SENATE BILL NO. 273 "An Act requiring that gross receipts and ideal gross be used to account for charitable gaming activities; requiring municipalities to provide to the state records concerning sales taxes assessed for charitable gaming activities; requiring that a charitable share of charitable gaming receipts be dedicated to charitable uses; relating to reports required for charitable gaming activities; relating to payments to the state from gross receipts of charitable gaming; relating to contracts between operators or vendors and permittees; relating to licensing of multiple-beneficiary permittees and to the duties of a multiple-beneficiary permittee to each holder of the permit; requiring a person employed as a gaming manager to be certified by the state; limiting the expenditure of amounts of gross receipts and ideal gross required to be paid to permittees or retained by permittees; relating to the amount of gross receipts and prizes allowed under a permit or a multiple- beneficiary permit; allowing operators to pool gross receipts, prizes, and door prizes among permittees; and providing for an effective date." Co-chair Sharp called SB 273 before the committee. He said he would limit discussions to merits of the bill and the concepts therein and not become involved in other vehicles that may or may not be in the committee or on its way to the committee. Any other proposals for other bills would be dealt with at a later date. He noted some reasons for this legislation was because last year's budget for the gaming division was reduced by over one-third. The commitment was made to try and streamline the workload for that division to allow an easier auditing procedure to be established and simplify the procedures and reporting procedures by operators and permittees. An extensive work session was held in Anchorage last summer wherein every participant present testified. Most of the information received at that time has been included in the bill as presently filed. Co-chair Sharp noted that teleconference sites on line were Mat-Su, Anchorage, Fairbanks, Cordova, Kenai, Ketchikan and Kodiak. He outlined the schedule that would be followed regarding this bill hearing. He said there would be public testimony following testimony from his staff and the department but he would decide then for a time limit depending on those signed up to testify. Senator Adams advised the committee he had no amendments and asked if any other committee member had amendments. Co- chair Sharp said all amendments suggested by the industry and permittees were reviewed by the department and as soon as they were numbered they would be distributed into the files. Tom Williams, staff to Co-chair Sharp was invited to join the committee. In reviewing to the sponsor statement and sectional analysis he referred to a letter included in the packet from the Department of Revenue strongly supporting this legislation. A spreadsheet also attached showed the relative allocation of pull-tab dollars wagers and what the mix would have been at various percentages of prize payouts and expenses; gross rates and net proceeds rates. Also included was a copy of the Charitable Gaming Task Force and summary recommendations which the department will address, as well as two computation sheets; one related to bingo charitable share provided by the department, as well as calculation of the vendor charitable share also provided by the department. Mr. Williams said the bill would ensure that out of every dollar wagered a certain minimum portion will ultimately be dedicated to charitable purposes. It will substantially simplify the accounting required for the Department of Revenue, the charities and the operators of the charities permit. The legislation would maintain the status quo with respect to the relative amounts available for gaming operations collected in State fees and returned to the charities for charitable uses. With emphasis on results-based budgeting he explained that this bill was results-based legislation which emphasized dollars going to the charities, coming off the top. Maximum amount of flexibility was given to operators and MVP managers without State interference. Mr. Williams explained the sectional as follows: Section 1: changes the calculation of the State's fee to a gross basis. Section 2: adds gaming manager certificates to the list of items that the department may regulate. Section 3: adds gaming managers to the list of persons whose books may be examined in conjunction with a gaming investigation. Section 4: sales tax. Section 5: charitable receipts. Section 6: charitable receipts. Section 7: simplifies recording process and eliminates duplicate reporting. Section 8: requires an operator to permit the permittee the charitable share due from a gaming activity conducted the previous month by the fifteenth of the following month. An amendment by the industry would change this to a calendar quarter basis instead of monthly basis. Section 9: preference to gaming managers. Section 10: Regulation of gaming managers. Section 11: Deletes reference to expenses and adds language explicitly prohibiting the charity from paying any expenses of an operator. Section 12: Deletes the requirement the Department either approve or disapprove operator contracts. Section 13: Operators to conduct gaming for minimum of one month for each permittee. Section 14: Revocation of license of operator who fails to remit minimum charitable share to the permittee, and further sets the minimum share. Section 15: Reporting and payment requirements for MBPS consistent with operator requirements. Section 16: (see section 14) Section 17: Substitutes charitable share for net proceeds. Section 18: Specific exemption for dog mushing contests. Section 19: (see section 14) Section 20: Net proceeds. Section 21: Net gross receipts. Section 22: Authorization pool for prizes. Section 23: Charitable share. Section 24: Charitable share. Section 25: Regulations of gaming manager certificates. Section 26: Repealer (proposed amendment). Section 27: Substitute ideal gross for ideal net. Section 28: Same vendor payment process. Section 29: False statement in application for gaming manager certificate. Section 30: Local sales tax to be excluded. Section 31: Substitute ideal gross for ideal net. Section 32: Defines charitable share and gaming manager. Section 33: Repeals all sections dealing with expenses. Section 34: Authorizes the department to proceed with regulation changes. Senator Donley asked Mr. Williams about section 26 and if there were any differences regarding the dollar amounts. Mr. Williams deferred to the department as the section repealed the existing limits based on net as opposed to gross receipts. He said they were advised this would be the equivalent of the status quo of the current limitations as translated to gross. Senator Adams asked the committee's recommendations on the two amendments mentioned. Mr. Williams asked if this was on the one year to two years? Senator Adams indicated as mentioned in his presentation. Mr. Williams said this was in regards to revocation and would have to be answered by the department as to their recommendation. He said he understood there was no objection with regard to the revocation limitations; they should be consistent. Senator Adams asked about expenses for administrative manager's fees that could be charged a charity. Mr. Williams said there were a variety of expenses that were dealt with and would again defer to the department. He believed, however, the limitations dealt with all sorts of expenses. Senator Adams said he felt there needed to be some control on the gaming manager's fees and he was concerned that some managers may be making as much as $100,000 per year and that would affect the end result of the charity. Mr. Williams said that under this legislation regardless what a gaming manager charged or the other operating expenses the amount distributed to the charity as their charitable share would not be affected. Expenses would no longer play a role in determining how much the charities get. Senator Donley further requested explanation of the theory behind section 26. He said existing statute had single maximums of prizes awarded and asked what the reason for proposing separate categories for types of activities was and increasing dollar amounts dramatically. Mr. Williams explained the concept of basing limitations on prize amounts or limitations on expenses had been eliminated. That needed to be translated to a gross receipts basis and there were a variety of scenarios calculated. Co-chair Sharp cautioned that the more technical questions be asked of the department. Senator Torgerson asked the definition of "gaming manager" and proposed a hypothetical. Mr. Williams said that as long as an individual received compensation for managing and controlling the actual operation that constituted "gaming manager". Deborah Vogt, Deputy Commissioner, Department of Revenue was invited to join the committee. She introduced Bob Bartholomew, Deputy Director, Income and Excise Audit, Department of Revenue and noted that he also served as their Legislative Liaison. She thanked Co-chair Sharp and his staff for all the work they have done on the bill and also thanked the committee for sponsoring the bill. She said the primary objective in the bill was budget. Due to the cuts last year, the director, administrative clerk and all clerical support were eliminated. With respect to these cuts, everything was added to the duties of the top management of Income and Excise Audit Division. She listed the primary responsibilities of the division and said gaming as an income generator was on the very low end of tax income to the State. This was because the program provided a source of funds for the charities. She felt the top management was spending an inordinate amount of time on the gaming program including enforcement activities. This legislation would simplify the program so there could be some control over the gaming industry but still get back to the real business of collecting taxes. Any charity can negotiate a larger share than what is required by this legislation. She further noted the department strongly supported this bill. Senator Phillips asked if the Governor endorsed the bill. Ms. Vogt said the Governor knew that she was here today but that she could not speak for him. She said as far as she knew, however, the concept had been hammered out with the Administration. Senator Donley said he did not understand why the Administration did not have a position on the bill. Ms. Vogt said they strongly supported it. Senator Donley asked what the difference was between the Administration supporting the bill and the Governor supporting it. Ms. Vogt said she supposed the fine line was in not taking away the Governor's actual freedom to look over a piece of legislation when it was passed and then make his decision about what he was going to do. She reiterated that this piece of legislation was strongly supported by the Administration. Senator Phillips said the reason he brought up this matter was because in the past, departments had supported bills, giving the impression they had no problems with them, and then after going through the whole process the bill was then vetoed by the Governor. Co-chair Sharp noted that the committee could summons Pat Porchot. Senator Adams advised that the committee knew there was no final CS to this piece of legislation and it was in its first version. As it passed through other bodies it could be changed which would then subject it to veto by the Governor if the original version were changed. He suggested the committee continue to work on the legislation. He then referred to page number twelve, line twenty and twenty-one which revoked certification and asked about the language if it were being changed. Mr. Bartholomew responded and said for operators there was a minimum threshold for revoking their license for one year and a maximum of five. In drafting this legislation they had started out with a two- year minimum suspension or revocation and by going back to one year it makes the legislation internally consistent with the current statute. Senator Donley commented on the inconsistency of the Administration over the past three years and felt the Senate Finance Committee, in particular, had been victimized by these inconsistencies and failure of the Governor to stand behind what his Administration has represented to this committee. Time again the committee has been told of the Administration's position, only when those exact same provisions went to the Governor they were then used as the basis for a veto. He said this was not good public policy. Senator Adams in response said the Governor can support legislation at any time, remembering the end results may not be what were started out with. Senator Donley said he felt the committee should discuss this matter and that the Governor had an obligation to take a position consistent with his Administration on issues as the legislation develops. The Governor should be able to identify what he supports, let the Legislature know that, and if they don't take heed, then the Governor was free to veto that action. Senator Phillips concurred with Senator Donley and felt also the issue should be discussed. Co-chair Sharp referred to a memo by the Department of Revenue indicating they strongly support this legislation. (pause on record) Senator Donley said he wanted a further understanding re section 26. This would include other sections that deal with maximum amount of prizes and maintain the existing dichotomy between operators and directly operated activities by the charities. He asked what would be the public policy reason for continuing this. He referred to past law when operators had to be bonded, secured and licensed; now that they were licensing managers, how far did the public policy go? Mr. Bartholomew responded that the intent was not to raise the limit of the amount of gaming that could take place with a permit. Current statute would allow a permittee, who runs their own operation, to award a million dollars in prizes. Average prize payout for pull-tabs is about seventy-seven percent. (Tape #35, Side A, switched to Side B.) Senator Donley indicated there were a lot of charities that never got their permits in to place and asked if the department had a position on these dollar amounts? Mr. Bartholomew explained that it had been worked out with Senator Sharp that they would not get into other gaming issues. They would not deviate from the objective of going to a percentage of gross and simplifying the reporting and levelling of the playing field with some of the MBP operations. He said they would like to stay within the confines of the bill. Senator Torgerson asked if the manager, because he received compensation, to be fingerprinted, licensed and certificated? Mr. Bartholomew outlined the requirements for the "gaming manager" to pass a test. He noted the original intent was to make sure the department regulated or licensed the primary person running the gaming activity. However, when the got into the MBP, the only tool available if someone was in noncompliance was to pull the permit of a permittee. The operation, however, would be allowed to continue while they got another permit. This legislation would not only include "gaming manager" but also expand it one step further to affect the self-directed operations. He explained that if one hired a "gaming manager" to run the operation, they would be subjected to getting a certificate and being regulated by the department. This would cover the MBPS and the self-directed. Senator Torgerson said his main interest was in a couple of organizations that he was familiar with that hired individuals as "gaming managers" who have the management of the day to day operations, however, the bank accounts, bookkeeping and the primary person in charge is not that same person. These are not "gaming managers" as defined here. He felt there should be an exemption for these employees. Mr. Bartholomew said they supported that concept. He felt a better definition should be brought forth for "gaming manager". Their intent was not to get to the individuals supervising the day to day activities. Senator Torgerson said a simple suggestion was "...that has sole responsibility for the management, control or oversight of the gaming activities...". Just because you are called a manager and you get paid for that position is too broad based. He further inquired if this legislation covered raffles. Mr. Bartholomew referred to section one and said if they do less than $20,000 worth of gross activities there is no fee paid to the State. The other part of this bill would try to simplify the recording, wherein they would just tell us their total sales and one line item for expenses. Senator Torgerson further inquired regarding confidentiality. He said the names and amounts of permittees were not public information. He asked if this would not be public information obtained from the municipalities or was this a problem? Mr. Bartholomew said according to their interpretation it would not be public information. The department had strong confidentiality statutes for taxpayer information. A municipality could make their own decision about making this information available to the public. Senator Torgerson asked if this should be made specific in the bill or if it were just standard practice? Mr. Bartholomew said it could be clarified in the bill to come under the confidentiality statutes for taxes. Senator Torgerson asked if this also covered sports pools? Mr. Bartholomew said this legislation would not address that issue. Senator Parnell referred to section eighteen, page nine, and quoted current law AS 05.15.150. He asked why an exception was being made for dog mushers' associations when all other qualified organizations are required to come before the department. Mr. Bartholomew said dog mushing was the one activity that consistently gives out way more in prizes than they bring in what would be considered entry fees. They show a big loss because they use other revenue sources such as corporate donations and other donations to help pay the prizes. The exception was just to allow them to use all of their gaming proceeds to go towards prizes. No other activity is allowed to do this. They do not feel there is any abuse. The money goes out to prizes. Senator Parnell asked if there were any other groups that might ask for such an exception? Mr. Bartholomew said he did not feel there was anyone else who fell into that category. He said the Ice Classics and Rain Classics uses the money they earn for scholarships. Senator Parnell asked if there was a problem for the department as regards to work load. Mr. Bartholomew said either an amendment needed to be made to keep them in compliance or the department needed to decide whether to revoke permits or not. But he did not think that was a situation they wanted to get into. Co-chair Sharp asked if Mr. Bartholomew had anything else he wanted to cover. Mr. Bartholomew said he wanted to explain the percentages of gross that were included. He explained how they arrived at the different percentages. For bingo the non-profit organization needed to give 1-1/2 percent of the gross proceeds. He further referred to section 14. It is the same percentage that appears in other sections of the bill. Senator Donley mentioned that this was another section that was being repealed and reenacted and asked that the status quo be reviewed. He noted in prior years there was a quarterly program which created many problems and this latest legislation provided for a year. Mr. Bartholomew said this provision which is the "mandatory shall revoke" is on an annual basis. If the minimum share is not paid after one year it will be revoked. Another section of the bill also requires a monthly payment to the charities. However, after hearing more testimony this morning they may go back to quarterly. He said the biggest change taking place as they went to percentage gross was that the statute requires a minimum payment to the non- profits plus all profits in excess of reasonable expenses. Current law says the non-profits would be paid monthly which still varies based on profits and is subject to negotiation between the non-profits and whoever runs the gaming activity. The department only wants to regulate to the minimum and make sure that minimum is paid. Senator Donley recalled that in addition to the annual provision in section 14 was that each quarter a certain goal had to be met. Was this quarterly report done away with a few years ago? Mr. Bartholomew explained that the current law did still require quarterly reporting to the Department of Revenue. It can be looked at on a quarterly basis to make sure they are in compliance. There is, however, no mandatory action taken if they are not. Senator Donley noted that this was changed in 1993. Mr. Bartholomew continued explaining the percentages. He referred to a one-page overview in the files, which showed how the 1-1/2 percent was calculated. This was a good faith attempt to maintain the current statute. Pull-tabs, however, needed more discussion because it was easy to get confused when looking at many different numbers. Primarily, one should keep in mind that this is driven by the amount of the prize payout. If one used a seventy-seven percent payout then there would be seven percent gross. Seven percent was a good faith adjustment across the board. There are new tools today that the gaming industry has wherein they can play with prizes and expenses but it does not affect what the charity gets. In the past it was hard to pay the minimums because certain organizations were not regulated as tightly as others. There are a number of issues in this legislation that will strengthen the regulation of those MBPS and that will help the over-all industry to be more financially stable. He said it was important to keep the pressure on the industry to give the money to the non-profits and not to have money taken out of the system. The last item would include other activities such as raffles. The requirement of ten percent was being exceeded by almost all those activities and they should not be affected. The last fee in the bill is the one that comes to the State of Alaska and today the law is one percent of whatever a non-profit receives. In order to maintain consistency, the department felt they should go to some percentage of gross so that everything would be based on total sales. That would be one-tenth of one percent of gross sales. He reviewed the amount received from pull-tabs as an example. Further he reviewed other gaming activities, such as, raffles, rain classics, ice classics that would probably end up paying slightly less to the State under this legislation. Senator Torgerson asked if there was not a three percent gross tax on pull-tabs now? Did this go away and was it replaced by one-tenth of one percent? Mr. Bartholomew said the three percent tax was paid by the pull-tab distributors and that remained unchanged. It would not be affected by this legislation. He said it was important to note that that fee would not affect the amount of money they get from gaming. He said the hopes were that more charities would receive the minimum and have the ability to pay the fees they are having to pay today. Senator Donley asked about the one-tenth of one percent and was this a tax on the activity? Mr. Bartholomew indicated this was correct. Senator Donley asked how much was generated last year. Mr. Bartholomew responded approximately $280,000. He said there were two overviews of the industry taken place in the last couple of years. In 1995 the Charitable Gaming Task Force and in 1996 a Legislative Audit. Four of the recommendations from the task force were included in the bill presently. One recommendation, both in the task force and the audit report, but not included in the bill was that the department should spend more of the money collected on running the program. Senator Donley noted the three percent was not a program receipt but inquired if the one tenth of one percent was categorized as a program receipt? Mr. Bartholomew said money from both fees did go in to funding the budget. Enough revenue was transferred to cover the $600,000 and the remainder stayed in the general fund. In further response to Senator Donley he said this was not a designated program receipt, but rather a general fund program receipt which is appropriated annually. Senator Adams asked about controlling undesirables from being game managers. This had been a problem in the past. Ms. Vogt explained briefly how this legislation would cover that matter. Co-chair Sharp indicated that at this time he wanted to take public testimony via teleconference. He noted that he would limit testimony to about three minutes each so everyone would get a chance to testify. Joseph Nyquist testified via teleconference from Fairbanks. He noted for the committee that his has operator's license rule changes and regulations. He said he supported SB 273. Michael Slezak testified via teleconference from Anchorage. He said the charitable gaming industry had just completed a major overhaul of regulations and statutes for 1997. He said the information received from the department was based on 1995 and 1996 numbers and that as yet the changes had not played out for 1997. He felt this did not make a lot of sense as to why a radical new concept would be introduced that had not been shown to work anywhere in the lower '48. There was a lot of talk about the elasticity of the gaming dollar, however, elasticity was removed once percentage of gross is established. He further noted that once prize payouts were lowered, a point would be reached that players would stop playing. This would cause more competition within the market place to try and attract players back. In running their own numbers he said with respect to the permittees he worked for every dollar was important to them. They have also had budget cuts due to grants being reduced both locally and on State level. He said the current proposal on the table with regard to taxes allowed all Federal, State and local taxes to be deducted. Since they had no control over how taxes were set, they should come off the top of the gross, including the pull-tab three percent tax. Jack Powers, operator license number 022, Anchorage, testified via teleconference from Anchorage. He does business as Tudor Road Bingo Center. He said he supported Commissioner Wilson Condon's letter of 28 January 1998 with a few exceptions. He was concerned with some remaining loopholes regarding MBPS. He did not want to see SB 199 be attached to this one. He reviewed sections of the bill that he felt still needed some work. He specifically identified section 13 and said he did not understand it. He said he would be glad to come to Juneau to work with the committee and the department regarding this section. Shirley Montgomery testified via teleconference from Mat-Su. On behalf of the Mat-Su Humane Society she thanked the committee for the opportunity to give testimony regarding this matter. She said they were very dependant on every dollar received explained how important this was to the Society and animals. With these funds they are able to support senior citizens in taking care of animals and also teach the care and safety of animals in the schools. They do not support making their MBP manager a "gaming manager" just so the State gaming people can control him. She noted that if their MBP manager was not doing a satisfactory job their MBP board could make their own decision of how to deal with this. She felt this legislation needed more work. Greg Peterson testified via teleconference from Ketchikan. He said the department does need help from the Legislature however feels that the numbers need to be looked at again. Doug McBride testified via teleconference from Ketchikan. He said he was a pull-tab distributor in Ketchikan. They strongly support the concept of a level playing field. He said gaming regulators, legislators and all participants in the industry should be able to see what is going on so they will have confidence the charities were getting enough money. He felt there should be simpler filing, auditing and regulatory compliance measures. He did not feel that shifting from the ideal net concept to the gross net concept was very misleading. He said the effective date should be long enough for distributors to sell out their products and replace them with products that comply. (Co-chair Sharp passed the chair to Senator Phillips at approximately 10:35 a.m.) John Regan testified via teleconference from Anchorage. He said he was with the Spenard Lion's Club and that their permit was used by Tudor Road Bingo (Jack Powers). They favoured the percentage of gross on bingo and pull-tabs. He said he was confused with the carry-over of funds by dog mushers. He said everyone else was required to apply for carry-over. (Tape #35, Side B changed to tape #36, Side A at approximately 10:37 a.m.) Mr. Regan continued his testimony and said he was concerned with the department's position and the information they had been giving the committee. He felt there should be more interaction with the gaming managers. He further did not understand the situation with gaming managers because in his situation he did not control any money and any monies were put into the MBP's account. His personal record did not need to be looked at because all he did was draw a paycheck. There was already enough statutes regarding undesirables not being able to seek these positions. He was also concerned with the increase in the one-tenth of one percent of gross that charities would be paying. The State of Alaska should not be going after non-profits if they need additional funding. If a state income tax is needed that should be discussed with the general public. Ed Bourgeois testified via teleconference from Anchorage. He represented Anchorage Opera. Their charitable gaming permit was operated by Jack Powers. He concurred and supported the testimony of Mr. Powers. He supported the legislation and the Department of Revenue to monitor the industry and level the playing field. (Co-chair Sharp returned to chair the committee.) Lanie Fleischer testified via teleconference from Anchorage. She indicated she was executive director of Big Brothers and Sisters, Anchorage. She said she was pleased with the present legislation. (Concluding testimony was severely affected by poor quality of teleconference.) There followed miscellaneous discussion at the table amongst the members. Mark Griffin testified via teleconference from Anchorage. He said he owned Alaska Bingo Supply but had not been involved in the gaming industry for many years. He felt the biggest problem was with the Department of Revenue regarding enforcement. He suggested all records required should be made public within fifteen days of the day received. He said the gaming industry was operating in a vacuum and with the lack of disclosed information no one was able to make adequate and informed decisions. He suggested simpler regulations should be enacted so there would be a more level playing field and all their work would not be wasted. Co-chair Sharp announced that anyone wishing to send in written testimony could do so to the Senate Finance Committee Secretary's office. Rosalie Nadeau was invited to join the committee. She indicated that she was the member in charge of the permit for Akeela Treatment Services, Anchorage. Since she was in Juneau she came to testify in person. She has represented charities since 1982. She said the bill was a good move in the right direction. A complex law could not be enforced by minimal staff and such staff could not provide guidance to permittees. She felt simplification was a good move, regardless of the fact the bill still had some problems such as addressed by Mr. Powers and others. "Gaming manager" was a crucial area. However, she said they supported the bill and said the drug and alcohol treatment program greatly benefited from pull-tabs. She did feel that SB 199 should not be "christmas treed" with this bill. Co-chair Sharp said he would reschedule the bill for 8:30 a.m. next Tuesday. This would give committee members time to review suggested amendments. He said different sources had been asked to define "operator" and asked the committee to also search out possible refinements. With that he held the bill in committee. Co-chair Pearce announced that the committee meeting tomorrow morning was cancelled but the meeting tomorrow afternoon at 4:30 p.m. was still scheduled. ADJOURNMENT Co-chair Sharp recessed the committee meeting at approximately 11:00 a.m. SFC-98 -1- 02/18/98