Report 2003-122 Summary - June 2004

California Gambling Control Commission:

Although Its Interpretations of the Tribal-State Gaming Compacts Generally Appear Defensible, Some of Its Actions May Have Reduced the Funds Available for Distribution to Tribes

HIGHLIGHTS

Our review of the California Gambling Control Commission's (Gambling Commission) administration of the Indian Gaming Revenue Sharing Trust Fund (trust fund) revealed the following:

RESULTS IN BRIEF

The California Gambling Control Commission (Gambling Commission) has dealt with challenges to its authority and to many of the decisions it has made in administering the Indian Gaming Revenue Sharing Trust Fund (trust fund). Representatives of various Indian1 tribes have argued that the Gambling Commission has incorrectly interpreted certain provisions of the 1999 Tribal-State Gaming Compacts (compact)2 to the detriment of the tribes. Many of these issues have arisen because the compact language is not always clear. Generally, although various tribes disagree with many of the Gambling Commission's interpretations, the interpretations appear defensible given the confusing language in the compact.

The trust fund was created by the Legislature in 1999. In its assigned role as trustee of the trust fund, the Gambling Commission is responsible for allocating gaming device licenses to tribes, ensuring that the allocation of gaming devices does not exceed the total authorized by the compact, collecting license fees from tribes operating gaming devices, and allocating those fees among noncompact tribes—tribes operating fewer than 350 gaming devices.

Some critics believe the Gambling Commission has not properly fulfilled its role, arguing that it is not meeting its responsibility to the noncompact tribes. The Gambling Commission has stated that its responsibilities to the noncompact tribes are to collect and distribute trust fund money; it does not believe it is obliged to maximize benefits to these tribes.

At least three tribes have questioned whether the Gambling Commission has the authority to issue gaming device licenses. However, the attorney general has opined that because the compact assigned the Gambling Commission the role of trustee of the trust fund, it is clear that the intent was for the Gambling Commission to also be the sole entity responsible for issuing licenses. The compact language regarding the number of gaming devices that can be operated is not clear, and so various groups have calculated different totals for this maximum. For instance, the Tribal Alliance of Sovereign Indian Nations maintains that 110,189 gaming devices should be allocated statewide, whereas the Gambling Commission contends that only 61,957 are available for statewide allocation.

The Gambling Commission was not always consistent in its application of the principles it established for dealing with gaming device licenses issued by the Sides Accountancy Corporation, the entity that allocated licenses before the Gambling Commission became operative. This inconsistency raises questions about whether the tribes put the gaming devices into commercial operation within 12 months of receiving licenses as required by the compact.

Some tribes disagree with the Gambling Commission's interpretation of the process described in the compact for allocating licenses. Based on its interpretation, the Gambling Commission did not allocate licenses to two tribes during its third license draw held in December 2003. The Colusa Indian Community of the Colusa Rancheria believes it should have received 108 licenses and the Paskenta Band of Nomelaki Indians believes it was entitled to 75 licenses from this draw.

Additionally, some tribes believe the amount of trust fund money available for disbursement to noncompact tribes has been significantly reduced because of the Gambling Commission's interpretations of the compact language. Based on its reading of the compact, the Gambling Commission excludes the first 350 licensed gaming devices for each tribe when calculating the quarterly payments owed. Conversely, the California Tribes for Fairness in Compacting (coalition), which represents several noncompact tribes, argues that the gaming tribes should be assessed fees on all licensed gaming devices and that the compact intended to exclude quarterly fees only on unlicensed gaming devices—that is, the first 350 devices, for which a tribe need not acquire a license, and grandfathered devices in use before the compacts were signed. Using the coalition's interpretation, the 15 tribes we reviewed would have paid an additional $19.1 million in license fees from September 2002 through December 2003.

Some tribes, including the coalition, believe the Gambling Commission's practice of offsetting quarterly license fees by the amount of the nonrefundable one-time prepayments tribes are required to pay when obtaining licenses violates the intent of the compact. Given the current allocation of licenses, if the Gambling Commission agreed with the coalition's interpretation, $37 million more would be available for distribution to noncompact tribes through the end of the compact term in December 2020.

In yet another debate, some tribes disagree with the Gambling Commission staff's interpretation that in using the term "commercial operation," the compact intended for all of a tribe's gaming devices—licensed and unlicensed—to be in operation simultaneously and continuously. The Gambling Commission has not yet adopted this proposed definition, and it is planning to meet with the tribes to discuss possible changes before it does so.

Also, a decision on multiterminal gaming devices—machines that can be played independently by a number of people—may result in some tribes being ineligible for trust fund disbursements while others may exceed the gaming device limit of 2,000 established by the compact. Although the commissioners have yet to formally adopt a position on multiterminal devices, staff have determined that the Gambling Commission should count each terminal as a gaming device that needs to be licensed separately. Based on this determination, Gambling Commission staff identified one tribe as ineligible for a trust fund disbursement during one quarter and found eight other tribes were operating more than 2,000 gaming devices each, the maximum allowed under the compact.

Challengers have taken some, but not all, controversial issues into the dispute resolution process. For instance, two tribes jointly filed a lawsuit challenging the Gambling Commission's authority to interpret compact provisions, but it was dismissed by the U.S. District Court. The Gambling Commission is aware of at least five other instances in which tribes requested meet-and-confer sessions with the Governor's Office.

Despite the controversy surrounding many of the Gambling Commission's actions, its administration of the trust fund is generally consistent with its interpretations of the compact provisions. For instance, all of the deposits into the trust fund for 14 of the 15 tribes we reviewed were accurate and timely, and the Gambling Commission has taken steps to deal with delinquent payments from the other tribe. However, we determined that the Gambling Commission may have underpaid the Lower Lake Rancheria (Lower Lake) tribe $416,000 for one quarter and overpaid the remaining eligible tribes $5,100 each for the same quarter. This error occurred because the federal Bureau of Indian Affairs (BIA) inadvertently left Lower Lake off the Federal Register of Indian Nations, which the Gambling Commission uses to determine whether a tribe is eligible to receive trust fund distributions. According to the Gambling Commission, it believes it did not err in withholding a distribution from Lower Lake because it bases eligibility on written evidence of federal recognition, and the BIA did not officially reaffirm the government-to-government relationship with the tribe until December 29, 2000. However, the BIA stated in writing that the government-to-government relationship between the federal government and Lower Lake was never severed.

The Gambling Commission conducted reviews in June and September 2003 to determine whether tribes had placed their licensed gaming devices in commercial operation within 12 months after receiving the licenses, as required by the compact. Two of the seven tribes it determined failed to put all of their licensed gaming devices into commercial operation within the required period did not contest the cancellation of their unused licenses. The Gambling Commission has not taken any formal action against the remaining five tribes, pending the resolution of its definition of the term "commercial operation." Additionally, for two of the three license draws it conducted, the Gambling Commission did not comply with its own license draw methodology. As a result, four tribes received a total of 307 gaming device licenses that should have been allocated to four other tribes.

Finally, the Gambling Commission has not adequately communicated its conflict-of-interest policy to all staff and commissioners. Consequently, its staff and commissioners may not be fully aware of circumstances that may represent potential conflicts of interest. Additionally, the law governing outside financial activities that commissioners may engage in is very broad and needs clarification.

RECOMMENDATIONS

If the governor concludes the Gambling Commission's interpretation and policies do not meet the intended purposes of the compact, the governor should consider renegotiating the compact with the tribes to clarify the intent of the language, to help resolve disputes over the interpretation of the language, and to enable the efficient and appropriate administration of the trust fund in each of the following areas:

If compact language is not renegotiated, the Gambling Commission should finalize its definition of what constitutes commercial operation for gaming devices.

The Gambling Commission should also finalize its position regarding gaming devices with more than one terminal to determine whether these devices should be counted as more than one device.

The Gambling Commission also should confer with the federal BIA and determine whether there is any federal law that requires it to pay Lower Lake for the quarter ending September 30, 2000, and, if not, whether any law prohibits it from paying Lower Lake. Barring any law to the contrary, we believe it is appropriate for the Gambling Commission to provide Lower Lake its fair share of the funds allocated that quarter and to deduct that amount from distributions to tribes that received distributions in that quarter.

To ensure that all tribes applying for gaming device licenses are provided the appropriate opportunity to obtain the number of licenses they are applying for, the Gambling Commission should consistently follow the license allocation procedures it has adopted.

Finally, the Gambling Commission should ensure that all staff and commissioners are informed of the conflict-of-interest policy. Furthermore, the Gambling Commission should seek clarification of the law governing outside financial activities that commissioners may engage in.

AGENCY COMMENTS

The Gambling Commission generally agrees with our recommendations and some of our conclusions. However, it disagrees with our conclusion that it was inconsistent in the application of its principles related to gaming device licenses issued by the Sides Accountancy Corporation (Sides), and that it should have considered the licenses issued by Sides when determining the priority given to tribes in the commission's first license draw.

1 Throughout this report we have used the term "Indian." We have used this term because it is the term used in both federal law and the compact.

2 Sixty tribes signed 61 compacts that had standard language agreed upon in 1999. Our review covered only these compacts because these are the only compacts that require tribes to make payments to the Indian Gaming Revenue Sharing Trust Fund. Because these compacts all contain standard language, we refer to them collectively as "the compact" in the report.