LAO 2004-05 Budget Analysis: General Government

Analysis of the 2004-05 Budget Bill

Legislative Analyst's Office
February 2004

California Gambling Control Commission (0855)

Established by Chapter 867, Statutes of 1997 (SB 8, Lockyer), the California Gambling Control Commission (CGCC) (1) monitors and enforces the terms of tribal-state gaming compacts (including the administration and distribution of funds received by the state as a result of Indian gaming activities), (2) licenses and regulates card rooms, and (3) provides oversight for specified aspects of horse track betting. The five-member commission is appointed by the Governor.

The Governor's budget proposes $52 million in expenditures ($46 million from the Indian Gaming Revenue Sharing Trust Fund, $4 million from the Indian Gaming Special Distribution Fund, and $2 million from the Gambling Control Fund) and 46 positions for support of the commission and its activities. In anticipation of renegotiated revenue sharing agreements with tribes, the Governor's budget also assumes $500 million in new revenues to the General Fund.

$500 Million Increased Revenue Assumption Risky

The proposed budget assumes $500 million in new revenues to the General Fund in anticipation of renegotiated revenue sharing agreements with tribes. The realization of such revenue in 2004-05, however, is unlikely. When the Governor presents the Legislature with the renegotiated compacts, the Legislature will likely need to weigh the impact of increased gaming against the benefit of any increased revenues.

Tribal-State Gaming Compacts. As a result of the passage of Proposition 1A in March 2000, Class III gambling (such as slot machines and banked or percentage card games) became legal on California Indian land for those tribes that enter into a tribal-state compact approved by the Legislature, the Governor, and the federal government. These compacts lay out the legal relationship between the tribes and the state with respect to Indian gambling. According to the commission, there are currently 109 federally recognized tribes in California, and 64 of these tribes have tribal-state gaming compacts that last until at least 2020. Of those 64 tribes, 51 are currently operating casinos in California.

Three New Compacts. In March 2003, the prior administration entered renegotiations with the gaming tribes in an effort to generate $680 million in new General Fund revenues. No tribes with existing compacts agreed to renegotiated arrangements. The prior administration, however, did come to new agreements with three tribes. The Legislature approved these agreements last year. Unlike the prior compacts, the new compacts require the payments of up to 5 percent of the tribes' winnings to the General Fund.

Existing Revenue Payments. Currently, pursuant to all but the three most recent compacts, tribes pay more than $130 million annually to the state for the right to offer Class III gambling. These revenues are not deposited into the General Fund. Instead, the use of the revenues is restricted to specified uses:

Is the Projected $500 Million in Increased Revenues Likely? The Governor proposes to again enter compact renegotiations with the tribes. The Governor proposes securing $500 million in annual General Fund revenues (beginning in 2004-05) as the result of these renegotiations. It is unknown what amount of revenue, if any, will result from the renegotiations. Yet, in our assessment, it is unlikely that the Governor will secure $500 million in budget-year revenues because:

The compacts are voluntary agreements, and some tribes could choose to continue to operate under the existing agreements for nearly two more decades. As such, the administration will likely have to negotiate away items of significant value to secure any sizable increases in revenue. For instance, some existing compact tribes have already expressed interest in an expansion of their gaming.

Legislature to Ratify the Renegotiated Compacts. Given these factors, it is risky to depend on tribal gaming as a way of raising large amounts of revenue to help balance the 2004-05 budget. We expect the Governor, following completion of renegotiations, to submit the compacts to the Legislature to be ratified. Regardless of the revenue amount negotiated, the Legislature will likely need to consider whether a greater presence of gambling in the state is worth the increase in General Fund revenue.

Special Distribution Fund—Opportunity for General Fund Savings

The $137 million in available monies in the Special Distribution Fund presents the Legislature the opportunity to help address the budget shortfall. We recommend that the Legislature use the available funds for existing programs, currently funded with General Fund dollars, which address the impact of gambling on communities.

How the Special Distribution Fund Works. Revenues to the Special Distribution Fund are dependent on the number of slot machines in operation as of September 1, 1999. Tribes contribute revenues each quarter to the fund, up to 13 percent of the average net win from these machines. Tribes are expected to contribute $86 million to the Special Distribution Fund in the budget year.

What Can the Funds Be Used For? The fund is subject to legislative appropriation for the following statewide purposes:

The language of the last item appears significantly broad to allow the funds to be used for any purpose. Yet, a federal district court has ruled that, since this broad statement follows four specific statements related to gambling, all of the funds must be used for gambling-related activities.

What Was Spent in 2003-04? The Legislature appropriated $94 million from the Special Distribution Fund in 2003-04 as follows:

Commission to Report to Legislature. The above measures also create new reporting requirements. Chapter 210 requires the CGCC to report to the Legislature the amount of funding from the Special Distribution Fund necessary to make up the difference between the $1.1 million maximum and the actual amount paid to each eligible tribe from the Revenue Share Trust Fund. Chapter 858 requires the Department of Finance, in consultation with the CGCC, to calculate the total revenue in the Special Distribution Fund that will be available for local government agencies impacted by tribal gaming. The information is to be included in the May Revision.

No Spending Plan From Governor. Based on current information, total resources in the Special Distribution Fund in 2004-05 will be roughly $150 million ($86 million in payments from tribes and revenues from past years). The budget proposes expenditures of $13 million for Indian gaming regulatory activities. The administration, however, does not propose expenditures for the remaining $137 million in the fund.

Funds Could Be Used to Alleviate General Fund Pressures. In reviewing the options for spending the fund balance, there are many possible uses. The impacts of gambling are widespread, even in communities without casinos. Costs related to public safety, road maintenance, and gambling addiction, for instance, affect many cities, counties, and the state. The costs of addressing even one of these areas would easily exceed the Special Distribution Fund's funding.

Given the budget situation and broad parameters of the fund, we recommend using the $137 million for spending which both meets the requirements of the fund and helps the budget situation. For instance, funds currently spent by the General Fund on gambling-related expenses could be replaced with Special Distribution Fund revenues—generating General Fund savings. Below, we outline two such possible uses for the fund revenues as illustrative examples:

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