SPECIAL DAILY GAMING UPDATE Tuesday, December 14, 2004 Pa. Gaming Control Board Convenes for Inaugural Meeting HARRISBURG (Dec. 14, 2004). Pennsylvania’s Gaming Control Board has begun setting the course for legalized gaming in the Commonwealth, and its first official acts ran the gamut from its chairman accepting service of a lawsuit challenging the board’s enabling statute to a measure allowing the board’s chair to negotiate for office space. To use the hyperlinks within this document… Throughout this document, you will see words highlighted by boxes. Those are “hyperlinks” to documents distributed at the Gaming Control Board meeting or other helpful documents regarding gaming in Pennsylvania. You need only click on the highlighted word(s) to retrieve the underlying document. The board, which includes seven voting members and four ex officio members, convened in the auditorium of the Pennsylvania State Museum in Harrisburg this morning before an audience estimated at 150. News reports indicated that, just before the meeting began, a sheriff’s deputy served board chairman Thomas “Tad” Decker with a complaint in one of several lawsuits challenging parts of Pennsylvania’s gaming statute. Mr. Decker declined to identify the plaintiff in that lawsuit, and the board did not discuss it during its public session. The board’s formal meeting began with Pennsylvania Secretary of the Commonwealth Pedro A. Cortes swearing in board members. Mr. Decker announced that the board’s highest priority would be its integrity and the integrity of the persons who will participate in Pennsylvania’s gaming industry. Board hears about applicable laws With that introduction, the board’s first order of business was to hear a summary of the laws applicable to the board as a state agency from Susan Hensel, special assistant in Pennsylvania’s Department of Revenue (a copy of the PowerPoint® presentation Ms. Hensel used is attached). Those laws include the following: • The Adverse Interest Act, which precludes board members from having an adverse or personal interest in contracts with the board; • The Right-to-Know Law, which provides Pennsylvania residents with access to public records and sets forth procedures to seek access to public records; • The Procurement Code, under which the Department of General Services will act as purchasing agent for the board; • The Ethics Act, which prohibits board members from engaging in conduct that constitutes a conflict of interest and requires filing of statements of financial interest; and • The “Open Meeting” or “Sunshine” Act, which requires that official actions of the board be taken at a public meeting. Public notice of such meetings is required and written minutes must be kept. • The Lobbying Disclosure Act, which requires disclosure of certain gifts made by lobbyists or given to board members. [Note: the Pennsylvania Supreme Court’s 2002 decision in Gmerek v. State Ethics Commission that the General Assembly could not regulate certain lobbying activities of lawyers has rendered inoperative the Lobbying Disclosure Act.] Board adopts code of conduct The board voted unanimously to adopt the Ethics Act as its official code of conduct and to conduct its meetings in accordance with the Sunshine Act. The board’s meetings will be recorded stenographically and the transcripts will be posted to the Board’s website (which you can find at www.pgcb.state.pa.us). Board member Kenneth T. McCabe proposed that the board adopt a requirement that all board members report all SPECIAL DAILY GAMING UPDATE December 14, 2004 contact by lobbyists. proposal. The board tabled the The board unanimously voted to enter into an interim interagency agreement with the Department of Revenue by which the Department of Revenue will provide the board with executive, legal and technological support on an interim basis until the board develops its own capabilities. Mr. Haines also suggested that the application software currently used by the Pennsylvania Horse Racing Commission could be customized for use by the board without significant expense. Chairman Decker then sought board approval for him to obtain emergency procurement authority to procure office space within Harrisburg for the board. The board passed the motion unanimously. Mike Walsh, special assistant to the Governor, discussed with the board human-resources issues, and proposed that the board use the existing SAP computer platform to manage its payroll, leave, benefits and procurement needs during its start-up (a copy of the PowerPoint® presentation Mr. Walsh used is attached). Mr. Walsh briefly described the standard pay classification and schedule currently used by Pennsylvania agencies under the Governor’s direct jurisdiction, but he reiterated that the board was not bound by that classification system and could develop its own. The board discussed the issue of salaries, and generally suggested that it would likely establish slightly higher salaries in order to be competitive and attract talent from other parts of the government. The board unanimously agreed to adopt as an interim measure the existing system of work hours, holidays, leave and benefits described by Mr. Walsh and to adopt the SAP platform to manage personnel issues. Board considers “start up tasks” Lynn Stelle, a consultant to the Pennsylvania Department of Revenue, then outlined key “start up” tasks for the board, including adoption of an organizational chart and staff hiring; approval of budgets for the board, the Department of Revenue and the Pennsylvania State Police; and procurement of a central control computer system (a copy of the PowerPoint® presentation Mr. Stelle used is attached). Mr. Stelle also outlined a proposed timeline. Under that timeline, in the first quarter of 2005, the board would approve regulations and forms for manufacturer- and supplier-licensing applications and for slots licenses. In the second quarter, the board would provide a 60-day comment period to political subdivisions for which slots are proposed, complete certain background investigations and issue the first manufacturer and supplier licenses. In the third quarter, the board would develop a lab to test and certify slot machines, install and test the Department of Revenue’s central control computer system, issue occupation permits to gaming employees and grant a conditional slots license to permit a temporary gaming facility to open. Mr. Stelle noted that this timeline is hypothetical, conditioned upon issuance of regulations and completion of background investigations, and that it could be subject to change due to pending litigation regarding Pennsylvania’s gaming legislation. Curt Haines, deputy secretary for information technology in the Department of Revenue, then addressed the board regarding interim informationtechnology infrastructure support provided by the Department of Revenue (a copy of the PowerPoint® presentation Mr. Haines used is attached). He explained that the Department of Revenue has made use of existing Commonwealth contracts to procure computers for the board, to provide Internet access, to secure e-mail, and to obtain other telephone and technology support for the board. Diversity plan tabled for later consideration Chairman Decker noted that, under the gaming statute, the board was required to adopt a diversity plan by January. He sought a motion to adopt a diversity plan that had been distributed to board members (according to some sources, it was distributed to board members yesterday). The board tabled the motion in order to allow members a greater opportunity to review the plan. At the end of the day, it appeared the board would take up the diversity plan tomorrow. 2 SPECIAL DAILY GAMING UPDATE December 14, 2004 Lynn Stelle returned to the podium to lay out a hypothetical organizational chart (a copy of the PowerPoint® presentation Mr. Stelle used is attached). He explained that the positions on the organizational chart were drawn from the experience of other states that allow gaming, and he said they reflect a redundant “belt-and-suspenders” approach. Mr. Stelle told board members that the final staff is not likely to be as “robust” as the organizational chart suggests. Board members sought more background information about the organizational structures used in other states. They then noted their preference that, before the Pennsylvania structure is established, the board appoint its chief counsel and executive director so that those persons could take part in staffing and organization. The staffing plan Mr. Stell suggested provides for 69 employees during FY 04-05 (the current fiscal year), 88 employees during FY 05-06 and 148 employees at the start of FY 06-07. criteria for eligible candidates (e.g., professional qualifications). Pennsylvania Treasurer Barbara Hafer then requested and received assurances from Mr. Decker that board members would be able to recommend candidates to the search firms. Board member Mary DiGiacomo Colins (a judge of the Philadelphia County Court of Common Pleas) advised the board that Diversified Search, Inc., in addition to being a Pennsylvania-based firm, was also a woman-owned business. Board considers centralized technology James Maida, president of Gaming Laboratories International, then gave the board a detailed historical overview of the types of technology deployed in gaming states (a copy of the PowerPoint® presentation Mr. Maida used is attached). He also described to board members the state-of-the-art technology known as Central Control Systems (CCS), a central system under the control of a state in which accounting data, security exception reports and software verification can be initiated. Pennsylvania’s gaming statute requires implementation of such a system. Mr. Maida, at Chairman Decker’s request, then explained the benefits of allowing a local system to operate alongside a central system. He pointed out that casino operators would be receiving the same data as is being transmitted to the CCS, but that they would be able to process that data to produce specific business information that is of importance to them but likely not to the Commonwealth (e.g., to identify machines that are more profitable than others, to implement promotional programs, etc.). Mr. Maida also emphasized the benefits in Pennsylvania’s Gaming Control Act, which allows for an “open protocol” to enable maximum flexibility for operators to determine which types of machines to use and to adapt more efficiently to technological advances. Deputy Secretary Haines summarized the status of procurement of a CCS, and he emphasized that, although the Gaming Control Act did not require strict compliance with the Commonwealth’s Procurement Code, the department nevertheless chose to embark on a “competitive” procurement (a copy of the PowerPoint® presentation Mr. Haines used is attached). Specifically, Mr. Haines noted that Board members question budget perception The staffing plan represents a significant portion of the overall budget, which would appear to be out of balance sometime in the next fiscal year based upon currently appropriated funds (and prior to the generation of licensee revenues). As a result, some board members questioned whether to pull the proposed budget from the board’s website to avoid the perception that the board would not be able to function as intended, both from an administrative and enforcement perspective. The board unanimously decided to clarify that the budget posted on the board’s website was merely a draft, and that it would be would be subject to further discussion and amendment. Chairman Decker moved for the board to embark on an “emergency procurement” to hire Pennsylvania-based, national search firms – Diversified Search, Inc., and Coleman Legal Search Associates – to begin the process of recommending names to the board for the positions of executive director and chief counsel. Board member Jeffrey W. Coy and Mr. McCabe asked several questions regarding the scope of the work anticipated, as well as what role the board would have in defining the 3 SPECIAL DAILY GAMING UPDATE December 14, 2004 the process began with an August 2004 “request for information” that enabled interested vendors to submit proposals to implement a CCS. That request outlined several, specific criteria that the Department of Revenue would consider mandatory in its evaluation of the proposals. The department received those proposals in September 2004. Since that time, it has reviewed the proposals and requested follow-up responses from the vendors with a focus on cost and minority/women participation. The department is still reviewing the updated proposals, and it anticipates selecting a vendor by the end of January, after which the department will begin contract negotiations with that vendor. The department’s goal is to have a contract in place well in advance of the commencement of gaming operations in Pennsylvania. Deputy Secretary Haines noted that the Gaming Control Act mandates that the board establish a process or a facility to test and certify slot machines prior to deployment, and he noted that many jurisdictions contract this responsibility out to third-party vendors. Mr. Haines further noted that the statute permits the board to accept testing and certification standards from other gaming jurisdictions prior to the establishment of its own standards/processes, but these interim standards/processes may not continue beyond July 2007, by which time the board must have in place an independent slot machine testing and certification facility. Chairman Decker moved to hire unnamed outside counsel to advise the board regarding the pending litigation that names the board as a party. The board adopted the motion unanimously. Mr. McCabe further clarified that the board would be free to adopt additional rules, beyond the Ethics Act, that would apply to board members and staff. Chairman Decker concurred. K&L serves a dynamic and growing clientele in regional, national and international markets that includes representation of over half of the FORTUNE 100. Currently approximately 800 lawyers strong, K&L’s practice embraces three major areas— litigation, corporate and regulatory and related fields. On January 1, 2005, K&L will combine with the English firm Nicholson Graham & Jones. Once the combination is finalized, Kirkpatrick & Lockhart Nicholson Graham, as the firm will then be named, will have approximately 950 lawyers located in London and ten U.S. cities, including Boston, Dallas, Harrisburg, Los Angeles, Miami, Newark, New York, Pittsburgh, San Francisco and Washington, D.C. For more information, visit K&L’s web site at: www.kl.com, or Nicholson Graham & Jones’ web site at www.ngj.co.uk. FOR MORE INFORMATION, please consult one of the lawyers listed below: Harrisburg David R. Overstreet 717.231.4517 doverstreet@kl.com David R. Fine 717.231.5820 dfine@kl.com Pittsburgh Sanford B. Ferguson 412.355.6494 ferguson@kl.com The attorneys resident in all offices, unless otherwise indicated, are not certified by the Texas Board of Legal Specialization. This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. ©2004 KIRKPATRICK & LOCKHART LLP. ALL RIGHTS RESERVED. *** The board reconvenes tomorrow morning to consider another full agenda. K&L will provide full coverage of that meeting by way of another special daily gaming update. 4