services have been performed by Holland Partners, a contract with Holland Partners, whose expiration date would be August th of. Actually, currently, there is a procurement going on for these services. However, due to the number of responses we received to the RFP, the evaluation time is taking a Daniel P. Feldhaus, CSR, Inc...

32 California State Lottery Commission Meeting June, little longer than we originally anticipated. The evaluation is scheduled to be completed early to mid-july; but that would be too late to come to the Commission meeting. We have a couple of advertising campaigns that marketing would like us to go through this type of research, one being for the $ playbook. Those ads start up in July, as well as the advertising effort against our 0 th anniversary. 0 For these reasons, we re asking the Commission to approve an amendment to the contract to exercise a clause that s in the current contract for an emergency extension. This extension would be up for just four months, through December,, and adding $,000 to the contract expenditure authority. Any questions? CHAIR KIRTMAN: Any questions? COMMISSIONER PEREZ: Nope. CHAIR KIRTMAN: Does any member of the public want to address the Commission at this time regarding Action Item 0.h? (No response) CHAIR KIRTMAN: Do I hear a motion to approve? COMMISSIONER PEREZ: I ll make a motion to approve. Daniel P. Feldhaus, CSR, Inc...

33 California State Lottery Commission Meeting June, 0 VICE CHAIR AHERN: Second. MS. TOPETE: Commissioner Ahern? VICE CHAIR AHERN: Yes. MS. TOPETE: Commissioner Perez? COMMISSIONER PEREZ: Yes. MS. TOPETE: Chairman Kirtman? CHAIR KIRTMAN: Yes. MR. HASEGAWA: Thank you. CHAIR KIRTMAN: Thanks, Jim. Action Item 0.i. MR. BUCHEN: Good morning, Commissioners. CHAIR KIRTMAN: Good morning. MR. BUCHEN: Nick Buchen, Deputy Director of Finance. So word on the street is, there s a lot riding on this budget. So I ll start with a refresher on the budget development process. The process begins with my budget team meeting separately with each division, to develop a division-specific base budget of administrative expenditures. And the business planning group develops a preliminary sales estimate by product, assuming that no new initiatives are undertaken by the Lottery. And then the associated prize-expense level is determined. Daniel P. Feldhaus, CSR, Inc...

34 California State Lottery Commission Meeting June, 0 This preliminary sales estimate and associated prize expense is combined with the divisional base -- administrative expenditures to create the Lottery s base budget. This initial base budget provides us with an idea of how much would be available for investment in new initiatives for the coming fiscal year. And this year, the executive team developed a contribution to education goal for the coming fiscal year, and then focused on investing in initiatives that are estimated to yield the highest profit. So the budget development process is essentially a balancing act between the estimated funding available on the base budget and the resources required for initiatives and other revisions to invest in our infrastructure that will enable us to meet our strategic goals and desired contribution to education. As included in our - business plan, which was adopted at the May Commission meeting, there are six key objectives for investment in this budget to enable us to maximize our contribution to education. First, increasing the Lottery s profits by improving draw-game sales; reducing perceived barriers to buying Lottery tickets through efforts aimed at both players and non-players; commemorating the Lottery s 0 th anniversary by thanking players, employees, Daniel P. Feldhaus, CSR, Inc...

35 California State Lottery Commission Meeting June, 0 stakeholders, and Californians in general; increasing efficiency and customization of marketing efforts directed at existing players, and reallocating funding to attract new players; and strengthening the relationship with Lottery retailers and providing support through more customized approaches in training, communications, selling, and incentives; and making improvement in the Lottery s infrastructure to increase efficiencies, effectiveness, and further grow profits. All initiatives and other revision proposals included in this budget tie back to one or more of those six key objectives. And the results of this process is the proposed fiscal year - budget. And I ll walk through each of the main sections separately to make it easier to digest, so you don t have to worry about you can t read that. So the charts I m about to go over with you compare our proposed budget for the - fiscal year to our latest year-end estimate for the - fiscal year. All dollar amounts on these charts are in thousands, and the - amounts represent the base budget, plus the initiatives and other budget revision proposals that are needed to achieve and support our profit estimate. And remember, the budget is a simple formula Daniel P. Feldhaus, CSR, Inc...

36 California State Lottery Commission Meeting June, 0 comprised of four major components: Sales, minus prize expense, minus administrative expenses, equals our contribution to education. Within each of these major sections of the budget, I ll compare the subtotal proposed for the - to the - year-end estimate, and highlight the major drivers of the change. And feel free to stop me at any time and ask questions. So with that, for sales, we re projecting a total of $ billion in the - budget, which is an increase of 0 million, or 0. percent from the current-year estimate. And the bulk of this increase is in our Scratchers product line, with a year-over-year increase of million projected, which is a. percent increase. This is primarily due to launching additional $ games, an additional $ game, and a $0 game to commemorate our 0 th anniversary. And our draw-game sales reflect a year-over-year increase of million, or. percent, which is attributed to a variety of proposed changes. As Commissioner Perez astutely inquired about, the budget does reflect the proposed changes to the Powerball matrix, which is expected to result in more Daniel P. Feldhaus, CSR, Inc...

37 California State Lottery Commission Meeting June, 0 frequent, large jackpot rolls, while improving the overall odds for players to win a prize. Also discussed earlier, reallocating the Fantasy prize pool to focus on top-prize growth is designed to increase Fantasy game sales. An initiative for Hot Spot will change pay-outs -- prize pay-outs and expand the number of Hot Spot retail locations. A SuperLotto Plus initiative includes retailer and consumer promotions, as well as events, coupons, and paid media campaigns. And the - sales levels for Fantasy and Daily Derby reflect a full year of jackpot signs, advertising the top prize in those games. So the next major area of the budget is prize expense, which you can see is projected to total $. billion in -. This is a $0 million increase over the current year, or. percent. And this year-over-year growth generally follows the projected growth in sales. And now, on to the administrative expenses which, by law, cannot exceed percent of our total revenues. The first area of administrative expense is retailer compensation, which is estimated to total Daniel P. Feldhaus, CSR, Inc...

38 California State Lottery Commission Meeting June, 0. million in -. And that s an increase of. million, or. percent from the current-year projection. And again, this growth generally follows the projected growth in sales. The next area of administrative expenses is gaming costs. And you can see that these are projected to total. million in -, which is an. million increase, or 0. percent. And as I said, when I presented the draft budget last month, the projected increase in gaming costs largely corresponds to the increase in sales, but it s partially offset by a shift in purchased gaming equipment to the depreciation line, which shows below in operating costs. And speaking of operating costs, this is the last area within administrative expense. And I ll take it line-by-line. So the personal services is projected to increase by. million from the current-year estimate. And this primarily reflects funding for a ½ percent pay increase that was authorized statewide for employees in most collective bargaining units. This increase also reflects the addition of new positions included in the initiatives and other revisions that we are proposing for -. Daniel P. Feldhaus, CSR, Inc...

39 California State Lottery Commission Meeting June, 0 And lastly, this increase also reflects a full-year cost of the positions that were approved on a partial-year basis in last year s budget. For the next line, marketing plan, costs are projected to increase by. million from the current-year projection. This increase is primarily the result of putting additional resources into our Mission is Message campaign, which is designed to improve people s attitudes about the Lottery and make them more aware of the work we do for public education. And the - marketing costs also reflect a full advertisement campaign this summer, to mitigate the sales declines that we typically experience during the summer months. Contractual services are projected to increase by. million over the current year. And the largest drivers of this increase are initiatives to develop the player rewards program to be launched in the - fiscal year, as well as a proposal to increase the quality of our player data and improve our data-analytics capabilities. Depreciation is estimated to grow by. million from the current-year projection. And this primarily reflects the shift from gaming costs that I talked about earlier. And that s for the purchased Daniel P. Feldhaus, CSR, Inc...

40 California State Lottery Commission Meeting June, 0 gaming equipment that we are now capitalizing, depreciating. Operating expense is projected to increase by. million from the current-year estimate. And the largest component of this increase is additional pro rata charges that are assessed by the Department of Finance. And that s to recover for indirect costs incurred by the State s central service agencies. As our fund continues to grow, the Department of Finance assesses more. The last two items within operating costs are the reserves. Since we are so close to the end of the current fiscal year and we ve not incurred any costs in these items to date, we ve zeroed them out for purposes of reflecting what we expect to spend in -. For -, we are, again, maintaining a $ million reserve for insurable risk; and that s to cover fiscal exposures for areas within our organization that we are continuing to self-insure. And the final item within operating costs is the administrative spending reserve. And this is formulaic and represents the difference between percent of our projected sales and our projected expenses in retailer compensation, gaming costs, and operating costs, including the reserve for insurable Daniel P. Feldhaus, CSR, Inc... 0

41 California State Lottery Commission Meeting June, risk. 0 This administrative spending reserve acts as a safeguard against uncertainties, such as if our sales do not come in as projected. When we close our books at the end of the year, any unspent administrative funds below the percent cap, including funds within both reserve line items, are transferred in their entirety to education. You can see that the bottom-line administrative expenditures are projected to total 0 million in -; and that s precisely percent of the billion in projected sales. This next slide is a roll-up of the resources needed for the proposed initiatives and other revisions that are reflected in the administrative expenses that I just walked through. Costs for the proposed initiatives and other revisions are summarized within the six key objectives from our business plan. And these initiatives, combined with the Scratchers product plan and other changes reflected in the budget, are estimated to increase sales by around 0 million in -. And I d like to note that the positions that we are requesting for - is less than half of Daniel P. Feldhaus, CSR, Inc...

42 California State Lottery Commission Meeting June, 0 what the Commission adopted last June, for our - budget. I know I ve thrown a lot of numbers at you, and it is easy to get bogged down, so I d like to provide some context on our administrative expenses. So on the surface, having a percent administrative budget might seem a bit excessive. But as shown in this pie chart, more than 0 percent of our administrative expenses are comprised of retailer compensation, gaming expenses, and marketing costs. And these three components are unique to our business operations and have a direct impact on our sales and profits. Excluding the reserves, our other operating cost, which is our overhead, accounts for only percent of our total administrative expenses and only. percent of our total projected revenues. This speaks to us doing a remarkable job of managing our costs, which enables us to maximize our contribution to education, which is what it s all about. Remember our simple formula of sales minus prize expense, minus administrative expenses, equals our contribution to education. There are a couple of additional items that factor into the final contribution. Specifically, both unclaimed prizes and the interest Daniel P. Feldhaus, CSR, Inc...

43 California State Lottery Commission Meeting June, 0 earnings on our cash sitting within the State Treasury are mandated to be transferred directly to education. And as I mentioned previously, every penny that remains unspent within the insurable risk and administrative reserve line items also goes to the bottom line. So assuming the reserves remain unspent, the total projected contribution to public education is estimated to be. billion in -. And this represents an increase of almost million over the estimated contribution for the current year. And I am pleased to say that the proposed fiscal year - contribution to education is the highest in the Lottery s history, as well as the $ billion we are projecting in sales. So those are both highest since the Lottery began nearly 0 years ago. This concludes my presentation. But before signing off, I d like to thank my budget team. Faye Skoglund is the budget officer. And the budget team was actually down a couple members this cycle. So Brett, Larry, Jené, and Ruth really stepped up and delivered. So with that, I d be happy to take any questions. (Applause) CHAIR KIRTMAN: Thanks, Nick. Daniel P. Feldhaus, CSR, Inc...

44 California State Lottery Commission Meeting June, Any questions? COMMISSIONER PEREZ: No. Good job explaining all the variances. Thank you. 0 MR. BUCHEN: Thank you. CHAIR KIRTMAN: Does any member of the public wish to address the Commission at this time regarding Action Item 0.i? (No response) CHAIR KIRTMAN: Do I hear a motion to approve action Item 0.i? COMMISSIONER PEREZ: I ll make a motion to approve. VICE CHAIR AHERN: And I ll second. MS. TOPETE: Commissioner Ahern? VICE CHAIR AHERN: Yes. MS. TOPETE: Commissioner Perez? COMMISSIONER PEREZ: Yes. MS. TOPETE: Chairman Kirtman? CHAIR KIRTMAN: Yes. ACTING DIRECTOR LaBRIE: Chair Kirtman, can you hear me? CHAIR KIRTMAN: Yes. How are you doing, Paula? ACTING DIRECTOR LaBRIE: I m doing good. Daniel P. Feldhaus, CSR, Inc...

45 California State Lottery Commission Meeting June, 0 I just wanted to chime in before you move on to the next item, just to say, we ve had a really great year, and I want to thank the Commission for all their support, and staff for all of their hard work. Thank you for approving the budget for next year. We re going to work very hard to meet all of our numbers. And we look forward to pressing on. So, again, thanks to everybody, we ve had a really good year. CHAIR KIRTMAN: Thank you, Paula. And I agree a hundred percent. Next on the agenda is the commissioners general discussion. Any commissioners have anything they d like to bring up at this time? VICE CHAIR AHERN: No, sir. CHAIR KIRTMAN: We ve tentatively scheduled commission meetings on September th and November th in Sacramento. Next up, public discussion. Any? (No response) CHAIR KIRTMAN: No? I guess that concludes our last meeting of the fiscal year. Daniel P. Feldhaus, CSR, Inc...

46 California State Lottery Commission Meeting June, Thanks for everyone s hard work. CHAIR KIRTMAN: Adjourned. (Gavel sounded) (The Commission meeting concluded.) --o0o-- 0 Daniel P. Feldhaus, CSR, Inc...

47 California State Lottery Commission Meeting June, TRANSCRIBER S CERTIFICATE This is to certify that: I transcribed to the best of my ability from an audio file provided to me by the California State Lottery Commission; and the foregoing pages to inclusive, contain a full statement and record of said audio recording. In witness whereof, I have hereunto set my hand on the 0 th day of July 0 Cathy S. Dizon Daniel P. Feldhaus, CSR, Inc...