Report 2006-036 Summary - July 2007

Indian Gaming Special Distribution Fund: Local Governments Do Not Always Use It to Mitigate the Impacts of Casinos, and Its Viability Will Be Adversely Affected by Compact Amendments

HIGHLIGHTS

Our review of the allocation and uses of the Indian Gaming Special Distribution Fund (distribution fund) money revealed the following:

• Local governments did not always use distribution fund money to mitigate casino impacts.
• The allocation of distribution fund money in some counties is based, in part, on the number of devices operated by tribes that did not pay into the fund because their compacts require them to negotiate directly with the county to pay for the mitigation of casino impacts. However, these counties continue to receive distribution fund dollars from the State.
• In many instances local governments do not use interest earned on unspent distribution fund money for projects related to casino impacts.
• Although all benefit committee members are required to file statements of economic interests, in our sample counties, 11 of the 13 tribal members that were required to file failed to do so.
• The ratification of compacts in June 2007, along with one that is awaiting ratification, may threaten the future viability of the distribution fund and the programs that depend on it, as they eliminate $92 million in payments to the fund beginning in fiscal year 2007-08. While we estimate that contributions to the State's General Fund would also total at least $174 million, almost $40 million per year could be required to pay for the estimated shortfall in the Revenue Sharing Trust Fund.

RESULTS IN BRIEF

The federal Indian Gaming Regulatory Act authorizes the State to enter tribal-state gaming compacts (compacts) that allow California Indian tribes to operate gaming devices on tribal lands. In anticipation of the passage of Proposition 1A, which was approved by voters in March 2000, amending the California Constitution to permit Indian gaming, 60 tribes agreed to the model compacts ratified in September 1999 (1999 compacts), which were materially indistinguishable from each other. Among the gambling devices allowed under the compacts are those designated as class III, which include off-track wagering, lotteries, certain card games, and slot machines. Only after a tribe and the State have negotiated a compact, which governs the conduct of the gaming activity, can the tribe operate class III gaming devices.

As required by the compacts, in fiscal year 2005-06, 37 of the tribes with compacts deposited money into the Indian Gaming Special Distribution Fund (distribution fund), the Revenue Sharing Trust Fund (trust fund), or both. These funds are administered by the California Gambling Control Commission (gambling commission). State law establishes criteria for disbursing money from both funds. Distribution fund deposits are based on the gross revenues tribes earn from operating class III gaming devices in use before the ratification of the 1999 compacts. Gross revenues, also called net wins, are the amounts players put in the devices less the amounts paid out to winners. Deposits into the trust fund are based on the number of class III gaming device licenses each tribe has acquired since the ratification of the 1999 compacts.

As shown in the text box on the following page, one designated use of the deposits made to the distribution fund is to provide grants for local governments—cities, counties, and special districts—adversely impacted by tribal gaming. State law created an Indian Gaming Local Community Benefit Committee (benefit committee) in each county in which Indian gaming is conducted. The benefit committees award distribution fund grants to local governments according to specified criteria. For instance, state law requires that the distribution fund be used for certain purposes, such as law enforcement, emergency medical services, environmental impacts, and water supplies.

The grants we reviewed were used for the statutorily mandated purposes. However, not every project funded under one of those purposes was linked to an impact from a casino. Specifically, we reviewed 30 grants totaling $12.1 million made to local governments in six counties and found five instances totaling $505,000 when the money was not used to offset the adverse effects of casinos. For example, Healdsburg District Hospital in Sonoma County received more than $52,000 for surveillance cameras. Although the hospital claimed it experienced several acts of vandalism in its parking areas and other disturbances, it could not provide evidence showing that those incidents were related to the casino or that the number of criminal incidents on its property had increased since the casino was built.

We also identified 10 instances totaling $2.3 million when the purposes of the grants as stated in the applications might have been somewhat relevant to the effects of the casinos but appeared primarily to address needs that were unrelated. For instance, the sheriff's department in San Diego County received over $149,000 to purchase a device to analyze chemicals from arson and other crime scenes and suggested that in the future some of these investigations may occur in the area around the casino. Use of this device is not intended to be limited to casino-related incidents; it will be used for cases throughout the county.

The intent of the law establishing the uses of distribution fund money allocated to local governments is to support those impacted by the operation of casinos within their jurisdictions. The law declares that the intent of the Legislature is that tribal governments participate in the process of identifying and funding mitigation of the impacts of tribal gaming and the funding for local governments is for the purpose of mitigating impacts from tribal casinos. However, there are no specific requirements that local governments must ensure that the funds are used for projects that directly address an impact from the casinos. As a result, local benefit committees have allocated funds to projects that have no direct relationship to casinos. Even though the money was not used to mitigate the impact of casinos, the grants appear to adhere to the explicit requirements of the law.

Prior to 2007 the Legislature ratified five new compacts and amendments to eight others (post-1999 compacts) with various terms or requirements different from those in the original compacts. The post-1999 compacts require tribes to negotiate directly with local governments to mitigate the impacts of casinos rather than requiring them to contribute to the distribution fund. However, although the post 1999 compacts bypass the distribution fund when negotiating for mitigation projects, some counties with tribal casinos and amended compacts continue to receive money from the distribution fund. For example, in fiscal year 2005-06 two counties received roughly $850,000 from the distribution fund in addition to the funding they received directly from the tribes. As a result, 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. Existing law allows these counties to receive funding for mitigation projects from both the tribes and the distribution fund.

Counties generally awarded all the funding they were allocated each year. However, in some cases, such as large capital improvement projects, it can take months or even years before spending on a casino mitigation project begins, leaving a significant amount of distribution fund money deposited in local government accounts that may earn interest for many years. We noted several instances when local governments did not use the interest earned on grants to pay expenses related to the projects for which the grants were intended, or for other casino mitigation projects.

Several local governments asserted that state law authorizes the use of interest earned on the grants for general purposes. However, our legal counsel advised us that given the nature of the grant funds, the interest on those grant funds must be used for the purposes established in the compacts and state law. We identified interest totaling $175,000 that local governments generated from two capital improvement projects and used to pay general county operational costs rather than applying it to mitigation projects or returning it to the benefit committee for allocation to other projects intended to offset the impacts of Indian gaming. We also identified numerous instances in which local governments placed funds in accounts earning no interest.

Allocations from the distribution fund follow a formula intended to establish a fair and proportionate system to award grants to local governments impacted by casino operations. We found that a sample of counties generally identified all eligible governments and granted amounts as required. However, although state law limits the types of local governments eligible to receive funding to counties, cities, and special districts, the benefit committees in two counties provided a total of $325,000 to school districts, which are ineligible entities because they are specifically excluded from the statutory definition of special districts.

Further, members of benefit committees do not always make the financial disclosures required by state law. The Political Reform Act of 1974 (political reform act) requires state officials and employees with decision-making authority to file statements of economic interests. These statements are intended to identify conflicts of interest that an individual might have. Counties were unable to provide 11 of the 13 statements we requested for benefit committee tribal representatives active in fiscal year 2005-06. The California Fair Political Practices Commission has advised that members of benefit committees are subject to the political reform act. When designated individuals do not file statements of economic interests, benefit committees may be unaware of conflicts of interest and cannot ensure that members are aware when they should remove themselves from making decisions that could pose conflicts of interest.

We also found that some counties lacked transparency and accountability in their distribution fund spending. Counties are required to report to the Legislature and the gambling commission annually on the projects they financed through the distribution fund. However, according to information provided by the gambling commission and various legislative committees, for the most recent fiscal year, nine counties failed to submit their reports to all the committees and agencies required and six counties failed to submit their reports at all. Our audit also revealed that one county submitted incomplete information for one of the fiscal years required. Failure to complete or submit the required reports makes it difficult for legislators and other decision makers to determine whether local governments are using the funds as intended.

In June 2007 the Legislature ratified one new compact and four of five amendments to existing compacts. To take effect, the newly ratified compact and four amendments still require approval by the federal Secretary of the Interior. Therefore, we refer to the compact and amendments (including the one amendment that has yet to be ratified) as "pending compacts" throughout our report. These pending compacts may threaten the future viability of the distribution fund. The pending compacts will change the method of calculating contributions to the trust fund and require tribes to begin contributing to the General Fund instead of the distribution fund. It is difficult to determine the precise impact these pending compacts might have because the contribution formulas largely depend on the tribes' future economic conditions and expansion decisions. We conservatively estimate that annual contributions to the trust fund from these compacts will increase by about $6.9 million, while annual contributions to the distribution fund will decrease by $92 million. Further, we estimate that contributions to the State's General Fund from these compacts will total between $174.3 million and $175.1 million for fiscal year 2007-08. Further, as casino operations expand, General Fund revenues will increase.

Despite the significant decrease in contributions to the distribution fund, the Government Code currently requires its continued use to pay for any shortfall in the trust fund—which we estimate will total $39.6 million per year—enabling the gambling commission to continue paying each noncompact tribe $1.1 million per year, as required by law. We anticipate that if these payments continue at their current level, by fiscal year 2010-11 the distribution fund will be unable to support the current level of expenditures for its other obligations. However, because of differences in existing law, a provision in the pending compacts, and language in pending legislation, it is unclear whether the distribution fund or the General Fund would be the source first required to pay for future trust fund shortfalls.

RECOMMENDATIONS

To ensure that local governments receive maximum benefit from the distribution fund and comply with applicable provisions of state law, the gambling commission should seek the following legislative changes:

• Amend the California Government Code (Government Code) to provide direction to local governments to ensure that they use distribution fund grants only to purchase goods and services that directly mitigate the adverse impacts of casinos on local governments and their citizens.
• Revise the allocation methodology outlined in the Government Code 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.
• Amend the Government Code to require that all funds be deposited into interest-bearing accounts and that any interest earned is used on projects to mitigate casino impacts.
• Amend the Government Code to allocate distribution fund money only to counties that submit annual reports as required.

To ensure that local governments comply with state laws related to the distribution fund, benefit committees should do the following:

• Require local governments to submit supporting documentation that clearly demonstrates how proposed projects will mitigate the effects of casinos.
• Ensure that local governments spend the interest earned on project funds only on mitigation projects, or return the money to the county for allocation to future mitigation projects.
• Grant distribution fund money only to eligible entities.
• Ensure that all benefit committee members follow the political reform act and file the required statements of economic interests, and inform the appropriate agency if they fail to do so.
• Submit annual reports to all required legislative committees and the gambling commission.

AGENCY COMMENTS

Four of the six counties we visited—Riverside, San Bernardino, San Diego, and Sonoma—disagreed with our conclusion that the Legislature intended that distribution fund grants be used to mitigate the impacts of Indian casinos in their respective counties. Additionally, Riverside and San Diego counties disagreed with our conclusion that interest earned on unspent grant money should be used for casino mitigation projects.

Finally, the gambling commission suggested that we add language to the report to provide more technical details about certain aspects of Indian gaming.

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• Agencies/Departments Related to This Report:
  • County Government
  • Gambling Control Commission, California