The California Gambling Control Commission (CGCC) is the primary state entity that regulates and licenses personnel and operations of the state’s gambling industry—principally tribal casinos and cardrooms. In recent years, the Legislature has approved significant expansions of CGCC’s staff and budget in order to allow it to regulate the rapidly growing tribal gambling industry. The 2008–09 Governor’s Budget continues this trend, increasing the size of the commission’s staff from 70 to 83 positions. Spending for commission operations would grow from $11.2 million in 2007–08 to $13.9 million in 2008–09. Over $10 million of this total is paid from the Indian Gaming Special Distribution Fund (SDF), which was established under the 58 tribal–state gambling compacts that were approved by the Legislature in 1999. While the Governor—not CGCC—is responsible for negotiating compacts with tribes and overall tribal–state relations, the commission has responsibility for administering certain payments and accounts established by the compacts. Accordingly, in this analysis, we discuss several issues relating to these payments and accounts, which go well beyond CGCC’s day–to–day operations.
Current law directs $101 million of annual tribal payments to the state to repay previous loans to the General Fund from the Traffic Congestion Relief Fund. Given the state’s budgetary situation, we recommend that the Legislature approve trailer bill language to (1) suspend the use of these payments to repay transportation loans in 2008–09 and (2) direct that the payments be deposited into the General Fund.
Payments Under Tribal–State Gambling Compacts Ratified in 2004. Chapter 91, Statutes of 2004 (AB 687, Nũńez), ratified amended gambling compacts between the state and five California Indian tribes:
- Pala Band of Mission Indians (based in San Diego County).
- Pauma Band of Luiseño Mission Indians (San Diego County).
- Rumsey Band of Wintun Indians (Yolo County).
- United Auburn Indian Community (Placer County).
- Viejas Band of Kumeyaay Indians (San Diego County).
The amended compacts provide for the five tribes collectively to pay the state $101 million per year for 18 years. Chapter 91 authorizes the California Infrastructure and Economic Development Bank (I–Bank) to securitize the tribes’ payments to the state—meaning that the I–Bank would issue bonds backed solely by these payments—for an up–front payment of up to $1.5 billion. This up–front payment would be used to repay previous loans to the General Fund from the Traffic Congestion Relief Fund (TCRF). By doing so, the Legislature reduced a General Fund obligation to repay the loan. Since 2004, various court challenges have delayed the issuance of the bonds. Previous budgets have dedicated the annual payments to repay a small portion of the TCRF loans each year. These repayments in turn have been used to repay the State Highway Account (SHA) for previous loans made to TCRF. The 2008–09 Governor’s Budget assumes that the bonds are not able to be sold until at least 2009–10 and once again proposes dedicating the $101 million annual payments to repay the TCRF. (Due to the use of several years of the payments to repay TCRF loans and revised estimates, the total amount of the up–front payment that may eventually be generated in a bond sale would be much less than the $1.5 billion authorized by Chapter 91.)
Compacts Give State Discretion for How to Use the Tribal Payments. As required under federal law, the five tribes’ amended compacts were approved by the Secretary of the Interior after passage of Chapter 91. Because the securitization of the tribal payments has not yet taken place (after which time the Legislature would have no control over the use of the payments), the state’s use of these payments currently is governed by Chapter 91 (which the Legislature can amend) and federal law (which requires the state to comply with the terms of the compact). The compacts with the five tribes include language acknowledging the state’s intent to securitize the $101 million through the I–Bank’s issuance of bonds, but there is no requirement in the compacts that the state use the funds for transportation purposes each year. Accordingly, we conclude that the Legislature, by amending state law, may suspend the use of the tribal payments to repay TCRF loans.
Program Impact. Under current law, the $101 million in tribal payments are to be deposited in SHA to repay previous loans made from that account to the TCRF. The funds would be used to provide cash outlays for capital projects in advance of reimbursements from the federal government. Suspending the tribal payment to the TCRF could delay the funding of highway capital outlay projects by up to that amount.
Recommend Directing $101 Million to the General Fund in 2008–09. Given the state’s fiscal condition, we recommend that the Legislature enact trailer bill language to suspend the use of the tribes’ payments for repaying TCRF loans for 2008–09 only. This would increase General Fund revenues by $101 million and help close the state’s budget shortfall. We do not propose to make the suspension permanent, nor do we propose amending the law authorizing the eventual issuance of bonds by the I–Bank. The recommendation would have no effect on the ability of the five tribes to operate their casino operations or their other payments to the General Fund or the Indian Gaming Revenue Sharing Trust Fund (RSTF), which distributes funds to tribes with no casinos or a small casino (non–compact tribes).
Annual revenues of the Revenue Sharing Trust Fund (RSTF) have been inadequate to fund the full $1.1 million payment to each of the state’s non–compact tribes that is envisioned in the state’s gambling compacts. Current law provides that funding the RSTF shortfall is the first priority of Special Distribution Fund (SDF) moneys, but the Governor’s budget instead uses General Fund payments from four casino tribes to make up the estimated $40 million RSTF shortfall in 2008–09. We recommend that the Legislature appropriate funds from the SDF to address the RSTF shortfall, per current law. This action would increase General Fund revenues by $40 million. (Add Item 0855–111–0367 to authorize a transfer from the SDF to the RSTF.)
Background. In 1999, the Governor and 58 tribes reached agreements on casino compacts (the 1999 compacts), and the Legislature passed a law approving them. Under the 1999 compacts, tribes acquire and maintain slot machine licenses by paying into the RSTF, an account administered by CGCC that makes payments to non–compact tribes. Under current law, the annual payments to non–compact tribes total $1.1 million for each tribe.
Since its inception, however, the RSTF has lacked sufficient funds to cover the costs of these payments. In prior years, the Legislature has appropriated funds from SDF—another account that receives payments from the 1999 compact tribes—to cure the shortfall. Chapter 858, Statutes of 2003 (SB 621, Battin), specifies that funding the RSTF shortfall is the first priority use of SDF funds—followed in descending order by other allowed uses of SDF funds: problem gambling prevention programs, casino regulatory costs of CGCC and the Department of Justice, and grants to local governments affected by tribal casinos.
Recently Approved Compacts Reduce SDF Revenues, But Protect RSTF Payments. In 2007, the Legislature ratified amended compacts with five Southern California tribes. (Four of the compacts were addressed in referenda on the February 2008 ballot, when voters allowed the four compacts to go into effect.) Under the compacts, the tribes will make substantial payments to the General Fund, and their payments to the SDF will end. This will reduce SDF revenues substantially—under the Governor’s budget forecast, from $147 million in 2006–07 (before ratification of the amended compacts) to $109 million in 2007–08 and $49 million in 2008–09 (the first full year when the amended compacts are in effect). The five compacts, however, contain provisions to protect payments to non–compact tribes, despite the large drop in SDF revenues. Each of the tribes agreed to make increased payments to the RSTF. In addition, four of the compacts provide that “if it is determined that there is an insufficient amount in the RSTF” to distribute the $1.1 million payments to each non–compact tribe, CGCC must direct a portion of the four tribes’ General Fund payments to the RSTF in order to cure the deficiency.
Governor’s Budget Directs $40 Million of Tribal General Fund Payments to RSTF. The Governor’s budget assumes that this provision of the four tribes’ compacts is triggered in 2008–09 and CGCC directs $40 million of tribal payments that otherwise would go to the General Fund to the RSTF.
Governor’s Proposal Ignores Current Law, Unnecessarily Reducing General Fund Revenues. We do not agree with the administration’s interpretation of the four tribes’ compacts and current law. Under current law, the first priority use of SDF funds is curing the RSTF shortfall. The budget forecasts that the SDF will have a $197 million fund balance at the end of 2008–09—equal to about seven years of proposed expenditures from the fund during the budget year. Moreover, under the Governor’s budget (which proposes no funding for grants to local governments affected by casinos), the SDF is expected to take in $21 million more in revenues than it spends in 2008–09. The amended compacts raise some issues concerning the future of the SDF, as discussed below. Nevertheless, in this difficult budget year, the administration’s plan to use General Fund money to cure the RSTF shortfall when there is plenty of money available in the SDF makes little sense. If the Legislature were to appropriate funds from the SDF to cure the RSTF shortfall, the provision of the four tribes’ compacts requiring a transfer from the General Fund to the RSTF would never be triggered. This would increase General Fund revenues in 2008–09 by $40 million.
Recommend Using SDF—Not the General Fund—to Address the RSTF Shortfall. We recommend that the Legislature add an item to the budget bill authorizing the Director of Finance to order a transfer from the SDF to the RSTF of up to $50 million. (This would provide a cushion if the estimated $40 million RSTF shortfall were to increase.) In conjunction with this action, we recommend the Legislature also adopt provisional language which (1) specifies that any portion of the $50 million not needed to cure the RSTF shortfall remain in the SDF and (2) ensures the General Fund transfer envisioned in the four tribes’ compacts will not be triggered.
1. The amount of any transfer ordered by the Director of Finance pursuant to this item shall be the minimum amount necessary to allow the Indian Gaming Revenue Sharing Trust Fund to distribute the quarterly payments described in Section 12012.90 of the Government Code and meet its other expenditure requirements. Any remaining portion of the amount authorized to be transferred pursuant to this item shall remain in the Indian Gaming Special Distribution Fund.
2. The Legislature finds and declares that the amount authorized in this item is expected to be sufficient to allow the Indian Gaming Revenue Sharing Trust Fund to distribute the quarterly payments described in Section 12012.90 of the Government Code during the 2008–09 fiscal year. Accordingly, the California Gambling Control Commission, acting for this purpose as the State Gaming Agency under various tribal–state compacts, shall not direct any funds to the Indian Gaming Revenue Sharing Trust Fund pursuant to Section 4.3.1(l) of the amended tribal–state compacts with the Morongo Band of Mission Indians, the Pechanga Band of Luise�o Indians, the San Manuel Band of Mission Indians, and the Sycuan Band of the Kumeyaay Nation.
3. The chair of the California Gambling Control Commission shall immediately submit a report to the Director of Finance, the Chair of the Joint Legislative Budget Committee, and the Legislative Analyst if he or she determines that the Indian Gaming Revenue Sharing Trust Fund will not have sufficient funds to distribute the quarterly payments described in Section 12012.90 of the Government Code during the 2008–09 fiscal year after consideration of the funds authorized for transfer by this item. No earlier than 15 days after submission of the abovementioned report, the California Gambling Control Commission may direct funds to the Indian Gaming Revenue Sharing Trust Fund, notwithstanding the requirements of Provision 2.
Citing a critical Bureau of State Audits (BSA) report, the Governor vetoed a $30 million appropriation from the Special Distribution Fund (SDF) for grants to local governments affected by tribal casinos in 2007–08, and his budget for 2008–09 includes no funds for these grants. We recommend that the Legislature—before appropriating any new grant funding—modify existing law to implement BSA’s key recommendations. Because grants would no longer be needed for casinos of several tribes with recent compacts, the Legislature should be able to appropriate smaller amounts for the grants in the future. This action will help preserve the solvency of the SDF, thereby reducing fiscal pressures on the General Fund.
Recent BSA Report. The 1999 compacts specify that grants to support local governments affected by tribal casinos are an allowable use of SDF funds. Chapter 858 provides that this is the lowest–priority use of SDF funds—after curing shortfalls in the RSTF, funding problem gambling programs, and covering costs of tribal casino regulatory agencies. Chapter 858 also required the Bureau of State Audits (BSA) to audit the use of SDF moneys. In its July 2007 report, BSA criticized some local government allocations of SDF grant dollars, finding that some funds were given to “projects that have no direct relationship to casinos.” In addition, BSA noted that several recent tribal–state compacts, including the five major compacts approved by the Legislature in 2007, require tribes to negotiate directly with counties and cities concerning environmental and public service effects of casino construction and expansion. The BSA report discussed how two counties received $850,000 from SDF in addition to moneys received directly from the tribes. As a result, the report concluded, “that money was unavailable for other local governments that do not negotiate directly with tribes for funds to offset the effects of casinos in their counties.” The BSA made several recommendations to the Legislature, including amendments to the law to ensure grants were spent only to “directly mitigate the adverse impacts of casinos” and to revise the grant allocation methodology “so that the allocation to counties is based only on the number of devices operated by tribes that do not negotiate directly with local governments to mitigate casino impacts.” We generally concur with BSA’s recommendations. Specifically, we recommend that the Legislature take action to implement BSA’s key recommendations prior to appropriating any new funding from the SDF for local government grants.
Effects of Recently Approved Compact Amendments. As discussed above, the five recently ratified compacts will reduce SDF revenues substantially. In addition, these compacts—as well as a few others—require tribes to negotiate directly with county and city governments in certain instances to (1) mitigate the negative environmental effects of casino construction and expansion and (2) provide reasonable compensation to local governments for increased costs of public services resulting from casinos. Because the compacts should increase tribes’ direct payments to local governments to address casino impacts, there well be less mitigation to be addressed by SDF grants. As such, the Legislature has an opportunity to reduce the annual amount of SDF grants in the future—from $30 million (the amount vetoed by the Governor in 2007–08) to perhaps somewhere between $10 million and $20 million in future years—reflecting the lower overall need.
Lower Annual Grant Funding Will Help the General Fund Over Time. Earlier, we discussed how the use of SDF funds to cure the annual shortfall in the RSTF can reduce pressure on the General Fund. In the future, as the SDF collects much less money from tribes, the Legislature can take other actions that (1) improve the solvency of the SDF and (2) reduce General Fund spending pressures (particularly from backfilling the RSTF) that would result from any future insolvency of the SDF. Reducing the annual amount of local government grant funding in the future is one such action. By reducing these expenditures, the SDF would have a better chance of maintaining a positive fund balance for a longer period of time, even as it meets its other funding commitments. In the future, if the currently sizable SDF fund balance is depleted, the Legislature will have the following difficult options from which to choose: (1) reducing funding for problem gambling, tribal regulatory, or local government grant costs; (2) using General Fund compact payments—instead of SDF funds—to cure the RSTF shortfall; (3) funding problem gambling, casino regulation, or local government grant costs from the General Fund; or (4) some combination of the above. Accordingly, preserving a positive SDF fund balance for as long as possible helps the condition of the General Fund.
The Governor’s budget includes several proposals to increase the commission’s budget and position authority. We withhold recommendation on all of the proposals pending review of the commission’s submissions under the Supplemental Report of the 2007 Budget Act.
Withhold Recommendation. The Legislature requested two submissions from CGCC in the 2007–08 supplemental report. Specifically, the reports are to include (1) information on funds generated for the state in the last year by CGCC’s audit program and (2) an update on the performance of CGCC’s slot machine inspection and testing program. These reports should provide important information to determine if recent increases in staffing have helped the commission increase its effectiveness. This will be an important consideration as the Legislature reviews the Governor’s proposals. Accordingly, we withhold recommendation on all of the Governor’s budget proposals for CGCC pending review of the supplemental report submissions, which are due on March 1, 2008.
As a result of tribal–state compacts approved by the Legislature in recent years, a small, but growing, amount of General Fund revenues comes from tribes as a result of their casino operations. The administration’s standard budgetary and financial reporting documents do not list tribal revenues with the same degree of prominence as other minor General Fund revenue sources. We recommend that the Legislature direct the administration to display tribal revenues as its own line item in future revenue reports.
Tribal Payments Are a Small, But Growing, Source of General Fund Revenue. Several tribes have agreed to make payments to the state’s General Fund in their casino compacts with the state. In 2006–07, tribes’ payments to the General Fund totaled $34 million. In 2007, however, the Legislature approved compacts with five Southern California tribes—each with a large casino operation—that will make payments to the General Fund beginning in 2008. While our office and the administration have differed substantially in our respective forecasts of how much money the tribes will pay the state during the next few years, there is little doubt that over the next few years, tribal payments to the General Fund will increase substantially—probably to the hundreds of millions of dollars per year. In addition, as evidenced by the recent debates concerning Propositions 94, 95, 96, and 97, there is significant public interest in knowing how much revenue the tribes are paying the state. However, in the administration’s standard budgetary and financial reporting documents (for example, key tables of state revenues submitted with the Governor’s budget and monthly bulletins from the Department of Finance), there are no listings of tribal revenues. Instead, the revenues are mixed in with a number of other “miscellaneous” revenues. In contrast, such revenue sources as small as $5,000 in annual revenues (guardianship fees) receive their own line item.
Recommend More Transparency. Transparency is important with any significant new revenue source. First, policy makers need to know how the revenue source is performing in order to craft a balanced budget each year. Second, policy makers and the public need to be able to hold accountable departments—such as CGCC—charged with collecting the payments and ensuring compliance by payers. Using this information, the Legislature would be better equipped to evaluate the revenue provisions of any future proposed tribal–state compacts. For these reasons, we believe that there needs to be more transparency concerning these payments in standard state financial reports. We recommend that the Legislature direct the administration to display tribal revenues as its own line item in future revenue reports.
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