Legislative Analyst's Office Analysis of the 2003-04 Budget Bill

California Gambling Control Commission (0855)

Established by Chapter 867, Statutes of 1997 (SB 8, Lockyer), the California Gambling Control Commission (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) is responsible for the licensing and regulation of 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 $51.5 million in expenditures ($46 million from the Indian Gaming Revenue Sharing Trust Fund, $3.3 million from the Indian Gaming Special Distribution Fund, and $2.2 million from the Gambling Control Fund) and 44.7 personnel-years for support of the commission and its activities. In anticipation of renegotiated revenue sharing agreements with tribes, the Governor's budget also assumes $1.5 billion in new revenues to the General Fund, which we discuss in more detail below.

$1.5 Billion Increased Revenue Assumption Risky

The proposed budget assumes $1.5 billion in new revenues to the General Fund in anticipation of renegotiated revenue sharing agreements. The realization of such revenue, 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 Scheduled for Renegotiations. 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 61 of these tribes have tribal-state gaming compacts that last until 2020. Of those 61 tribes, 51 are currently operating casinos in California. The compacts have a scheduled renegotiation period in March 2003. The Governor proposes securing $1.5 billion in General Fund revenues as the result of these renegotiations.

Existing Revenue Payments. Currently, pursuant to the compacts, tribes pay $140 million annually to the state for the right to offer Class III gambling. Unlike the Governor's proposal, however, these revenues are not deposited into the General Fund. Instead, the use of the revenues is restricted to specified uses. Specifically, the tribes pay the following:

• Revenue Sharing Trust Fund. This includes $46 million annually in licensing fees to operate gaming machines. These funds are distributed to noncompact tribes.
• Special Distribution Fund. This includes $94 million in fees, based on the average net win of machines in operation as of September 1, 1999. (We discuss this fund in detail below.)

Is the Projected $1.5 Billion in Increased Revenues Likely? 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 $1.5 billion in budget-year revenues because: 

• Under federal law, the Governor cannot impose a tax on the tribes, therefore, the tribes must agree to pay any additional monies.
• The $1.5 billion proposed is ten times what tribes currently pay, and about 30 percent of their current annual gross revenue of $5 billion.
• The budget proposes that the collected revenues go directly to the General Fund, as opposed to the current policy, in which the revenues are used largely in a manner related to the tribes or gambling.
• Since the renegotiated compacts also need to be approved by the federal government, it may be difficult to implement any changes to revenue payments to ensure full-year revenues in the budget year.

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.

Gaming in Other States. Connecticut and New York are often offered as examples of states that collect significant revenues from gaming tribes. In Connecticut, gaming tribes contribute 25 percent of their net win from slot machines to the state. In New York, a large tribe contributes up to 23 percent of its net wins. According to the commission, these collection rates were established as part of the original compacts, not through renegotiated compacts. Consequently, the conditions in which these states' original compacts were negotiated are different than that of California today. California's tribes can opt to continue to operate under the original compacts.

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 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 $88 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 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. Figure 1 (see next page) summarizes how these contributions are made based on the number of machines. The commission is responsible for collecting the appropriate amount of payments into this fund. Pursuant to the compacts, the first quarterly payments into this fund began September 30, 2002. As noted above, tribes are expected to contribute $94 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: 

• Reimbursement for state regulatory costs associated with implementation of the compacts.
• Grants for gambling addiction programs.
• Grants to state and local agencies affected by tribal government gaming.
• Payment of shortfalls that may occur in the Revenue Sharing Trust Fund.
• Any other purpose specified by the Legislature.

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.

No Spending Plan From Governor. Based on current information, total resources in the Special Distribution Fund will be roughly $102 million ($94 million in payments from tribes plus interest and other revenues). The budget proposes expenditures of about $14 million, almost exclusively for Indian gaming regulatory activities. The administration, however, does not propose expenditures for the remaining $88 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 $88 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:

• Public Safety Demands. Gambling activities increase the needs for law enforcement services throughout the state. We therefore believe the Special Distribution Fund could appropriately be used to address these public safety demands. In total, cities and counties spend billions of dollars annually on public safety. The state contributes a small amount of this total annually ($116 million from the General Fund) though the Citizens' Option for Public Safety (COPS) program. If the Legislature continues to fund the COPS program, a portion of the funding could be directed from the Special Distribution Fund. Given the large amounts of money being spent, it is reasonable to assume that such a small COPS-related portion of total public safety expenditures is already spent on gambling-related activities.
• Treat Gambling Addiction. There are currently many individuals with gambling problems. It is reasonable to assume that some individuals that suffer from this problem seek mental health services. Currently, several hundreds of millions in General Fund dollars are allocated to counties to provide mental health services at the local level. As with the public safety example above, a portion of these General Fund expenditures could be replaced with Special Distribution revenues.