Report 2013-036 Summary - March 2014

Indian Gaming Special Distribution Fund:

Counties' Benefit Committees Did Not Always Comply With State Laws for Distribution Fund Grants

HIGHLIGHTS

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

RESULTS IN BRIEF

In this review of four counties, our third examination of the allocation and expenditure of grants from the Indian Gaming Special Distribution Fund (distribution fund), we found, as we have in our two previous reports on this subject, that the Indian gaming local community benefit committees (benefit committees) responsible for distributing these funds did not always comply with state laws for the distribution fund grants they awarded. The distribution fund uses money that some tribal casinos contribute under agreements known as gaming compacts between the tribes and the State to mitigate the impact of tribal gaming on local governments. As of January 2014 California had 70 compacts with 109 of the State's federally recognized tribes, 59 of which operate a total of 60 tribal casinos in 26 counties.1

The Legislature appropriated $30 million in fiscal year 2010-11 and $9.1 million in both fiscal year 2011-12 and fiscal year 2012-13 from the distribution fund for grant awards to local governments for projects to mitigate the impact of the casinos (mitigation grants). State law requires that the benefit committees award mitigation grant funds for priorities such as law enforcement and fire protection, public health, and roads. In addition, it requires that if a project provides other benefits to the local jurisdiction, the mitigation grant funds pay only for the proportionate share of the project that mitigates the casino's impact on that local jurisdiction. However, our review of 12 grants that four counties—Butte, Lake, Riverside, and San Diego—awarded in fiscal years 2010-11 through 2012-13 found that benefit committees awarded nearly $1.7 million in funds for seven of these grants without sufficient documentation from the grant applicants. Specifically, either the applicants did not sufficiently demonstrate that their project mitigated the effect of Indian gaming or the requested funding did not represent a proportionate share of the costs attributable to casino impacts. For example, Butte County's benefit committee awarded $221,000 to increase staffing at a local fire department without obtaining documentation to support how this amount was a proportionate share of the impact of the casinos on that jurisdiction.

Benefit committees also did not follow other state laws for mitigation grants. In one of the counties, a local government did not receive as much grant funding as it should have by law according to the nexus criteria, a test of geographic proximity that defines the minimum grant amounts that qualified local governments are entitled to receive. Specifically, for the three fiscal years ending 2012-13, Butte County's benefit committee incorrectly awarded the county $57,500 in nexus funds that should have been awarded to the city of Oroville instead.2 Additionally, the benefit committees in Butte and Lake counties do not have processes to verify that their grant recipients comply with requirements for interest earned on mitigation grant funds; as a result, they did not verify that grant recipients had used such interest only to mitigate casino impacts, as required by state law. Further, San Diego County's benefit committee directed the California State Controller's Office (Controller) to disburse funds directly to the county, which then disbursed the amounts to grant recipients. San Diego's benefit committee believes this process improves its ability to manage its grant program. However, the process is not in compliance with state law, which requires the Controller to disburse the funds directly to the local government jurisdictions that are to receive the grants.

Our review also revealed that Butte County's benefit committee does not comply with state law requiring it to have a conflict-of-interest code (conflict code). Although the county was informed by the Fair Political Practices Commission in 2007 that its benefit committee was required to adopt a conflict code, the benefit committee has not done so. Additionally, we noted that members of the benefit committees and other designated individuals in all four of the counties we reviewed did not always make the financial disclosures state law requires. The law requires each designated individual to file a statement of economic interests that helps to identify conflicts of interest that he or she might have, yet designated individuals in the four counties failed to file 19 required statements, and another 11 statements were either late or incomplete.

As with our previous audits of the mitigation grants from the distribution fund, we noted that the balance of the distribution fund continues to decline. Expenditures and transfers from the distribution fund exceeded revenues by a total of $95.6 million for fiscal years 2010-11 through 2012-13, continuing a decline in fund balance that may result in near depletion of the distribution fund by the end of fiscal year 2014-15. Amendments to Indian gaming compacts during fiscal years 2003-04 through 2008-09 that did not include an obligation to contribute to the distribution fund may have accelerated the fund balance decline. New or amended compacts entered into since fiscal year 2008-09 may generate additional revenue for the distribution fund, but they are unlikely to contribute enough to halt the fund's decline.

Finally, state oversight and technical assistance from an agency such as the California Gambling Control Commission (gambling commission) or the Department of Justice (Justice) could improve benefit committees' compliance with state laws for administering the mitigation grant program. State law does not identify any agency responsible for conducting oversight of or providing technical assistance to the benefit committees. Instead, state law places responsibility for selecting grants with the benefit committees, and makes the counties responsible for administering grants. However, the benefit committees and counties lack definitive guidance and technical assistance, especially on issues where state law is silent. Our report highlights instances of noncompliance for which state oversight could likely have improved compliance with state laws. For example, state oversight might have identified Butte County's error in determining funding for one of its cities earlier and prevented the error. In addition, some of the concerns we discuss in this report are the same as or similar to concerns we discussed in our past two audits. As a result, we believe state oversight could improve compliance with state laws for this program.

RECOMMENDATIONS

To comply with state law, benefit committees should ensure that they obtain sufficient documentation from grant applicants to demonstrate that proposed projects mitigate casino impacts. If applicable, that documentation should demonstrate that the requested funding represents a correct proportion of the costs attributable to casino impacts.

To comply with state law requiring it to reserve specific amounts of mitigation grant funds for local government jurisdictions based on the nexus criteria, Butte County's benefit committee should correct its determinations of nexus eligibility for the city of Oroville and Butte County by April 1, 2014. Further, it should ensure that it awards the minimum funding to each local government jurisdiction consistent with its corrected nexus determinations.

To ensure that grant recipients comply with state law concerning interest earned on mitigation grant funds, by June 2014, the Butte County and Lake County benefit committees should establish policies and procedures to verify that grant recipients use interest earned on grant funds to mitigate casino impacts as required by state law.

If San Diego County's benefit committee believes that its process for distributing grant funds improves its ability to manage its grant program, it should seek legislative authority to change its process. Otherwise, San Diego County's benefit committee should instruct the Controller to release funds directly to the grant recipients as state law requires.

Unless the Legislature amends current state law, the Controller should implement its plan to modify its distribution process beginning with fiscal year 2013-14 grant awards to ensure that it releases funds directly to approved grant recipients.

To comply with state law, by June 2014, Butte County's benefit committee should adopt a conflict code.

To improve compliance with state laws and provide technical assistance in administering the mitigation grant program, the Legislature should consider designating an agency such as the gambling commission or Justice to provide oversight and technical assistance to the benefit committees.

AGENCY COMMENTS

Butte County concurred with the audit findings and accepts the recommendations. Lake County is taking steps to address the recommendations but expressed frustration at the challenge counties face in complying with certain aspects of the law. Riverside County indicated that it is taking or will take steps to address the recommendations. San Diego County indicated it will take steps to address the recommendations. Finally, the Controller stated that it has revised its processes to address our recommendation.

1 In February 2013 the Rincon Band began operating under Secretarial Procedures, which are the result of mediation between the tribe and the State and are a full substitute for a gaming compact. Because the tribe had a previous compact and now operates under different terms, for ease of discussion we refer to it as having an amended compact.

2 Nexus funds are allocated based on cities' and counties' geographic proximity to Indian casinos and the Indian land upon which those casinos are built.