Analysis of the 2005-06 Budget Bill
Legislative Analyst's Office
Established by Chapter 867, Statutes of 1997 (SB 8, Lockyer), the California Gambling Control Commission (1) monitors and enforces the terms of tribal-state gambling compacts (including the administration and distribution of funds received by the state as a result of Indian gambling 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 $13.2 million in expenditures ($10.9 million from the Indian Gaming Special Distribution Fund, and $2.3 million from the Gambling Control Fund) and 89 positions for support of the commission and its activities.
We recommend that the Legislature reject a proposal for $4.8 million and 46 positions (two-year limited-term) for increased regulatory activities related to tribal gambling. Instead, we recommend that the administration resubmit a request which distinguishes between resources for workload under the 1999 and 2004 compacts, provides justification for a state testing lab, and considers the role of the Department of Justice in regulating tribal gambling. (Reduce Item 0855-001-0367 by $4.7 million and Item 0855-001-0567 by $124,000.)
Gambling on Tribal Lands. Indian tribes with tribal-state gambling compacts can operate slot machines and certain other casino-style gambling in California. Currently, 66 tribes have compacts and operate about 56,000 slot machines.
1999 Compacts. Most tribes signed their current compacts in 1999. Under these compacts, a tribe may operate up to two facilities and up to a total of 2,000 slot machines. In exchange, tribes make some payments to the state, which can only be used for specified purposes. The payments are made into two funds, the Revenue Sharing Trust Fund (RSTF) and the Special Distribution Fund (SDF). These compacts expire in 2020.
2004 Compacts. In June 2004, five tribes signed amendments to their compacts and these agreements were approved by the state. Under the amended compacts, the tribes may operate as many slot machines as they desire. In exchange, these tribes provide a combined $100 million payment annually to the state. The state plans to issue a bond backed by these revenues to repay a transportation loan obligation. The tribes provide additional payments to the General Fund for slot machines added to their facilities. These compacts expire in 2030, ten years later than the 1999 compacts. In addition, in August 2004, two tribes signed new compacts and two additional tribes amended their existing compacts. Under the provisions of these compacts, the tribes generally make payments to the state based on the "net win" of their slot machines. These agreements expire in 2025 or 2030. The Governor's budget assumes $34 million in 2005-06 General Fund revenues from the 2004 agreements.
State Agencies That Regulate Tribal Gambling. The commission and the Division of Gambling Control within the Department of Justice (DOJ) are the state's tribal gambling regulatory entities. The DOJ conducts background investigations for the commission on gambling licenses and work permit applications received by the commission. The DOJ reports that a substantial portion of its tribal law enforcement resources are spent on criminal investigations—including those involving cheating, illegal games, and illegal slot machines. The commission 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 tribal gaming activities.
The administration proposes to increase the commission's budget by $4.8 million and 46 two-year, limited-term positions, which would result in a doubling of its current staff. Specifically, the commission requests:
The administration stated its intent to seek a supplemental appropriation to start these activities in the current year.
We have several concerns with the administration's proposal, which are discussed below.
Not Clear What Problems Being Addressed. Even though the proposal is a major expansion of the commission that would result in a doubling of its size, the administration has provided little justification as to what problems would be addressed. The commission staff report that the proposal only funds activities required under the 2004 compacts. Our review, however, reveals that some of the request is for workload required under the 1999 compacts. For instance, the request includes seven auditing positions to conduct audits of payments made into the SDF. Payments are required to the SDF under the 1999 compacts, not the 2004 compacts. In reviewing the request, the Legislature needs to be able to distinguish any funding which augments existing activities from those new activities.
Assumptions Unclear. In addition, the commission was unable to provide information on the assumed level of growth in gambling in the state, which should form the basis of anticipated workload. Without these assumptions, it is difficult to evaluate the reasonableness of the requested resources.
Gaming Testing Lab Not Required. The request for 13 positions for the state gaming testing lab would commit significant state funds to an activity not required under the provisions of the compacts. The 2004 compacts require that games—prior to being operated in a casino—be tested by ei ther an independent lab or a gaming testing lab operated by the state. Currently, new machines put into operation under the 2004 compacts are being tested by independent labs. To the extent that the state funds and operates a gaming test lab, there are no guarantees that the tribes and machine manufacturers would choose to utilize it. The commission notes some possible state advantages to a state lab, such as increased state expertise and control. The commission, however, has not fully explored the fiscal implications of developing such a lab. For instance, the proposal does not consider the possibility of minimal workload.
Poor Output From Existing Audit Staff. Currently, the commission conducts two main types of audits. One of the audits requires that staff count the machines in operation at a facility to ensure that the tribe is complying with the compact provisions related to the RSTF. The other is a financial audit to ensure that the tribe is complying with the provisions related to the payments to the SDF. The SDF compliance audits require that the commission verify that the tribe is paying a designated share of its net win. The requested additional audit positions would focus on these types of financial audits for payments to the SDF and the General Fund. Since the implementation of the 1999 compacts, the commission has completed only one financial audit of the payments made to the SDF. (The commission does note that five additional audits are underway.) Given this limited financial audit productivity from existing staff, it is difficult to determine whether additional resources would be used effectively.
Duplicative Activities Between the DOJ and the Commission. Based on our review, it appears that efficiencies could be achieved by better coordinating at least some of the activities of the DOJ and the commission. For example, the commission's audits to ensure compliance with the provisions related to RSTF payments require staff to count the number of machines in operation at the facilities. The DOJ reports that its compliance and enforcement personnel also count gaming devices to ensure the totals are within the limits specified by the compacts. These duplicative efforts result in an inefficient use of state gambling regulatory resources. Commission and DOJ staff report that there have been some past efforts to collaborate in conducting such audits. Both staffs report these collaborations were successful and helped maximize staff resources. Yet, continuing or expanding the efforts to collaborate with DOJ does not appear to have been considered in the development of the current proposal.
2004 Compacts Require Additional Resources. It is reasonable to expect that some level of additional commission resources is needed given the recent agreements with the tribes. These revised agreements have already resulted in an increase in the number of slot machines in operation. Moreover, required payments under the compacts directly affect the state's General Fund condition.
Recommend Resubmittal of Request. Given the current level of information available, however, we are unable to determine what level of resources are reasonable. Consequently, we recommend that the Legislature not approve the administration's current request. Instead, the administration should resubmit a request that includes the following: