LAO 2006-07 Budget Analysis: General Government

Analysis of the 2006-07 Budget Bill

Legislative Analyst's Office
February 2006

California Gambling Control Commission (0855)

Established by Chapter†867, Statutes of 1997 (SB 8, Lockyer), the California Gambling Control Commission is the primary public entity that regulates and licenses personnel and operations of the stateís gambling industry. This industry has grown rapidly in recent years. The commission regulates 55 tribal casinos and more than 100 gambling establishments and cardrooms.

The 2006-07 Governorís Budget proposes a significant expansion of the commissionís staff and mission. Specifically, the budget increases the size of the commissionís staff to 72 positions, up 50†percent from currently authorized levels. Spending for commission operations would grow from $8.4†million in 2005-06 to $10.9†million in 2006-07, an increase of 31†percent. (The Governorís budget proposes a related expansion of the investigation activities of the Division of Gambling Control in the Department of Justice [DOJ]. We discuss that proposal in the ďJudiciary and Criminal Justiceď chapter of this publication.)

Expansion of Commission Staff Justified, but Pace of Growth and Funding Method Need Consideration

We agree with the administration that the Legislature should expand the commissionís staff. We, however, recommend rejecting the proposal to change existing policy and pay for some commission costs from the General Fund. Instead, commission operations should continue to be supported entirely by special funds with fees and charges for gambling-related activities. In addition, we recommend certain reductions in the administrationís proposal. Specifically, we recommend: (1) rejecting the commissionís request to expand its audit staff by six positions and (2) approving the three proposed positions for a new field inspection program on a two-year limited-term basis. (Reduce Item 0855-001-0001 by $725,000. Increase Item 0855-001-0367 by $290,000.)

Background

Gambling on Tribal Lands. As authorized by the federal Indian Gaming Regulatory Act, state law gives the Governor the power to negotiate tribal-state gambling compacts with federally recognized Indian tribes. The Legislature must approve all such compacts. Tribes agreeing to these compacts can operate slot machines, certain card games, and other types of gambling in California. Currently, 54 tribes operate around 55,000 slot machines. About one-half of these machines are in casinos in San Diego County and Riverside County. The number of casinos has increased 35†percent in the past five years, and the number of slot machines has increased 31†percent.

1999 Compacts. Most tribes signed their current compacts in 1999, under which each tribe may operate up to two facilities with a total of 2,000 slot machines. In exchange, tribes make payments to two funds administered by the state, the Revenue Sharing Trust Fund (RSTF) and the Special Distribution Fund (SDF). The funds in the RSTF are distributed to tribes that do not operate slot machines or operate less than 350 machines. The SDF moneys are distributed in priority order to: (1) address shortfalls in the RSTF so that eligible tribes receive $1.1†million annually, (2) fund programs addressing gambling addiction and related problems, (3) fund regulatory activities of the commission and DOJ, (4) provide grants for local government agencies affected by tribal casinos, and (5) achieve any other gambling-related purpose.

2004 Compacts. In June 2004, five tribes signed amendments to their compacts, and these agreements were approved by the Legislature. Under the 2004 compacts, these five tribes may operate as many slot machines as they wish. In exchange, the tribes provide a combined $100†million payment annually to the state, which is to be used to support an upcoming bond to repay a portion of the stateís obligations to transportation funds. The tribes also provide additional payments to the General Fund for slot machines added to their facilities. In August 2004, two tribes signed new compacts, and two other tribes amended compacts, under which the tribes generally make payments to the General Fund based on the ďnet winĒ of their slot machines. Based on these nine 2004 compacts, tribes will pay a projected $25†million to the General Fund in 2006-07.

Compacts Will Result in Continued Gambling Expansion. Tribes with approved compacts now have about 25 new or expanded casinos under development. In addition, the Governor has reached agreement with tribes on one amended and four new compacts, which await consideration by the Legislature.

Proposal

The administration proposes to increase the commissionís budget by $2.5†million. (Special funds receiving gambling-related revenues would provide $1.8†million of this amount, and the General Fund the balance of $725,000.) The proposal requests 24 new positions and the conversion of 2.5 limited-term licensing staff positions to permanent ones. Specifically, the commission requests the following increases in staffing:

Comparison to 2005-06 Proposal. The 2005-06 Governorís Budget requested an augmentation of $4.8†million and 46 new positions for the commission. This proposal was rejected by the Legislature. The 2006-07 proposal-while similar in some respects-provides less funding for expansion. In general, the 2006-07 proposal is much better justified than the plan offered one year ago. For instance, the 2005-06 expansion proposal requested funds to hire 13 new staff for field inspections and a new state gambling testing laboratory. The 2006-07 proposal also creates a field inspections unit, but the testing laboratory has been replaced with a proposal for a better defined technical services, research, and testing program to assist in regulating increasingly complex electronic gambling devices. In addition, the 2006-07 proposal-unlike the plan of one year ago-is coordinated with a $3.3†million proposal by DOJ to expand its Division of Gambling Control.

No Need for General Fund Dollars

The commission currently receives all operational funding from the SDF and the Gambling Control Fund (for cardroom regulation), which receive gambling-related fees and revenues. The administration proposes to fund part of the costs of the commissionís expansion (as well as that of DOJís investigative activities) from the General Fund. The administrationís rationale is that, since some tribes make payments to the General Fund, a proportion of regulatory costs should also be paid from the General Fund. As noted above, however, state law and the compacts allow commission regulatory funding to come from SDF. (The SDF is projected to have a fund balance of $113†million at the end of 2006-07). We therefore recommend continuing to fund commission regulatory activities exclusively from revenues derived from the industry itself, as is usually the case with other regulatory agencies. Shifting costs from the General Fund to the SDF results in a General Fund benefit of $725,000.

Increased Workload and Technology Justify Expansion

Tribal and Other Gambling Activities Have Increased Workload. The commission provided information that shows its workload has increased substantially with recent expansions of gambling in the state. The number of applications it considered for the licensing of owners, employees, and other professionals, for example, more than quadrupled between 2002-03 and 2004-05. The 2004 compacts established new commission duties (generally not implemented to date) with respect to audits and quarterly inspection of casino devices. New regulations require manufacturers and distributors of gambling equipment to provide specific information each quarter on shipments within the state. The commission also now regulates ďproposition playerĒ companies, which provide hired players to start games or keep games going at casinos, thereby attracting other patrons to the gambling table.

Commission Needs to Improve Productivity, Prove Worth of New Units

While we agree with the administration that the Legislature should expand the commissionís staff, we have concerns with components of the administrationís proposal, which are discussed below.

Recommend Rejecting Proposed Audit Staff Expansion. The commission reports that it has completed only about six full audits of tribes since its inception, citing several provisions of the stateís compacts that restrict its ability to audit tribal operations effectively. Expanded workloads and turnover also seem to be responsible for some of the poor record to date. Until the commission can provide evidence of improving productivity of existing staff, expansion is not warranted. We recommend, therefore, that the Legislature reject the proposal to expand the auditing staff at this time. This change would reduce the total costs of the expansion proposal by approximately $435,000.

Recommend Making Inspection Positions Limited-Term. The Governorís budget for 2006-07 requests eight positions for two proposed new units: (1) a three-member field inspection unit principally for inspecting casinos quarterly under the 2004 compacts and (2) a five-member technical services, research, and testing unit to assist commissioners and staff (including field inspectors) with technical issues associated with the functioning, integrity, and operations of todayís advanced gambling equipment. Other states with significant concentrations of casinos, such as Nevada and New Jersey, already have regulatory units of this type. But, with no track record in this area, the commission needs to show that these new units produce more benefit for the state, gambling partons, and tribes than they cost. Consequently, we recommend that the new positions in the inspections unit-like those proposed for the new technical resources unit-be approved on a two-year limited-term basis.


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