Summary

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 July 2007 Report 2006-036 C A L I F O R N I A S T A T E A U D I T O R The first five copies of each California State Auditor report are free. Additional copies are $3 each, payable by check or money order. You can obtain reports by contacting the Bureau of State Audits at the following address: California State Auditor Bureau of State Audits 555 Capitol Mall, Suite 300 Sacramento, California 95814 916.445.0255 or TTY 916.445.0033 OR This report is also available on the World Wide Web http://www.bsa.ca.gov The California State Auditor is pleased to announce the availability of an on-line subscription service. For information on how to subscribe, please contact the Information Technology Unit at 916.445.0255, ext. 456, or visit our Web site at www.bsa.ca.gov. Alternate format reports available upon request. Permission is granted to reproduce reports. CALIFORNIA STATE AUDITOR Elaine M. Howle State Auditor Doug Cordiner B u r e a u o f S t a t e A u d i t s Chief Deputy 555 Capitol Mall, Suite 300 Sacramento, CA 95814 916.445.0255 916.327.0019 fax www.bsa.ca.gov July 12, 2007 2006-036 The Governor of California President pro Tempore of the Senate Speaker of the Assembly State Capitol Sacramento, California 95814 Dear Governor and Legislative Leaders: As required by Chapter 858, Statutes of 2003, the Bureau of State Audits presents its audit report concerning the allocation and use of moneys from the Indian Gaming Special Distribution Fund (distribution fund). This report concludes that money provided to local governments was used for the statutorily mandated purposes. However, not every project we reviewed was related to an impact from a casino. Although it appears that the intent of the law is that projects are to mitigate the impacts of tribal gaming, there is no specific requirement that they do so. Prior to this year, the Legislature ratified five new compacts and eight amended compacts since the original compacts were ratified in 1999. These post-1999 compacts require tribes to negotiate directly with local governments to mitigate the impacts of casinos, and eliminate the requirement that these tribes contribute to the distribution fund. However, some counties where these casinos are located continue to receive mitigation grant money from the distribution fund for the casinos operated by these tribes as well as from direct negotiations with the tribes. We also noted several instances when local governments did not use the interest earned on unspent grant funds to pay for expenses related to casino mitigation projects. Rather, the interest was deposited into the local government’s general fund or other operational accounts. Finally, amended compacts that were ratified by the Legislature in June 2007 and are pending approval by the federal Secretary of the Interior, along with one other amended compact that has yet to be ratified, may threaten the future viability of the distribution fund. However, we estimate that this same group of compacts will also provide substantial revenues to the Indian Gaming Revenue Sharing Trust Fund (trust fund) and the State’s General Fund. Specifically, our estimates indicate the compacts will eliminate $92 million in contributions to the distribution fund, increase contributions to the trust fund by $6.9 million, and increase contributions to the General Fund by between $174.3 million and $175.1 million for fiscal year 2007–08. However, if required to fund the shortfalls in the trust fund, within four years the distribution fund would be unable to support the programs that depend on it. Respectfully submitted, ELAINE M. HOWLE State Auditor California State Auditor Report 2006-036 vii July 2007 Contents Summary 1 Introduction 7 Chapter 1 Current Provisions in the Law Led to Questionable Uses and an Inequitable Distribution of Funds 21 Recommendations 36 Chapter 2 Pending New and Amended Compacts May Significantly Affect the Viability of the Indian Gaming Special Distribution Fund and Programs That Depend on It 39 Appendix A Number of Gaming Devices Operated by Federally Recognized Indian Tribes in California as of March 2006 49 Appendix B Grant Amounts Distributed to Counties for Mitigation Projects 53 Responses to the Audit California Gambling Control Commission 55 California State Auditor’s Comments on the Response From the California Gambling Control Commission 63 County of Fresno 67 Placer County 69 County of Riverside 71 California State Auditor’s Comment on the Response From the County of Riverside 81 County of San Bernardino 85 California State Auditor’s Comments on the Response From the County of San Bernardino 89 County of San Diego 91 California State Auditor’s Comments on the Response From the County of San Diego 97 Sonoma County 99 California State Auditor’s Comments on the Response From Sonoma County 103 California State Auditor Report 2006-036  July 2007 Summary Results in Brief Audit Highlights . . . The federal Indian Gaming Regulatory Act authorizes the State Our review of the allocation and uses of the to enter tribal-state gaming compacts (compacts) that allow Indian Gaming Special Distribution Fund California Indian tribes to operate gaming devices on tribal lands. In (distribution fund) money revealed the anticipation of the passage of Proposition 1A, which was approved following: by voters in March 2000, amending the California Constitution to permit Indian gaming, 60 tribes agreed to the model compacts »Local governments did not always use ratified in September 1999 (1999 compacts), which were materially distribution fund money to mitigate indistinguishable from each other. Among the gambling devices casino impacts. allowed under the compacts are those designated as class III, which include off-track wagering, lotteries, certain card games, and »The allocation of distribution fund money slot machines. Only after a tribe and the State have negotiated a in some counties is based, in part, on the compact, which governs the conduct of the gaming activity, can the number of devices operated by tribes tribe operate class III gaming devices. that did not pay into the fund because their compacts require them to negotiate As required by the compacts, in fiscal year 2005–06, 37 of the tribes directly with the county to pay for the with compacts deposited money into the Indian Gaming Special mitigation of casino impacts. However, Distribution Fund (distribution fund), the Revenue Sharing Trust these counties continue to receive Fund (trust fund), or both. These funds are administered by the distribution fund dollars from the State. California Gambling Control Commission (gambling commission). State law establishes criteria for disbursing money from both funds. »In many instances local governments Distribution fund deposits are based on the gross revenues tribes do not use interest earned on unspent earn from operating class III gaming devices in use before the distribution fund money for projects ratification of the 1999 compacts. Gross revenues, also called net related to casino impacts. 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 »Although all benefit committee number of class III gaming device licenses each tribe has acquired members are required to file statements since the ratification of the 1999 compacts. of economic interests, in our sample counties, 11 of the 13 tribal members that As shown in the text box on the following page, one designated use were required to file failed to do so. of the deposits made to the distribution fund is to provide grants for local governments—cities, counties, and special districts— »The ratification of compacts in June 2007, adversely impacted by tribal gaming. State law created an Indian along with one that is awaiting Gaming Local Community Benefit Committee (benefit committee) ratification, may threaten the future in each county in which Indian gaming is conducted. The benefit viability of the distribution fund and committees award distribution fund grants to local governments the programs that depend on it, as they according to specified criteria. For instance, state law requires that eliminate $92 million in payments to the the distribution fund be used for certain purposes, such as law fund beginning in fiscal year 2007–08. enforcement, emergency medical services, environmental impacts, While we estimate that contributions to and water supplies. the State’s General Fund would also total at least $174 million, almost $40 million The grants we reviewed were used for the statutorily mandated per year could be required to pay for the purposes. However, not every project funded under one of estimated shortfall in the Revenue Sharing those purposes was linked to an impact from a casino. Specifically, we Trust Fund. reviewed 30 grants totaling $12.1 million made to local governments in six counties and found five instances totaling $505,000 when the 2 California State Auditor Report 2006-036 July 2007 money was not used to offset the adverse effects of Allowed Uses for the Funds Administered casinos. For example, Healdsburg District Hospital by the Gambling Commission in Sonoma County received more than $52,000 for surveillance cameras. Although the hospital claimed Distribution Fund it experienced several acts of vandalism in its parking • Makes up for any shortfall in the trust fund. areas and other disturbances, it could not provide • Funds gambling addiction and awareness evidence showing that those incidents were related to programs. the casino or that the number of criminal incidents on • Pays for the regulatory activities of the its property had increased since the casino was built. gambling commission and the Department of Justice. We also identified 10 instances totaling $2.3 million when the purposes of the grants as stated in • Allocations to support local governments impacted by tribal gaming. the applications might have been somewhat relevant to the effects of the casinos but appeared Trust Fund primarily to address needs that were unrelated. Funds are allocated to non-gaming tribes. For instance, the sheriff’s department in San Diego Each non-gaming tribes receives $1.1 million County received over $149,000 to purchase a device per year. to analyze chemicals from arson and other crime scenes and suggested that in the future some of Sources: California Government Code, sections 12012.75, 12012.85 and 12012.90. 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 California State Auditor Report 2006-036 3 July 2007 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  California State Auditor Report 2006-036 July 2007 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 California State Auditor Report 2006-036  July 2007 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. 6 California State Auditor Report 2006-036 July 2007 • 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. California State Auditor Report 2006-036 7 July 2007 Introduction Background Indian gaming on tribal lands within California has experienced extensive growth over the past eight years. As of March 2006, Indian tribes operated more than 58,000 electronic gaming devices such as slot machines and other electronic games of chance. According to the National Indian Gaming Commission, revenues from Indian gaming in California have grown from $2.9 billion in fiscal year 2001–02 to $7 billion in fiscal year 2005–06. Recognizing the significant impact casinos can have on the areas in which they are located, the tribal-state gaming compacts (compacts) ratified in 1999 include language that provides funding to support local government jurisdictions—cities, counties, and special districts— that are impacted by tribal gaming. For example, the presence of a casino can increase the level of traffic, pollution, and crime as patrons are drawn to the area. Because of the sovereignty of tribal lands, the operation of casinos on those lands does not fall under the normal jurisdiction of the State. Therefore, relationships between the State and tribal casinos are regulated through the provisions of the compacts authorized by the federal Indian Gaming Regulatory Act (IGRA). The compacts ratified in 1999 establish license and operation fees that provide money for two funds: the Revenue Sharing Trust Fund (trust fund), which is used to fund distributions to tribes that do not have compacts or operate fewer than 350 gaming devices, and the Indian Gaming Special Distribution Fund (distribution fund), which is used to finance various state and local government activities. The doctrine of Indian sovereignty is central to the debate and controversy surrounding Indian gaming. Indian sovereignty is based on well-established principles of law that protect sovereignty by limiting the jurisdiction of state governments over Indian affairs taking place on Indian lands. As one court stated, “In modern times, even when Congress has enacted laws to allow a limited application of [state] law on Indian lands, the Congress has required the consent of tribal governments before [state] jurisdiction can be extended to tribal . . . lands.” The doctrine of Indian sovereignty plays an important role in defining the relationship between tribes and states and limits the extent to which California can regulate tribal gaming. Federal Indian Gaming Regulatory Act Partly in response to the U.S. Supreme Court’s decision in California vs. Cabazon, which held that California did not have the authority to enforce its “bingo statute” or prohibit gaming on tribal lands when gambling activities were allowed in other parts  California State Auditor Report 2006-036 July 2007 of the State, Congress enacted the IGRA in 1988. Congress stated that the purpose of the IGRA was to provide “a statutory basis for the operation of gaming by Indian tribes as a means of promoting tribal economic development, self-sufficiency, and strong tribal governments” and “to shield [tribal gaming] from organized crime and other corrupting influences, to ensure that the Indian tribe is the primary beneficiary of the gaming operation.” A federal court described the IGRA as an example of “cooperative federalism” in that it seeks to balance the competing sovereign interests of the federal government, state governments, and Indian tribes by giving each a role in the regulation of gaming by Indian tribes. The IGRA establishes three classes of gaming activity, as described in the text box, each subject to differing Classes of Gaming jurisdiction: the tribe, the State, or the federal Class I —social games played solely for prizes of government. The tribes themselves generally have minimal value or gaming connected to traditional regulatory authority over class I and class II gaming. tribal ceremonies or celebrations. Our audit is limited to class III gaming devices. As a California appellate court noted, class III Indian Class II—certain games of chance in which wagers and winnings are limited, such as bingo. gaming is considered the most important part of the regulatory scheme imposed by the IGRA because it Class III—all other forms of gaming that are not includes high-stakes casino-type games that may be class I and II, such as high-stakes gaming, including a substantial source of revenue for the Indian tribes. off-track wagering, lotteries, certain card games, and The regulation of class III gaming has been the most slot machines. controversial aspect of the IGRA and has been the Source: United States Code, Title 25, Section 2703. subject of numerous lawsuits. For class III gaming to be permissible on federally approved tribal lands, those lands must be located in a state that permits that form of gaming. In addition, under the IGRA, class III gaming can be conducted only after a tribe negotiates a compact with the state governing the conduct of gaming activities, the federal secretary of the interior approves the compact, and the tribe adopts an ordinance or resolution approved by the chair of the National Indian Gaming Commission. The compact is the key to class III gaming under the IGRA. In approving a compact, federal law permits states and Indian tribes to develop joint regulatory schemes through the compact process. In this way a state gains the civil regulatory authority it might otherwise lack, and a tribe gains the ability to offer class III gaming. The IGRA permits the compact to include provisions relating to several issues that arise once class III gaming begins, including the assessment of fees by the State in amounts necessary to defray the costs of regulating gaming activities. It is important to note, however, that the extent of a state’s regulation over class III gaming on tribal lands is limited to the authority granted by the IGRA and by the federally approved tribal-state gaming compact. California State Auditor Report 2006-036  July 2007 Tribal-State Gaming Compacts in California At the March 2000 primary election, Proposition 1A received voter approval. Proposition 1A amended the California Constitution to give the governor the authority to negotiate and enter into compacts, subject to ratification by the Legislature, and to give federally recognized Indian tribes the authority to operate slot machines, lottery games, and certain types of card games on Indian lands in California consistent with the IGRA. In 1999, anticipating voter approval of Proposition 1A, the State entered into 61 compacts (1999 compacts) with 60 of the 106 federally recognized Indian tribes in California at that time. The 1999 compacts later received final federal approval, as required by the IGRA. These compacts are effective until December 31, 2020, and are generally identical. Between 2003 and 2006 the governor negotiated and the Legislature ratified five additional compacts and amendments to eight of the original compacts (post-1999 compacts), with federal approval. 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. As shown in Table 1 on the following page, the provisions in the 1999 compacts related to contributions to state-administered funds are significantly different from those in the post-1999 and pending compacts. Gaming Devices Allowed by the 1999 Compacts Subsequent to the ratification of the 1999 compacts, the governor directed the California Gambling Control Authorized Gaming Devices (no licenses required) Commission (gambling commission) to allocate A tribe may operate the larger of the following without gaming licenses to Indian tribes for the number of a gaming device license: devices allowed in the original compacts, as described 1. Grandfathered gaming devices, which are the devices in the textbox. The gambling commission is also a tribe had in operation on September 1, 1999. responsible for ensuring that the number of licenses issued statewide for certain compacts does not exceed 2. Entitlement gaming devices, which are the first 350 gaming devices operated by the tribe. the total number authorized by the compacts. In consideration for the State’s willingness to enter into Licensed Gaming Devices these compacts, the tribes have agreed to provide to A tribe may acquire licenses to use gaming devices in the State, on a sovereign-to-sovereign basis, a portion excess of the number the compact authorizes it to use, of their revenues from gaming devices. The terms of the but cannot operate more than 2,000 gaming devices. compacts also recognize that the State has a “legitimate Source: 1999 Tribal-state gaming compacts. interest in promoting the purposes of the IGRA for all federally recognized Indian tribes in California, whether 1 The Capitan Grande Band of Diegueno Mission Indians is a federally recognized tribe consisting of the Barona and Viejas groups, each of which signed a compact with the State. 0 California State Auditor Report 2006-036 July 2007 Table 1 Summary of Revenue Provisions for Ratified and New Tribal-State Gaming Compacts original compacTs posT-1999 compacTs pending compacTs* 1999 compacT 2003 compacT 2004 compacT 2004 amendmenT raTified compacT† a ra m T e i n fi d e m d e 2 n 00 T 6 ‡ Number of Class III Up to 2,000 devices From 350-2,000 From 1,500-2,000 Unlimited number of Up to 99 devices From 5,000-7,500 devICes allowed devices per tribe devices per tribe devices devices per tribe per CompaCt CoNtrIbutIoNs Payments on a None Payments on a Payments of $2 million None Payments of to the reveNue per-device basis per-device basis annually per tribe; payment $2 million sharINg trust fuNd and contingent based on a per-device fee to $3 million upon net wins or flat fee based on the year annually per tribe of operation CoNtrIbutIoNs Payments based on None None None None None to the INdIaN percentage of net gamINg speCIal wins from devices dIstrIbutIoN fuNd operated as of September 1999 Payments of Payments based on total 15 percent to Payments based number of devices in 25 percent of Payments of on total number of operation or percentage net wins from CoNtrIbutIoNs to None 5 percent of devices in operation of net wins Payment based on devices in excess the geNeral fuNd net wins and percentage of percentage of net wins of 2,000 net wins Payments of $5.75 million Payment of to $33.8 million for $20 million to certain tribes§ $45 million annually Sources: 1999 compacts, post-1999 compacts, and pending compacts. * Though ratified, until approved by the federal Secretary of the Interior, the one new compact and four amended compacts cannot take effect and are therefore considered pending. † This is a new compact with the Yurok Tribe. ‡ One amendment remains unratified by the Assembly. § A portion is designated for annual transportation bond payments made by five tribes totalling $100.8 million per year. gaming or non-gaming.” To accomplish this goal, the compacts indicate that each of the State’s tribes without compacts or operating fewer than 350 devices (noncompact tribes) may receive distributions of $1.1 million each year from the trust fund. As of February 2007 California had ratified compacts with 66 of the federally recognized tribes in California, 56 of which operate a total of 57 tribal casinos. Figure 1 shows the casinos operating class III gaming devices by federally recognized Indian tribes in California. Appendix A lists the tribes with compacts and indicates the number of gaming devices each is currently allowed to operate. California Gambling Control Commission The gambling commission was created by the 1997 Gambling Control Act to serve as the regulatory body over gambling activities in the State, including Indian gaming. It has jurisdiction over the operation, concentration, and supervision of gambling establishments. A commission consisting of five appointed California State Auditor Report 2006-036  July 2007 figure 1 Location of Indian Casinos Operating Class III Gaming Devices in California Casinos with class III gaming in operation This casino has been closed since August 2004 Source: California Gambling Control Commission, December 2006. Note: Map is an approximation and not drawn to scale. Icons are representative of approximate locations. 2 California State Auditor Report 2006-036 July 2007 commissioners oversees and makes policy decisions for the gambling commission. The gambling commission performs audits and collects trust fund deposits based on quarterly license fees. The gambling commission also acts as the trustee of the trust fund and administers the distribution fund. The gambling commission’s regulatory authority includes auditing the books and records related to class III gaming operations of the Indian casinos that pay into the distribution fund and the State’s General Fund to ensure, among other things, that their net win calculations are accurate. As described in more detail in Chapter 2, net wins, which are the amounts players put in the devices less the amounts paid out, are critical in determining the amount Indian casinos will contribute to the General Fund under the terms of new and amended post-1999 compacts and pending compacts. Although the specific provisions differ somewhat, based on our review of the post-1999 and pending compacts, the following provisions appear to provide a mechanism to ensure the accuracy of the tribes’ contribution to the General Fund as long as the gambling commission consistently exercises its authority to complete any of the following activities: • Some compacts have a provision requiring that an appointed representative of the tribe certify the net win figure, usually the chief financial officer. Compacts with this provision also allow for the gambling commission or some other state agency to audit the net win figure. • Some compacts have a provision requiring that an independent certified public accountant who is not an employee of the tribe certify the net win figure. Additionally, the provision allows the gambling commission to audit the net win figure. • Some compacts have a provision stating that the gambling commission has the right to inspect the gaming facility with respect to class III gaming and all related gaming operation records. This includes inspection and copying of the class III gaming operation papers, books, and records. Indian Gaming Special Distribution Fund The 1999 compacts call for each tribe that operates more than 200 grandfathered devices—those in operation as of September 1, 1999, before the compacts were ratified—to deposit a percentage of its average net wins into the distribution fund. The net win of a device is its gross revenue, or the amount players put in the device, less the amount paid out to winners. As shown California State Auditor Report 2006-036 3 July 2007 in Table 2, the percentage of average net wins for grandfathered devices deposited into the distribution fund ranges from 7 percent to 13 percent, depending on how many devices the tribe operates. Table 2 Distribution Fund Tiered Payment Schedule for 1999 Tribal-State Gaming Compacts Number of devICes IN operatIoN as of september 1, 1999 perCeNtage of average gamINg devICe Net wIN 201-500 7% 500-1,000 10 1,000+ 13 Source: Tribal-state gaming compacts ratified in 1999. Note: Tribes with 200 or fewer devices in operation as of September 1,1999 do not pay into the distribution fund. The California Government Code (Government Code) reserves the money deposited into the distribution fund to address four needs prioritized as follows: 1. Supporting the trust fund to ensure that it can distribute $1.1 million annually to each tribe that does not have a compact; a total of $50.5 million was allocated to this purpose in fiscal year 2005–06. 2. Funding the problem-gambling prevention program managed by the Department of Alcohol and Drug Programs; a total of $3 million was allocated to this purpose in fiscal year 2005–06. 3. Paying the operating costs for the regulatory functions of the gambling commission and the Department of Justice (Justice); a total of $16 million was allocated to this purpose in fiscal year 2005–06. 4. Supporting local governments impacted by tribal gambling; a total of $50 million was allocated to this purpose in fiscal year 2005–06. Indian Gaming Revenue Sharing Trust Fund As part of their agreement to the 1999 compacts, tribes that purchase licenses for gaming devices must contribute to the trust fund. For each license it purchases, a tribe under a compact must pay into the trust fund a nonrefundable one-time prepayment fee of $1,250. The compact also requires tribes to pay license fees each quarter. It uses a graduated rate schedule, based on the number of licensed gaming  California State Auditor Report 2006-036 July 2007 devices a tribe has, to determine the amount of the quarterly license fee a tribe pays, as shown in Table 3. The gambling commission made its first distribution to the noncompact tribes—tribes without compacts or operating fewer than 350 gaming devices—in May 2001 and has attempted to make distributions of $1.1 million annually to each noncompact tribe since that time. However, trust fund revenues have never provided sufficient money to make the full annual distribution to the noncompact tribes. Therefore, since fiscal year 2002–03, transfers from the Indian Gaming Special Distribution Fund of $45.3 million to $50.6 million per year have been made to supplement those distributions. Table 3 Revenue Sharing Trust Fund Tiered Payment Schedule for 1999 Tribal-State Gaming Compacts Number of lICeNsed devICes fee per devICe per year 350-750 $ 900 751-1,250 1,950 1,251-2,000 4,350 Source: Tribal-state gaming compacts ratified in 1999. Note: Tribes with fewer than 350 licensed devices do not contribute to the Revenue Sharing Trust Fund. Problem-Gambling Prevention Program Administered by the Department of Alcohol and Drug Programs, the Office of Problem Gambling is the second priority for the use of distribution fund money and received $3 million in fiscal year 2005–06. According to a deputy director, the Department of Alcohol and Drug Programs used roughly $1.6 million of this allocation for conducting public awareness campaigns and operating toll-free crisis management telephone lines; slightly more than $800,000 to perform various research and needs assessments; and the remainder to survey the gambling industry, develop publications, convene an advisory group, and administer and monitor the program. Regulatory Activities of the Gambling Commission and Justice The gambling commission received $6.2 million and Justice received $9.8 million in fiscal year 2005–06 for regulatory activities related to Indian gaming. The gambling commission states that it used the funds to administer the process of drawing gaming device licenses; account for all gaming device license fees; ensure that the California State Auditor Report 2006-036  July 2007 allocations of gaming devices among California Indian tribes do not exceed the allowable numbers provided in the compacts; and perform various auditing functions, including conducting audits of quarterly contributions, performing quarterly desk reviews, certain licensing functions, and handling net win reporting issues. Justice states that it uses its distribution fund allocation to support the Indian gaming-related regulatory activities of its four divisions: Division of Gambling Control, Division of Public Rights, Executive Division, and Hawkins Data Center. For example, the Indian Gaming Law Section of the Division of Public Rights monitors Indian gaming practices and consults and advises the governor on compact negotiations and Indian law issues, and the Division of Gambling Control works with other state gaming agencies and tribal governments to regulate class III gaming on tribal lands. Local Governments Affected by Tribal Gambling Each year the Department of Finance (Finance), in consultation with the gambling commission, is required to calculate the total revenue in the distribution fund available to grant to local governments for projects intended to mitigate the adverse effects of casinos. Finance includes that information in the May budget revision. The State Controller’s Office (Controller), in consultation with the gambling commission, then determines the allocation from the budget act for eligible counties to use for mitigation projects. As shown in Figure 2 on the following page, the funds allocated for mitigating casinos’ impacts are further divided between counties with casinos that contribute to the fund because they operate more than 200 grandfathered devices and counties with casinos operating 200 or fewer devices on September 1, 1999, or some of those with tribes that have post-1999 compacts. The funds are then allocated to the county tribal casino account in each county. In each county where tribes have been operating devices since September 1, 1999, and pay into the distribution fund, the money is further allocated into a tribal casino account for each tribe based on the amount it paid into the distribution fund in the previous fiscal year. In fiscal year 2005–06 the governor decreased the amount of funding available for mitigation grants in the budget act by $20 million because some counties were not providing Finance with the required annual reports on the use of distribution fund spending. However, in March 2006, the Legislature passed Senate Bill 288, which immediately reinstated the $20 million in funding and required counties to submit their annual reports by October 1 to the chair of the Joint Legislative Budget Committee, the chairs of the Senate and Assembly committees on governmental 6 California State Auditor Report 2006-036 July 2007 figure 2 Allocation of Funding From the Distribution Fund to Local Governments Total Amount Appropriated for Fiscal Year 2005–06 $50 million* 95% 5% Counties with casinos paying into the Countiesthatdonothaveanycasinos Distribution Fund (those with more than 200 payingintothedistributionfund(those devices in operation as of September 1, 1999). with200orfewerdevicesinoperationas ofSeptember1,1999,orthosewith amendedcompacts). Allocatedtoeachcountytribalcasino accountbytheformula(A)/(B)x(C) Allocatedtoeachcountytribalcasino Where: accountbythe formula (A)/(B)x (C) (A) is 95 percent of the total amount appropriated, Where: (B) isthetotalnumberofgamingdevices (A) is5 percent of the total amount operating prior to September 1, 1999, appropriated, in all counties contributing to the (B) is the total number of gaming distribution fund, devices in counties with no casinos (C) is thenumberofgamingdevices in contributing to the distribution fund, the county operating prior to (C) isthenumberofgamingdevices September 1, 1999, required to operating in the county. contribute to the distribution fund. Grantedtolocal governments to mitigate the impact of casinos within specified Allocatedtoindividualtribalcasino priorities. accountsinproportionto what the tribe paidintothedistributionfundduringthe priorfiscalyear. Allocatedtolocalgovernmentsaccording tothecriteriadescribedinFigure4. Source: California Government Code, sections 12714 and 12715. * $30 million appropriated from the budget act and an additional $20 million pursuant to Senate Bill 288, Chapter 13, Statutes of 2006. California State Auditor Report 2006-036 7 July 2007 organization, and the gambling commission. Counties administering grants from the distribution fund are now required to include detailed information on the mitigation projects they fund in their annual reports. Figure 3 shows a summary of the purposes that counties reported spending their distribution fund allocations on for fiscal year 2005–06. figure 3 Total Mitigation Expenditures From the Distribution Fund by Category, as Described in County Annual Reports Roads Law $15,739,883 Enforcement (32%) $14,698,134 Fire Services/EMS (29%) $12,942,269 (26%) Recreational Counties that All other and youth did not submit categories services annual reports $3,071,693 $1,596,958 $1,954,063 (6%) (3%) (4%) Source: Fiscal year 2005–06 annual reports submitted by counties. The $50 million allocated to local governments in fiscal year 2005–06 was divided among 25 counties that issued 200 grants. The amount received by each county varied considerably. As shown in Appendix B, Modoc County received the least of any county and elected not to spend the funds it was allocated, so the funds were returned to the distribution fund for reallocation during the next fiscal year. Riverside County received the most—almost 43 percent of the $50 million—and distributed it in 79 grants averaging over $260,000 each. To award grants from the distribution fund, each county is required to form an Indian Gaming Local Community Benefit Committee (benefit committee). The benefit committee is composed of two county representatives selected by the county board of supervisors, three elected representatives selected by the county board of supervisors from cities located within 4 miles of a tribal casino, and two representatives selected on the recommendation of a majority of the county’s tribes paying into the distribution fund. San Diego County’s representation differs slightly because only one city is located within 4 miles of a casino. Its benefit committee consists of two representatives of the county selected by the county board  California State Auditor Report 2006-036 July 2007 of supervisors, one elected representative selected by the board of supervisors from the city located within 4 miles of a tribal casino, three representatives selected on the recommendation of a majority of the county’s tribes paying into the distribution fund, and the sheriff of San Diego County. As described in the text box, the benefit committee is responsible for establishing procedures for allocating Responsibilities of Indian Gaming Local funds to local governments within the county and Community Benefit Committees for selecting eligible applications for the distribution • Awarding grants. of funds. To correctly allocate funds to local governments, benefit committees must follow a set of • Ensuring funds are allocated according to priorities criteria established in the Government Code, as shown established by law. in Figure 4. These criteria are intended to provide a • Establishing all application policies and procedures fair and proportionate system to award grants to local for grants from the Individual Tribal Casino Account governments impacted by tribal gaming. or County Tribal Casino Account. • Assessing the eligibility of applications for grants After the benefit committees award grants and receive from local jurisdictions impacted by tribal gaming affirmative sponsorship of the tribes from whose operations. individual tribal casino accounts the funds are being • Determining the appropriate amount for distributed, the Controller releases the funds directly reimbursement from the aggregate county tribal to the selected local government entities. Although account of the demonstrated costs incurred by the multiyear grants are allowed, any money that counties county for administering the grant program (not to do not grant by the end of the fiscal year reverts to exceed 2 percent of the total county allocation). the distribution fund. Grants are administered by the county, which can be reimbursed up to 2 percent of the Source: Calfornia Government Code, Section 12715. funds for demonstrated administrative expenses. California State Auditor Report 2006-036  July 2007 figure 4 Allocation of Funds From County Tribal Casino Accounts and Individual Tribal Casino Accounts Indian Gaming Special Distribution Fund Nexus Test Criteria: 1. The local government jurisdiction borders Indian 60% lands on all sides. 20% 20% 2. The local government partially borders Indian lands. 3. The local government maintains the highway, To cities and counties road, or predominant To cities, counties, To cities, counties, based on the nexus test of access route to a casino and special districts, and special districts, geographical proximity. within 4 miles. allocated at the allocated at the benefit committee’s benefit committee’s 4. All or a portion of the local discretion to address discretion to address government is located the impact of casinos the impact of within 4 miles of a casino. that pay into the 50% casinos.* 30% distribution fund. 20% Equalproportionsto localgovernments Equalproportionsto meetingallfour localgovernments Equalproportionsto nexustestcriteria.† meetingthree of the localgovernments nexustestcriteria.† meetingtwo of the nexustestcriteria.† Source: California Government Code, Section 12715. * Grants awarded are limited to service-oriented and one-time large capital projects subject to the sponsorship of tribes paying into the fund. † These funds may be reallocated to local governments meeting a different number of nexus test criteria if no local governments meet the required number of criteria. Scope and Methodology Government Code, Section 12717, requires the Bureau of State Audits to conduct an audit every three years regarding the allocation and uses of moneys from the distribution fund by the recipients of the grant money and report its findings to the Legislature and all other appropriate entities. To determine if distribution fund money is allocated appropriately to each county, we verified the Controller’s calculation of the amounts deposited in each county’s account for the same period. Using factors including the amount of funding received and geographic location, we evaluated the use of distribution fund grants at six counties: Fresno, Placer, Riverside, San Bernardino, San Diego, and Sonoma. We reviewed the composition of the benefit committees to ensure their membership met the requirements of state law, and we requested copies of members’ conflict-of-interest filings. We also reviewed the Controller’s claim 20 California State Auditor Report 2006-036 July 2007 schedules to ensure that county claims for administrative costs did not exceed 2 percent of the annual allocation, and we ensured that counties allocated distribution fund money by the end of the fiscal year or that it reverted back to the distribution fund. To determine if grant funds are being appropriately awarded at the county level, we reviewed county and benefit committee policies and procedures and interviewed county staff regarding the awarding of distribution fund grants. We reviewed the eligibility of local governments in each sample county and assessed whether the county allocated funds appropriately according to the criteria in state law. To determine if each grant awarded at the counties we sampled had a reasonable relationship to a casino’s impact and satisfied one of the purposes required in state law, we obtained annual reports for fiscal year 2005–06 grants, which were the most recent available at the time of our audit, and selected a sample of five grants at each county using criteria such as the amount of the grant, the amount of funds remaining, and the type of project. We then reviewed grant applications describing the selected projects and their relationships to casinos’ impacts, interviewed grantee staff, and obtained supporting documentation of those impacts. In addition, for large capital projects or those with significant amounts of funding not spent, we determined if interest earned on unspent funds was used for projects intended to offset the effects of casinos. To verify that counties submit required annual reports, we requested the fiscal year 2005–06 reports from the gambling commission and all required legislative committees for each county that receives money from the distribution fund. Finally, to determine the ability of the distribution fund to continue to fund the programs that depend on it, we compared fiscal year 2005–06 distribution fund contributions to estimated future contributions based on changes in compact provisions in new and amended pending compacts. We then compared these to current-year expenditures from the distribution fund. Because we are unable to project how fast casinos will expand or forecast the changes to their profitability, we made a conservative estimate based on fiscal year 2005–06 gaming device counts and net win figures. California State Auditor Report 2006-036 2 July 2007 Chapter  CuRRent PRovISIonS In the LAw LeD to QueStIonAbLe uSeS AnD An IneQuItAbLe DIStRIbutIon oF FunDS Chapter Summary Our review indicates that local governments—cities, counties, and special districts—have not always used grants allocated from the Indian Gaming Special Distribution Fund (distribution fund) to finance projects that directly mitigate the adverse impact Indian gaming has on communities. Of the 30 grants we reviewed in six counties, 10 were used for projects benefiting the entire county and were only partially related to the effects of casinos, and five were not related to casinos’ impacts. Although counties might find it reasonable to use distribution fund grants to help finance a project that benefits the entire county, as a best practice a local government should only use distribution fund money to cover the portion of the project related to the impact of a casino and use other sources for the portion of the project that benefits the entire county. The legislation creating the grant program declares as its intent that tribal governments participate in the process of identifying and funding the mitigation of impacts from casinos. However, the law does not specifically require that all projects funded by the grants be directly related to offsetting the adverse impacts of casinos. When a distribution fund grant is used for purposes that have little or no relationship to a casino’s impacts, the influence of the casino may not be adequately addressed. Tribes with new and amended tribal-state gaming compacts (post-1999 compacts) are not required to contribute to the distribution fund but must negotiate directly with local governments for mitigation projects. However, two counties with tribes that have post-1999 compacts received roughly $850,000 in distribution fund money in fiscal year 2005–06. Although this distribution fund money may benefit the citizens of those counties receiving mitigation funding from two sources, it leaves less of the distribution fund available to other local governments that have only one source of funding to offset the negative impacts of casinos. Local governments have not always begun using distribution fund grants immediately after receiving them. In fact, some local governments we reviewed had not expended their grants several years after receiving the money. Consequently, these local governments have earned interest on their unspent grant funds, but they have not always spent the interest on projects that relate to the effects of casinos. Although the law does not provide guidance on what to do with interest earned on unspent grant funds, our 22 California State Auditor Report 2006-036 July 2007 legal counsel advised us that, as a general rule, the interest must be used for the same purpose as the principal project. Nonetheless, we found that interest was not always used for the project for which the funds were awarded or for future mitigation projects. Counties could improve their administration of the distribution of grant funds and their disclosure of information. Some counties awarded distribution fund grants to ineligible applicants, leaving fewer funds for distribution to eligible entities. Further, some tribal representatives on the Indian Gaming Local Community Benefit Committee (benefit committee) in each county we reviewed failed to file required statements of economic interests. 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 that they should remove themselves from making decisions that may pose conflicts of interest. Finally, according to documentation provided by the gambling commission and various legislative committees, only nine of the 24 counties receiving distribution funds in fiscal year 2005–06 submitted all the required annual reports to the California Gambling Control Commission (gambling commission) and the Legislature detailing the use of current- and prior-year distribution fund grants. When local governments fail to submit the required annual reports, it is difficult for the public and the Legislature to determine if funds are being spent as intended. Local Governments Did Not Always Use the Distribution Fund to Pay for Mitigation Projects The legislation establishing the distribution fund declares the intent of the Legislature that tribal governments participate in identifying and funding the mitigation of the impacts of tribal gaming through the grant process. The legislation also states that the grants are for distribution to local governments impacted by casinos. Finally, the senate floor analysis describes the legislation creating the distribution fund and grant process as establishing “priorities and procedures. . . for the purpose of mitigating impacts from tribal casinos.” However, the legislation does not establish a clear requirement that the grants be used only for projects that actually mitigate the impacts from tribal casinos in all instances. As a result, distribution fund grants are not always being used to address the adverse consequences to local governments of the location and operation of Indian casinos in their communities. Based on our review of 30 grants, we determined that often a distribution fund grant financed a project that had the potential of offsetting the repercussions of a casino but was mainly used for California State Auditor Report 2006-036 23 July 2007 activities that benefited the county as a whole. Even though the potential exists that some of the goods or services acquired with these grant funds could be used to mitigate the impact of a casino, it is unclear whether the Legislature intended distribution fund grants to be used in this manner. In other cases grant funds were used for projects totally unrelated to casinos. Specifically, of the 30 grants we tested, five were not used to mitigate casinos’ impacts, 10 were not solely intended to lessen casinos’ impacts but were primarily used for needs not related to casinos, and 15 were used specifically to alleviate casinos’ impacts. Consequently, money from the distribution fund did not always go toward projects that mitigated the impacts that Indian gaming can have on communities, such as increased crime, which threatens the safety of nearby residents; traffic congestion, which increases the likelihood of accidents; and the poor air quality resulting from increased traffic. State law requires distribution fund money to be deposited in individual tribal casino accounts to Allowed Uses of Distribution Fund Grants be available for cities, counties, and special districts impacted by tribal casinos. As shown in the text • Law enforcement box, state law also requires local governments to • Fire services use distribution fund grants for certain designated • Emergency medical services purposes such as law enforcement and fire services. • Environmental impacts Further, state law mandates that tribal sponsorship • Water supplies confirm that a grant application has a reasonable • Waste disposal relationship to a casino impact and that the money will be spent for one of the uses listed in the text box. • Behavioral health • Planning and adjacent land uses Our review confirmed that grants were awarded • Public health for the uses listed in the text box. However, we • Roads also found that they were not always awarded for • Recreation and youth programs projects that were designed to mitigate an impact • Child care programs directly resulting from a casino. Although state law does not specifically require a local government to Source: California Government Code, Section 12715(g). demonstrate that a project will mitigate an impact of a casino, the law does stipulate that the tribe must sponsor the grant for the project, and that tribal sponsorship is to confirm that the project is related to the impact of a casino. The law also does not specifically require the benefit committees to ensure that grant funds are used solely to pay for projects that are directly related to the impact of a casino. However, we believe that the requirement for tribes to confirm that grant applications have a reasonable relationship to a casino’s impact reflects a legislative intent to grant money to lessen the impacts of casinos. Unless the funds are used for this purpose, communities that are most likely to be adversely affected by casino operations do not receive the benefit of having the impact addressed. 2 California State Auditor Report 2006-036 July 2007 We found that local governments are not always using grant funds to mitigate the impacts of casinos on communities most directly affected. We reviewed 30 distribution fund grants awarded by six counties—five grants in each county—and found that none None of the six counties we visited of the six counties consistently used the grant funds solely for consistently used grant funds for projects that mitigate the impact of casinos. As shown in Table 4, projects that solely address the the number of instances when grant funds were not used solely to impacts of casinos. reduce adverse consequences of casinos ranged from one of the five grants we tested in San Bernardino County to all five of the grants we tested in Sonoma County. In 10 instances the goods and services purchased with grant money had the potential for use in mitigating casinos’ impacts, should the needs arise. However, the main beneficiaries were the counties as a whole because the projects had little connection to casinos. For example, the Fresno County Sheriff’s Department received a distribution fund grant totaling $658,000 of which $515,000 was to purchase 650 handguns and other weapon-related equipment. However, only four deputies are assigned to work the area where the casino is located. Although other deputies might be called on to respond to a situation involving the casino, it is apparent that the purchase benefits all Fresno County residents and not just those affected by the casino. Table 4 Uses of Distribution Fund Grant Money by Local Governments Number of graNts (fuNds graNted) 17 perCeNt of projeCts 33 perCeNt of projeCts 50 perCeNt of projeCts revIewed do Not revIewed are prImarIly revIewed address a CouNty address a CasINo ImpaCt NoN‑CasINo related CasINo’s ImpaCt 2 3 Placer — ($127,885) ($324,738) 1 1 3 Fresno ($68,120) ($658,486) ($1,211,555) 1 4 Sonoma — ($52,247) ($334,852) 1 2 2 Riverside ($257,000) ($771,300) ($289,224) 2 3 San Diego — ($366,884) ($4,660,000) 1 4 San Bernardino — ($170,000) ($2,825,741) 5 10 15 Totals ($505,223) ($2,301,522) ($9,311,258) Source: Bureau of State Audits’ review of fiscal year 2005–06 Indian Gaming Special Distribution Fund grants. California State Auditor Report 2006-036 2 July 2007 In another instance, the San Bernardino County Consolidated Fire District (fire district) was awarded a $170,000 distribution fund grant. The fire district intends to use the money to purchase a rescue/ambulance boat and hire additional staff for holiday weekends. In its grant application, San Bernardino County officials stated that the influx of holiday visitors and recreational vehicles result in accidents on or near Lake Havasu. According to an analyst with the fire district, the Lake Havasu area’s population of 50,000 triples on holiday weekends because of visitors, but the fire district does not know how many visitors come to use the casino. The casino is relatively small—6,900 square feet, with 220 slot machines and five table games—and the fire district’s application does not mention the other recreational activities that draw visitors to the 25,000-acre lake. However, the Web site of the chamber of commerce of Lake Havasu City, Arizona, which is located directly across the lake from the casino, states that the major attractions to the area are the recreational activities offered by the lake, including boating, fishing, camping, and annual festivals, as well as the London Bridge, which was relocated to Lake Havasu City in 1971 and draws more than 500,000 visitors to the area each year. Therefore, it appears likely that the rescue/ambulance boat and additional staff will be used mainly for purposes other than those related to the casino. We acknowledge that these and other purchases are beneficial to the counties. However, it is unclear whether the Legislature intended for distribution fund grants to be used to pay for goods and services that would be used mainly for incidents unrelated to a casino. Although counties might find it reasonable to use distribution fund grants to purchase goods or services that benefit the entire county, we believe that the intent of the law is to offset the adverse effects of casinos and that local governments should use other sources of money to pay for the portion of the acquisition expected to be used for activities unrelated to a casino. For example, the San Diego County Sheriff’s Department requested a distribution fund grant totaling $750,000 to partially fund the purchase of a new $6 million sheriff’s station intended to meet the public safety needs of the surrounding communities and tribal lands. The sheriff’s department provided us with data indicating the percentage of adult arrests that were casino-related, which was actually greater than the proportion of distribution fund money used for the new station. The remaining project costs will be paid Although Healdsburg District for with funds from other sources. Hospital was awarded $52,000 to purchase and install surveillance In other cases grants were used for projects with no apparent direct cameras because of vandalism and relationship to casinos’ impacts. For example, a distribution fund other disturbances at the hospital, grant totaling more than $52,000 was awarded to the Healdsburg it did not provide any evidence of District Hospital (hospital) in Sonoma County to purchase and the connection between these acts install surveillance cameras at strategic locations on the roof of and the casino. 26 California State Auditor Report 2006-036 July 2007 the hospital. The cameras monitor the hospital’s parking areas and building entryways. In its grant application the hospital claimed that it experienced several acts of vandalism in the parking areas and disturbances in the patient waiting area of the emergency department. However, the hospital did not provide evidence of any connection between the vandalism or disturbances and the casino, which is located 10 miles away. Nor did the hospital’s application include data showing that the number of criminal incidents at the hospital had increased since the casino was built. Furthermore, the hospital only used $18,900 of the grant award on the surveillance cameras. The remaining money was used to purchase a defibrillator and to purchase and install a pharmacy climate control system. These purchases occurred even though the Sonoma County benefit committee approved only the hospital’s request to purchase and install surveillance cameras in its application and did not authorize and was not informed by the hospital of the decision to spend grant funds on other items. When a distribution fund grant is used for purposes that have little or no relationship to a casino impact, the problems the community experiences because of a casino will not be adequately addressed. Ultimately, it is the citizens living and doing business in the areas surrounding the casino who will suffer the consequences. Compacts Ratified Since 1999 Require Tribes to Directly Fund Efforts to Mitigate Casinos’ Impacts, but Local Governments Continue to Receive Distribution Fund Money Post-1999 compacts require tribes to negotiate directly with local Although two tribes negotiated governments to pay for local mitigation projects in lieu of paying directly with local governments into the distribution fund. However, based on the allocation to pay for mitigation projects and methodology established in state law in 2004, two counties where did not pay into the distribution casinos under post-1999 compacts are located received roughly fund, based on the allocation $850,000 in distribution fund money in fiscal year 2005–06. Local methodology established in state governments in those counties received money for projects that, in law, the two counties where these accordance with the post-1999 compacts, should have been funded tribes are located still received directly by the tribes. Consequently, less distribution fund grant $850,000 from the distribution fund money is available to other counties where tribes are not required in fiscal year 2005–06. to provide funding directly to local governments. As described in the Introduction, 60 of California’s Indian tribes entered into the 61 compacts signed in 1999. All the 1999 compacts contained materially identical terms, including a provision requiring tribes operating casinos to make annual contributions 2 The Capitan Grande Band of Diegueno Mission Indians is a federally recognized tribe consisting of the Barona and Viejas groups, each of which signed a compact. California State Auditor Report 2006-036 27 July 2007 to the distribution fund based on the net wins of gaming devices in operation on September 1, 1999. Since the ratification of the 1999 compacts, five new and eight amended compacts have been ratified. However, the post-1999 compacts do not include provisions requiring tribes to make annual contributions to the distribution fund. Instead, they require the tribes to negotiate directly with local governments to pay for mitigation projects. An allocation method was established in state law in 2004 to equitably distribute grant money from the distribution fund to counties affected by Indian gaming. As explained in the Introduction, counties where tribes are not obligated to make contributions to the distribution fund receive 5 percent of the total amount the Legislature appropriates for grants to local governments, and counties where tribes must make contributions to the distribution fund receive 95 percent of the The California Government Code total appropriation. However, the California Government Code has not been amended to address (Government Code) has not been amended to address the changes the changes to mitigation funding to mitigation funding caused by the post-1999 compacts. caused by the post-1999 compacts. As shown in Figure 5 on the following page, when a tribe that currently contributes to the distribution fund agrees to an amended compact that replaces provisions for contributing to the distribution fund with requirements to negotiate directly with local governments, one of two situations occurs. If another casino in the county is contributing to the distribution fund, the total allocation to the county is reduced because it is based in part on the number of grandfathered devices operating in the county by casinos contributing to the distribution fund. Because one casino is no longer contributing to the distribution fund, its grandfathered devices are not included when calculating that county’s allocation. Alternatively, if no other casinos in the county are contributing to the distribution fund, the county becomes one of those receiving 5 percent of the Legislature’s appropriation; however, the county continues to receive money from the distribution fund because that allocation is based in part on the total number of gaming devices in the county. Thus, if no other casino is contributing to the distribution fund, the county continues to receive an allocation for the casino’s gaming devices, although the casino is required to negotiate with the county directly to mitigate any impact the operation of the casinos housing those machines may be causing. The county then has an advantage over other counties because it receives mitigation funding from two sources: the distribution fund and the tribes. At the same time, the amount of distribution fund money available to the remaining counties affected by casinos is reduced. One amendment to an existing compact that has not yet been ratified by the Assembly also requires the tribe to negotiate directly with local governments and will further exacerbate the problem just 2 California State Auditor Report 2006-036 July 2007 figure 5 Illustration of How Amended Compacts Can Affect Distribution Fund Allocations $30,000,000 TOTAL ALLOCATED Devices contributing to fund in county (a or 1) 95% allocated to counties Allocation to county (c or 3) = X $28,500,000 Devices contributing to fund in all counties (b or 2) paying into the fund Total devices in county (d or 4) 5% allocated to counties Allocation to county (f or 6) = X $1,500,000 Total devices in counties not contributing (e or 5) not paying into the fund PRE-AMENDMENT POST-AMENDMENT ALLOCATION DOLLARS ALLOCATION DOLLARS DEvICES FORMULA RECEIvED DEvICES FORMULA RECEIvED County A Grandfathered devices contributing to fund 5,000 (a) 95% $14,250,000 (c) 2,000 (1) 95% $11,400,000 (3) Plus $ direct from tribe Grandfathered devices not contributing to fund 0 3,000 Non-grandfathered devices 3,000 3,000 Total devices 8,000 8,000 County B Grandfathered devices contributing to fund 2,000 (a) 95% $5,700,000 (c) 0 Grandfathered devices not contributing to fund 0 2,000 Non-grandfathered devices 1,000 1,000 Total devices 3,000 3,000 (4) 5% $300,000 (6) Plus $ direct from tribe County C Grandfathered devices 0 0 Non-grandfathered devices 3,000 3,000 Total devices 3,000 (d) 5% $375,000 (f) 3,000 (4) 5% $300,000 (6) Plus $ direct from tribe County D (No amendment negotiated) Grandfathered devices 0 0 Non-grandfathered devices 3,000 3,000 Total devices 3,000 (d) 5% $375,000 (f) 3,000 (4) 5% $300,000 (6) (No money from tribe) Other counties not presented Grandfathered devices contributing to fund 3,000 3,000 Total devices in counties not contributing 6,000 6,000 Total devices contributing 10,000 (b) 5,000 (2) Total devices in counties not contributing 12,000 (e) 15,000 (5) Grandfathered devices not contributing to fund 4,000 6,000 and non-grandfathered devices in 95% counties Total devices 26,000 26,000 Source: Bureau of State Audits’ hypothetical examples based on compact terms and California Government Code, Section 12715. California State Auditor Report 2006-036 2 July 2007 described. If the amendment with the San Manuel Band of Mission Indians (San Manuel Band) in San Bernardino County is ratified, the county will no longer have any devices requiring a contribution to the distribution fund and will therefore receive a portion of the 5 percent funding share allocated to counties that do not have devices contributing to the distribution fund. This allocation will be based on the total number of devices in the county, including those operated by the San Manuel Band. As a result, San Bernardino County will be able to negotiate directly with the San Manuel Band to fund local mitigation projects and will also receive money from the distribution fund for the same purpose. The situation possible in San Bernardino County already exists in Placer County, which has been eligible for funding from both sources because of the compact with the United Auburn Indian The United Auburn Indian Community (Auburn Indian Community) that was amended Community provided Placer in 2004. Placer County has always been eligible for a portion County with an annual payment of the 5 percent funding share allocated to counties that do not of $2.1 million to mitigate the contribute to the distribution fund; however, the post-1999 compact impact of the casino through direct with the Auburn Indian Community also requires the tribe to negotiations. In addition, although negotiate directly with Placer County to pay for projects intended this tribe did not pay into the to offset the effects of casino construction or expansion. In fiscal distribution fund, the county received year 2005–06, in addition to the $765,000 Placer County received $765,000 from the distribution fund from the distribution fund, it also receives $2.1 million in annual for the same purpose. funding through direct negotiations with the Auburn Indian Community, both amounts for the purpose of financing mitigation projects. Although the grant money might benefit the citizens of Placer County, by receiving funding from two sources the county decreases the grant funds available for other cities and counties that depend solely on distribution fund grants to address the impact of casino operations. Interest That Local Governments Earned on Unspent Distribution Fund Money Has Not Always Gone Toward Mitigation Projects Some local governments have earned interest on distribution funds until the funds are needed for the intended project. In many instances, large amounts of grant money remained unspent for more than a year, and the local governments indicated to us that the interest earned was not always allocated back to the original mitigation project or used for similar future projects. In fact, several local governments we spoke to use the interest to pay for general operational costs. In some cases local governments did not even earn interest, instead depositing the grant funds in accounts that generate no interest. 30 California State Auditor Report 2006-036 July 2007 Counties that administer distribution fund grants are required to submit annual reports that describe, among other things, the amount of each grant they received, the intended use of the grant, and the amount of money spent to date. We reviewed the annual reports submitted by 17 counties for fiscal year 2005–06. In addition to information on fiscal year 2005–06 grants, the reports contained information on funds remaining from grants awarded in previous fiscal years. Our review revealed 14 instances when counties had not spent at least $100,000 of the distribution fund grant money awarded them more than a year after receiving the funds. In fact, according to the annual reports, as of June 30, 2006, the 17 counties had not spent a total of $1.3 million (5.5 percent) of the $23.4 million awarded to them in fiscal year 2003–04 and $6.3 million (23 percent) of the $28.1 million awarded to them in fiscal year 2004–05. This is not surprising given the long-term nature of many of the capital improvement projects selected by benefit committees. For example, Yolo County received total grant awards of $426,000 in fiscal year 2003–04 and $511,000 in fiscal year 2004–05. However, as of June 30, 2006—the date of the most recent annual report—the county had spent only $61,000 of its fiscal year 2003–04 grant awards and $169,000 of its fiscal year 2004–05 grant awards. Likewise, local governments in San Diego County received $5 million in grants for fiscal year 2004–05 but as of June 30, 2006, had spent only $2.4 million. Many local governments we visited used the interest earned on unspent distribution fund money for general county purposes rather than on the original mitigation projects or future projects with a similar purpose. Several local governments asserted that the Government Code grants them authority to use interest earned on that money for general purposes. Our legal counsel advised us that although the law does not specifically require a local government to allocate interest earned on unspent grant funds to original or The purposes for which distribution future mitigation projects, the Government Code section cited by fund money may be spent are set local governments states that earned interest may be deposited in forth in the compacts and state their general funds unless otherwise specified by law. The purposes law. Accordingly, our counsel for which distribution fund money may be spent are set forth in the has advised that the interest on compacts and state law. Accordingly, our counsel advised us that distribution fund money should be the interest on distribution fund money is subject to the common used for mitigation projects. law rule that unless it is separated by statute from the principal, the interest should be used for the originally intended purpose. Thus, we believe the interest should be used to support mitigation projects. Apparently, many local governments did not consider whether other legal restrictions applied to the use of the interest earned on distribution fund money. Consequently, many local governments we visited told us that they do not have procedures in place to ensure that interest earned is allocated to the originally funded project or to another project that will alleviate a casino impact. California State Auditor Report 2006-036 3 July 2007 For example, officials in San Bernardino County acknowledged that they have not allocated interest earned on unused distribution City officials estimate that the city fund money to a casino-related purpose. From fiscal year 2003–04 of Highland in San Bernardino through fiscal year 2005–06, the city of Highland in San Bernardino County has earned roughly County received $2.2 million for a road improvement project. $133,000 in interest, all of which has However, as of March 2007 it had spent only about $63,000. City been used to pay for purposes other officials estimate that the city has earned roughly $133,000 in than mitigation. interest, all of which has been used to pay for other capital project costs rather than mitigation projects. Officials from Highland stated that beginning in July 2007 it would use interest generated from Indian gaming funds for the same purpose as the original funds. Our review revealed similar examples in two other counties. In San Diego County, the sheriff’s department received two grants totaling $899,000, of which $750,000 remained unspent at the time of our audit. These funds are kept in the county’s general fund and, according to the county sheriff’s department, approximately $41,700 in interest earned from these funds was not allocated to mitigation projects. Similarly, officials from two local governmental entities in Riverside County stated that they do not use interest earned from distribution fund grants for casino-related projects. Rather, one local government allocates the interest to its operating fund and uses it for general purposes, and the other local government transfers the interest earned from distribution fund grants to the city’s general fund but indicated to us that it will allocate interest earned to the distribution fund beginning in fiscal year 2006–07. Further, we noted two grants in San Bernardino County totaling $879,000, two grants in Riverside County totaling $613,000, and two grants in Placer County totaling $187,000 that local officials indicated were maintained in accounts that earned no interest. Had these six grants totaling roughly $1.7 million been deposited in an account that paid interest, these counties could have earned additional funds for their mitigation projects. One county we reviewed has procedures in place to ensure that interest earned on grants from the distribution fund is used to assist local governments adversely affected by Indian casinos. Fresno County places the distribution fund money it receives in a county account and reimburses individual departments for expenses they incur for casino-related mitigation projects. This practice allows Fresno to account for any interest earned and to use the interest for future projects related to offsetting the effects of casinos. 32 California State Auditor Report 2006-036 July 2007 Allocations to Counties Were Calculated Correctly, but Counties and Benefit Committees Need to Improve Their Administration of Distribution Fund Grants The State Controller’s Office (Controller) correctly allocated distribution fund money designated for the support of local governments affected by tribal gaming. However, local governments have failed to meet several requirements of state law and could improve other aspects of their administration of distribution fund grants. Our review revealed that one county inconsistently applied the criteria used to allocate distribution funds, and did not adhere to the amounts determined pursuant to its allocation methodology. Moreover, we noted that benefit committees awarded grant funds to ineligible entities, which reduces the amount of funding available for eligible entities. We also found that benefit committees did not require all their members to file statements of economic interests, and many counties failed to submit required annual reports to all designated entities. When committee members fail to file required statements of economic interests, local benefit committees may be unaware of conflicts of interest, and cannot ensure that the committee members are aware of their responsibility to remove themselves from making certain decisions. Further, when counties do not submit annual reports, the Legislature and the public have no assurance that funds are being spent as intended. Grant Allocations Have Generally Been Properly Calculated, but Some Local Governments Were Not Awarded the Amounts They Were Allocated Through the Nexus Test The Controller accurately calculated grant allocations to each county based on the budget act and information received from the gambling commission. To distribute grant funds in a fair and efficient manner while giving priority for funding to local governments affected by casinos paying into the fund, state law requires the Controller to use the allocation methodology described in the Introduction to determine the amount of money each county should receive. Additionally, state law requires a county receiving distribution fund money to allocate a portion of its funding to local governments based on the nexus test criteria listed in Figure 4 in the Introduction. We found that counties generally conducted the nexus test using the required criteria. However, our review identified one county that inconsistently applied the nexus test criteria and did not always award the amounts local governments were allocated through the nexus test. In reviewing the application of the nexus criteria in Riverside County, we identified two instances where the criteria were not consistently applied. Specifically, the county concluded that the California State Auditor Report 2006-036 33 July 2007 city of Banning and the county itself met three of the four nexus criteria. In both cases, the county incorrectly concluded that land within each respective local government’s jurisdiction bordered the tribal land where a casino was located. County officials agreed with our assessment and stated that it would revise its application of the nexus criteria. Further, Riverside County did not even adhere to its inaccurate nexus test calculation. We identified several instances where cities in Riverside County were awarded less money than they should have been allocated under the nexus test. For example, the City of Palm Desert should have received a minimum of $131,000; however, it only received $46,000. According to the county’s principal management analyst, this occurred because the tribes may not have sponsored projects that totaled up to the maximum amount these cities should have been allocated. Some Grantees Were Not Eligible for Funding Although state law provides clear guidance defining the intended recipients of distribution fund money—cities, counties, and special districts—some benefit committees provided grant money to ineligible entities. Specifically, of the 30 grants we reviewed, we found two instances in which benefit committees awarded grants to school districts. State law specifically excludes school districts from the definition of special districts. Nevertheless, Clovis Unified School District in Fresno County requested and was awarded a distribution fund grant from fiscal year 2005–06 funds for $68,100 to help in purchasing books for new schools. According to the minutes of a May 12, 2006, open meeting, the county’s legal counsel initially advised the benefit committee that the school district was not a special district and hence was not eligible for the grant. However, the tribal representative stated that he supported the project, and the chair of the benefit committee stated that unless someone brought legal action against the benefit committee contending the contrary, he did not believe the State would take any action. In the same meeting, Fresno County’s legal counsel stated that after reviewing a letter from Clovis Unified School District, he determined that while he had initially relied on a statute that specifically excludes school districts from the statutory definition of special districts, he had found another section of the law that states that for the purpose of special taxes, school districts may be considered special districts. Fresno’s counsel further advised that there is some provision of law that would permit the committee to define Clovis Unified School District as a special district. However, we do not agree. Our legal counsel advised us that because school districts do not fall within the definition of special districts for the purposes of distribution fund grants, they are not eligible to receive grant funds. 3 California State Auditor Report 2006-036 July 2007 In another instance Riverside County awarded a distribution fund grant to the Banning Unified School District by having the Banning Police Department (police department) submit an application for it, in effect using the police department as its fiscal agent. According to the police department, the chairman of the Morongo Band of the Mission Indian Tribal Council requested that the police department apply for the grant on the school district’s behalf. The police department requested a $257,000 grant on behalf of the school district to fund two programs: $125,000 for a program connecting troubled students with services that could enhance their academic achievement and $132,000 for a full-time police officer on campus who would work with the school district, the community, and the Although the benefit committee police department to promote campus safety. Riverside County recognized that a school district stated that the benefit committee took a supportive position on the was not eligible to apply for school district project because it addressed one of the priorities, distribution fund money, it recreation and youth programs, specified in the law that defines approved the application because it the uses of the discretionary fund. A representative of the county was impressed by the collaborative also explained that although the benefit committee recognized nature of the project and because the school district was not eligible to apply for distribution fund the tribe sponsored it. money, it approved the application because it was impressed by the collaborative nature of the project and because the tribe recognized the need to support it. Despite the attributes of the projects just described, we believe that the benefit committees did not have adequate reasons to disregard the law and award funds to ineligible grantees. Because the Legislature has identified specific entities and purposes for this money, counties must ensure that they follow the statutory requirements. If other entities are affected by casino operations, local governments should consider asking the Legislature to amend the law to expand the eligibility requirements rather than disregarding the requirements by providing grants to entities they know are not eligible to receive funds. Some Benefit Committee Members Fail to Meet Disclosure Requirements The Political Reform Act of 1974 (political reform act) requires state and local officials and employees with decision-making authority to file statements of economic interests annually and on assuming or leaving a designated position. These statements are intended to identify conflicts of interest that an individual might have. However, the counties we visited could not provide 11 of the 13 statements of economic interests for tribal representatives on the benefit committees for fiscal year 2005–06. The political reform act is the central conflict-of-interest law governing the conduct of public officials in California. The intent expressed in the act states that public officials, whether elected or California State Auditor Report 2006-036 3 July 2007 appointed, should perform their duties in an impartial manner, free from bias caused by their own financial interest or the financial interests of persons who have supported them. The political reform act places certain duties and responsibilities on local government agencies to ensure that their designated employees, including benefit committee members, comply with the act’s reporting and disclosure requirements. The political reform act requires each designated employee to file a statement disclosing reportable investments, business positions, and interests in real property and income (statement of economic interests) on an annual basis and within 30 days of assuming or leaving office. The statements must be retained by the filing officer and made available for public inspection. Finally, the political reform act also requires local government agencies to report apparent violations to the appropriate agencies. Despite these statutory requirements, we received only two of the 13 statements of economic interests for tribal representatives that we requested from the counties we reviewed. Although the Although the counties requested counties requested that tribal members file statements, 11 of the that tribal members file statements 13 tribal members that were required to file failed to do so. Three of economic interests, 11 of the of the six counties we requested statements from informed us that 13 tribal members that were the tribal members of their respective benefit committees asserted required to file failed to do so. that they are exempt from the requirements to submit statements. The other three counties we visited stated that they do not know the reasons tribal members did not file the required statements. However, the California Fair Political Practices Commission has issued an advice letter regarding this issue stating that any individual serving in a capacity as a member of a public agency, including tribal members of benefit committees, are subject to the provisions of the political reform act. When designated individuals do not file statements of economic interests, benefit committees may be unaware of conflicts of interest. Further, the benefit committees cannot ensure that members are aware that they should remove themselves from making decisions that may pose conflicts of interest. Many Counties Did Not Properly Report Their Use of Distribution Fund Money State law requires each county that receives distribution fund grants to submit an annual report by October 1 each year detailing, among other information, the specific projects funded by the grants and how current-year grant money has been or will be spent. However, counties do not always adhere to this requirement. In response to the failure of some counties to submit their annual reports in fiscal year 2004–05, the governor decreased by $20 million the amount appropriated to local governments for mitigating casinos’ impacts in the fiscal year 2005–06 budget. The Legislature subsequently 36 California State Auditor Report 2006-036 July 2007 passed legislation reinstating the $20 million and modifying the reporting requirements. Nevertheless, many counties still fail to submit their annual reports by the October 1 deadline or do not submit them to all required entities. In fact, according to the gambling commission and various legislative committees, in 2006 only nine counties reported to all required entities, and six of the 24 counties receiving funds did not report at all. Our review also found that at least one county did not include all required information in its most recent annual report. The law requires each county to submit an annual report on its current- and prior-year allocations and expenditures for distribution fund grants. However, in fiscal year 2005–06 Riverside County failed to report its current-year grant allocations and only provided expenditures of prior-year grants. Because no agency is responsible for overseeing distribution fund grants provided to local governments, it is critical that counties are transparent in reporting the amounts they allocate and the purpose of each grant. Unless counties adhere to reporting requirements, it is difficult for the Legislature and the public to understand the impacts casinos have on local governments, what grant funds are being spent for, and how long it is taking for projects to be completed. 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 changes to legislation: • Amend the 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. California State Auditor Report 2006-036 37 July 2007 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 the projects for which the grants were awarded or return the money to the county for allocation to future mitigation projects. • Correct the inconsistent application of nexus test criteria and ensure that local governments receive at least the minimum amounts they are allocated under the Government Code requirements. • 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 complete annual reports to all required legislative committees and the gambling commission. 3 California State Auditor Report 2006-036 July 2007 Blank page inserted for reprographic purposes only. California State Auditor Report 2006-036 3 July 2007 Chapter 2 PenDInG new AnD AmenDeD ComPACtS mAy SIGnIFICAntLy AFFeCt the vIAbILIty oF the InDIAn GAmInG SPeCIAL DIStRIbutIon FunD AnD PRoGRAmS thAt DePenD on It Chapter Summary Revenues to three state funds will change dramatically if one new tribal-state gaming compact (compact) and amendments to five existing compacts are approved. The pending new and amended compacts (pending compacts) would decrease annual revenues in the Indian Gaming Special Distribution Fund (distribution fund) by an estimated $92 million. If another funding source is not used for the programs the distribution fund supports, including payments to cover shortfalls (backfill) in the Revenue Sharing Trust Fund (trust fund), the distribution fund would exhaust its current reserve within four years and be unable to support those programs. On the other hand, the revenue reduction to the distribution fund that would result from the ratification of the pending compacts would be partially offset by about $6.9 million in additional revenue for the trust fund in fiscal year 2007–08, reducing the amount that otherwise would be required for the backfill to the trust fund. The pending compacts also require substantial payments into the State’s General Fund; we conservatively estimate these will total between $174.3 million and $175.1 million for fiscal year 2007–08. The increased revenues to the General Fund are based partially on profits, and as more gaming devices come into operation, the revenues will increase. Legislation under consideration would use this General Fund money to support the trust fund if the distribution fund cannot. The Department of Finance (Finance) anticipates that if the pending compacts are approved, beginning in fiscal year 2008–09 the General Fund will cover the trust fund backfill. New Compact Provisions Will Change the Amount of Revenues in the Distribution and Trust Funds Pending amendments to tribal compacts will significantly decrease revenues in the distribution fund and, to a lesser extent, increase trust fund revenues. 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. In fiscal year 2005–06 the five compacts with pending 0 California State Auditor Report 2006-036 July 2007 amendments provided two-thirds of distribution fund revenues. However, the amendments will eliminate those payments to the distribution fund, causing a significant reduction and affecting its ability to fund the programs that depend on it. We estimate that at the casinos’ current levels of operation, the amendments will reduce distribution fund revenues by $92 million annually. In contrast, the amendments provide the trust fund with increased revenues, which we estimate will be about $6.9 million annually, again based on current operating information. As described in the Introduction, the compacts negotiated in 1999 had no material differences regarding contributions to the trust fund and the distribution fund. Because of the formulas used, a few tribes with class III devices in operation as of September 1, 1999, provided most of the revenue to the distribution fund. Between 2003 and 2006, the Legislature ratified five new compacts and amendments to eight others (post-1999 compacts), and the federal Secretary of the Interior approved the new and amended compacts. The post-1999 compacts differ significantly from those ratified in 1999 in that they no longer require tribes to pay into the distribution fund and change the calculations for deposits to the trust fund. They also provide for contributions directly to the General Fund, the impact of which we describe in the following section. Because the changes in operations allowed by the post-1999 compacts have not been fully implemented—the tribes have not installed all the permissible gaming devices, for example—their fiscal effects on the trust fund and General Fund have not been fully realized. The pending compacts have provisions similar to those of the post-1999 compacts. To determine the fiscal impact on the distribution fund, we compared fiscal year 2005–06 distribution fund revenues, which would come The pending amendments for only from tribes whose original 1999 compacts have not changed, to five compacts would eliminate our estimates of revenues assuming all pending compacts were in approximately $92 million in effect—including one amended compact yet to be ratified. The pending revenue to the distribution fund compacts no longer require the tribes to contribute to the distribution annually, affecting its ability to fund and instead call for the tribes to contribute to the General Fund. fund the programs that depend Under the 1999 compacts, the five tribes with pending amendments on it. contributed two-thirds of the total revenue in the distribution fund in fiscal year 2005–06—a total contribution of about $92 million. A loss of that magnitude would have a significant impact on the distribution fund’s ability to support program activities. For fiscal year 2007–08, anticipated expenditures for the problem-gambling prevention program, costs of certain regulatory functions of the Department of Justice and the gambling commission, and grants to support local governments adversely affected by tribal gaming will total roughly $55.6 million. This amount does not include the distribution fund’s responsibility California State Auditor Report 2006-036  July 2007 figure 6 The Special Distribution Fund Balance Will Diminish Rapidly if It Continues to Fund the Shortfall in the Revenue Sharing Trust Fund $160 140 120 100 80 60 40 20 0 -20 -40 2005–06 2006–07 2007–08 2008–09 2009–10 2010–11 2011–12 Sources: Bureau of State Audits’ projection of future special distribution fund balance based on the Governor’s Budget for fiscal year 2007–08, California Gambling Control Commission accounting documents, and ratified and pending compacts. sralloD fo snoilliM ni ecnalaB to provide backfill distributions to the trust fund, which we estimate would be $39.6 million for fiscal year 2007–08. Therefore, the estimated fiscal year 2007–08 combined expenditures for the distribution fund total $95.2 million. However, without the revenue from the pending compacts, we estimate that annual revenue including interest to the distribution fund will total only $53.2 million for the 2007–08 fiscal year. Assuming trust fund revenue from the tribes and program expenditures remain static, we estimate that the distribution fund will have a deficit of more than $42 million for the year. This deficit would increase as interest revenue on the declining fund balance decreases. As shown in Figure 6, we estimate that should the conditions assumed for fiscal year 2007–08 continue into the future, without additional resources the distribution fund will be unable to meet its obligations in approximately four years (by fiscal year 2010–11). Later in this chapter we discuss the potential use of General Fund resources to help fund current distribution fund activities. The pending compacts partially offset the loss of distribution fund revenues by providing for increased revenues in the trust fund. As discussed in the Introduction, the first of the four priorities for the use of distribution fund resources is to backfill the trust fund. To fully understand the effect of the pending compacts and how Fiscal Year 42 California State Auditor Report 2006-036 July 2007 the decrease in the distribution fund revenues will affect the four priorities in total, we looked at the fiscal impact of the pending compacts on the trust fund contribution. The five tribes that have amendments to their compacts pending were contributing to the trust fund based on a formula that charges an annual fee for each gaming device put in operation after September 1, 1999. The pending amendment provisions would require each tribe to contribute a flat fee of $2 million to $3 million annually. By comparing fiscal year 2005–06 trust fund revenues with estimated future revenues, we calculate that the pending amended compacts will provide a net increase of about $6.9 million in annual trust fund revenues. Finally, if the post-1999 compact tribes place additional devices in operation, as allowed in the compact provisions, additional revenue will be deposited in the trust fund. Because backfilling the trust fund is currently the first priority of the distribution fund, this increase would directly reduce the obligations of the distribution fund. Post-1999 and Pending Compacts and Amendments Provide Revenues to the General Fund Unlike the 1999 compacts, the pending compacts require tribes to provide revenues to the General Fund, but estimating the amount of revenue that will be raised is made difficult by uncertainties about when tribes will start or expand their gambling operations and what the impact of those changes will be. Because of differences in the assumptions we used in our calculations, our estimate of fiscal year 2007–08 revenue to the General Fund differs significantly from Finance’s. The post-1999 compacts have similar provisions, but their effect on the General Fund has not yet been fully realized. The pending compacts generally contain two types of provisions requiring contributions to the General Fund. The first is an annual flat fee requirement regardless of casino profitability or size. This provision requires the five tribes with pending amendments to make annual payments to the General Fund totaling $167.6 million. A second compact provision requires annual General Fund contributions based on casino net wins and the number of gaming devices in operation in excess of the 2,000 allowed by the original 1999 compacts. To estimate the contributions to the General Fund from the second type of provision, we had to make some assumptions to calculate future revenues. Specifically, because it is impossible  The one amendment yet to be ratified by the Assembly would provide $45 million, or over 25 percent, of these payments to the General Fund. California State Auditor Report 2006-036 3 July 2007 to project how fast casinos will expand or forecast changes to their profitability due to future expansion, we based our estimate of revenue contributions to the General Fund on fiscal year 2005–06 counts of gaming devices and net wins. Using these data, we estimate that General Fund revenues from net wins and gaming devices in operation will increase total revenue by between $6.7 million and $7.5 million per year. We based our estimate on two factors. First, it includes 99 anticipated devices from the pending new compact. In addition, it includes devices We conservatively estimate an that, according to the gambling commission, are no longer in operation increase in total General Fund because the two casinos with pending amendments were operating contributions from the pending more than 2,000 devices, in violation of their compact terms. However, compacts of between $174.3 million we elected to include those additional devices in our calculation of and $175.1 million for fiscal total General Fund revenues for fiscal year 2007–08 because it is likely year 2007–08. that the casinos can quickly put them back into operation. Overall, we estimate an increase in total General Fund contributions from the pending compacts of between $174.3 million and $175.1 million for fiscal year 2007–08. Our estimates of contributions to the General Fund for fiscal year 2007–08 differ significantly from those calculated by Finance for the Governor’s Budget May Revision 2007–08 because of differing assumptions regarding casino expansion. On April 10 and 11, 2007, the tribes with pending amended compacts testified before the senate committee on governmental organization. A portion of the testimony focused on when the tribes intended to add more gaming devices and how many more they would add. Based on the tribes’ testimony, Finance has assumed for its estimate that the tribes will add 9,250 additional devices to operations by January 1, 2008, resulting in more than $314 million in additional revenue to the General Fund for fiscal year 2007–08, in contrast to our estimate of $174.3 million to $175.1 million. We believe our more conservative approach to the revenue calculation for fiscal year 2007–08 is appropriate primarily because the tribes’ testimony about how long it would take to put additional devices into operation was often not very specific. For example, one tribe indicated that it would take two to three years to install an additional 1,000 machines. Three tribes stated that they would install additional machines fairly quickly but did not expect to reach their respective compact limits of 7,500 devices each. Although it is likely that the casinos will eventually expand, our inability to determine with certainty when the tribes will install additional devices led us to use the most current numbers available to us for devices in operation and casino profitability for our estimate of contributions to the General Fund for fiscal year 2007–08. Further, given that, as of June 2007, one pending compact still needed to be ratified by the Assembly and all  California State Auditor Report 2006-036 July 2007 of the pending compacts require approval by the federal Secretary of the Interior, we believe it is unlikely 9,000 new gaming devices will be made operational in such a short period of time. As further confirmation of the reasonableness of our estimate, we reviewed information for the eight tribes that have had amendments ratified since 1999; seven of these tribes are allowed to operate an unlimited number of gaming devices. We determined that as of March 2006, when according to the most recent statewide device count that the gambling commission has conducted, only three of the seven tribes had more than 2,200 devices in operation, with one other tribe operating 2,197 devices. None of these four tribes have ever operated more than 2,722 devices, and of the 66 tribes with compacts, only these four have legally operated more than the 2,000 devices allowed in the original 1999 compacts. Even though the four tribes could operate an unlimited number of gaming devices under their amendments ratified in June 2004, none had added more than 827 as of March 2006, indicating that tribes can take a significant amount of time to expand their operations. Although we believe that basing our estimates of future contributions on current device counts and net wins is a conservative yet reasonable approach, we also recognize that because revenues to the General Fund are based partially on net wins, those revenues will increase as more gaming devices are put into operation. In addition to the income from the pending compacts, contributions to the General Fund will increase as tribes with post-1999 compacts choose to build or expand their casinos. These post-1999 compacts provided $128 million in General Fund revenue in fiscal year 2005–06. However, that figure will increase because several casinos allowed under post-1999 compacts only recently began operations or will begin operations this year. Given their short or nonexistent periods of operation, these casinos have yet to submit information on their profitability or contribution levels. Therefore, to estimate their contributions to the General Fund, we made assumptions about their profitability based on minimum and maximum values for casinos of similar size provided by the gambling commission. Using these figures and the number of devices the casinos expect to operate, we estimate that General Fund revenues will increase between $1.7 million and $10.4 million for fiscal year 2007–08, bringing total General Fund contributions from post-1999 compacts to between $129.7 million and $138.4 million. 4 Two tribes with 1999 compacts were operating over 2,000 devices, in violation of their compact. For additional information, please see footnote ll in Appendix A. California State Auditor Report 2006-036  July 2007 Overall, we estimate that General Fund revenues for fiscal year 2007–08 from the post-1999 and pending compacts will total between $304 million and $313.5 million. These amounts represent between 4.3 percent and 4.5 percent of the $7 billion in revenue that Indian gaming in California generated during fiscal year 2004–05. Further, for fiscal year 2007–08, we estimate that trust fund and distribution fund revenue from tribal contributions will total $39.4 million and $47 million, respectively, representing 0.6 percent and 0.7 percent of total fiscal year 2004–05 gambling revenue, respectively, as shown in Figure 7. figure 7 Projected Fiscal Year 2007–08 Indian Gaming Contributions to the State Compared to the $7 Billion in Total Indian Gaming Fiscal Year 2004–05 Revenue Projected fiscal year 2007–08 Fiscal year 2004–05 Revenue* Balance General Fund revenue $6,642,110,519 (94.5%) $313,523,459 (4.5%) Projected fiscal year 2007–08 Revenue Sharing Trust Fund revenue $39,348,523 (0.6%) Projected fiscal year 2007–08 Special Distribution Fund revenue $46,999,230 (0.7%) Sources: National Indian Gaming Commission reports and Bureau of State Audits’ projections of future Special Distribution Fund and Revenue Sharing Trust Fund revenues based on fiscal year 2007–08 Governor’s Budget, California Gambling Control Commission accounting documents, and ratified and pending compacts. * Fiscal Year 2004–05 is the most recent revenue figure available. General Fund Revenues May Be Used for Many Purposes Future General Fund revenue contributions from Indian gaming may be used to help reduce the impact of the $92 million decrease in distribution fund revenue. Finance has indicated that, beginning in fiscal year 2008–09, the administration plans to have the shortfall in the trust fund covered from tribal contributions to the General Fund. Should such a shift in funding occur, it would significantly reduce expenditures currently paid by the distribution fund and allow it to continue to pay for its programs in the long term. However, pending legislation would require the General Fund 6 California State Auditor Report 2006-036 July 2007 to pay for the shortfall in the trust fund only if the distribution fund cannot. Although we estimate the distribution fund’s revenue, including interest earned on the fund balance, will be more than $2.4 million less per year than its expenditures for these programs with the loss of revenue from the pending compacts, the distribution fund’s reserve would allow it to provide the current funding level for approximately 20 years, assuming revenues and expenditures remain roughly the same and the General Fund pays for any backfill distributions required by the trust fund. Four of the pending compact amendments contain provisions that redirect a portion of their General Fund revenue contributions to the trust fund if there is an insufficient amount in the trust fund to distribute $1.1 million to each eligible tribe. However, without further clarification in the Government Code by the Legislature, it is unclear if this compact provision to cover any shortfalls in the trust fund takes place before or after the Government Code requirement for the distribution fund to cover any shortfalls in the trust fund. Furthermore, the General Fund contributions required by the General Fund contributions compacts may also be obligated to repay a California Department required by the compacts may of Transportation fund (transportation fund) that made loans to be used to offset the $92 million the General Fund in prior fiscal years. For fiscal year 2005–06, decrease in distribution fund $101 million in tribal payments to the State were used to repay a revenue, and may also be obligated loan from the transportation fund to the General Fund. State law to repay transportation fund loans indicates that shortfalls in the Transportation Congestion Relief made to the General Fund in prior Fund can be repaid from Indian gaming revenues or from other fiscal years and therefore would not contributions to the General Fund. The California Department be available for other purposes. of Transportation estimates a $588 million shortfall by the end of fiscal year 2007–08 in the Transportation Congestion Relief Fund, which exceeds our estimates of total tribal gaming contributions to the General Fund for the year. As such, any increase in General Fund revenue from pending compacts may be obligated to repay the Transportation Congestion Relief Fund and thus would not be available for backfill distributions required by the trust fund or for other purposes. California State Auditor Report 2006-036 7 July 2007 We conducted this review under the authority vested in the California State Auditor by Section 85 et seq. of the California Government Code and according to generally accepted government auditing standards. We limited our review to those areas specified in the audit scope section of the report. Respectfully submitted, ELAINE M. HOWLE State Auditor Date: July , 007 Staff: Steven Cummins, CPA, Audit Principal Jonnathon Kline Simerdip Kaur Khangura Rosa Reyes Albert Sim, MPA Katrina Williams  California State Auditor Report 2006-036 July 2007 Blank page inserted for reprographic purposes only. California State Auditor Report 2006-036  July 2007 Appendix A numbeR oF GAmInG DevICeS oPeRAteD by FeDeRALLy ReCoGnIzeD InDIAn tRIbeS In CALIFoRnIA AS oF mARCh 2006 On September 1, 1999, California entered into 57 tribal-state gaming compacts (compacts) with federally recognized Indian tribes. Eventually, 60 tribes agreed to the terms of the 1999 compacts. From 2003 to 2006, the Legislature ratified five new compacts and eight amended compacts, bringing the total number of gaming devices operated by California Indian tribes to more than 58,000 as of March 2006. In June 2007 the Legislatiure ratified one new compact and four amendments (a fifth amendment has yet to be ratified). However, these compacts have not yet been approved by the federal Secretary of the Interior. The 1999 compacts require tribes to obtain licenses for gaming devices they plan to operate in excess of the first 350 (entitlement devices) or those already in operation on September 1, 1999 (grandfathered devices). The 1999 compacts also specify 2,000 as the maximum number of devices that each tribe can operate. However, compacts ratified from 2003 to 2006 contain different provisions regarding the maximum number of devices allowed. Table A on the following pages describes the maximum number of gaming devices allowed for each compact, the number of devices each tribe operated as of March 2006, the number of grandfathered devices, and when the compact was negotiated or amended. 0 California State Auditor Report 2006-036 July 2007 Table a Number of Gaming Devices Operated by Federally Recognized Indian Tribes in California as of March 2006 CurreNt maxImum CasINo IN graNdfathered Number of devICes federally reCogNIzed INdIaN trIbe year of CompaCt operatIoN devICes* devICes† allowed Agua Caliente Band of Cahuilla Indians 2006 Amendment X 1,153 2,000 2,000‡ Alturas Rancheria 1999 Compact X — 148 2,000 Augustine Band of Cahuilla Mission Indians 1999 Compact X — 751 2,000 Barona Band of Mission Indians 1999 Compact X 1,057 2,000 2,000 Big Sandy Rancheria Band of Mono Indians 1999 Compact X 239 329 2,000 Big Valley Rancheria 1999 Compact X 353 518 2,000 Bishop Paiute Tribe 1999 Compact X 273 329 2,000 Blue Lake Rancheria 1999 Compact X — 700 2,000 Buena Vista Rancheria of Me-wuk Indians 2004 Amendment — — — unlimited Cabazon Band of Mission Indians 1999 Compact X 741 1,956 2,000 Cahto Tribe of Laytonville 1999 Compact X 125 83 2,000 Cahuilla Band of Mission Indians 1999 Compact X 207 302 2,000 Campo Band of Mission Indians 1999 Compact X — 750 2,000 Chemehuevi Indian Tribe 1999 Compact X 100 230 2,000 Chicken Ranch Rancheria 1999 Compact X 224 255 2,000 Coast Indian Community of the Resighini Rancheria 1999 Compact X 135 350 2,000 Colusa Indian Community 1999 Compact X 523 846 2,000 Coyote Valley Band of Pomo Indians 2004 Compact X — 280 2,000 Dry Creek Rancheria Band of Pomo Indians 1999 Compact X — 1,600 2,000 Elem Indian Colony of Pomo Indians 1999 Compact — — — 2,000 Elk Valley Rancheria 1999 Compact X 167 342 2,000 Ewiiaapaayp Band of Kumeyaay Indians 2004 Amendment — — — unlimited Fort Mojave Indian Tribe 2004 Compact — — — 1,500 Hoopa Valley Tribe 1999 Compact X 85 98 2,000 Hopland Band of Pomo Indians 1999 Compact X 307 563 2,000 Jackson Band of Mi-wuk Indians 1999 Compact X 435 1,500 2,000 Jamul Indian Reservation 1999 Compact — — — 2,000 La Jolla Indian Reservation 1999 Compact — — — 2,000 La Posta Band of Mission Indians 2003 Compact X — 349§ 350 Manchester-Point Arena Rancheria 1999 Compact — — — 2,000 Manzanita Tribe of Kumeyaay Indians 1999 Compact — — — 2,000 Middletown Rancheria Band of Pomo Indians 1999 Compact X 150 429 2,000 Mooretown Rancheria Concow Maidu Tribe 1999 Compact X 500 999 2,000 Morongo Band of Mission Indians 2006 Amendment X 1,627 2,045ll 2,000# Pala Band of Mission Indians 2004 Amendment X — 2,268 unlimited Paskenta Band of Nomlaki Indians 1999 Compact X — 773 2000 Pauma Band of Luiseno Mission Indians 2004 Amendment X — 1,049 unlimited Pechanga Band of Luiseno Indians 2006 Amendment X 1,333 2,139ll 2,000# Picayune Rancheria of Chukchansi Indians 1999 Compact X — 1,800 2,000 California State Auditor Report 2006-036  July 2007 CurreNt maxImum CasINo IN graNdfathered Number of devICes federally reCogNIzed INdIaN trIbe year of CompaCt operatIoN devICes* devICes† allowed Pit River Tribal Council 1999 Compact X 129 156 2,000 Quechan Tribe of the Fort Yuma Reservation 2006 Amendment X — 349 1,100 Redding Rancheria 1999 Compact X 401 951 2,000 Rohnerville Rancheria 1999 Compact X — 316 2,000 Rincon San Luiseno Band of Mission Indians 1999 Compact X — 1,599 2,000 Robinson Rancheria Band of Pomo Indians 1999 Compact X 380 595 2,000 Rumsey Band of Wintun Indians 2004 Amendment X 416 2,589 unlimited San Manuel Band of Mission Indians 2006 Amendment X 974 2,000 2,000** San Pasqual Band of Mission Indians 1999 Compact X — 1,261 2,000 Santa Rosa Rancheria Tachi Tribe 1999 Compact X 472 1,950 2,000 Santa Ynez Band of Chumash Indians 1999 Compact X 760 1,998 2,000 Santa Ysabel Band of Diegueno Mission Indians 2003 Compact X — 349†† 350 Sherwood Valley Rancheria Band of Pomo Indians 1999 Compact X 127 227 2,000 Shingle Springs Band of Miwok Indians 1999 Compact — — — 2,000 Smith River Rancheria 1999 Compact X 235 262 2,000 Soboba Band of Mission Indians 1999 Compact X 991 2,000 2,000 Susanville Indian Rancheria 1999 Compact X 150 221 2,000 Sycuan Band of the Kumeyaay Nation 2006 Amendment X 519 1,996 2,000‡ Table Mountain Rancheria 1999 Compact X 835 2,000 2,000 Torres-Martinez Desert Cahuilla Indians 2003 Compact X — 350‡‡ 2,000 Trinidad Rancheria 1999 Compact X 196 341 2,000 Tule River Indian Tribe 1999 Compact X 408 1,384 2,000 Tuolumne Band of Me-wuk Indians 1999 Compact X — 1,024 2,000 Twenty-Nine Palms Band of Mission Indians 1999 Compact X 740 2,000 2,000 Tyme Maidu Tribe, Berry Creek Rancheria 1999 Compact X 406 900 2,000 United Auburn Indian Community 2004 Amendment X — 2,722 unlimited Viejas Band of Kumeyaay Indians 2004 Amendment X 1,132 2,197 unlimited Yurok Tribe 2005 Compact — — — 99§§ Totals — 57 19,005 59,518 — * Grandfathered devices are those the tribe had in operation on September 1, 1999. † The 1999 compacts limit a tribe to a total of 2,000 devices. ‡ This compact was negotiated in 2006, and was ratified by the Legislature in June 2007. If approved by the federal Secretary of the Interior, the maximum number of devices allowed will increase to 5,000. § Opened in January 2007. Since this casino opened in 2007, they were not included in the California Gambling Control Commission’s (gambling commission) device count as of March 2006. ll The numbers indicate that the Pachenga and Morongo tribes are operating more than the 2,000 gaming devices allowed in their compacts. In early 2000 the tribes acquired devices with multiple player stations and counted them as one device. The tribes were requested to cease operation of the terminals that exceeded the number allowed by August 2006. Compliance by the tribes was confirmed by the gambling commission and Department of Justice. However, the gambling commission’s most current device count was conducted in March 2006 when the tribes were still operating more than the allowed number of devices. # This compact was negotiated in 2006 and ratified by the Legislature in June 2007. If approved by the federal Secretary of the Interior, the maximum number of devices allowed will increase to 7,500. ** This compact was negotiated in 2006, and ratified by the Senate in April 2007. If ratified by the Assembly, the maximum number of devices allowed will increase to 7,500. †† Opened April 2007. Since this casino opened in 2007, devices were not included in the gambling commission’s device count of March 2006. ‡‡ Opened in spring 2007. Since this casino opened in 2007, devices were not included in the gambling commission’s device count of March 2006. §§ This compact was negotiated in 2005 and was ratified by the Legislature in June 2007. It is a new compact and if approved by the federal Secretary of the Interior, the maximum number of devices allowed will be 99. 2 California State Auditor Report 2006-036 July 2007 Blank page inserted for reprographic purposes only. California State Auditor Report 2006-036 3 July 2007 Appendix b GRAnt AmountS DIStRIbuteD to CountIeS FoR mItIGAtIon PRoJeCtS In fiscal year 2005–06, grants to counties for the support of local governments affected by Indian gaming casinos totaled $50 million through two distributions. The budget act appropriated $30 million for this purpose, and Senate Bill 288, Chapter 13, Statutes of 2006 (Senate Bill 288), reappropriated $20 million removed from the budget by the governor. As shown in Table B, this money was distributed among 25 counties that received anywhere from $42,000 to $21.3 million. table b Fiscal Year 2005–06 Allocations to County Tribal Casino Accounts Number of seNate CouNty graNts approved budget aCt bIll 288 totals Amador 6 $ 556,224 $ 371,897 $ 928,121 Butte 11 1,197,658 800,766 1,998,424 Colusa 13 764,513 511,161 1,275,674 Del Norte 3 82,842 59,346 142,188 Fresno 9 1,595,299 1,066,633 2,661,932 Humboldt 7 196,696 123,348 320,044 Imperial 4 47,663 29,890 77,553 Inyo 7 172,785 115,526 288,311 Kings 3 643,800 430,451 1,074,251 Lake 16 788,182 526,987 1,315,169 Lassen 5 38,856 24,366 63,222 Madera 2 310,845 194,932 505,777 Mendocino 9 253,260 169,332 422,592 Modoc 0* 25,904 16,244 42,148 Placer 12 470,239 294,888 765,127 Riverside 79 12,762,395 8,533,067 21,295,462 San Bernardino 5 1,831,991 1,224,888 3,056,879 San Diego 26 4,989,453 3,335,999 8,325,452 Santa Barbara 7 1,325,471 886,224 2,211,695 Shasta 10 475,749 318,091 793,840 Sonoma 7 276,307 173,273 449,580 Tehama 4 133,491 83,712 217,203 Tulare 6 492,318 329,169 821,487 Tuolumne 1 56,806 37,981 94,787 Yolo 3 511,253 341,829 853,082 Totals 255 $30,000,000 $20,000,000 $50,000,000 Sources: Fiscal year 2005–06 annual reports submitted by counties and the State Controller’s Office. * No Indian gaming local community benefit committee established.  California State Auditor Report 2006-036 July 2007 Blank page inserted for reprographic purposes only. California State Auditor Report 2006-036  July 2007 (Agency response provided as text only.) California Gambling Control Commission 2399 Gateway Oaks Drive, Suite 100 Sacramento, CA 95833-4231 June 29, 2007 Ms. Elaine M. Howle, State Auditor* California State Auditor 555 Capitol Mall, Suite 300 Sacramento, California 95814 Dear Ms. Howle: In reference to your letter of June 21, 2007, I have enclosed comments regarding the draft report captioned, “California 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.” The enclosed comments titled, “California Gambling Control Commission Compliance Division Comments on the BSA Report Titled California Indian Gaming Special Distribution Fund, Review June 26, 2007,” are provided in this format as many of the suggested edits relate to factual corrections that you may wish to incorporate by editing the text of the report. The California Gambling Control Commission (Commission) believes the Bureau of State Audits (BSA) has done a thorough study and research into the local mitigation grant program authorized by statute. The description of the process is the best compilation to date of the funding mechanism and relationship to the grant program. The grant program results are not within the scope of authority of the Commission. Without statutory authority and resources, the Commission is not able to exercise a judgment as to the assessment of the local agencies grant program outcomes. The Commission appreciated the opportunity to facilitate your staff in this worthwhile effort. Sincerely, (Signed by: Steven V. Giorgi) STEVEN V. GIORGI Executive Director For DEAN SHELTON Chairman Encl. * California State Auditor’s comments begin on page 63. 6 California State Auditor Report 2006-036 July 2007 California Gambling Control Commission Compliance Division Comments on the bSA Report titled California Indian Gaming Special Distribution Fund Review June 2, 2007 1 . Page 3 – First paragraph, next to last sentence insert the following: Tribes can operate class III gaming devices after a Tribe and the State have negotiated a Compact, the 2 Compact is ratified by the State Legislature, and the Secretary of the Interior, and the approved Compact is published in the Federal Register. The Compact governs the conduct of the gaming activity. Delete the last sentence in the first paragraph. 2. Page 3- Second paragraph. After the first sentence insert the following: 3 Governor Schwarzenegger’s new and amended Compacts require Tribes to make payments to the General Fund, in lieu of the distribution fund. 3. Page 3 – Second paragraph. Change the third sentence to read: In fiscal year 2005-06, 26 of the 66 Tribes with Compacts deposited money into the distribution fund and 39 tribes contributed to the trust fund. [note: the commission collected a payment from Cache Creek Casino in 3 FY 05/06 that related to an underpayment in FY 04/05. If that payment is excluded, there would be 25 tribes that contributed to the distribution fund for FY 05/06. Also, the 39 tribes paying into the trust fund includes tribes that are amortizing prepayment credits. If the tribes amortizing credits are excluded, there would be 25 tribes making payment to the trust fund]. . Page 3 – Second to the last sentence 4 A better definition of “Gross Revenues” taken from the AICPA Audit and Accounting Guide, Casinos, is: Gross gaming revenues is the net win from gaming activities, which is the difference between gaming wins and losses before deducting costs and expenses. Reason - The definition in the BSA report is not found in the AICPA guide and the compact requires the use of the AICPA definition of net win. . Page 3 – Last sentence Change the wording to: 5 Deposits into the trust fund are based on the number of class III gaming device licenses each tribe has acquired since the negotiation of the 1999 compacts. Reason – Deposits are not based upon the number of gaming devices a tribe has put into operation. It is based on the number of gaming device licenses acquired over 350. Page 1 of 7 California State Auditor Report 2006-036 7 July 2007 California Gambling Control Commission Compliance Division Comments on the bSA Report titled California Indian Gaming Special Distribution Fund Review June 2, 2007 6. Page  – See text box (Allowed uses for the Funds Administered by the Gambling Commission). Change the second sentence under the bullet under “Trust Fund” to read: Each nongaming tribe shall receive $1.1 million per year. 5 (There is not a “guarantee of at least $1.1 million” per year.) 7. Page  – Last paragraph. Replace the first sentence with the following: Since the original Compacts were ratified in 1999, the Legislature has ratified five new Compacts and eight amended Compacts with various terms or requirements different from those in the original Compacts. Also make similar correction on Page 33 and everywhere else this information appears. 5 Please note that the Legislature does not “amend” Compacts – they ratify amended Compacts. While various terms and requirements in the new and amended Compacts are different from the 1999 Compacts, some of the provisions have been retained.) . Page 6 – First Sentence. Revise the following to the first sentence (see underlined/deleted text) and add new sentences: However, although the post-1999 Compacts bypass the distribution fund when negotiating for mitigation projects, some counties with tribal casinos with amended Compacts where these casinos are located 5 continue to receive money from the distribution fund. Specifically, existing law allows these counties to continue to receive funding for mitigation projects. Legislation would be necessary to change the allocation methodology to restrict these counties from receiving future annual allocations for mitigation projects. . Page  – First Paragraph. (Inyo County submitted their FY 2005-06 mandated report to the Commission (report dated April 26, 2007). 6 Please contact us if you need a copy. 0. Page  – Second Paragraph, Fourth Sentence. Revise the sentence as follows (see underlined/deleted text): Page 2 of 7  California State Auditor Report 2006-036 July 2007 California Gambling Control Commission Compliance Division Comments on the bSA Report titled California Indian Gaming Special Distribution Fund Review June 2, 2007 5 The pending Compacts will change the method of calculating contributions to the distribution fund and trust fund and require tribes to begin contributing to the State’s General Fund instead of the distribution fund. . Page  – top of Page The report states that “Despite the significant decrease in contributions to the distribution fund, pending legislation may require its continued use to pay for any shortfall in the trust fund…” 7 This is inaccurate, as existing law and the 1999 Compacts authorize the distribution fund to be used for shortfalls in payments to the trust fund. If BSA is referring to SB 62 (Florez) as the “pending legislation”, this bill provides that if there are insufficient funds in the distribution fund to fully fund payments to eligible recipient tribes from the trust fund, money from payments made by Compact Tribes to the General Fund shall be transferred to the trust fund to address the deficiency. It is important to note that four of the Governor’s pending amended Compacts with Morongo, Sycuan, San Manuel, and Pechanga all include Compact provisions to provide a mechanism to allow the State Gaming Agency (Commission) to redirect a portion of the “flat fee” payments made by these Tribes to cover any shortfalls in the trust fund to ensure that the trust fund has sufficient resources to make payments to eligible Tribes. Please make conforming changes in the discussion related to the distribution fund and trust fund on 7 Page 48 and 56 to reflect the provisions in the Governor’s four pending amended Compacts. 2. Page  – Line 2, first paragraph 5 Operate more than 58,000 Class III electronic gaming devices such as… [There are more than 58,000 gaming devices, 58,000 relates to Class III.] 3. Page  - Last sentence Change wording to: 5 “…distributions to tribes that do not have compacts or operate fewer than 350 gaming devices…” Reason - The money is paid to tribes operating fewer than 350 gaming devices as defined in compact section 4.3.2(a)(i), not those operating 350 or fewer gaming devices. . Page 2, Line 3, first paragraph 2 “As one court stated,…” Which court? It is an unattributed quote. Page 3 of 7 California State Auditor Report 2006-036  July 2007 California Gambling Control Commission Compliance Division Comments on the bSA Report titled California Indian Gaming Special Distribution Fund Review June 2, 2007 . Page 3, Line , first paragraph “… includes high-stakes casino-type games…” Is this a direct quote from a court case or a paraphrase which 2 is not cited? 6. Page 3, Line , second paragraph In approving the compact, the federal government permits states and Indian tribes to develop joint 5 regulatory schemes through the compacting process. In approving the compact the federal government does not cede its regulatory authority. However, the CRIT decision has limited that authority with regard to Class III gaming, by holding that the NIGC has no statutory authority to promulgate or enforce regulations governing minimum internal control standards. 7. Page  – under heading tRIbAL-StAte GAmInG ComPACtS In CALIFoRnIA, third sentence The sentence states that the State entered into 61 compacts with 60 tribes. That would mean one tribe has two compacts. This probably results from BSA counting Viejas and Barona as one tribe (Capitan Grande Band 5 of Diegueno Mission Indians). BSA should consider providing an explanation if the language is kept this way. . table  – Summary of Revenue Provisions for Ratified and Pending tribal State Gaming Compacts Is the “2004 Compact” (column 4) intended to cover the new 2004 Compacts? 2 The “Pending 2005 Compact” (column 6) was negotiated again in 2006. Accordingly, Yurok is a new 2006 Compact. The Table appears to leave out several of the pending new and amended Compacts (Big Lagoon, Los Coyotes, Quechan, Lytton). If BSA intends to only cover certain Compacts, it would be clearer to list the 8 names of the Compacts in the Table. For the “2004 Amendment” (column 4) - Contributions to the Revenue Sharing Trust Fund The RSTF payments under “2004 Amendment” are not based on a per-device fee or a flat fee based on the 9 year of operation. The 2004 amended Compacts pay a flat fee into the RSTF. Footnote 1 should be clarified. The payments footnoted in the Table 1 to the General Fund under “2004 5 Amendment” are annual transportation bond payments. These payments are made by five Tribes (Pala, Pauma, Rumsey, United Auburn and Viejas) and total $100.8 million per year. Page 4 of 7 60 California State Auditor Report 2006-036 July 2007 California Gambling Control Commission Compliance Division Comments on the bSA Report titled California Indian Gaming Special Distribution Fund Review June 2, 2007 Contributions to the General Fund 2 “Net Wins” – this should read “net win” . Page  - Insert Reference number 2. It states that “Entitlement gaming devices, which according to the compacts are…..” The 1999 compacts do not use or define the word “entitlements”. The word “entitlements” is a naming 5 convention used by the CGCC to refer both to compact section 4.3.1(a) and (b) gaming devices. BSA may want to consider striking the words “…according to the compacts…” 20. Page  – First paragraph, last sentence Change wording to: 5 “…distributions to tribes that do not have compacts or operate fewer than 350 gaming devices…” Reason - The money is paid to tribes operating fewer than 350 gaming devices as defined in compact section 4.3.2(a)(i), not those operating 350 or fewer gaming devices. 2. Page  – Last full paragraph, first sentence 10 The sentence states there are 108 federally recognized tribes. However, page 14 states there are 106 federally recognized tribes. Inconsistent numbers. [note: the commission uses 107 as the number of federally recognized tribes. The BSA in their audit report of the trust fund used 106] 22. Page  – second paragraph 11 Correct the number of Tribes and Tribal casinos. There are 55 Tribes that operate a total of 56 Tribal casinos. This does not include the La Jolla Slot Arcade operated by the La Jolla Band of Mission Indians. This casino last operated in August of 2004 (operated seasonally). Also not included are Santa Ysabel and Torrez- Martinez. Those tribes opened casinos in April 2007. 23. Page 6 – first paragraph 5 Second sentence - Change the word “board” to commission. 2. Page 6, first paragraph, second to the last sentence 5 Suggest a wording change from “new-device license fees” to “gaming device license prepayment fees”. Page 5 of 7 California State Auditor Report 2006-036 6 July 2007 California Gambling Control Commission Compliance Division Comments on the bSA Report titled California Indian Gaming Special Distribution Fund Review June 2, 2007 Reason – The current wording makes it sound as though there is a license fees on new-devices, which is not the case. 2. Page 6, first sentence Clarify language related to audits. Some suggested language: “The gambling commission’s regulatory authority includes auditing the books and records related to the class III gaming operation of the Indian casino that pay into the distribution fund and general fund to 5 ensure….” Reason – To clarify the limited scope of the audit of books and records and the funds to which the audits pertain. 26. Page 6, second sentence A better definition of “Gross Revenues” taken from the AICPA Audit and Accounting Guide, Casinos, is: 4 Gross gaming revenues is the net win from gaming activities, which is the difference between gaming wins and losses before deducting costs and expenses. Reason - The definition in the BSA report is not found in the AICPA guide and the compact requires the use of the AICPA definition of net win. 27. Page 7, second sentence A better definition of “Gross Revenues” taken from the AICPA Audit and Accounting Guide, Casinos, is: 4 Gross gaming revenues is the net win from gaming activities, which is the difference between gaming wins and losses before deducting costs and expenses. Reason - The definition in the BSA report is not found in the AICPA guide and the compact requires the use of the AICPA definition of net win. 2. table 2, following page 7 September 1999 should be September 1, 1999 to be consistent with the compact. September 1, 1999 is an 5 important date to the distribution fund. Page 6 of 7 62 California State Auditor Report 2006-036 July 2007 California Gambling Control Commission Compliance Division Comments on the bSA Report titled California Indian Gaming Special Distribution Fund Review June 2, 2007 2. Page , bottom paragraph, fifth sentence Change wording to: 5 “…distributions to tribes that do not have compacts or operate fewer than 350 gaming devices…” Reason - The money is paid to tribes operating fewer than 350 gaming devices as defined in compact section 4.3.2(a)(i), not those operating 350 or fewer gaming devices. 30. Figure 2, following page 20 5 September 1999 should be September 1, 1999 to be consistent with the compact. September 1, 1999 is an important date to the distribution fund. 3. Figure 2, following page 20 5 First block under 5%, (those with fewer than 200….) should be fewer than 201 per 1999 compact section 5.1(a). 32. Page 33, first sentence, last paragraph 2 The sentence states that the State entered into 61 compacts with 60 tribes. That would mean one tribe has two compacts. This probably results from BSA counting Viejas and Barona as one tribe (Capitan Grande Band of Diegueno Mission Indians). BSA should consider providing an explanation if the language is kept this way. 33. Page , paragraph 2, second from last line 5 “… by the federal Bureau of Indian Affairs…” The Secretary of the Interior must approve compacts. 3. Page , paragraph , line  12 Page 55, paragraph 1, line 5 and the footnote at the bottom of the page has no attribution in Appendix A in the copy provided to CGCC. Page 7 of 7 California State Auditor Report 2006-036 63 July 2007 Comments CALIFoRnIA StAte AuDItoR’S CommentS on the ReSPonSe FRom the CALIFoRnIA GAmbLInG ContRoL CommISSIon To provide clarity and perspective, we are commenting on the California Gambling Control Commission’s (gambling commission) response to our audit report. The numbers below correspond to the numbers we have placed in the margins of gambling commission’s response. Given the nature of the comments provided by the gambling 1 commission, we are disappointed that it chose not to work with us regarding any concerns it has over technical details and with the specific wording used in the report. As is our policy, we asked executive management staff at the gambling commission to contact staff if they had any concerns about the report. However, despite having seven business days to respond, staff from the gambling commission made no attempt to contact us. Had they elected to do so, many of the issues discussed in the gambling commission’s response could have been quickly resolved to the satisfaction of both parties. Also, while preparing our draft audit report for publication, page numbers shifted. Therefore, the page numbers that the gambling commission cites throughout its response do not correspond to the page numbers in our final report. The gambling commission suggested that we add language to the 2 report to provide more technical details about certain aspects of Indian gaming. Although we made some of the suggested changes, many comments were too technical in nature and did not affect the accuracy of the report. Relevant information regarding deposits into the distribution and 3 trust funds is described in detail in the Introduction and Chapter 2 of the report. As discussed with the gambling commission at our June 19, 2007 exit conference, the Summary section of the report is not intended to describe each issue in full detail. We appreciate the commission’s dedication to technical accuracy, but believe our language adequately summarizes the salient points for the interested reader. We appreciate the gambling commission’s suggestion, but without 4 a detailed explanation of the costs and expenses relevant to the calculation of this figure, which are limited and very technical in nature, we believe that the language used is more appropriate. 6 California State Auditor Report 2006-036 July 2007 5 We agree with the gambling commission’s suggested change and have modified the text. 6 Subsequent to sending the draft report to the gambling commission we received the report from another source and updated our report. 7 We disagree with the gambling commission’s assertion that our statement is inaccurate. As the commission states in its response, Senate Bill 62 would require that payments made to the State’s General Fund be transferred to the Revenue Sharing Trust Fund (trust fund) if there are insufficient funds in the Indian Gaming Special Distribution Fund (distribution fund). The provision in the new amendments described in the gambling commission’s response states that if there is an insufficient balance in the trust fund, a portion of the payments into the General Fund may be redirected. Our concern is which fund will be used first, the distribution fund or the General Fund, to ensure the trust fund is adequately funded; and our report discusses the ramifications of continuing to use the distribution fund as the first source of funding to pay for any shortfall in the trust fund. As stated on page 46 of the report, if the General Fund does pay for the shortfall in the trust fund, the distribution fund will be adequately funded for approximately 20 years. Conversely, if the distribution fund pays for the shortfall in the trust fund, it will be exhausted in approximately four years. 8 The compacts listed by the gambling commission in its response have not been ratified by the Legislature. Further, the gambling commission previously indicated to us that it did not believe that these compacts would be considered in the near future. However, because the commission finds our terminology confusing, we have re-labeled the table to identify compacts ratified by the Legislature in 2007. 9 The gambling commission is mistaken. The 2004 amendment to the compact with the Beuna Vista Rancheria of Me-Wuk Indians states that contributions to the revenue sharing trust fund are based on a graduated scale of fees for each gaming device in operation, or a “per-device” fee. Further, the 2004 amendment to the compact with the Ewiiaapaayp band of Kumeyaay Indians states that: “Commencing on January 1 of the sixth calendar year of the tribe’s gaming activities, the tribe shall pay on a quarterly basis to the State Gaming Agency for deposit into the trust fund for the following annual fees in accordance with the following schedule.” This provision changes the amount contributed based on the year of operation. California State Auditor Report 2006-036 6 July 2007 Draft text was revised. 10 We understand that the La Jolla Slot Arcade is a seasonal operation 11 that last operated in 2004, but included it in our count of casinos as the gambling commission did in the documentation they provided to us on casino locations. The footnote was completed for the final report. 12 66 California State Auditor Report 2006-036 July 2007 Blank page inserted for reprographic purposes only. California State Auditor Report 2006-036 67 July 2007 (Agency response provided as text only.) County of Fresno Administrative Office 2281 Tulare Street, Room 304 Fresno, California 93721 June 25, 2007 Elaine M. Howle California State Auditor Bureau of State Audits 555 Capitol Mall, Suite 300 Sacramento, CA 95814 RE: Fresno County Indian Gaming Local Community Benefit Committee Dear Ms. Howle: Fresno County is in receipt of the July 2007 draft, redacted “California Indian Gaming Special Distribution Fund: Local Governments Do Not Always Use It to Mitigate the Impacts of Casinos” audit report prepared by the California State Auditor’s office. The Fresno County Indian Gaming Local Community Benefit Committee was one of the six counties selected to be audited. We appreciate the effort undertaken by the California State Auditor in this endeavor. The final, public report will be shared with the members of the Fresno County Indian Gaming local Community Benefit Committee. We anticipate their consideration of your recommendations. Sincerely, (Signed by: Larry Fortune) Larry Fortune, Chair Fresno County Indian Gaming Local Community Benefit Committee 6 California State Auditor Report 2006-036 July 2007 Blank page inserted for reprographic purposes only. California State Auditor Report 2006-036 6 July 2007 (Agency response provided as text only.) Placer County Good Morning: We have received two copies of the draft audit Report of the 2005-06 SDF / LCBC. We support the recommendations contained in the Report and will distribute copies of the Final Report to the members of the Placer County LCBC. I also wish to thank-you and the other members of your audit team for your cooperation and assistance in conducting this audit. If you have any questions please feel free to contact me. Thank-you (Signed by: Michael E. Paddock) Michael E. Paddock Senior Management Analyst 70 California State Auditor Report 2006-036 July 2007 Blank page inserted for reprographic purposes only. California State Auditor Report 2006-036 7 July 2007 (Agency response provided as text only.) County of Riverside’s Response to the California State Auditor’s Report, “California 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.”* On March 7, 2000 California voters approved Proposition 1A, which legalized slot machine and banking card games on Tribal lands and put into effect 61 Tribal-State gaming compacts; most compacts were signed on September 10, 1999. Through the Tribal-State compacts, Tribes operating more than 200 gaming machines on September 1, 1999 were assessed a percentage of their average “net win” to be paid into the Special Distribution Fund (SDF). These quarterly payments were based on the number of gaming devices in operation. Funds from the SDF were designated for: grants to address gambling addiction, grants to mitigate Tribal gaming/casino impacts, State regulatory costs, backfill of the Revenue Sharing Trust Fund (to benefit non-gaming tribes), and other purposes specified by the Legislature. On October 11, 2003, Governor Davis approved Senate Bill 621 (Battin and Burton), which established a method for distributing Indian Gaming Special Distribution Funds (SDF) to local government agencies impacted by Tribal gaming/casinos. With 44.8 percent of the statewide “grandfathered” machines, Riverside County receives approximately 43 percent of the statewide allocation of Special Distribution Funds. Riverside County was the model in implementing SB 621, providing guidance and copies of all of the documents developed for the program to every other county requesting the information. Even Riverside County’s Community Benefit Committee website was copied by certain counties. Riverside County is proud of the success of its Indian gaming mitigation grant program; over the past four years, $57.8 million was allocated to 255 worthy projects. On average, more than 90 percent of the annual countywide allocation funds public safety and road projects. On March 19, 2007, the Bureau of State Audits conducted an entrance conference and visited five grant recipients. An exit conference was conducted via conference call on June 14, 2007. In response to the draft audit report titled “California 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,” following is a summary of the BSA’s comments, findings and recommendations and Riverside County’s response. bSA Comment: The Bureau of State Audits (BSA) reported that Riverside County received almost 43 percent of the $50 million and distributed it in 24 grants averaging almost $900,000 each (page 21 and Table B). 1 Riverside County Response: Riverside County has 5,392 (44.8 percent) of the statewide 12,041 September 1, 1999 “grandfathered” machines. Riverside County received almost 43 percent of the $50 million statewide allocation, but it was distributed through 70 grant projects, averaging approximately $300,500 each. 2 * California State Auditor’s comments begin on page 81. Page 1 72 California State Auditor Report 2006-036 July 2007 County of Riverside’s Response to the California State Auditor’s Report, “California 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.” bSA Comment: In fiscal year 2005/06, the Governor decreased the amount of funding available for mitigation grants in the Budget Act by $20 million because some counties were not providing Finance with the required annual reports on the use of distribution fund spending. (Page 21) Riverside County Response: The following language is included in SB 621, Section 12716: “Each county which administers grants from the Indian Gaming Special Distribution Fund shall provide an annual report to the Legislature by April 1st of each year detailing the specific projects funded by all grants in their jurisdiction.” With few exceptions, counties submitted their annual reports on time to the Legislature. It is the understanding of Riverside County that because “Finance” was not identified in SB 621 as a recipient of the 3 required annual report, the Legislature passed SB 288, reinstating the $20 million in funding and clarifying/ expanding the recipients of the annual report. bSA Finding: Some counties lacked transparency and accountability in their distribution fund spending. Counties are required to report to the Legislature and the Gambling Control Commission annually on the projects they financed through the distribution fund. However, our audit revealed that …one county submitted information for the wrong fiscal year (page 8). Our review found that at least one county did not include all required information in its most recent annual report. The law requires each county to submit an annual report on its current and prior year allocations and expenditures for distribution fund grants. However, in fiscal year 2005/06, Riverside County failed to report its current year grant allocations and only provided expenditures of prior year grants (page 45). bSA Recommendation: Submit annual reports to all required Legislative committees and the Gambling Control Commission (page 10, 47). Riverside County Response: Senate Bill 288, Section 12716 states: “Each county that administers grants from the Indian Gaming Special Distribution Fund shall provide an annual report to the chairperson of the Joint Legislative Budget Committee, the chairpersons of the Senate and Assembly committees on governmental organization and Page 2 California State Auditor Report 2006-036 73 July 2007 County of Riverside’s Response to the California State Auditor’s Report, “California 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.” the California Gambling Control Commission by October 1 of each year, detailing the specific projects funded by all grants in the county’s jurisdiction in the previous fiscal year, including amounts expended in that fiscal year, but funded from appropriations in prior fiscal years. The report shall provide detailed information on the following: (a) The amount of grant funds received by the county. (b) A description of each project that is funded. (c) A description of how each project mitigates the impact of tribal gaming. (d) The total expenditures for each project. (e) All administrative costs related to each project, excluding the county’s administrative fee. (f) The funds remaining at the end of the fiscal year for each project. (g) An explanation regarding how any remaining funds will be spent for each project. (h) A description of whether each project is funded once or on a continuing basis.” As SB 288 directs, Riverside County’s two-part annual report, dated September 25, 2006, lists the specific projects funded by all grants in the county’s jurisdiction in the prior fiscal year (FY 2004/05), which expended funds from 4 July 1, 2005 through June 30, 2006 (and after). In addition, the report identified grants awarded in the previous fiscal years (FY 2003/04 and 2004/05) which expended funds in FY 2004/05, 2005/06 and year-to-date in 2006/07. The report also provided all of the required detailed information ((a) through (h), above). Absent the ability to seek clarification from the State on the accuracy of Riverside County’s interpretation of SB 288, the California State Association of Counties (CSAC) was consulted. Riverside County staff explained that jurisdictions received funds in early July 2006 and it was our opinion the Legislature would not find any use in two months worth of expenditures. Based on the language included in the Bill (288), we determined the Legislature was requesting the expenditures covering the period July 1, 2005 through June 30, 2006 from FY 2004/05 grant awards, as well as FY 2005/06 expenditures from FY 2003/04 grant awards. CSAC agreed with Riverside County’s determination. This discussion prompted BSA staff to mention that other counties were able to award FY 2005/06 funds prior to July 2006 (allowing for a longer period of expenditures). The BSA staff asked Riverside County what caused the bottle-neck in awarding these funds, since the State Controller’s Office released Individual Tribal Casino Account balances on September 30, 2005. Riverside County staff noted that because of the significant funding received for distribution each year, a process was developed in the program’s first year and is adhered to each year. Staff described the following process used by Riverside County in FY 2005/06: • The State Controller’s Office released a letter, dated September 30, 2005, containing the Budget Act portion of the Individual Tribal Casino Account (ITCA) balances statewide; Riverside County’s portion was $12.7 million. • During the subsequent Riverside County Local Community Benefit Committee (CBC) meeting, held December 12, 2005 (quarterly meeting schedule), the Committee approved the updated grant application template and schedule. • Notice of funding availability was released to local jurisdictions on December 15, 2005. Page 3 7 California State Auditor Report 2006-036 July 2007 County of Riverside’s Response to the California State Auditor’s Report, “California 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.” • The deadline for application submittal to Tribal governments was February 2, 2006. • Applications and letters of sponsorship were due to the benefit committee by April 3, 2006. • CBC members review and rank sponsored applications. • SB 288 ITCA allocations were provided by the State Controller’s Office in a letter dated May 5, 2006; Riverside County’s portion was $8.5 million. • Award of 70 grant projects, totaling $24 million, was made June 19, 2006. • Release of Warrant Request forms were submitted to the State Controller’s Office on or about June 23, 2006. • Grant funding was received by local jurisdictions on or about July 7, 2006. bSA Finding: Benefit Committees in two counties provided a total of $325,000 in funds to school districts which are ineligible entities because they are specifically excluded from the statutory definition of special districts (page 7). Although state law provides clear guidance defining the intended recipients of distribution fund money– cities, counties and special districts – some benefit committees provided grant money to ineligible entities. Specifically, of the 30 grants we reviewed, we found two instances in which benefit committees awarded grants to school districts. State law specifically excludes school districts from the definition of special districts (page 41). Riverside County awarded a distribution fund grant to the Banning Unified School District using the Banning Police Department (police department) to submit an application for it, in effect using the police department as its fiscal agent. According to the police department, the Chairman of the Morongo Band of Mission Indian Tribal Council requested that the police department apply for the grant on the school district’s behalf. The police department requested a $257,000 grant on behalf of the school district to fund two programs: $125,000 for a program connecting troubled students with services that could enhance their academic achievement and $132,000 for a full-time police officer on campus who would work with the school district, the community and the police department to promote campus safety. Riverside County stated that the benefit committee took a supportive position on the school district project because it addressed one of the priorities, recreation and youth programs, specified in the law that defines the uses of the discretionary fund. A representative of the county also explained that although the benefit committee recognized that the school district was not eligible to apply for distribution fund money, it approved the application because it was impressed by the collaborative nature of the project and because the tribe recognized the need to support it (page 42). Despite the attributes of the projects just described, we believe that the benefit committees did not have adequate reasons to disregard the law and award funds to ineligible grantees. Because the Legislature has identified specific entities and purposes for this money, counties must ensure that they follow the statutory requirements. If other entities are affected by casino operations, local governments should consider asking the Legislature to amend the law to expand the eligibility requirements, rather than disregarding the requirements by providing grants to entities they know are not eligible to receive funds (page 43). Page 4 California State Auditor Report 2006-036 7 July 2007 County of Riverside’s Response to the California State Auditor’s Report, “California 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.” bSA Recommendation: Grant distribution fund money only to eligible entities (page 10, 47). Riverside County Response: Gang activity is a concern for Casino Morongo and the Banning community. The Banning Police Department implemented a Knock-Out (K.O.) Gangs program targeting known gang members and affiliates. Often, these gang members and affiliates are school age and/or have school-age siblings and friends at-risk of becoming gang members and affiliates, themselves. The Banning Unified School District implemented a “Connect to Achieve” program for troubled students and their families. Through this funding, K.O. Gangs officers refer at-risk students to the “Connect to Achieve” program in the hopes of increasing students’ self-esteem and providing activities and structure to lessen interest in gang involvement/activities. The “Connect to Achieve” program connects at-risk students with community-based counseling and substance abuse services. The Banning Police Department assigned a school resource officer to the Banning School District. The officer works with school officials to supervise the campus and maintain order. Grant funds were provided to the Banning Police Department for the “Connect to Achieve” program and the Banning Police Department’s school resource officer. Through a sub-contract between the Banning Police Department and the Banning Unified School District, Banning Police Department monitors the progress 5 of the “Connect to Achieve” program and reimburses the Banning Unified School District for applicable program expenses. Banning Police Department maintains the balance of the funds to reimburse itself for the staff campus resource officer. The Banning Police Department does not serve as a “fiscal agent” for the school district to enable the district to receive gaming grant funds. An aspect of this program that the BSA staff did not consider is the difference between the school district’s view of the goals of the program and the casino’s view. The school district views the students’ progress from an academic perspective (as presented in the grant application) but the casino views students’ progress from the perspective of reducing gang membership and crime (mitigation measure). bSA Finding: Apparently, many local governments did not consider whether other legal restrictions applied to the use of the interest earned on distribution fund money. Consequently, many local governments we visited told us they did not have procedures in place to ensure that interest earned is allocated to the originally funded project or to another project that will alleviate a casino impact (page 38). Further, we noted two grants in Riverside County, totaling $613,000, that local officials indicated were maintained in non-interest bearing accounts (page 39). Page 5 76 California State Auditor Report 2006-036 July 2007 County of Riverside’s Response to the California State Auditor’s Report, “California 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.” bSA Recommendation: Ensure that local governments spend the interest earned on project funds only on the projects for which the grants were awarded or return the money to the county for allocation to future mitigation projects (page 46). Riverside County Response: As BSA’s legal counsel indicated, the Government Code states that earned interest may be deposited in the 6 general fund unless otherwise specified by law. Because the use of interest is not specified in SB 621, some grant recipients deposited the interest into their general funds, as the Government Code allows. Community Benefit Committee staff will provide information to all current and future grant recipients regarding the collection and use of interest from Indian gaming grants. bSA Finding: Benefit committees do not always make the financial disclosures required by state law. The Fair Political Practices Commission has advised that members of benefit committees are subject to the Political Reform Act (page 7). bSA Recommendation: 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 (page 47). Riverside County Response: Community Benefit Committee staff will advise the Tribal representatives serving on the committee of the Fair Political Practices Commission opinion that members of benefit committees are subject to the Political Reform Act. bSA Finding: Local governments have failed to meet several requirements of state law and could improve other aspects of their administration of distribution fund grants. Our review revealed that one county inconsistently applied the criteria used to allocate distribution funds, and further did not adhere to the amounts determined pursuant to its allocation methodology (page 39). In Riverside County, we (BSA staff) identified two instances where the criteria were not consistently applied. Specifically, the County concluded that the City of Banning and the county itself met three of the four nexus criteria in regard to one casino. In both cases, the county incorrectly concluded that land with each respective local government’s jurisdiction bordered the tribal land where the casino was located. The county agreed with our assessment and agreed to revise its application of the nexus Page 6 California State Auditor Report 2006-036 77 July 2007 County of Riverside’s Response to the California State Auditor’s Report, “California 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.” criteria. Further, Riverside County did not adhere to its inaccurate nexus test calculation. We identified several instances where cities in Riverside County were awarded less money than they should have been allocated under the nexus test. For example, the City of Palm Desert should have received a minimum of $131,000, however, it only received $46,000. According to the county’s Principal Management Analyst, this occurred because the tribes may not have sponsored projects that totaled up to the maximum amount these cities should have been allocated (page 41). bSA Recommendation: Correct the inconsistent application of nexus test criteria and ensure that local governments receive at least the minimum amounts they are allocated under the government code requirements (page 47). Riverside County Response: During a recent telephone conversation between BSA staff and county staff, county staff acknowledged incorrectly crediting the county as partially bordering the parcel of land upon which the Spa Resort Casino is built. It was explained that this error occurred as a result of the checkerboard nature of the Tribal land in Riverside County. Likewise, the City of Banning received credit for partially bordering the parcel of land upon which Casino Morongo is built. Regarding the BSA’s statement that Riverside County did not adhere to its “inaccurate” nexus test calculation, county staff explained that a variance between funding for which a jurisdiction was eligible versus funding awarded may have resulted from either the jurisdiction not applying for, or the Tribe not sponsoring, projects up to the maximum amount of funding for which the jurisdiction was technically eligible. SB 621, Section 12715, paragraph (h) states, “All grants from Individual Tribal Casino Accounts shall be made only upon the affirmative sponsorship of the Tribe paying into the Indian Gaming Special Distribution Fund from whose individual Tribal casino account the grant moneys are available for distribution.” It appears that awarding the maximum amount of funding to a jurisdiction for which they are technically eligible is more important 7 to the auditors of this program than the Tribe confirming that the grant application has a reasonable relationship to a casino impact through sponsorship. Clarification should be provided to counties if the focus has changed in this regard. With respect to the specific example provided for the City of Palm Desert, the City applied for and received $46,000. It is not known whether any other applications were submitted by the City of Palm Desert, because only sponsored applications are provided to the Community Benefit Committee. bSA Finding: One Riverside County grant project might have been somewhat relevant to the effects of the casinos but appeared primarily to address needs that were unrelated (page 5). Two Riverside County grants were used for projects benefiting the entire county and were only partially related to the effects of casinos and one Riverside County grant project was not related to the casinos’ Page 7 7 California State Auditor Report 2006-036 July 2007 County of Riverside’s Response to the California State Auditor’s Report, “California 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.” impacts. Although counties might find it reasonable to use distribution fund grants to help finance a project that benefits the entire county, as a best practice, a local government should only use distribution fund money to fund the portion of the projected related to the impact of a casino and use other funding sources for the portion of the project that benefits the entire county (page 26). One Riverside County grant was not used to mitigate casinos’ impacts; two Riverside County grants were not solely intended to lessen casinos’ impacts but were primarily used for non-casino related needs and two grants were used specifically to alleviate casinos’ impacts. Consequently, money from the distribution fund did not always go toward projects that mitigated the impacts that Indian gaming can have on communities, such as increased crime, which threatens the safety of nearby residents; traffic congestion, which increases the likelihood of accidents; and the poor air quality resulting from increased traffic (page 28). Local governments are not always using grant funds to mitigate the impacts of casinos on communities most directly affected. We reviewed 30 distribution fund grants awarded to six counties and found that none of the six counties consistently used the grant funds solely for mitigation projects. Two Riverside County grants were used for purchase of goods and services that had the potential for use in mitigating casinos’ impacts, should the need arise. However, the main beneficiaries were the counties as a whole because projects had little connection to casinos (page 30). bSA Recommendation: Require local governments to submit supporting documentation that clearly demonstrates how proposed projects will mitigate the effects of casinos (page 10, 46). Riverside County Response: The grant application form requests mitigation information. Specifically, the requests state, “On a separate sheet(s) of paper, describe the impacts associated with the Tribal casino and/or gaming (please include historical data, if available)” and “On a separate sheet(s) of paper, provide a complete description of the project, including the effect it will have on the specific impacts described above.” SB 621, Section 12715, paragraph (h) states, “All grants from Individual Tribal Casino Accounts shall be made only upon the affirmative sponsorship of the Tribe paying into the Indian Gaming Special Distribution Fund from whose individual Tribal casino account the grant moneys are available for distribution. Tribal sponsorship shall confirm that the grant application has a reasonable relationship to a casino impact and satisfies at least one of the priorities listed in subdivision (g).” SB 621, Section 12715, paragraph (g) states, “The following uses shall be the priorities for the receipt of grant money from Individual Tribal Casino Accounts: law enforcement, fire services, emergency medical services, environmental impacts, water supplies, waste disposal, behavioral, health, planning and adjacent land uses, public health, roads, recreation and youth programs and child care programs. The County of Riverside disagrees with the BSA’s statement, “… the main beneficiaries were the counties as 8 a whole because projects had little connection to casinos.” Tribal sponsorship and the priorities set forth in SB 621 ensure that funds are used in accordance with the law and consistent with Tribal views of gaming/ Page 8 California State Auditor Report 2006-036 7 July 2007 County of Riverside’s Response to the California State Auditor’s Report, “California 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.” casino impacts. Tribal gaming/casino impacts are probably not completely obvious and BSA staff may have experienced difficulties correctly determining whether Special Distribution Funds were used to mitigate the associated impacts, especially since input was not solicited from Tribal representatives. Fifty-two out of 70 projects funded were for public health and safety projects (law enforcement, fire services, 2 emergency medical services and public health). Page 9 0 California State Auditor Report 2006-036 July 2007 Blank page inserted for reprographic purposes only. California State Auditor Report 2006-036  July 2007 Comments CALIFoRnIA StAte AuDItoR’S CommentS on the ReSPonSe FRom RIveRSIDe County To provide clarity and perspective, we are commenting on Riverside County’s response to our audit report. The numbers below correspond to the numbers we have placed in the margins of Riverside County’s response. While preparing our draft report for publication, page numbers 1 changed, therefore, page numbers Riverside County refers to throughout its response may be different in the final report. The report has been corrected. The original number is from 2 Riverside’s annual report entitled “Indian Gaming Special Distribution Fund Annual Report Fiscal Year 2005/06” which describes the information contained as “Total Amount of Grant Funds Allocated to Riverside County in FY 2005/06.” However, this report erroneously contained information on money granted in fiscal year 2004–05. Riverside is mistaken regarding the factual circumstances 3 surrounding Senate Bill 288, Chapter 13, Statutes of 2006 (SB 288). As described in the fiscal year 2005–06 governor’s budget, the governor reduced the funding because counties were not submitting annual reports. Further, SB 288 did not add the Department of Finance as a recipient of annual reports; rather, as described on page 15 of the report, it added the Joint Legislative Budget Committee, the Senate Committee on Governmental Organization, the Assembly Committee on Governmental Organization, and the California Gambling Control Commission. Riverside is confused regarding the definition of a “fiscal year.” 4 If a report is due October 1, 2006, which is within fiscal year 2006–07, the previous fiscal year would be 2005–06. We continue to recommend that Riverside submit information required in the California Government Code (Government Code) rather than, as described on page 3 of its response, taking it upon itself to decide what information the Legislature would find useful. We are pleased that Riverside’s response elaborates on our 5 description of how the school district is the ultimate beneficiary of these funds. On page 5 of its response, Riverside provides a model definition of a fiscal agent in describing how the police department reimburses the school district for applicable program expenses, and reimburses itself for services provided to the school district. Further, in our interviews with police department staff, they stated 2 California State Auditor Report 2006-036 July 2007 that they were asked to apply for this funding on behalf of the school district, and agreed that their role could best be described as a “pass-through entity” for the school district. Therefore, we stand by our conclusion that the grant funds were awarded to an ineligible entity. Furthermore, while as Riverside describes, the casino may view the project as mitigating its impact on crime and gang-membership, the police department told us that they had no evidence showing a reasonable relationship to a casino impact. 6 We stand by our conclusion that the interest on Indian Gaming Special Distribution Fund (distribution fund) money should be used for the originally intended purpose. The compacts clearly state that moneys in the distribution fund are available for appropriation by the Legislature for specified purposes, including the support of state and local government agencies impacted by tribal gaming and other purposes specified by the Legislature. The compacts also declare the intent of the parties that compact tribes be consulted in the process of identifying purposes for grants made to local governments. Our legal counsel has advised that the courts and the California attorney general have concluded that Section 53647 of the Government Code does not abrogate the general common law rule that interest must be used for the same purposes as the principal. Instead, whether the interest should be credited to the general fund for other purposes depends upon the source of the funds and restrictions that have been placed upon the funds. Our legal counsel has also advised that given the source of the funds, that is private funds that are directed to the distribution fund through a compact with a sovereign nation, the general common law rule would apply to the use of interest rather than Section 53647. 7 Riverside misunderstands the importance of the nexus test. As described in the legislative intent, the funding is intended to be divided equitably among local governments impacted by tribal gaming. The criteria of the nexus test, which evaluate a local government’s geographical proximity to a casino, help ensure that local governments receive a fair and proportionate share of grant money. We agree that if a local government applies for less money to mitigate casino impacts than they have been allocated, the remainder should be used for other local governments. However, by deferring to the tribes its responsibility to review applications and select those to award grant funds, as the county acknowledges on page 7 of its response, it does not know if other applications related to casino impacts were submitted by local governments in this jurisdiction. As such, we continue to recommend that Riverside follow the Government Code requirements in allocating money to local governments. California State Auditor Report 2006-036 3 July 2007 Riverside is mistaken. As described in several examples on 8 pages 22 through 26 of this report, tribal sponsorship and the priorities set forth in Government Code, Section 12715, do not ensure that the projects funded mitigate an impact caused by a casino. In reviewing these grants, we not only reviewed the descriptions in applications provided by Riverside, but also obtained the documentation to support those descriptions directly from the entities most familiar with the impacts of the casinos, the local governments receiving the funds and working to mitigate the impact of the casino on a day-to-day basis. Riverside’s stated dependence on the “Tribal views of gaming/casino impacts” fails to alleviate our concern or address our finding.  California State Auditor Report 2006-036 July 2007 Blank page inserted for reprographic purposes only. California State Auditor Report 2006-036  July 2007 (Agency response provided as text only.) County of San Bernardino Board of Supervisors 385 North Arrowhead Avenue, Fifth Floor San Bernardino, CA 92415-0110 June 28, 2007 Elaine M. Howle, State Auditor* Bureau of State Audits 555 Capitol Mall, Suite 300 Sacramento, CA 95814 Attention: Tanya Elkins Submitted is a copy of the San Bernardino County response to your audit titled “California 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.” As requested, the County has responded to the recommendations of the audit and has included the entire response, including cover letter and attachments, on the enclosed diskette using a Microsoft Word file. If you wish to discuss the response, please contact Briana Lee, Administrative Analyst, County of San Bernardino, at 909-387-5301 Sincerely, (Signed by: Dennis Hansberger) Dennis Hansberger, Chair Supervisor, Third District * California State Auditor’s comment appears on page 89. 6 California State Auditor Report 2006-036 July 2007 County of San bernardino Response to June 2, 2007 California State Auditor Report on Indian Gaming Special Distribution Fund. The County of San Bernardino welcomes the California State Auditor’s review of the important subject of the California Indian Gaming Special Distribution Fund. The California State Auditor recommends: . Require local governments to submit supporting documentation that clearly demonstrates how proposed projects will mitigate the effects of casinos. 2. ensure that local governments spend the interest earned on project funds only on the projects for which the grants were awarded or return the money to the County for allocation to future mitigation projects. 3. 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. Below is the county response to the four key items highlighted in the audit report: County Response to Item #. The county will continue to require local governments to submit adequate documentation that clearly demonstrates how projects will mitigate the effects of casinos. In the case of San Bernardino County Fire, the county believes the rescue/ambulance boat purchased with the grant award for the 06/07 fiscal year, once in service, will be used for a majority of casino related medical and rescue services and the award received for salaries was used to pay for staff that responded 1 to reservation or casino related calls. County Fire has an agreement with the Chemehuevi Indians to cover more than 30 miles of reservation land for fire and emergency medical response. This includes waterfront, the Lake and Havasu Landing Resort and Casino. Up to 80% of service calls are to the reservation, Casino or the Lake area (for rescues) in California. Unless called out under mutual aid County Fire does not respond into Arizona, which is, where the Lake Havasu Chamber of Commerce and Lake Havasu City is located. As provided to the auditors on March 19, 2007 the Havasu Landing Casino and Resort is located directly on Lake Havasu, in California, with a full service marina that includes three boat ramps, launch and retrieval service, fueling station, boat slips and a general store. This allows access by visitors from both Arizona and California, via the waterways, to the Casino for dining, shopping or gaming at the Casino. The Casino also has an air strip with free shuttle service to the casino and back to the airport, no landing fees and tie downs. The Casino has a complete RV park and campground that is currently under expansion with daily, weekly and monthly rates and mobile home parks with year round and long term leases available. All of these are located on the reservation which is serviced by County Fire. The Casino also runs free boat shuttle service to and from the Casino to the London Bridge (Arizona) every thirty minutes. This shuttle service is available to all visitors coming to the Lake Havasu area. County Fire is on call twenty four hours a day seven days a week to service any and all emergency incidents that occur at California State Auditor Report 2006-036 7 July 2007 the Casino or the surrounding reservation area, including on the Lake. The emergency responses are not limited to holiday weekends when the population swells and water and road traffic increase ten fold. Based on this information, the county believes year round responses to this area can be greatly attributed to the reservation and the Casino with all of its attractions. Attachment A is included as reference.* County Response to Item #2. The county will implement procedures to ensure that the interest earned on distribution funds for long-term capital projects will remain with the project. Although the law is silent on the issue of allocation of interest earned, beginning July 1, 2007 (Fiscal Year 2007/08), material amounts of grant money for long-term projects remaining unspent will be deposited in an interest bearing account and all interest earned will be allocated back to the original project or used for future mitigation projects. County Response to Item #3. All members of the Indian Gaming Local Community Benefit Committee will continue to be informed of the requirement to file an annual Statement of Economic Interest, 30 days or more before the filing deadline of April 1 of each year. All members of the Committee that do not file a statement a week prior to the deadline will be reminded of the requirement of filing the statement. If members of the committee thereafter do not file a statement, those members of the committee will be notified within 10 days after the deadline, that the deadline has passed and that the statement needs to be filed. If there is no compliance thereafter, a second notice will be sent to the member again notifying them of the requirement. If the member does not comply after a two week period has passed from the date of the second notice, the appropriate state agency will be notified. County Response to Item #. The county has in the past and will continue to exercise due diligence in the detailing and reporting of the specific projects funded by the grants. In accordance to the annual reporting requirements as set forth by the Legislature, the county will continue to adhere to the October 1st deadline for all required entities in order to facilitate transparency in the allocation and purpose of each grant.* * Attachment not included. For a copy of the attchment contact San Diego County.  California State Auditor Report 2006-036 July 2007 Blank page inserted for reprographic purposes only. California State Auditor Report 2006-036  July 2007 Comments CALIFoRnIA StAte AuDItoR’S Comment on the ReSPonSe FRom SAn beRnARDIno County To provide clarity and perspective, we are commenting on San Bernardino County’s response to our audit report. The number below corresponds to the number we have placed in the margin of San Bernardino County’s response. San Bernardino County appears to be confused about the 1 intended beneficiaries of Indian Gaming Special Distribution Fund (distribution fund) grants. On page 1 of its response, the county refers to the agreement with the tribe to cover more than 30 miles of reservation land for fire and emergency medical response, as similarly indicated in the application for funds, which stated that the rescue/ambulance boat is used for firefighting along the shore and in the marina and for the rescue of patients from watercraft accidents. However, as stated on page 22 of our report, the intent of distribution fund grants is to mitigate the impact of casinos. Although the county states that up to 80 percent of the calls are to the reservation, casino, or lake area, the intent of the law is to mitigate the impact of the casino, and responses to other parts of the reservation would be necessary with or without the presence of the casino. We stand by our conclusion that the distribution fund grant money was not used solely for the mitigation of casino impacts. Further, the county’s response notes that the award for salaries pays for staff that respond to reservation or casino calls. However, as described in the application for funds, the additional staffing is for the general Havasu area, and as described on page 25 of the report, given the popularity of the lake Havasu area, we do not believe that increased staffing for holiday weekends is entirely related to the casino. We acknowledge on page 23 of our report that the funds may be partially used to mitigate the impacts of the casino, but we also note as a best practice the procedure used by one San Diego grantee to use other funds for the portion of a project unrelated to the casino. 0 California State Auditor Report 2006-036 July 2007 Blank page inserted for reprographic purposes only. California State Auditor Report 2006-036  July 2007 (Agency response provided as text only.) County of San Diego Chief Administrative Office 1600 Pacific Highway, Ste. 209 San Diego, CA 92101-2472 June 27, 2007 Elaine M. Howle* State Auditor 555 Capitol Mall, Ste. 300 Sacramento, CA 95814 Dear Ms. Howle: RESPONSE TO CALIFORNIA INDIAN GAMING SPECIAL DISTRIBUTION FUND: LOCAL GOVERNMENTS DO NOT ALWAYS USE IT TO MITIGATE THE IMPACTS OF CASINOS Thank you for giving us the opportunity to review your draft audit report. We have the following responses and corrective actions regarding each finding: A. LoCAL GoveRnmentS DID not ALwAyS uSe the DIStRIbutIon FunD to PAy FoR mItIGAtIon PRoJeCtS 1. Statements in Report On Page 29, the Draft Report (Report) states that two grants in San Diego were used for projects benefiting the entire county and were only partially related to the effects of the casinos. The Report then goes on to state on Page 30 that these two grants “were not solely intended to lessen casinos’ impacts but were primarily [emphasis added] used for non-casino-related needs” and “…the main [emphasis added] beneficiaries were the counties as a whole because the projects had little connection to casinos.” 2. Response The County disagrees with the above statements and provides the following response for the Sheriff Crime Scene Investigation Instrumentation Grant and the Inland Agencies and East County 1 Fire Protection Districts, FY 06/07 Dispatch Fees Grant: a) Sheriff Crime Scene Investigation Instrumentation Summary. The instrumentation purchased through the IGLCB grant is for the investigation of arson fire. The justification as presented and approved by the IGLCB committee and the sponsoring Tribes is straightforward: one of the most serious risks to the 116,000-acres of tribal lands and 10 casinos 1 in the County is fire. (See attached map of Reservations in San Diego County) This region is one of the few in the nation that has a “fire season,” much like some regions of the world have a hurricane season. One hundred percent of the fires present risk to the tribal lands and their properties, to * California State Auditor’s comments begin on page 97. 2 California State Auditor Report 2006-036 July 2007 San Diego County Response to Audit June 27, 2007 their residents and to their patrons and visitors. Further, the risk of fire is substantially increased in the East County—to the region and to the Tribal lands—by virtue of the number of visitors and patrons to gaming establishments. There is no practical way to parse the percentage of increased risk: the increased population creates increased risk of fire and every fire represents a risk to the security of the Tribal properties, their people, and their patrons. That’s why the IGLCB has historically supported the purchase of fire engines and even a fire helicopter to service the region. The purchase of the arson detection instrument is no different than those earlier approved grant purchases. Further, the funding did not include the work of the criminalists at the Crime Lab who have spent hours validating the instrument, a requirement for forensic investigations pursuant to accreditation standards; nor did the funding request staffing to deploy the instrument during the course of an investigation. Thus, the grant funded only a percentage of the cost of the effort to deploy the instrument purchased with IGLCB funds. Public safety priority. Since the inception of the IGLCB grants, fire has been a public safety priority of the Tribal governments and the public agencies that service them. The original grant applications came in the wake of the worse fire disaster—and one of the worst natural disasters of any sort—in the history of California. The fires threatened tribal lands in the East County—the location of Sycuan, Barona, and Viejas—and exposed their continuing vulnerability. Not surprisingly then the original grants partnered the San Diego Sheriff’s Department, the only countywide frontline public safety agency, with local fire districts—the San Miguel/Alpine, Lakeside, Rural and East County Fire Protection Districts. The aim was to propose ways of boosting protection to the Tribes and the surrounding areas. This translated into the purchase of fire engines and a fire helicopter, as well as the funding of fire fighting personnel and training. Since then fire fighting and emergency rescue, fire detection and prevention, have remained staples of the grant awards, creating continuity in the funding and identifying gaps in the availability and delivery of service. Identifying the necessary equipment to better investigate arson was part of an overall priority scheme set by the Tribal governments and the IGLCB committee. nexus to gaming. In what way is this connected to gaming? The gaming facilities of Barona, Sycuan, and Viejas are among the most successful in San Diego County. While there is no uniform method of counting “visitors” to casinos and tribal lands, the Tribal governments are able to provide solid estimates: Viejas puts the number of visitors to Tribal land last year at 5.5 million; Sycuan puts the number at 3.7 million and Barona states that the number of visitors to its casino for calendar year 2006 was 3,275,645. This number does not include visitors to other entertainment venues or those traveling through Tribal lands on their way to another destination. Thus these numbers, substantial by any measure, are a direct result of Indian gaming. The safety of visitors is an articulated priority of the Tribal leadership. the risk. These tribal lands and their casinos are particularly vulnerable to fire. While the City of San Diego is a coastal community with a temperate climate, the East County locale of the tribal lands is dramatically different, operating in its own microclimate with its own unique ecosystem: desert-like temperatures with high vegetation that has adapted to the dry and hot conditions. Recently, a group of independent scientists, assembled for the purpose of conservation planning in East County, marked the unique ecology of this region: its geology, elevation, climate— precipitation and temperature—wildlife, and vegetation. [See Report of the Independent Science Advisors on the San Diego East County MSCP (NCCP/HCP) March 31, 2006.] 2 California State Auditor Report 2006-036 3 July 2007 San Diego County Response to Audit June 27, 2007 The result is a perfect storm of fire conditions: hot temperatures, high vegetation, and fierce winds. Indeed, just as some regions of the nation have a “rainy season” or a “cold season,” in San Diego County meteorologists and climatologists refer to a “fire season,” a term adopted from the California Department of Forestry to designate a state of alert. Significantly, San Diego is one of only three regions (the other two being its neighbors, Riverside and San Bernardino) that maintains a “fire season” state-of-alert at all times. the need for instrumentation. In directing funds toward the purchase of state-of-the-art arson investigation equipment, the Tribal governments and the IGLCBC identified a gap in the delivery of fire protection and investigation. That led to approval for the purchase of a GCMS. Any and every fire in this region threatens Tribal lands, Tribal residents, and gaming patrons. And any and every fire is the subject of a fire investigation because arsonists are known to work across large geographic regions. The guy who sets a fire today in Ramona, if not caught, may get his thrills next week by setting a fire near Barona. During October 2003, San Diego County was stricken with the worse fire in California history burning 273,246 acres and causing the death of 15 people. More than half of the county’s 18 Indian Reservations were threatened or directly affected by the wildfires. The Barona Rincon and San Pasqual Reservations, which all have large casinos, were hit especially hard by the fires, which resulted in the deaths of three people. Thirty-five homes were destroyed along with a preschool and several outbuildings. On the San Pasqual reservation 67 homes were destroyed. At nearby Rincon, 75 percent of the reservation’s 4,000 acres were burned. Investigative response. The investigative response to fire addresses the needs of the Tribal lands and the surrounding region seamlessly. The County of San Diego maintains a Bomb and Arson Unit at the San Diego Sheriff’s Department. It works in conjunction with fire districts throughout the County and in cooperation with the City of San Diego’s Metro Arson Strike Team, a multi-agency team that is available to conduct investigations regionally. The San Diego County Crime Laboratory 1 provides service for all arson investigations in the unincorporated area (Sheriff’s jurisdiction), including all tribal lands, and the incorporated areas of the County other than the City of San Diego. The Crime Laboratory’s service is two-fold: Crime Scene Investigators respond to suspicious fires at the request of an investigator and complete a crime scene investigation. The Lab’s crime scene investigation team includes Forensic Evidence Technicians, Latent Print Examiners, and Criminalists. Any evidence captured at the crime scene is returned to the Laboratory for scientific analysis. Forensic analysis of evidence routinely takes place in Forensic Biology (for DNA) and Fingerprint Analysis, as well as in Trace Evidence, where the bulk of arson investigation work is done in the crime laboratory. A Trace Evidence criminalist will compare evidence from crime scenes to samples collected from suspect and victim sources to try to determine whether there is a link between suspect, victim, and crime scene. Significantly, the types of analyses also include analysis of fire debris for the presence and identification of flammable liquids. It is in this analysis that the GCMS plays its part in every case investigated. In the gas chromatograph, a complex mixture of volatile organic chemicals (VOCs), such as ignitable liquids, is separated into individual components. In the mass spectrometer, each individual component is then identified. The identities of the individual components and the relative amounts of each present allow the criminalist to identify what type of ignitable liquid, if any, is present. 3  California State Auditor Report 2006-036 July 2007 San Diego County Response to Audit June 27, 2007 This permits a forensic scientist to determine if gasoline or some other accelerant was used to help ignite a fire. That provides guidance for investigators and assists in determining whether to treat the fire investigation as criminal in nature. All of this is reported to investigators. Conclusion. In short, authorization of this effort by the Crime Lab follows an historic public safety priority of the Tribal governments and IGLCB funding: the prevention and detection of fire. This policy priority has been in evidence since the first grants, recognizing the risk to the Tribal lands and the region because of the locale of the 10 gaming facilities and because of the increased number of visitors to the region because of Indian gaming. b) Inland Agencies and East County Fire Protection Districts, FY 06/07 Dispatch Fees The grant of $217,700.92 was 58.67% of the total estimated cost of $371,000.00 for FY06-07 Dispatch Fees, and associated costs, for two East County Fire Agencies and 14 Inland Fire Agencies. These agencies are First Responders in a 1,078-square mile area and they also respond to fires and emergencies through Mutual Aid Agreements in the whole county. 2 Although there are no exact statistics available, we believe there is an extremely reasonable relationship between the grant and casinos’ impacts because of the millions of visitors and thousands of employees that travel through these agencies’ response areas. Our belief, which was confirmed by the three Tribes on the Committee, is based on the following facts: 1) there were approximately 12 million visitors to the Barona, Sycuan and Viejas Casinos in 2006 and each of these casinos employ approximately 2000 persons; 2) all of these visitors and employees travel by car or buses; 3) there are seven (7) additional casinos in the County, three of them, Campo, La Posta and Santa Ysabel Casinos, in the inland and east county area; 4) in addition to the need to respond to medical emergencies, and car accidents in general, the San Diego Region is a high-fire risk area; and 5) there are only 41,707 residents in the Contract Service Areas of these agencies. 3. Corrective Action The County will ensure that applications for grants clearly document the relationship between the funding requested and the impacts of Indian casinos. b. InteReSt thAt LoCAL GoveRnmentS eARneD on unSPent DIStRIbutIon FunD money hAS not ALwAyS Gone towARD the PRoJeCt FoR whICh the GRAnt wAS AwARDeD 1. Statements in Report On Page 37, the Report states that many local governments used the interest on unspent distribution fund money for general county purposes rather than on the original mitigation projects of future projects with a similar purpose and assert the Government Code grants them authority to do so. The Report also states that “Our legal counsel advised us that although the law does not specifically require a local government to allocate interest earned on unspent grant funds to original or future mitigation projects, the Government Code cited by local governments states that earned interest may be deposited in their general funds unless other wise specified by law. The purposes for which distribution fund money may be spent are set fort in the compacts and state law. Accordingly, our counsel has advised that the interest on distribution fund money is subject to 4 California State Auditor Report 2006-036  July 2007 San Diego County Response to Audit June 27, 2007 the common law rule that unless it is separated by statute from the principal, the interest should be used for the originally intended purpose. Thus, we believe the interest should be used to support the purposes for which the grants were originally awarded.” The County disagrees with the above statements and provides the response below. 2. Response Government Code Section 53647 provides that interest on all money belonging to the County must be paid into the general fund unless otherwise directed by law or the governing body. Because neither State law, gaming compacts nor the Board of Supervisors directed that interest 3 earned on unspent grant funds be used as grant funds, Section 53647 requires the interest to be separated from the principal. 3. Corrective Action The County will consider your recommendation. C. Some beneFIt CommIttee membeRS FAIL to meet DISCLoSuRe ReQuIRementS 1. Statements in Report The Report states on Page 44 that “,,, we received only 1 of the 13 statements of economic interests for tribal representatives…” 2. Response The County sent statements to your office for two of the three tribal representatives that served on 4 the committee in FY05-06. One Tribal Representative did not file a statement of economic interest in FY05-06. County has learned that the reason the one Tribal Representative did not file is that neither the Committee nor the Board of Supervisors had adopted a Conflict of Interest Code in FY05-06. 3. Corrective Action The Committee has since adopted a Conflict of Interest Code and the Board of Supervisors adopted it on June 12, 2007. D. mAny CountIeS DID not PRoPeRLy RePoRt theIR uSe oF DIStRIbutIon FunD money 1. Statements in Report On Page 45, the Report states that “in 2006 only three counties reported to all required entities.” 2. Response San Diego County has fully complied with reporting requirements in State law. 5 6 California State Auditor Report 2006-036 July 2007 San Diego County Response to Audit June 27, 2007 3. Corrective Action No corrective action is needed. Thank you again for the opportunity to review the Report and considering our response. If you have any questions, please call me, at (619) 685-2542. Sincerely, (Signed by: Chantal Saipe) CHANTAL SAIPE Tribal Liaison and County staff to the Benefit Committee Attachment* * Attachment not included. For a copy of the attchment contact San Diego County. 6 California State Auditor Report 2006-036 7 July 2007 Comments CALIFoRnIA StAte AuDItoR’S CommentS on the ReSPonSe FRom SAn DIeGo County To provide clarity and perspective, we are commenting on San Diego County’s response to our audit report. The numbers below correspond to the numbers we have placed in the margins of San Diego County’s response. San Diego County appears to be confused about the intended 1 beneficiaries of Indian Gaming Special Distribtuion Fund (distribution fund) grants. Specifically, on pages 1 through 4 of its response, the county makes several references to the equipment purchased by the Sheriff’s Department being used to alleviate potential fire threats to tribal lands, implying that their focus is the protection of tribal lands. However, as stated on page 22 of our report, the intent of distribution fund grants is to mitigate the impact of casinos. Further, San Diego County acknowledges that the equipment will be used to investigate incidents in areas unrelated to the casino or tribal lands. Specifically, on page 3 of its response, San Diego County officials state “the San Diego County Crime Laboratory (a branch of the Sheriff’s Department) provides service for all arson investigations in the unincorporated area, including tribal lands, and the incorporated areas of the County other than the City of San Diego.” As stated on page 2 of the report, the Sheriff’s Department suggested that in the future some of these investigations may occur in the area around the casino. However, because the 116,000 acres of tribal lands make up only 4 percent of the county’s area, we stand by our conclusion that the equipment purchased with distribution fund grant money is primarily for the benefit of the entire county rather than mitigating the impact of the casino. Although San Diego County disagrees with our determination 2 that the equipment purchased with distribution fund grant money by the Inland Agencies and East County Fire Protection Districts was primarily to benefit the entire county, on page 4 of its response, the county acknowledges that these agencies “are First Responders in a 1,078-square mile area and they respond to fires and emergencies through Mutual Aid agreements in the whole county.” However, San Diego appears to be unfamiliar with how mutual aid calls are reimbursed. Because the jurisdiction to which a department provides mutual aid is responsible for reimbursing the associated costs, any incidents at casinos or the reservation would be reimbursed by the reservation, rather than through the grant  California State Auditor Report 2006-036 July 2007 funds. As such, we stand by our conclusion that the grant funding is primarily for the benefit of the county rather than mitigating the impact of the casino. 3 We stand by our conclusion that the interest on distribution fund money should be used for the originally intended purpose. The compacts clearly state that moneys in the distribution fund are available for appropriation by the Legislature for specified purposes, including the support of state and local government agencies impacted by tribal gaming and other purposes specified by the Legislature. The compacts also declare the intent of the parties that compact tribes be consulted in the process of identifying purposes for grants made to local governments. Our legal counsel has advised that the courts and the California attorney general have concluded that Section 53647 of the California Government Code does not abrogate the general common law rule that interest must be used for the same purposes as the principal. Instead, whether the interest should be credited to the General Fund for other purposes depends upon the source of the funds and restrictions that have been placed upon the funds. Our legal counsel has also advised that given the source of the funds, that is private funds that are directed to the distribution fund through a compact with a sovereign nation, the general common law rule would apply to the use of interest rather than Section 53647. 4 We agree with San Diego County’s statement that two of the three tribal members who served on the Indian Gaming Local Community Benefit Committee filed a statement of economic interest. As shown on page 35, we have revised the text to reflect this information. California State Auditor Report 2006-036  July 2007 Agency response provided as text only. Sonoma County Local Community Benefit Committee 575 Administration Drive, Room 104A Santa Rosa, California 95403 June 25, 2007 Elaine M. Howle, State Auditor* Bureau of State Audits 555 Capitol Mall, Suite 300 Sacramento, CA 95814 Attn: Tanya Elkins Re: Agency Response to Request for Comments on Draft Report Titled, “California Indian Gaming Special Distribution Fund: Local Governments Do Not Always Use It to Mitigate the Impact of Casinos, and Its Viability Will Be Adversely Affected by Compact Amendments” Ms. Howle: On Friday June 22, I received a copy of the draft report, “California 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.” The report, addressed to County Supervisor Valerie Brown, was delivered to me in my capacity as the 2007 Chair of the Sonoma County Indian Gaming Local Community Benefit Committee (“Committee”). Thank you for the opportunity to comment on the draft report. I would like to offer the following comments, which address both the process and substance of the draft report. I received the draft report on Friday, June 22, with a requirement that written comments be submitted to the State Auditor by 5:00 p.m. on the following Wednesday, June 27. To allow for a thorough review and response, Committee staff requested the State Auditor allow an extension of one week for comments. Pursuant to our request, Steve Cummins, Audit Principal, authorized an extension to 5:00 p.m. on Friday, June 29, 2007. Although we appreciate the additional two days granted, the short timeframe for comment does not provide sufficient time for a thorough review and response. The draft report states that reproduction and distribution is prohibited, citing a confidentiality requirement (Government Code Sections 8545(b) and 8545.1). Although the referenced code section does not appear applicable to members of the Committee, correspondence from the State Auditor specifically indicates the draft report is to remain confidential. Due to the confidentiality requirements, it is not clear who is 1 authorized to review and comment on the report. Ideally, the Committee would meet, review the report, and provide direction to staff to prepare a response. The draft report as distributed does not allow an opportunity for the Committee to meet, discuss the draft report, and formulate a written response. As such, I am responding on behalf of the Committee without the benefit of input from the entire Committee. * California State Auditor’s comments begin on page 103. 00 California State Auditor Report 2006-036 July 2007 Elaine M. Howle, State Auditor Bureau of Atate Audits June 25, 2007 Page 2 The draft report is incomplete and substantially redacted such that the details and specifics of concerns 2 identified by the State Auditor are not visible for review. As an example, the entire second chapter, which we assume will address how the special distribution fund’s viability will be adversely affected by compact amendments, is not included in the draft report. As a Committee, we have a strong interest in insuring continued funding for local governments affected by tribal gaming. We would have appreciated an opportunity to review and comment on the findings and recommendations in this area. Due to the redacting, it is unclear if additional details which provide more specific information on grants authorized by the Committee will be included in the final report. In short, it is difficult for us to provide a comprehensive review and comment on the draft report as provided to us by the State Auditor. The substance of the report is also of concern. The title of the draft report, “ California Indian Gaming Special Distribution Fund: Local Governments Do Not Always Use It to Mitigate the Impacts of Casinos, and Its Viability Will Be Adversely Impacted by Compact Amendments,” seems to imply a misuse of special distribution funds by local governments. The implication is not supported by the content of the draft report. 3 The draft summary (page 4, paragraph 2) states as follows, “The grants we reviewed were used for the statutorily mandated purposes.” The draft summary (page 5, paragraph 2) goes on to state that, “… 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. Therefore, even though the money was not used to mitigate the impacts of casinos, the grants appear to adhere to the requirements of the law.” Based on these statements, it seems the report would be more appropriately titled to indicate that all of the grants audited adhere to state statute. The draft report implies, and is critical of local governments for not meeting certain standards which are above and beyond the standards established by statute. As an example, the draft report states (page 4, paragraph 2) that the audit, “… found five instances… (1 in Sonoma) when money was not used to offset the adverse effects of the casino… 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.” As stated earlier in the draft report, this grant, like all of the others reviewed by the audit, was “used for the statutorily mandated purposes.” Further, “there are no specific requirements that local governments must ensure that the funds are used for projects that directly address an impact from a casino.” It is not clear why the draft report calls this grant out as an example and implies that the Hospital is required to show evidence 4 that incidents of vandalism were directly related to the casino. Throughout the draft report, assertions are made that funded grants are not used to offset casino impacts when in fact there is no legal requirement for them to do so. The draft report includes a factual error in relationship to the Healdsburg District Hospital grant. The report states (page 32, paragraph 2), “Furthermore, the hospital only used $18,900 of the grant award on 5 surveillance cameras. The remaining funds were used to purchase a defibrillator and to purchase and install a pharmacy climate control system. These purchases occurred even though the Sonoma County Benefit California State Auditor Report 2006-036 0 July 2007 Elaine M. Howle, State Auditor Bureau of Atate Audits June 25, 2007 Page 3 Committee approved only the hospital’s request to purchase and install surveillance cameras… and did not authorize and was not informed by the hospital of the decision to spend grant funds on other items.” This information is incorrect and we request that it be corrected in the final report. The Healdsburg District Hospital’s original grant application requested funding for the hospital surveillance system. On May 8, 2006, the District Hospital submitted a written request to Harvey Hopkins, Chairman of the Board of Directors of the Dry Creek Rancheria, requesting additional funding for a defibrillator and to purchase and install a pharmacy climate control system. The letter of sponsorship from the Tribe to the Committee includes tribal sponsorship of the hospital surveillance system, the emergency room defibrillator, and the pharmacy climate control system improvements. A copy of the sponsorship letter, which includes all of the intended uses, was previously provided to the state auditors. The draft report goes on to state that of the 30 grants reviewed, 10 (4 in Sonoma) were used for project benefiting the entire county and were only partially related to the effects of casinos, and five (1 in Sonoma) were not related to casinos’ impacts (page 26, paragraph 1). Although details of which grants the draft report is referring to are redacted, the report goes on to state that five grants funded by Sonoma’s Committee were not used solely to reduce adverse consequences of casinos. Again, the draft report implies that statue 6 requires a direct link between a funded grant and a casino impact. Clearly current statute does not require such a link. The draft report finds that members of the benefit committees do not always make the financial disclosures required by law. Of the counties audited, most of the Tribal representatives on the committee did not file statements of economic interest. Sonoma County did request that all members of the Committee file statements of economic interest. In Fiscal Year 2005- 2006, the Tribal representatives on the Committee did not complete and return their statements of economic interest to the County. The County has no record of why the Tribe did not comply with the request to complete and return the forms. Since 2005-2006 Tribal members have completed and returned their statements of economic interest as requested by the County. Again, I want to assert that our Committee is meeting all of the statutory requirements of Government Code Section 12710 et. seq. An understanding of the statutory use of these funds is critical to the audit’s findings related to grants made by our Committee. In Sonoma County, the Dry Creek Rancheria of Pomo Indians operates the River Rock Casino, which is the only casino currently operating in Sonoma County. River Rock Casino does not have gaming devises subject to an obligation to make payments to the Indian Gaming Special Distribution Fund. As such, our Committee is subject to Government Code Section 12715(f) (1) which states, “For each county that does not have gaming devices subject to an obligation to make payments to the Indian Gaming Special Distribute Fund, funds may be released from the county’s County Tribal Casino Account to make grants selected by the county’s Indian Gaming Local Community Benefit Committee pursuant to the method established in this section to local jurisdictions impacted by tribal casinos. These grants shall be made available to local jurisdictions in the county irrespective of any nexus to 7 any particular tribal casino. These grants shall follow the priorities specified in subdivision (g).” The priorities specified in subdivision (g) are: law enforcement, fire services, emergency medical services, environmental impacts, water supplies, waste disposal, behavioral, health, planning and adjacent land uses, public health, roads, recreation and youth programs, and child care programs. 02 California State Auditor Report 2006-036 July 2007 Following is a summary of the grants, affirmatively sponsored by the Tribe, and approved by our Committee for funding in FY 2005-2006: 8 All of these grants meet the spirit, the intent, and the letter of the law. Pursuant to our Committee process, which is governed by Bylaws adopted by the Committee, each of the jurisdictions who received funding in FY 2005-2006 submitted a completed grant application which included information on how the jurisdiction is impacted by tribal casinos. The Dry Creek Rancheria Board of Directors reviewed the grant applications, determined them to be consistent with one or more of the funding priorities specified in Governments Code Section 12715(g), affirmatively sponsored them, and recommended a level of funding to the Committee. The Committee approved the recommended funding level and notified the State Controller by June 30, as required by statute. We hope that our comments are helpful and that the final report will be substantially rewritten to accurately reflect current statute and to accurately assess whether Local Community Benefit Committees are in compliance. We are concerned with the process used in this review, including 1) inadequate time period for analysis; 2) heavily redacted documentation; 3) confidentiality constraints (that appear to limit consultation with Committee members or grantees). Further, we would appreciate acknowledgement in the final report, 8 by the State Auditor, that our Committee is in full legal compliance with State statute. The Committee stands ready to work with the State to help insure that the impacts of tribal casinos on local communities are fully mitigated and appreciates this opportunity to review and comment on the draft report. Sincerely, (Signed by: Mike McGuire) Mike McGuire, Chair Sonoma County Local Community Benefit Committee California State Auditor Report 2006-036 03 July 2007 Comments CALIFoRnIA StAte AuDItoR’S CommentS on the ReSPonSe FRom SonomA County To provide clarity and perspective, we are commenting on Sonoma County’s response to our audit report. The numbers below correspond to the numbers we have placed in the margins of Sonoma County’s response. The Bureau of State Audits (bureau) leaves the decision as to who is 1 responsible for reviewing and responding to our reports up to the entity being audited. The draft report is provided to the entity whose operations are being audited, in this case the Indian Gaming Local Community Benefit Committee (benefit committee), and to whom our recommendations are being addressed. As described during our exit conference of June 21, 2007, we agreed with the benefit committee chair that in this case it seemed logical that those individuals at the county responsible for administering the Indian Gaming Special Distribution Fund (distribution fund) grant process would assist in reviewing and commenting on the draft report. Further, during the exit conference we stated that our staff were available at any time for consultation via phone to answer questions such as these. Sonoma County is mistaken. The draft report we provided included 2 all of the information related to Sonoma County. The information that was redacted applied to other counties or general issues that were not related to our review of distribution fund grants at Sonoma County. Because the second chapter does not apply to the operations of the benefit committee in Sonoma County, it is not necessary for Sonoma to review or comment on it. Furthermore, according to the Government Code section that governs our operations, the bureau is not allowed to disclose information that does not pertain to Sonoma County before the public release of our report. We do not believe our report title implies that distribution fund 3 grant money is being misused. Based on the results of our audit as described on pages 22 through 26, it is a factual statement that local governments do not always use grant funds to mitigate the impacts of casinos. As with other examples in our report, the Healdsburg District 4 Hospital (hospital) grant was used as an example of how some grants have no claimed or actual relationship to the impact of a casino. As stated at page 22 of the report, there are no specific requirements that local governments must ensure that funds are used for projects that directly address an impact from a casino. However, we believe that the requirement for tribes to confirm that 0 California State Auditor Report 2006-036 July 2007 grant applications have a reasonable relationship to a casino impact reflects a legislative intent that grant money be used to mitigate the impact of casinos. 5 Sonoma is misrepresenting the situation. When we requested the application submitted to and approved by the benefit committee, the copy provided to us from the county files listed only the surveillance system. In addition, the request for release of funds sent to the State Controller’s Office listed the project as a surveillance system. Although the tribe was informed of the change to the hospital’s application, this information is not disclosed in the application or committee approval documents the county provided to us. According to Sonoma County’s deputy county administrator, Healdsburg District Hospital provided additional information to the tribe, but did not provide information to the benefit committee. Further, if the benefit committee and county were informed of the change, we question why the annual report provided to the Legislature seven months later, and three months after the date it was due, described the project as “Healdsburg District Hospital— Hospital Surveillance System.” As such, it does not appear that the benefit committee approved the purchase of the additional items. 6 As stated on page 5 of the report, even though the money was not used to mitigate the impact of casinos, the grants appear to adhere to the requirements of the law. Further, we make clear the difference between the requirements of the law and the intent of the law on pages 22, 23, and 25. 7 Sonoma appears to be misinterpreting the statute. As used in this section of the Government Code, the term nexus applies to a list of criteria establishing a relative level of geographic proximity, not the relationship of the project to the casino. 8 Sonoma County’s concerns regarding the process used to conduct the audit are unfounded. The bureau follows generally accepted governmental auditing standards which include requirements to share the results of our audit, and provide a draft copy of the report for review. Further, the Government Code governing our operations requires us to keep the results of our audit confidential until it is made public. To comply with the Government Code, we redacted those portions of the report that were not applicable to Sonoma County. Finally, although Sonoma asks that we state they comply with the intent of the law, the stated intent of the law is to mitigate impacts from tribal casinos, and as described in the report, the documentation provided to us demonstrated that the projects funded by Sonoma had little or no direct relationship to a casino impact, as indicated in Table 4 on page 24 of our report. California State Auditor Report 2006-036 0 July 2007 cc: Members of the Legislature Office of the Lieutenant Governor Milton Marks Commission on California State Government Organization and Economy Department of Finance Attorney General State Controller State Treasurer Legislative Analyst Senate Office of Research California Research Bureau Capitol Press