AUSTIN (KXAN) – A recent report looking into the Texas Lottery Commission (TLC) found deficiencies in oversight, procedural shortcomings, licensing inefficiencies, and state dependency on the agency, but also acknowledged the TLC was “stuck between a rock and a hard place” with its competing goals of generating revenue and regulating the industry.
In advance of its meeting on Aug. 14, the Sunset Advisory Commission released its reports on several agencies under review, including the TLC, before the 89th legislative session begins next year.
In addition to identifying four primary issues, the report also provided recommendations to address them including management and statutory changes. Those recommendations will be provided to the Legislature during the upcoming 89th legislative session.
“We welcome the Sunset Advisory Commission’s independent review to assist the Lottery Commission in its ongoing efforts to adjust and improve,” said Texas Lottery Commission Chairman Robert G. Rivera. “We are aware of the report’s specific concerns and look forward to reviewing the Sunset Advisory Commission’s final recommendations and implementing any changes the Legislature deems necessary.”
What does the TLC do?
The TLC is the state agency tasked with administering and regulating the state’s lottery and charitable bingo activities to generate revenue for the state, in particular the Foundation School Fund and Fund for Veterans’ Assistance.
Members of the TLC are appointed by the governor and confirmed by the Senate, with at least one member required to have bingo industry experience.
These commission members directly oversee the lottery’s operations from licensing and advertising to prize payment and enforcement. The Sunset staff report found that total lottery sales in fiscal year 2023 amounted to $8.6 billion, $2.1 billion of which, or 25% of the total, was transferred to the Foundation School Fund.
In addition to the lottery, the commission handles licensing and oversight of bingo-related activities. This includes auditing bingo conductors and verifying licensee account balances, as well as maintaining a bingo hall worker registry. According to the report, out of the $928.4 million total gross receipts for bingo, approximately $32.3 million, or 3% of the total, went toward charitable distributions.
Commission’s findings
Issue 1 – TLC is insufficiently involved in its role and “lacks mechanisms to ensure the long-term success of the state lottery and charitable bingo.”
According to Sunset staff, the TLC “has broad rulemaking authority over both the lottery and bingo” but after reviewing five years’ worth of transcripts of public meetings, they could not identify a single “instance of commission directed rulemaking in the past five years.”
Another regulatory shortcoming was found in the TLC’s selection process for the Bingo Advisory Committee (BAC) which the Sunset report found is “heavily weighted toward bingo industry interests” which in turn risks that the industry being regulated is unduly influencing the commission’s decisions.
The Sunset staff found the BAC is also restricted by the TLC from discussing topics or issues not specifically permitted by the Bingo Enabling Act and they are therefore prohibited from considering advancements in the industry like video bingo and electronic pull tabs.
While the report found deficiencies with the operation of the BAC, they also found the absence of a Lottery Advisory Committee (LAC) left the TLC’s understanding of the industry “overly dependent on staff and its lottery operator vendor.” With signs of decreasing sales for the first time in 10 years, the report reflected concerns that if the lottery keeps ignoring changes to the industry, it will fall behind in the next decade.
In addition to these wide-ranging oversight issues, the report also found that due to its present reporting requirements, the TLC presented a fragmented view of its responsibilities to the Legislature, emphasizing revenue goals and “downplaying regulatory objectives.”
To address these issues, the report recommends creating subcommittees to allow specialization amongst commission members, requiring improvements to the process for appointing BAC members, and prohibiting limitations on BAC discussion of bingo related topics.
Furthermore, the Sunset staff recommends modifying the statute to consolidate reporting requirements and creating a Lottery Advisory Commission to serve a similar role as the BAC.
Issue 2 – Significant improvements are needed “to ensure effective, fair, and efficient bingo regulation” by the TLC’s Charitable Bingo Operations Division (CBOD).
The Sunset report found that although the CBOD identified which licensees it will audit and inspect utilizing an audit plan and risk assessments, it failed to consider all risk information because it maintains “separate licensing and enforcement systems.”
Licensee risk assessment scores are calculated by the CBOD using the Bingo Operations Services System (BOSS) according to the report, but relevant data like bingo complaints, as well as audit and inspection violations, are tracked and stored in the separate Complaint Activity Monitoring Program (CAMP) which does not interface with BOSS.
As a result of this bifurcated data system where BOSS tracks the risk scores of licensees and CAMP tracks their compliance history, the report says “a licensee with an extensive history of violations does not necessarily get audited more frequently” because compliance history is only required by statute to be considered for inspections and not audits.
Additionally, the report found that insufficient training and inspection criteria left the agency “poorly prepared” to guarantee thorough and fair inspections and that due to a failure to clearly define repeat violations, the agency cannot track recidivists.
Sunset staff claim in the report that they analyzed the last six years of enforcement data and found the data to be incomplete and error-riddled which “makes evaluating the division’s performance nearly impossible.”
The report proposed addressing these issues by modifying the TLC’s budget to incorporate an indirect administration goal and altering the organizational hierarchy of the agency to “create a single chain of command.”
Additionally, the report seeks to address the issues with the CBOD by statutory changes to the audit risk assessment process and the BAC’s inspection criteria, as well as improvements to the division’s data practices.
Issue 3 – Changes are necessary to “eliminate unnecessary regulatory burdens and unfair advantages” experienced by certain regulated businesses resulting from the charitable bingo licensing process.
When evaluating the TLC’s licensing process for bingo manufacturers, the report found that the agency has not denied a license application in the last 10 years. Over the past five years, the TLC has annually inspected two to five manufacturers, and the report says no violations were found.
In addition, the TLC requires samples of all bingo materials be submitted for review by manufacturers who must in turn wait for an approval letter prior to selling them to a distributor.
The report found that due to this verification process for bingo products which enforces standards and confirms they satisfy state requirements, the primary reason for the TLC to license manufacturers is eliminated.
Just as with manufacturers, the report found that no distributor license applications have been denied in the last 10 years, and in the past five years the TLC has only inspected two distributors with no violations found. The report states that no enforcement actions have been taken by the TLC against licensed distributors in the last 10 years.
In a related licensing issue, Sunset staff state that current regulations of lessors have “unfairly created a preferred class of lessor” in the form of grandfathered lessor licenses who, when compared to regular lessors, can make up to three times the rent.
According to the report, grandfather provisions are intended “to die out as grandfathered licensees leave the market,” however, under the current regulations governing transfers “grandfathered lessor licenses have persisted for three decades and will persist forever.”
The transfer rules in question state that if an individual dies or relinquishes their license, the grandfather rights may not be transferred. However, the report states that corporate entities can maintain their grandfather status because they preserve their identity even when sold to a new owner.
As a result, the report found that of the 307 licensed lessors in fiscal year 2023, 179 of them, or 58% of the total, were grandfathered allowing them to “avoid the current statutory rent restrictions.”
Sunset staff suggested that the distinction between standard lessors and grandfathered lessors be eliminated and treated as a single category. They also recommended eliminating the licensing requirements for manufacturers and distributors.
Issue 4 – Despite these issues, the state still needs the TLC
Although the Sunset report found the aforementioned issues with the TLC, it also found that agency’s intended purpose remained necessary for the state.
Lottery sales have broken records for 13 consecutive years, and according to the report have brought in more than $19 billion for school funding and $215 million for veterans. Sunset staff calculated that losing the lottery would leave the state looking elsewhere to make up for the annual loss of more than $2.1 billion.
After considering administrative alternatives, Sunset staff concluded that shifting responsibilities or merging the TLC into another agency would have “no substantial benefit.” And while Sunset staff considered privatization of the lottery, they found that fiscal savings are unlikely to be significant and would come at the cost of the licensing and regulatory controls needed for the state to stop bad actors.
Furthermore, the report states that despite the differing and sometimes competing objectives of running the lottery and regulating bingo, the CBOD is “too small to be a standalone agency” as it relies on the TLC staff for its administrative services.
The report proposed addressing this state dependency on the agency by continuing the TLC for another 12 years and eliminating the Sunset expiration dates from the relevant statutes.
What is the Sunset Advisory Commission
Established in 1977, the Sunset process is intended to review state agencies and programs to determine if they require improvements, should be merged with another agency, or should be abolished.
State agencies have a Sunset date at which time they automatically terminate unless a bill is passed by the Legislature to continue the agency for a period traditionally lasting another 12 years.
The Sunset Advisory Commission says it is scheduled to review 22 agencies on average every two years with reviews scheduled in the next 12 years for 131 agencies.