Legislature(1997 - 1998)
04/22/1997 08:03 AM House STA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 156 - CHARITABLE GAMING The next order of business to come before the House State Affairs Standing Committee was HB 156, "An Act relating to charitable gaming; relating to the percentages of gross receipts from charitable gaming that are required to be devoted to charitable uses; requiring managers of charitable gaming activities to be licensed; removing the authority for operators to conduct charitable gaming; prohibiting permittees, members in charge, and gaming managers from having certain financial interests or associations with persons who have been convicted of certain crimes; and providing for an effective date." Number 0931 REPRESENTATIVE TERRY MARTIN, Alaska State Legislature, explained the bill developed three years ago during a finance hearing with the Department of Revenue and the Charitable Gaming Division. It was apparent that the legislature should consider evaluating gross receipts versus net profit receipts from the operators and committees. If the committees and departments were allowed to go by gross receipts there would be major efficiencies and the committees would perhaps be more active in evaluating what they could receive by taking a larger role. In comparisons to other states and even Canada, Alaska was out of line by allowing a higher percentage to go to charities. The only way to have a higher percentage, however, was to either decrease the rewards or the operating expenses. Furthermore, the budget for the Charitable Gaming Division was depended on the bill. Its budget had been reduced by $300,000 instead of the original $500,000 in light of the bill because additional accountants would be needed to review the annual reports. The major emphasis was the adjustment of the gross receipts versus the adjusted net receipts for the true amount of money that a charity received. The major objection had been from the multiple beneficiary permit holders in hopes that the operating costs would be reduced when the opposite had happened. He felt that the issue had been settled under former Governor Walter Hickel when the talk was a minimum of "only" 30 percent when 12 percent was going to charity. Since that time, however, only 8 percent or 9 percent was going to charity. What happened? he asked. Multiple beneficiary permit holders was one of the reasons. In conclusion, if we truly want gaming in Alaska to help private charities then let's at least do what other states did - gave a fair margin of the receipts to the committees. Number 1296 CHAIR JAMES asked Representative Martin if he had a sectional analysis of the bill? It was a complicated bill. CHAIR JAMES explained the took 30 percent of the gross up front and gave it to the charities, and eliminated the audit requirement by the department thereby saving money. She asked Representative Martin if there was an increase in tax? Number 1339 REPRESENTATIVE MARTIN replied the tax had not been adjusted. It had been brought up by the different committees, however. The tax was at 3 percent now. Number 1349 CHAIR JAMES asked Representative Martin if the tax would bring in more money? REPRESENTATIVE MARTIN replied the tax would bring in more money in revenues, but it did not have to if the committee decided otherwise. It was adjustable. The tax right now was at 3 percent. It was up to the committee to decrease it for example if it wanted to. CHAIR JAMES stated the committee did not want to go in that direction. Number 1388 REPRESENTATIVE DYSON commented he was uncomfortable setting a fixed profit margin. He would be outraged by government doing that in any other industry. It was laudable but we were saying to the charities that they were not smart enough to pick an operator that would give a reasonable cut of the receipts. He asked Representative Martin why the charities were not smart or sophisticated enough to require reputable operators? Number 1455 REPRESENTATIVE MARTIN replied the original concept of "gaming" in Alaska was acceptable because it helped the poor and homeless. The concept of "gambling" was viewed in the same vein as prostitution when the only difference between gaming and gambling were the letters "b" and "l". The same methods were used in gambling as they were used in gaming. Therefore, the idea was to allow for a fair percentage to go to the charitable organizations. And, according to the data, the organizations involved in gaming were getting away with an awful lot in the name of charity. Number 1586 REPRESENTATIVE DYSON asked Representative Martin why were the charities not able to pick reputable operators that would give them a very fair cut of the gross receipts? Number 1569 REPRESENTATIVE MARTIN replied it was a delicate situation. The last complainant said the operator told him to find somebody else. A lot of times a charity did not know who were the good operators until after the fact as in business. Right now the operators were doing well without giving too much to charities. Number 1622 REPRESENTATIVE HODGINS asked Representative Martin how much the 1 percent tax equaled to as a net percentage? REPRESENTATIVE MARTIN replied $270 million. The tax was not changed in the bill, only the receipts. More taxes would go to the division, however. REPRESENTATIVE HODGINS replied a 1 percent net would be easy to look at while a 1 percent gross would be harder to look at. REPRESENTATIVE HODGINS asked Representative Martin what the profit was on a box of pull-tabs? Number 1697 REPRESENTATIVE MARTIN replied it depended on the type of pull-tabs. Moreover, if an operator knew he had to give 20 percent on a box of pull-tabs, for example, he could give to the charity the money in the beginning. It would then be up to the operator to sell all of the pull-tabs. The winning factors could be adjusted so that they paid a 75 percent payout. Number 1744 REPRESENTATIVE HODGINS asked Representative Martin if the bill affected volunteer operations? Number 1772 REPRESENTATIVE MARTIN replied volunteer operators such as the American Legion did it all internally. They knew what the profit would be from the beginning. It was the operator that needed to be evaluated in terms of what it did for charity. It was also hoped that the charities would become more active in regards to the operators. Number 1832 REPRESENTATIVE HODGINS asked Representative Martin, for clarification, if the bill mostly impacted operators and not volunteer type organizations? REPRESENTATIVE MARTIN replied, "Yes." Number 1884 REPRESENTATIVE BERKOWITZ wondered if the bill was another Republican tax plan by taxing the gaming industry 1 percent. REPRESENTATIVE MARTIN replied he was not taxing the gaming industry. The tax was in current law. He would prefer no tax, but someone had to protect the charitable organizations through either general funds or receipts. Number 1921 REPRESENTATIVE BERKOWITZ asked Representative Martin if his beef was with the operators? REPRESENTATIVE MARTIN replied his beef was if the state wanted to legalize gambling for charities then they should get a fair shake. REPRESENTATIVE BERKOWITZ asked Representative Martin if the fair shake would come from the operators? REPRESENTATIVE MARTIN replied the fair shake would be the monitoring of the operators to ensure that expenses added on as net costs would be looked into in a fair way. REPRESENTATIVE BERKOWITZ commented, if we were concerned about how operators behaved, more effort would be spent on training and regulating them. REPRESENTATIVE MARTIN replied if you wanted charitable gaming a cautious approach was needed. There was potential for corruption and misuse of the money in gambling - $270 million was not a small amount of money. Who would monitor the operators? he asked. The charities did not want to monitor them so the only answer was to look at the gross receipts. Number 2025 REPRESENTATIVE BERKOWITZ explained he met a young woman who was dying who put together some charitable gaming efforts that were skimmed off by unscrupulous operators. The failure was in the state's ability to ensure the ethical behavior of the operators. The problem, therefore, was regulating the operators rather than telling the market directly how to behave. Number 2074 REPRESENTATIVE MARTIN replied the major weakness over the years had been that the operators were in complete control. They had put an absolute stop to looking into their industry. We were the responsible ones. It was not just a revenue generating bill as claimed by some. The simplest and most efficient way was to put the operators on a separate accounting system of gross receipts. Number 2123 CHAIR JAMES stated she did not view pull-tabs as an industry. They were here because charities needed a method to raise revenue for their causes. In addition, the revenues gleaned by the state, however calculated, should cover the administrative cost of the program. A charity should get the maximum amount after covering the administrative cost - expenses and payouts. She needed to know the administrative cost to determine if 30 percent was a good amount. There was no way that the state could take enough as a percentage to pay for the types of audits that Representative Berkowitz mentioned. However, audits could be avoided if there were not any loopholes. It was similar to the flat tax versus graduated tax system debate. She asked for a schematic of the administrative expenses to determine if 30 percent was a good amount. Number 2315 REPRESENTATIVE ELTON stated there was a market dynamic here that assumed at some point sales would go down. He asked Representative Martin what would happen to the sales if 30 percent of the gross went to charities? Would charities end up with less because sales dropped dramatically? for example. Number 2345 REPRESENTATIVE MARTIN replied he did not want to make any assumptions. But in comparison to other states, Alaskan charities were not getting their fair share. The bill adjusted the factors involved. It was a big mess according to the Internal Revenue Service (IRS). The IRS did not know what truly was going to charity and what the operators were keeping for themselves. Number 2405 REPRESENTATIVE ELTON stated he would like to know what charities were actually getting in other states at 30 percent. It would indicate the balance. An amount of gross going to a charity would mean nothing while an amount of money on the other hand would give the market dynamic. It was frustrating because the information should be available. Number 2435 REPRESENTATIVE MARTIN replied he did not know if that type of information was available or not. The national industry studied the dynamics under legalized gambling. The studies indicated that many states wanted to pull back on legalized gambling because they found out it was not raising the expected revenues. There was a diminishing factor of the market. TAPE 97-47, SIDE B Number 0001 REPRESENTATIVE ELTON stated he did not disagree with the goal but an arbitrary figure like 30 percent scared him. He applauded the effort of getting to the balance that gave more to charities but not of picking a number out of the air. Number 0028 REPRESENTATIVE MARTIN replied, "You can choose any number you want, if the major goal is to make sure a fair amount in comparison to other cities and states is going to charity." If the free market dictated, however, the charities would receive even less money. Number 0040 CHAIR JAMES stated she did not know if 30 percent was the right number. Testimony further down the road would help determine if the number was right. It would be important to look at what the operators were claiming as expenses, assuming they were correct. Number 0097 REPRESENTATIVE IVAN asked somebody to speak about the statutes being repealed in Sec. 32. CHAIR JAMES explained that a sectional analysis had been requested that would explain the repealed statutes. Number 0121 REPRESENTATIVE BERKOWITZ stated he agreed with the objective of the bill. He did not like the approach, however. Furthermore, the difference between Democrats and Republicans was that Republicans felt - in general - people were greedy without altruistic intentions. He agreed with the approach strangely enough. The fix was to deny that the less than benign impulses were restrained through enforcement. Therefore, the weak link in the bill was not providing enforcement of the operators. Number 0161 REPRESENTATIVE MARTIN replied there was enforcement in current statute. Enforcement would not be needed if the receipts went to gross because the charities themselves would find out real quick if they had been cheated. The enforcement would be by making the charities more active. He did not mind if the committee wanted to look at the current enforcement in statute for adjustments. In addition, he did not mind if the committee wanted to adjust the gross receipt figure of 30 percent either. Number 0218 CHAIR JAMES explained the difference between Democrats and Republicans was that Democrats supported collective rights while Republicans supported individual rights. Number 0246 REPRESENTATIVE HODGINS explained it would take a very convincing argument to change his mind about operators and why they were needed. A charity was lazy if it needed an operator to generate funds. He did not like operators from Anchorage going to the Kenai Peninsula and taking dollars out. He would love to see that either the charities raise their own money; or not to get a permit, if they wanted an operator to raise money for them. That was the way he wanted to see the pull-tabs and bingo industry go. Number 0298 REPRESENTATIVE MARTIN replied he agreed in his heart. Most charities did not want to get involved with gambling. It was important that the charities become more active in the process and as a result they would make more money. Number 0380 DENNIS POSHARD, Director, Charitable Gaming Division, Department of Revenue, was the next person to testify in Juneau. This was a simple bill with very complicated consequences. The bill was simple because it only did the following three things: removed operators as a legal means of conducting gaming activity, established the method to determine the amount that went to charities as a percentage of gross, and licensed gaming managers. Consequently, the amount of tax that went to the state changed to 1 percent of the gross receipts or roughly a tax increase of 1000 percent. It was unintended and according to discussions with Representative Martin the level should be set back to .1 percent to equal what it was today. MR. POSHARD further explained the current method used to derive at the public benefit either through net proceeds or a minimum percentage of gross receipts required the division to police the expenses through long and contentious audits. Therefore, the department strongly supported going to a system of gross receipts; it would be more efficient. MR. POSHARD further explained the department supported licensing gaming managers. Many operators went to a multiple beneficiary permitees (MBP) status which had evolved to take advantage of the current system. Typically errors were found in an audit but it was difficult to prove that the individual was responsible as opposed to the charity. MR. POSHARD further explained there were charities that did not have the capital means to get involved in gaming; they did not have the expertise for example. Therefore, a well regulated operator provided a legitimate service to charities. MR. POSHARD further explained the fiscal note was an assumption at the 30 percent gross level. It would not only put operators out of business but some vendors and charities as well. It would be more difficult for charities to remain in compliance causing a significant reduction in the amount of gaming and the amount of money going to charities. MR. POSHARD further explained the information on the impact to the industry at various percentages that Representative James and Elton were asking for was not possible. No one had done studies on the elasticity of a pull-tab or bingo dollar. The economist within the Department of Revenue also indicated it would be difficult to come up with a schedule internally. There were too many factors involved so it boiled down to a judgement. MR. POSHARD further explained the current statewide average return to charities was 9 percent for pull-tabs and 4 percent for bingo as a percentage of gross. In addition, the current prize payout for pull-tabs was 78 percent and above 90 percent for bingo. The profits ranged from 60 percent to 80 percent depending on the pull- tab. The fixed expenses would be affected at a forced 30 percent causing a reduction in the amount of money going to charities. MR. POSHARD further explained, in conclusion, that the division supported two out of the three changes to the bill. It did not want to get involved with changing the charitable gaming pie - the prize payouts, the expenses, and the amount of money that went to the charities. The state currently took $2 million out of the charitable gaming pie and the division received about $900,000 to run the program. This year it appeared that the division would only receive about $600,000. Number 1124 CHAIR JAMES asked Mr. Poshard what was the percentage of net that the operators received? MR. POSHARD replied it was 30 percent of adjusted gross for pull- tabs and 10 percent for bingo and all other activities for an operator. CHAIR JAMES asked Mr. Poshard if the bill changed bingo? MR. POSHARD replied the bill changed the percentage of gross to 30 percent for all activities. CHAIR JAMES asked Mr. Poshard if the 9.43 percent in comparison to other states included bingo? MR. POSHARD replied, "Yes." The 9.43 percent was the total amount of public benefit derived - money to charities and state revenues. CHAIR JAMES stated, if we changed the figure to 10 percent of the adjusted gross, the amount that charities received would increase by a sizeable amount. MR. POSHARD replied the 9.43 percent was gross, not adjusted gross. CHAIR JAMES asked Mr. Poshard if we were talking about the actual payout or the available payout? MR. POSHARD replied it depended on the charity. The charity had the option to account for it either way - actual or available. CHAIR JAMES asked Mr. Poshard if the charity would be paid the ideal gross up front or after the operator sold the pull-tabs in a bar for example? MR. POSHARD replied currently there were two choices - a lease agreement or a vendor arrangement. In a lease agreement the charity leased space in a bar and sold the pull-tabs itself. In a vendor arrangement the bar paid the charity 70 percent of the ideal net up front and sold the pull-tabs itself. CHAIR JAMES asked Mr. Poshard if the 1 percent was paid on the 70 percent of the ideal net? MR. POSHARD replied, "Correct." CHAIR JAMES asked Mr. Poshard if he knew how many were done in a vendor arrangement as opposed to a lease agreement? MR. POSHARD replied of the total pull-tab activity at $208 million the vendors accounted for about $22 million or 10 percent. Number 1433 CHAIR JAMES stated she supported a change so that the division would not have to audit expenses. It was a waste of time and it did not get to the problem. She asked Mr. Poshard if the bill would disallow vendors? Number 1484 MR. POSHARD replied the bill did not outlaw vendors. However, if a vendor was required to pay 30 percent of the gross receipts up front there was not a lot of room left for profit. The task force heard that the 70/30 arrangement was too high. Therefore, anything that would change the profit to the vendor would result in fewer vendors. Number 1618 CHAIR JAMES asked Mr. Poshard if the vendors would have to have a license? MR. POSHARD replied vendors currently registered with the division. Number 1641 REPRESENTATIVE HODGINS stated in the example of the wholesale scenario the charities were lazy because they would get their money up front. He asked Mr. Poshard if the Moose Club for example would be required to hold a certain percentage as profit, or would all proceeds be considered? Number 1745 MR. POSHARD replied, "Yes, to both." All of the proceeds would be considered, but if they did not equal 30 percent of the gross receipts, the club would be out of compliance resulting in a suspension or revocation of its license. Number 1805 REPRESENTATIVE ELTON asked Mr. Poshard if there was anything that established elasticity in the slot machine business? Number 1843 MR. POSHARD replied, "Yes." That was why in Las Vegas the payouts were posted. Number 1879 REPRESENTATIVE ELTON asked Mr. Poshard what percentage of charities used operators? And what percentage of the gaming revenues were derived through operators? Number 1895 MR. POSHARD replied about 15 percent to 20 percent of the charities used operators. Operators accounted for about 33 percent of the gross gaming activity and about 23 percent of the total money to charities. Number 1929 REPRESENTATIVE ELTON asked Mr. Poshard if there should be a different system for bingo? Number 1944 MR. POSHARD replied it was a policy call. In his opinion, he would say, yes, because they had different types of prize payout structures. Bingo generally paid out more in prizes than pull- tabs. MR. POSHARD distributed to the committee members a handout titled "Charity Gaming in North America: 1995 Report". CHAIR JAMES announced she would put the bill in a subcommittee to look at it further. Number 2061 REPRESENTATIVE IVAN said he respected the intent of the bill, but he was concerned about the tough reporting requirements for the smaller communities and the impact. The state was so large. He asked Mr. Poshard if he saw a problem in the smaller communities such as Akiak? Number 2161 MR. POSHARD replied the division did not see a lot of problems with operators and vendors in the smaller communities. There was not a bar in Akiak for example. Typically, it was the local governing body that applied for the permit which hired a person from the community to keep track of it. There were some problems of accuracy under the current system because they were required to account for everything. The bill would probably simplify reporting thereby making things easier for the smaller communities. That did not mean it would make it more difficult to achieve profitability, however. Number 2364 PAUL BLAIR was the first person to testify via teleconference in Glennallen. The discussion had been interesting. It looked like you were going in the right direction by changing the gross receipts to the ideal net, and the 1 percent to .1 percent. The payout on pull-tabs at 30 percent would cause a loss for the operators. It was good to see discussion surrounding the percentages in a favorable way for all. TAPE 97-48, SIDE A Number 0001 MR. BLAIR further said that he was not in favor of the bill as written now, but would be in favor if amended as discussed today. Number 0111 CHAIR JAMES announced he would have another chance to testify when the subcommittee came back with a committee substitute. Number 0145 MICHAEL SLEZAK was the next person to testify via teleconference in Anchorage. This was not exactly a $270 million industry, it was more of a $40 million to $50 million industry because the play backs were not real dollars, but a generated byproduct. Some communities such as Juneau had a sales tax of 5 percent of the gross that did not take into account the prize payout. A 30 percent of the gross receipts would kill pull-tabs and gaming in Alaska. A percentage of gross was not a bad concept. The problem was generality of the industry. Pull-tabs stores, bingo halls, and moose clubs did not have the same overhead costs. Bingo halls, for example, were a feeding area for pull-tabs. There were a lot of things to consider to come up with a viable adjusted gross percentage which had not been discussed today. Number 0420 GARY LANGILLE, Representative, Kodiak Chamber of Commerce; Small World Day Care Center; and Kodiak Liquor License Association, was the next person to testify via teleconference in Kodiak. It seemed that it was a top-down approach with little consultation and arbitrary action in regards to the state dealing with non-profits until there was legislation. This was not a good way for government and non-profits to deal with each other; it led to poor legislation and bad relations. Section 1 (b) was just another blow to non-profit fund raising. Gaming was to allow non-profits to raise their own money so that they were less dependent on hard pressed government revenues. Gaming was not to be used as a source of government revenue. Therefore, why was this needed if the current pull-tab tax revenue was greater than what the division spent? In addition, he wondered if Sec. 16 (3) (c) applied to a non-profit group that wanted to fight a tax on its industry? Furthermore, a 30 percent of the gross receipts going to charity was not practical. In Kodiak we did not allow operators so all of the money went to the non-profits. We could not meet the standard. There were games that paid up to 84 percent in payouts so the numbers did not match. The cutting back of game prizes would kill the sales of the pull-tabs and put us out of business. We did support provisions on the right to examine books and records - Sec. 5. We also supported Sec. 11. In general, more consultation and work was needed on the bill. Number 0602 EARL MICKELSON, Commander, American Legion Post - Kodiak, was the next person to testify via teleconference in Kodiak. He echoed a good share of what Mr. Langille brought up. It seemed that we were back to putting lids and controls on operators yet the concept of gaming expressed in the statutes was for non-profit. There were operators that were for profit. We supported the bill to the extend that it did away with operators. "We don't need them. We haven't needed them here." Only 15 percent to 20 percent of the non-profits used operators. If you did not drop the operators then the controls should be addressed separately. We did not support 30 percent, we could not live with it. In addition, the state revenue for audits could be performed at 1 percent of the net. Number 0786 JEFF HARMON, Representative, Lions Club - Kodiak, was the next person to testify via teleconference in Kodiak. The city of Kodiak passed an ordinance to not allow operators and we get by just fine without them. Operators were essential for some non-profits in the state but the bill was a "big anvil to try to kill a little fly." Unfortunately, the bill would kill all the rest of us at the same time. The bill should be renamed to "a bill to destroy charitable gaming in the state of Alaska." In addition, the club was proud of its operation and would invite an audit of its books at any time. He personally resented the comments that charities were lazy or stupid. Sometimes they just did not have the wherewithal to do it. The passage of the bill would result in less services rendered by the non-profits to the communities so that the same non-profits would go to the legislature looking for money. The bill was not well written; it simply took out the wording "ideal net" and inserted the word "gross". Take the bill back to the subcommittee and give it further thought on its impact. Number 0936 WAYNE STEVENS, Executive Director, Kodiak Chamber of Commerce, was the next person to testify via teleconference in Kodiak. The chamber was a non-profit organization designated as a 501(3)(6). It ran a self-directed game with its own employees. It took a very proactive role in its gaming activity. The chamber felt it was being penalized by the suggestion of passing the bill. Gaming was a good fund raising activity for the chamber. It had its own accountant that monitored the income and expenses. He took exception to the statement that HB 156 would help alleviate criminal activity often plagued by the gaming industry by forcing the gaming permitees to file quarterly reports. The chamber submitted all reports required annually and quarterly. The net proceeds were far greater than what Mr. Martin alluded to, we already paid 1 percent on the net proceeds and 3 percent to the state for the cost of the games. The passage of the bill would not increase revenue to the state; it would shut down self-directed gaming and eliminate a stable funding stream to non-profit organizations in Kodiak and throughout the state. Number 1034 CHAIR JAMES announced the subcommittee would include the following committee members: Representative Hodgins, Berkowitz and James.
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