Report 2010-036 Summary - February 2011

Indian Gaming Special Distribution Fund: Local Governments Continue to Have Difficulty Justifying Distribution Fund Grants

HIGHLIGHTS

Our audit of the Indian Gaming Special Distribution Fund (distribution fund) revealed the following:

RESULTS IN BRIEF

In this review, our second examination of the allocation and expenditure of grants from the Indian Gaming Special Distribution Fund (distribution fund), we found that the Indian Gaming Local Community Benefit Committees (benefit committees) responsible for distributing these funds within the counties continue to have difficulty in complying with distribution fund grant requirements and with related laws. The distribution fund uses money contributed by some tribal casinos, required under agreements known as gaming compacts between the tribe and the State, to mitigate the impact of tribal gaming on local governments in the State. As of September 2010 California had compacts with 67 of California's federally recognized tribes, 57 of which operated a total of 58 tribal casinos in 26 counties.

In fiscal year 2008-09, the Legislature appropriated $30 million from the distribution fund to local governments for mitigation projects. This amount was divided among 25 counties, which issued 185 grants. Our review of a sample of 20 of these grants awarded to local governments in seven counties revealed that for 10 of the grants, which together totaled $3.2 million, the local government either could not provide evidence of, or could not quantify, the impact of a local casino. As a result, for projects that both mitigated an adverse impact of a casino and provided other local benefits, neither we nor the county could determine whether the share provided from the distribution fund grants was proportional to the casino's impact, as required by state law.

These grants may have been approved because some county benefit committees obtained the tribes' sponsorship for the proposals before selecting them for funding. Requiring the benefit committee to select projects for grant funding before obtaining tribal sponsorship would have several inherent benefits. Not only does the consideration of each grant application by the benefit committee in a public meeting allow for discussion and public comment on each application's relative merits, but it also presents the opportunity for an applicant to provide additional information and clarification on the application.

In three of the counties we reviewed, five local governments did not receive as much grant money as was set aside for them in law by the nexus test—a test of geographical proximity that defines the minimum grant amounts certain local governments should receive. In total, more than $1.2 million set aside for these local governments went instead to other cities and counties. The county representatives described several reasons for this situation. Santa Barbara County misinterpreted the law, leading it to miscalculate the nexus amounts, and the benefit committee decided to further reduce the amount. In Riverside County, one city that was eligible for grant funds did not apply for a grant, and the tribes did not fully sponsor other grants. Finally, Amador County was unable to explain why it awarded the amounts it chose. Only Riverside County informed local governments of the amounts set aside for them based on the nexus test. We also found that a poor understanding of the law's requirements resulted in one grant benefiting an ineligible entity. The benefit committee in Yolo County provided roughly $336,000 to a school district, which is an ineligible entity under state law.

Our review also revealed that members of benefit committees do not always make the financial disclosures required by state law. Although each member is required to file a statement of economic interests that helps to identify conflicts of interest that he or she might have, our review found that 12 of the 49 committee members in four of the seven counties whose grants we reviewed failed to file their statements. Further, two members filed statements more than a year late. Several factors contributed to these omissions, including the failure of some benefit committees to establish conflict-of-interest codes that include each of the elements required by state law as well as the failure of filing officers who collect such forms to follow guidelines for administering the process.

During our review, we calculated the current balances of the distribution fund and the Indian Gaming Revenue Sharing Trust Fund (trust fund), from which the California Gambling Control Commission distributes funds to tribes that operate few gaming devices or that do not have gaming compacts with the State. We also summarized the revenue and expenditures of each of these funds. Changes in contribution requirements due to amended compacts, as well as changes in the number of licenses, have altered the revenue streams of both funds.

Although the amended compacts have resulted in less revenue for the distribution fund, they have increased the revenue available to the State's General Fund, which the Legislature might need to consider as an alternative source for funding grants and services related to casino impacts in the future. Additionally, the new or amended compacts allow tribes to work directly with local governments to address casino impacts. Eight of the tribes with new or amended compacts that we contacted have entered into written agreements with local cities and counties, and these tribes have agreed to contribute to mitigation projects and to reimburse the local governments for services provided to the casinos.

We also reviewed the fiscal year 2008-09 allocation by the State Controller's Office (Controller) from the distribution fund to counties. We found that the Controller used the formula established in law but that, due to newly amended compacts, some tribes ceased making contributions to the distribution fund partway through fiscal year 2007-08—a situation that the law did not anticipate. Had the allocation taken into account the fact that these tribes did not contribute throughout the year, approximately $2 million would have been distributed differently, providing some counties with more money and others with less.

RECOMMENDATIONS

The Legislature should consider amending the law to require that counties forfeit equivalent amounts of future money from the distribution fund if their benefit committees approve grant applications that fail to provide evidence that projects are funded in proportion to casinos' impacts. To make certain that the projects' eligibility, merit, and relevance are discussed in a public forum during the projects' selection, the Legislature should also clarify that benefit committees should meet to consider applications before submitting them for tribal sponsorship.

Alternatively, the Legislature could emphasize local priorities by amending the law to allow benefit committees to approve any applications that are submitted to them for public debate and committee approval before tribal sponsorship, regardless of the proportionality of a casino impact.

To provide an incentive for benefit committees to award cities and counties the amounts that the Legislature has appropriated to them for mitigating casino impacts, the Legislature should require that grant funds allocated for each city and county according to the nexus test revert to the distribution fund if they are not awarded to that city or county.

The Legislature should amend the law for allocating distribution funds to counties to include provisions for prorating a county's distribution fund allocation based on the percentage of the year that each gaming device in the county is required to contribute to the fund. Such an amendment would ensure a more proportionate distribution when the number of contributing gaming devices changes during the course of the year.

To help ensure that they meet the grant requirements established in the law, counties should take the following actions:

AGENCY COMMENTS

Two of the seven counties we visited—Riverside and Amador—disagreed with various determinations we made regarding the relationship of casino impacts to the grants their benefit committees awarded. Two of the counties—Humboldt and San Diego—either objected to, or indicated a concern with, involving the county auditor in the process of reviewing applications. Three of the seven counties—Shasta, Humboldt, and Santa Barbara—indicated that they had altered, or were planning to alter, their practices to implement our recommendations related to conflict-of-interest codes or the filing of statements of economic interest. Humboldt also indicated that it believes grant funds are inadequate to address casino impacts, and Amador suggested that the current grant requirements are rigid, unresponsive, and overly prescriptive.