ALC-Executive Subcommittee

Can we get the members in the states. Yeah. Yeah. I'm in that mood. But. We could We go ahead and recognized a lottery office of Arkansas lottery. Let you introduce yourself thank you Mr chairman members my name is Eric Kaler I'm executive director of the Arkansas lottery. If you would go ahead and do a introduction of a rule thank you Sir we're here seeking emergency approval of revised rules for the office of the Arkansas lottery there are seven key points that have been addressed during the rule revision process I hasten to point out that these rules were first established in two thousand and nine upon inception of the lottery they were slightly revised in twenty twelve my records do not reflect any further amendments since twenty twelve so I do believe that these rules were right for a complete review and that's exactly what we undertook to do their seven key points for your consideration that we deem render this to fall under consideration for emergency adoption and I'll summarize those for you and then tell you what we have done to remediate to comply with the statutory requirements for rule revision of the seven key points the first key point is the abolition of the lottery commission the lottery rules continue to refer to the Arkansas lottery commission which was dissolved in twenty fifteen it provides all administrative power in operating the Arkansas lottery under the Arkansas lottery commission an entity that no longer exists. The Arkansas lottery commission upon its dissolution lottery was moved under the aegis of the department of finance and administration as a division of that agency under its management services division. And the director of the office of the Arkansas lottery now administers all aspects of the Arkansas scholarship lottery I serve in that capacity also served in the role of executive director of the Arkansas scholarship lottery. The abolition of the lottery commission references are intended to bring clarity and actually bring the rules in alignment with the actual administration and operation of the lottery. You'll notice that in those rules the executive director has the authority to designate certain individuals or committees within the lottery to also make decisions administratively so that's something that that has been going on now since twenty fifteen the rules did not reflect that the current amended rules is proposed to you today fill that gap second keypoint his review of directors decisions under the current rules all reviews of decisions by the executive director are to be handled by the Arkansas lottery commission Arkansas lottery commission again was dissolved in twenty fifteen there is no due process math a pathway for those who would seek to appeal an adverse decision rendered by the executive director under the revised rules it would bring it in line with the Arkansas administrative procedures act and would provide for review by circuit court in the state of Arkansas. We believe that is vitally important for the safety and protection of both consumers in Arkansas and the integrity of the lottery. The third is lottery careers and career services this is a distribution that has been authorized in Arkansas since April of twenty twenty we have had one vendor Jett pocket that has operated in the space this is an entity that operates a mobile app this was created back during the pandemic times and allows players to purchase. Instacart draw tickets only know Winston take its and no fast play draw tickets only they purchase these tickets on a mobile app the the mobile app provider contracts with a licensed Arkansas retailer who is licensed by the lottery and that licensed retailer pulls a physical ticket in the store and keep sentence in a safe and safe keeping device and we have procedures built around that if it's a winning ticket the player can come in and claim that physical ticketing cash it or the B. Currier service will mail their ticket to them via mail. There again this is nothing new it's been in place since April of twenty twenty the rules did not formally provide for it there were no internal controls that were in writing we have been reached that we've received reach out from other financial career services desiring to do business in Arkansas and that was the impetus behind our decision to include that in a holistic review of the rules it simply brings in practice in the rule what we already operate in practice. The next key point is anonymity of winners in excess of five hundred thousand dollars the rules currently are silent with regard provisions of act eight eighty nine at twenty twenty one which provides that a winner of a lottery prize in excess of five hundred thousand may elect to remain anonymous for a period of time. These proposed rule revisions bring our rules in line with that statutory and now codified a piece of legislation. Next keypoint is retailer lost coverage this proposed operational rule four point four this addresses retailer lost coverage this is a mechanism that provides procedures around the offering of credit to retailers historically since inception lottery has provided tickets to retailers on a twenty eight day pay basis so we we follow debt for twenty eight days with most retailers. In order to give us a little bit of internal control we have revise those rules that now provide. If a retailer owes the lottery debt than the lottery can force that retailer to go out in obtaining self bond it to cover any potential losses thereby hedging our losses at the lottery. Next kia consideration is draw coordinators to develop and maintain responsibility for drawing activities here again these rules were drafted in two thousand and nine when the lottery was using manual cross systems does this the industry has now advanced auto draw Arkansas was one of the first adoptees of auto drawing twenty twenty one we now have a full automated drop process we do not use manual draw managers the the rules as they currently exist require us to have a full build out set of procedures around a process that no longer exist so that cleans that rule up and brings that into the modern day as well. And then lastly sales and retention of tickets made consistent with Arkansas code annotated section twenty three one fifteen four oh two and four three and what this does is is this brings into line the rules with the actual practice regarding an eligible players employers who are restricted from play members of a lottery employees members of their immediate household vendors members of their immediate household are not allowed to play however the rules were somewhat vague and not as clear as we believe was prudent so we did go ahead and tighten up that language as well the reason we're here for margin C. role consideration as we undertook to to go through the process of twenty five fifteen to sixteen. Which is a rule revision process we we we we did the best we could we took we read the rules we thought we had a handle on it and we can we proceeded we check marked every box every box. In in in in sequence with one exception and it was the first step we neglected to provide B. L. R. with a copy of our proposed revised rules we did provided to the Secretary of State we provided to the governor we provided to the FNA we published in the paper we had a public hearing we we opened it up for public comments and received absolutely none and but we we we wanted to circle back and and we understand now the matter of prudence and and and being performed and that's that's our intention so what we intend to do if we receive emergency adoption of the rules we will immediately next week began the administrative rules process again we'll publish again will file with the secretary of state again of course will begin that process by notifying the alarm. And and we'll make sure that the checklist that we have now developed is is followed to the tee we also use this as a learning experience it for us we we went back and we created a new internal procedure for both rule revision but I also want to add there was some confusion on the counter yesterday and we were embarrassed by that as well and we've added a procedure as well for tracking the legislative calendar and we were here at one thirty we missed the nine o'clock we were supposed to be before two committees I apologize to this committee for the agency not appearing yesterday at nine o'clock we respect you respect your time and and and we we have committed to do better in that regard. I'll answer any questions. Well. I have a couple. and then we have few members have questions but one one of my questions is this is two thousand twenty two. The commission was abolished in twenty fifteen if I understood my reading correctly why are we just now here to clean the rules of on the Commission language that was passed in twenty fifteen. Mr chairman having joined in August of twenty twenty I can only bring you up to date from that date for responsible for two years so tell me about those two that that's correct. We we have rules we we dealt with those rules we didn't reading from stem to stern we were dealing with rules as we encounter provisions under the rule no one in it hi historically a lottery was around to instruct anyone that's currently at the lottery that these rules and never been significantly revised since two thousand nine and have not been holistically reviewed since twenty fifteen. Once we started working through the rules on a daily basis and started seeing where the gaps were it quickly became apparent that these these are behind these are behind the eight ball these have to be done and I can answer for wine the the five years that predated me. The previous administration didn't catch that but. It did take me two years to get around to figuring out that this is not going to be an easy process and we started this process six or eight months ago and and began working towards this but if you'll remember when I joined we were in the throes of a pandemic and we have people out of the office the world was on its head there were considerations that were a little bigger than you know the administrative just kind of fell to the tail there had to be a priority list we work that priority list we've implemented auto draw we have we've launched a new Lotto game we're improving our margins we delivered to record numbers the FY twenty one was a record both net proceeds in revenue twenty two was the second best in history so we spent the last two years working on performance internal operations and and and trying to plan for the next five years the administrative things while there certainly important many times they do fall to the back certainly was not by any intention and we're happy to be in front of it now I'm thankful to say that to my knowledge the fact that we did have gaps in the rules have not created any liability the lottery so while it should have been keeping myself and others up late at night at least there was no exposure that's that's a slight token of comfort but regardless we believe that what we have before you today adequately covers all the gaps and accurately reflects the apple actual operations and administration practices of the lotteries that exist in twenty twenty to. So let's talk about the ticket sales on mobile devices is the part of the rule that addresses that is that in the monopoly on that side or does that open it up for more explain to us exactly what that does. What this does is about their again prior to my arrival in April of twenty twenty the lottery approved a single vendor to do a pilot test of a mobile application in the State of Arkansas that's a company call Jett pocket Jett pocket opened a licensed retailer here called winners corner and they were regulated through their their lottery license as a retailer we we monitor that situation I joined in August they were they were fully operational we begin monitoring that we work closely with them to determine whether or not we believe it created an ordinance liability or whether or not it was something that benefited the lottery harmed the lottery or was revenue neutral. We have not had problems they've been good partners with us we had increased from other entities around the country asking if they could come in and operate in similar vein we couldn't see a good reason to dissuade sales in in a modern method which is preferred by consumers it's not I lottery it's it's not considered a lottery in any sector of of the lottery business there is a physical ticket generated you simply inserting a third party custodian into the process. We have one additional company that would like to join us immediately we have another at the door we believe that the rules per S. per pose protect the lottery if you'll notice there's a provision that says that a mobile app operator cannot be a license lottery retailer the reason for that is is these mobile app companies charge a markup to consumers no different than if you order it Kroger and they put a mark up to deliver to your your car house or Walmart or uber eats or any of those things lottery has a statutory commitment to selling tickets at face value so any any of any contact we have with the ticket that ticket is going to be offered to the consumer at face value if the consumer wants to elect the convenience delivery features such as ordering on a mobile app and pay a fee for that we want that to be over the wall and away from water. And so that's the purpose of actually formalizing this we think it gives us internal controls it also allows us if we have a financial career that comes in and we believe is operating either you legally or otherwise to the impairment the lottery we have the ability to. To to remove the authorization from the licensed lottery retailer utilizing that service and they'll have to make a choice you either drop the Currier or you lose your license. Misspeak or you're recognized for a question. Thank you Mr chairman and my questions around these career service and you touched on one item that was was going to be my question you mentioned at the outset that is it Jack pocket that the state came into the State. That they actually set up a retailer here in Arkansas does that retailer have a physical location it does and so you could walk in and buy a lottery ticket directly from them you can walk in and buy a lottery ticket directly from them you can buy other products they sell board games and other gaming assessor res they got their licensed retailer operates separate from the mobile app we away L. does not have authority and does not have the resources to regulate financial careers in a in a in a broad scale like in New York or New Jersey what we've done is we've created a pathway were license lottery retailers can use these services independent of lottery and that opens the market place up it removes us from having to be responsible for any disputes over fees or markups or things of that nature it's strictly we do business with the license lottery retailer the license lottery retailer is allowed under the proposed rules to contract with the mobile app provider to make delivery to their customers so circle K. come and go seven eleven any of these places now will be able to be advantaged an offer mobile app purchase again this is not a lottery these are physical tickets when you order on the app it's no different than ordering your food and going and picking it up you order your lottery ticket you can either go pick it up or they'll hold that ticket for you and when the draw is completed if it's a winning ticket you can come pick the ticket up and go cash it or they'll mail it to you if it's a losing ticket. So that you have to physically go get the ticket at some point if you're a winner that's correct okay and then if I could have just a couple follow ups Mr chairman that that would the other part of my question was when you initially presented it it sounded like the career service this third party could could could enter into an agreement with a retailer in Arkansas to do that in my question is going to be how do you how do they determine what retailer they're going to use but it sounds like they set up their own but also under this rule I take it that Jett pocket or similar entity could no longer approach the lottery about setting up a career service that it would actually take a retailer approaching approaching the lottery and so in the instance of this Jack pocket or a third party that's out of state they can't come to the lottery and ask for permission and go find a retailer date there has to be a retailer actually approach the lottery a licensed retailer probes the lottery to ask for permission to do that that is correct and then the lottery has to approve that mobile application vendor so we we we don't we don't license them but if we research that vendor we have a retailer come to us let's say and say aye I want to use this service we research that service and were uncomfortable with that perhaps they have regulatory matters in another state or something that nature under the proposed rules we have the ability to deny that request okay thank you. Senate recognized. Thank you I think my questions are kind of a long I'm right here thank you hi my questions are a little bit along the same lines there so as I understand this this will discuss the retailer this won't be like in our of P. with the the lottery or anything like that so that that is not what we're doing that's correct okay and then are do we have the ability to monitor or audit or inspect if those retailers do this that they will have procedures in place and safety around you know those tickets and how they're being held and things like that how how does that work absolutely under under the we have a separate retailer contract that is referenced in the rules and and that that retailer contract provides for for all of the above so If you repeat your question again I wanna make sure I'm I'm specific to an answer well I mean I think a deed to the lottery have the ability to go in and assess the either or inspect whether these retailers that do this third party online app as purchasing that they have the ability to have a safe way of handling that for that for those customers yes ma'am in fact under the retailer agreement we have the right to go inspect their books both the retailer and the safe and things like that absolutely all of it in in our our security investigators currently periodically I do surprise visits on Jack pocket on their both their retail location and on the mobile apps side and we have the authority to go in and look at their books and records as well so if we you know if if if we believe that we do believe it's prudent to periodically audit those types of partners we will be looking at their books and records to make sure they're in full compliance so I'm I'm assuming that these mobile apps will be referencing the Arkansas lottery and and all that as their is there a check off with the lottery with the office of the lottery to make sure that whatever is appearing on the app is actual to what we're advertising in our messaging and I would think that that would have to be a pretty tight look at to make sure that things were done correctly absolutely we do that they are they are prohibited from using any of our images or referencing any of our games without our prior approval we approve those virtually on a daily basis sometimes multiple times a day okay okay all right thank you. Representantes thank you Mr chair I'm sitting here just looking through this entire rule packet and. I'm still trying to figure out exactly what the emergency is I understand that you're wanting to get this done quicker than than what you had anticipated but at. I'm find myself uncomfortable trying to get something this massive Lee. In a revision over all through a subcommittee that has no additional checks and balances and and almost. No other disclosure to to the rest of the members of even the Legislative Council before it's in effect and then if you don't get the rules promulgated in adopted then it reverts back to what is today so is there a component of this bike the the careers are various things that are like an actual emergency and can you bring those to us specifically. And then just adopt the go through the regular role promulgation process on those things that are not actually an emergency. The the the abolition of the lottery commission in the creation of A. L. in the executive director I think that that is that's that's just a house cleaning but that certainly is something that I don't think is I don't think that's controversial I mean. Referencing an entity that no longer exist and we're replacing it with the new entity so I think just as a matter of clarity you know we periodically to receive complaints at the lottery from either players or retailers who have been denied licenses or things of that nature. Thankfully NO one has pursued administrative appeal because under the current rules there's no mechanism for that and I think that's really where consumer protection and integrity of the lottery comes into play and that's a review of the director's decisions right now there is no provision for an appeal from an adverse decision from the Arkansas lottery under emergency provision this would immediately. Push those complaints into the Arkansas administrative procedures act which is consistent with what other state agencies to and that would protect consumers as well as any retailers who wish to pursue a grievance against an adverse decision there's no due process right now if you complain to the lottery and I deny your claim. You're in the water. So that that is one component that seems to be something that might have a level of an emergency to get that due process in place Would you be willing to possibly take this back and say here's the emergency parts that we need to get in place and here's the reasons for the emergency because just. A revision of your entire rules. I mean I'm I'm not sure exactly what all's in here in its entirety but it's quite a bit of of no so that's a lot of it's cleaner and But as far as does arise to the level of emergency to get it done I just don't want to be. Russian something through that is and and missing something that. I thought was clean up I appreciate appreciate those comments I think I can is a highlight for each one of them and I'll just start in reverse since I was stating that one last on the sales and redemptions of tickets make consistent with Arkansas Code statue twenty three one fifteen four two one four three that's a restricted ineligible player list as it stands right now and I don't expect that to happen but if an employee of the lottery or employee of a lottery vendor attempted to purchasing claim a ticket under the current lottery rules to would be a huge gap as to whether or not they were eligible players we have an internal policy at the lottery that says that you're not eligible unfortunately our rules are not that clear and so you know there again it's it's something that merely brings actual practice in line with with the rules right now it could be argued that a household member of a vendor or a lottery employee can in fact play the water we don't believe that's proven we don't believe that enhances game integrity and public confidence and in there for that's why we sought to make the change and tighten up that restriction with regard to the draw coordinators to develop and maintain responsibility for drawing activities I think that's an emergency because currently we're undergoing an internal audit our internal auditor is circling that there noting that we do not have main we have not been maintaining manual drop procedures we haven't used them in over eighteen months there's no reason to maintain those and yet we're facing a write up in an internal audit which will be referred to the legislative audit. We'd like we'd like to avoid that. Retailer lost coverage I currently have one retailer that I'm having to work with who owes the lottery at that time. We're working on that we chips that down I believe you'll be successful in paying that off but there again right now I have no mechanism if if he walks from the table I have no ability to collect. The anonymity of winners in excess of five hundred thousand dollars that's ACT eight eighty nine of twenty twenty one that laws already in place our rules are inconsistent with the law. It's simply an adoption of of the current law into the rules codified lottery careers and career services I think the emergency there would really be more of a commercial economic and reputational emergency Jett pocket currently enjoys a majority status in Arkansas as they were the pilot vendor we do have a company that is at the door ready to fill out paperwork and has been very very patient with us work with us through the rules process and standing down and allowing us to to formalize a process for allowing them to enter the market as well I think they have made a significant investment in Arkansas they to have opened a retail operation here in Little Rock and we'd like to get them up and running as well in the spirit of encouraging other vendors to come to Arkansas. And then the other two I believe up I've already addressed. But will will follow the we'll follow the committee's directions will. But that's our position. Thank you for your answer. Senator and you have a question at I. which is also point out that it was it's very important to update these rules based on the changes that we made to the Arkansas lottery scholarships and how they for funded that was a lot of work that we did last session and I see that that is a big part of your rule that you have here that follows those statutes that we passed and twenty twenty one Senator Hickey so I I I do understand the concerns and I I respect my colleagues for asking those questions I'm glad that representative Dotson did that that I would have a motion at the proper time to to to approve these rules as an emergency basis. The Committee seeing no further questions without objection a proposed rule is reviewed and approved and review and approval shall be effective upon adjournment of the meeting a Legislative Council on Friday October twenty six first two thousand twenty two I will tell you that this is fine and I'm not going to object to it but for now own be a committee you're supposed to be at and submit the rules by checking all the boxes because it is kind of ridiculous that we didn't meet the thirty days and then we didn't meet yesterday so let's do things right going forward. Yes we we were using it as a learning lesson we've updated our procedures internally and I do apologize thank you senator.