MINUTES{PRIVATE }   SENATE FINANCE COMMITTEE   25 June 1997   1:30 p.m.    TAPES    SFC-97, Tape 153, Sides A and B SFC-97, Tape 154, Sides A and B CALL TO ORDER Senator Bert Sharp, Co-chair, convened the meeting at the Alaska Legislative Information Office, Anchorage, Alaska, at approximately 1:45 p.m. PRESENT In addition to Co-chair Sharp, Senators Phillips, Adams, and Parnell were present. ALSO ATTENDING: Representative Terry Martin; Tom Williams, Staff, Senator Bert Sharp; Deborah Vogt, Deputy Commissioner, Department of Revenue; Dennis Poshard, Director, Division of Charitable Gaming, Department of Revenue; Larry E. Meyers, Director, Division of Income and Excise Audit, Department of Revenue. SUMMARY INFORMATION SB 273 CHARITABLE GAMING Work Draft for SB 273, Version "H" (6/20/97) was discussed at the interim meeting. TESTIFIERS:  The following individuals testified in person or via teleconference regarding the gaming issue: John Lopez, Operations Manager, Alaska Bingo Supply, Anchorage; Joe Nyquist, Operator, Fairbanks and Anchorage; Randy Koelsch, Operator, Fairbanks; Jack Powers, Operator, Anchorage; Bob Wolting, Fairbanks; Ann McElrea, Soldotna; Earl Mickelson, Commander, American Legion Post, Kodiak; Larry Hackenmiller, Vendor, Fairbanks; Kent Hartzberg, Executive Director, Boniface Bingo, Anchorage; Tom Dewhirst, Anchorage; George Wright, Member-in-Charge, Alaska Native Brotherhood, Juneau; Don Skewis, Vendor, Anchorage; Ashley Reed, Charitable Gaming Association of Alaska, Anchorage; and Dave Hammock, General Manager, Public Radio Station KBBI, Homer. Co-chair Sharp explained that the purpose of the meeting was to discuss draft legislation [for SB 273, version "H"] that had not been introduced in order to gather opinions from the department and participants in the gaming industry in Alaska. He pointed out that the meeting would be limited to the proposals included in the draft legislation, principally the simplification of gaming accounting by basing the charitable share on gross receipts instead of net proceeds. He added that other gaming issues would be addressed by other legislation, other committees, and other meetings. Co-chair Sharp reported that the percentages included in the draft legislation were for discussion purposes only; the numbers would be subject to change. He emphasized that the desire of the committee was that the legislation not change the flow of any dollars from the direction they currently went, as far as the state, charities, operators, and permit holders. He stated that the committee wanted to come up with percentages that resulted in the same flow of money from the operation of gaming in the state of Alaska. Co-chair Sharp noted that there would be a presentation by his staff, followed by a presentation by the Department of Revenue (DOR). He added that comments and recommendations regarding the proposed legislation would be made available to those directly involved in charitable gaming, specifically the charity's multi-beneficiary permittees, gaming operator vendors, and pull-tab distributors. He noted that when legislation was introduced at the beginning of the session, there would be ample opportunity for additional public comment as the provision moved through the committee process in both the Senate and the House. Co-chair Sharp pointed out that the draft version being used in the hearing was the "H" version. He noted past promises made to DOR to simplify the auditing procedures related to gaming and the efforts required by operators and permittees. TOM WILLIAMS, STAFF, SENATOR BERT SHARP, explained that the Senate Finance Committee subcommittee for DOR had considered various alternatives for savings, one of which was to consolidate the Division of Charitable Gaming into the Division of Income and Excise Audit, as it had been in the 1980s. Various ways of streamlining the charitable- gaming process had been considered so that fewer resources would be needed. The commissioner of DOR had expressed interest in the proposal and urged the committee to proceed. Mr. Williams referred to the sponsor statement, a sectional analysis of the work draft ("H" version dated 6/20/97), and copies of statutes that had either been repealed or repealed and re-enacted. He read from the sponsor statement: The legislation is intended to insure that charity's share of charitable gaming proceeds will be taken first off the top of every dollar played. The public will be ensured that out of every dollar wagered, a certain minimum portion will be going for charitable purposes. At the same time, it will substantially simplify the required accounting for the Department of Revenue, charities, and the operators of charity permits. Finally, insofar as possible, this legislation is intended to maintain the status quo with respect to the relative amounts returned to the charities, the relative amount that the state collects in fees, and the relative amount available for the actual gaming operations. Current Alaska law bases the amount that a permittee or permittee's licensed operators must generate for charitable purposes and bases on adjusted gross gaming income (gross receipts plus price payouts and taxes). In addition, the law describes what a charity or an operator can or cannot claim as an allowable operating expense when determining the net proceeds (the adjusted gross income less the allowable operating expenses). This requires the charities that are operators in the state to all generate, review, and often audit a substantial amount of accounting data, specifically as relates to what is an allowable expense. For the entities involved in charitable gaming, this is time-consuming and can be expensive. This legislation would base the amount required to be dedicated for charitable purposes (called "charitable share" in the legislation) on gross gaming receipts. It would also base the state's fee on gross gaming receipts. Not only would reporting be substantially simplified, the need to audit allowable expenses would be eliminated. The Department of Revenue strongly supports the concept behind the legislation, which would simplify the regulatory oversight and regulatory process, reducing the cost of processing gaming reports. More importantly, it will enable the department to expend more of its recently reduced charitable gaming budget on auditing and the investigation of gaming activities. Mr. Williams noted that the bill was 11 pages long and had a lengthy and tight title because the legislation was not intended to be a "fix-all" for all charitable gaming's ills (perceived or otherwise); it was intended to move to gross receipts and simplify accounting. He added that most of the sections dealt with replacing the term "net proceeds" (used currently) with the term "charitable share" (the percentage of the gross receipts that would go to the charity; the amount had to be used for charitable purposes, as defined currently under law). He provided an overview of the sectional analysis: · Section 1: Repeals and re-enacts the section of law that determines how much of a fee goes to the state, and puts it in a percentage so that it will generate approximately the same amount currently generated. · Section 2: Substitutes gross receipts for the references to authorized expenses net proceeds, and also provides the authority to explicitly regulate the timing of the payment of charitable shares currently implied in Section 11. Language is also expanded to make more clear who can hold a multiple-beneficiary permit (MBP). · Sections 3, 4, and 5: Substitute the charitable share language for net proceeds. · Section 6: Updates a reference. · Section 7: Deletes the references to expenses and adds language that will explicitly prohibit a charity from paying any of the expenses of an operator, which will ensure that the charitable share is not directly or indirectly reduced. Mr. Williams noted that in the initial discussions, the department presented a series of recommendations; those were narrowed down. He continued with the sectional analysis: · Section 9: Repeals and re-enacts the provision of law that requires certain portions of the proceeds to go to the charitable share and defines the charitable share at a preliminary percentage of 2.5 percent of gross receipts for bingo, 7 percent of gross receipts for pull-tabs, and 10 percent of gross proceeds for all other gaming activities (including fishing derbies and raffles). · Section 10: Amends statutes adding reporting requirements for holders of multiple beneficiary permits that are consistent with the operator reporting requirements. It does not change when MBP holders are required to make distributions to permittees. · Section 11: Comparable portion to Section 9 as relates to MBPs, setting percentages of what must be dedicated for charitable share. · Section 12: Substitutes charitable share for net proceeds. · Section 13: Spells out the amount of the minimum charitable share. Mr. Williams detailed that while the minimums stipulated in Section 13 would be the minimum charitable shares, there would be nothing that prohibited an operator or permittee from dedicating more of the gross proceeds to charitable uses. Entities that operated their own games could dedicate more. He continued with the sectional analysis: · Sections 14 and 15: Substitutes charitable share for net proceeds. · Section 16: Adds a new section to statute which would authorize operators to pool gross receipts, prizes, and door prizes by activity, which will simplify accounting but not adversely impact the amounts provided to the charities. · Sections 17 and 18: Substitute charitable share for net proceeds. · Section 19: Repeals and re-enacts existing law to base gaming limitations on gross receipts rather than prize payouts, except for bingo. Bingo limitations will remain based on prizes, which will add consistency and reduce required accounting without abandoning a workable system for bingo. · Section 20: Substitutes "ideal gross" for "ideal net" and reduces the percentage to a level that will return approximately the same amount to the permittee. (The terms "ideal gross" and "ideal net" deal with pull-tab operators.) · Section 21: Removes the ideal provision and more clearly describes the vendor payment process (works with Section 20). · Section 22: Redefines gross receipts to exclude local sales taxes collected. · Section 23: Amends the definition of ideal gross and ideal net. · Section 24: Defines charitable share. · Section 25: Repeals three sections of statutes that pertain to authorized expenses and net proceeds. · Section 26: Allows the department to proceed with the regulatory process so that regulations can take effect at the same time that the statutory changes are affected. Mr. Williams explained that the intended effect on DOR was to simplify operations and to allow the department to utilize resources better; the intended effect on charities, multiple-beneficiary permittees, game operators, and pull- tab distributors was to hold the status quo (as far as possible). He emphasized that the idea was not to redistribute the dollars generated by gaming. Mr. Williams discussed other options that had been considered, including gaming legislation by Representative Terry Martin heard in the House State Affairs Committee, which discussed the option of putting forth different percentages for different types of operators. The proposal was not included in the version currently being discussed, in order to keep the playing field level and not protect certain types of operations. Entities would be free to make their own decisions (such as what expenses to incur) if everyone was paying off a certain gross. Mr. Williams pointed to a handout, the executive summary of the recommendations of the governor's Charitable Gaming Task Force. He noted that several of the recommendations, although not all, were addressed by the current version of the legislation. Senator Phillips asked whether any of the recommendations had been implemented since 1995. DENNIS POSHARD, DIRECTOR, DIVISION OF CHARITABLE GAMING, DEPARTMENT OF REVENUE, replied that the department took several steps in achieving some of the recommendations through the implementation of a new set of regulations that the task force helped to craft. He noted, however, that few statutory changes had occurred. REPRESENTATIVE TERRY MARTIN emphasized that he was opposed to taxing the industry. He asked whether phrasing had been included to protect certain elements of the industry. Mr. Williams responded in the negative. He said there were proposals designed to change the charitable share depending on the type of operation. The differential would recognize different costs. He admitted that the term "protection" might not be the best word, and pointed out that the proposal had not been adopted in the version. The current version would set the percentage for all different types of operations and not make a differential for any particular one. Representative Martin queried the phrase "charitable share." He asked whether the total amount that would go to the permittee would be lowered. He stated concerns. DEBORAH VOGT, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE, testified that the budget of the Division of Charitable Gaming had been cut significantly during the previous legislative session and that the division had been merged with the Division of Income and Excise Audit, directed by Mr. Meyers. She acknowledged the role of Mr. Poshard, the out-going director of the Division of Charitable Gaming. Co-chair Sharp noted that the hearing had been scheduled in order to get testimony from Mr. Poshard before he left the division. Ms. Vogt testified that regulating the gaming industry in Alaska had been and would continue to be a challenge, and had been made harder by budget cuts. The department intended to maintain a strong presence in the industry, although the Division of Income and Excise Audit had a lot of other duties and charitable gaming would not be at the top of its agenda. She noted that the department was currently facing serious changes in the gaming industry, including the budget cuts reducing the ability to look after the industry. In addition, she noted disturbing trends in the reports filed with the department; a review of the 1996 reports had shown an increase in non- compliance. The information was public information, although the names of particular gaming operations had not been included in the presentation because the point was to look at the industry as a whole. Ms. Vogt pointed to testimony that the proposed legislation was intended to be revenue neutral. She added the qualification that the goal was true only to the extent that people complied with the percentages established by the legislature. To the extent that operations did not comply with current law, she hoped the bill would not be revenue neutral and would have the effect of bringing people into compliance. Ms. Vogt believed the legislation would work to solve some of the problems in the industry, but she did not believe it would solve all the problems. She noted discussion with staff regarding issues that were not addressed and added that the department was supportive of steps that were being taken. Mr. Poshard provided a presentation with an overview of gaming in the state. He pointed to a slide with bar charts representing the number of permits issued, not the activity in dollars; the figures inside the bars represented the dollar amounts of gaming activity that occurred during each of the years. He gave the committee an overview of activity: · When the activity began in 1960, there was no gaming division. When gaming was legalized in the state, the gaming program was within DOR, which was responsible under statute for gaming activities. There was about $600,000 in gross receipts in gaming activity in 1960. · In 1984, pull-tabs were authorized through regulation and the department issued 763 permits; there were gross receipts of approximately $41.6 million. · In 1988, operators were legalized, pull-tabs were legalized by statute, and the prize limits on pull- tabs were increased; 1,026 permits were issued, with gross receipts of about $87.5 million. · In 1989, after the legalization of pull-tabs and operators, 1042 permits were issued, with gross receipts of approximately $186 million. Also in 1989, gaming was transferred from DOR to the Department of Commerce and Economic Development (DCED). · In 1993, MBPs and vendors were authorized, minimum payments to charities were increased, and gaming was elevated to division status within DOR; 1,046 permits were issued, with a gross of $227 million. · In 1994, regulations were enjoined; there was about $257 million in activity, with a high of 1,126 permits. · In 1996, new regulations were adopted; 1,056 permits were issued, with about $270 million in gross receipts. · In 1997 (for FY 98), the gaming division's budget was cut by one-third, the division was eliminated, and the program transferred to the Income and Excise Audit Division. Mr. Poshard turned to the next slide, comparing the division budget and the activity that occurred from 1990 to the present. He provided details: · The first bar chart represented the gross receipts from gaming. In 1995, there were approximately $270 million in gross receipts; 1996 and 1997 were estimates. · The second bar chart represented the net proceeds, or the amount of money that actually went to the charities. In 1995, the amount was $22.3 million. · The third bar chart represented the division's budget, which reached a high in FY 94 of just over $1 million. In FY 98, the gaming budget was limited to approximately $600,000. Mr. Poshard defined the terms that would be used in the presentation (statewide averages; some operations returned more than others to the charities). He defined the terms and percentages for pull-tabs: · Average pull-tab dollar: The amount someone paid to play a pull-tab; the total receipts or gross of that gaming activity, or 100 percent of the money taken in. About 77 percent of the gross was paid out in prizes in Alaska, on the average. · Ideal net: An idea unique to pull-tabs; if every pull- tab ticker were sold at face value, and every prize was paid out in the series (pull-tabs were bought in a series, where the exact ticket count, each ticket's worth, and the prizes that would be paid out was known). The ideal net was the ideal gross figure minus the prizes paid out. · Taxes: About 1 percent of the total pull-tab dollar. · Adjusted gross:  The gross minus prizes and taxes; the figure from which the minimum percentages were currently calculated. Operators were required to return 30 percent of the adjusted gross income to the charities. The charities were required to limit their expenses to 70 percent of the adjusted gross income and retain 30 percent. · Expenses: On the average, 12 percent of the pull-tab gross went to expenses, including rent, operator fees, light bills, and equipment such as pull-tabs. · Net proceeds: The amount going to the charity, what was left after subtracting prizes, taxes, and expenses. Net proceeds were the same as the profit of the gaming activity, and represented about 10 percent of every pull-tab dollar. Mr. Poshard next defined the terms and percentages for bingo: · Average bingo dollar: The amount someone paid to play bingo; representing the total receipts or gross of that gaming activity, or 100 percent of the money taken in. About 83 percent of the gross got paid out in prizes in Alaska, on the average. · Taxes: (No taxes on bingo). · Adjusted gross: The gross minus prizes. · Expenses: On the average, 15 percent of the bingo gross going to expenses, including rent, operator fees, light bills, and equipment such as bingo paper. · Net proceeds: The amount going to the charity, what was left after subtracting prizes and expenses. Net proceeds were the same as the profit of the gaming activity, and represented about 2 percent of every bingo dollar. Mr. Poshard emphasized that the figures were state-wide averages; some operations returned higher percentages, and others returned less. He defined other terms used in the industry: · Gross: The total dollar value of all the amounts wagered on games of chance and skill, or the total amount players put up to participated in the games. · Ideal net: (Defined above in pull-tab definitions). · Adjusted gross: The gross less prizes and taxes. Adjusted gross was often used in Alaska to calculate the minimum percentage that went to charities. · Net proceeds: The profit of the games, which went to the charities. Mr. Poshard reviewed the basics of the charitable-gaming business. He explained that government the government regulated the industry in order to ensure that the appropriate level of public benefit was being derived from the activity. Public benefit consisted of 1) the money to the charities, and 2) state revenues. Mr. Poshard addressed how the government ensured public benefit from charitable gaming in Alaska. He first reviewed the money to the charities, detailing that at least 30 percent of the adjusted-gross income on operator-owned pull-tabs had to go to charities. Permittees were held to the same standard by limiting expenses. The net represented about 10 percent of the total pull-tab dollar, and at least 10 percent of the adjusted gross income on the Copper River runs, bingo, and all other gaming activities had to be returned to the charities. The charities were held to the standard by limiting expenses to 90 percent. In addition, all profits above the statutory minimum had to go to the charities. The charities were due the net proceeds of the gaming activity, which could be something more than the minimums if the expenses were less than the maximum expenses. Mr. Poshard addressed the question of how tax revenues were derived for the government. He detailed that 3 percent of the ideal net of every pull-tab game was collected by the distributors and remitted to DOR as a pull-tab tax. In addition, 1 percent was collected on the net proceeds of activities of permittees who made more than $20,000 in net proceeds each year. Annual permit and license fees were also collected. Mr. Poshard turned to how Alaska compared with other states in per-capita gaming expenditures. He pointed to a visual comparing how much money each Alaskan spent each year on pull-tabs and bingo and emphasized that Alaskans were first in the nation. The numbers were taken from the 1995 National Association of Fundraising Ticket Manufacturer report on charity gaming. Per-capita bingo expenditures were roughly $88, and per-capita pull-tab expenditures were $345. The amounts were the amount paid to participate; the numbers also represented prize money turned back as an additional wager. He summarized that the total per-capita expenditure in Alaska was $433. Mr. Poshard moved to the next slide, illustrating how Alaska compared to other states in deriving public benefit from gaming activity. He stressed that the figures represented the returns to the charities as percentages of gross, and not the total dollars returned to the charities. States had different systems; many states did not have the size of charitable gaming as Alaska, and some had substantially more. He explained that there were several different methods for deriving public benefit. As a percentage of gross, Alaska derived approximately 80.86 percent in public benefit. (He noted that the numbers were taken from the 1995 National Association of Fundraising Ticket Manufacturer report on charity gaming.) Mr. Poshard addressed policing expenses in Alaska and elsewhere and questioned whether Alaska's approach was the best. In Alaska, amounts were policed by limiting profit to 30 percent of the adjusted gross and limiting the expenses to 70 percent. In addition, the charities reviewed the profit of the gaming activities, while the state was put in the position of policing the expenses. [SFC-97, Tape 153, Side B] Mr. Poshard continued that the program focused on policing the books and records of individual gaming operations to assure that the profit went to the charities and that the expenses were reasonable and necessary. He stressed that the statutory limitation on expenses in Alaska required that they be reasonable and necessary. Mr. Poshard turned to the results of the system. In many cases, expenses expanded to consume nearly every profit over the minimum amount, which created slow-moving and contentious audits of charities and operators. The department was put in the position of making very subjective determinations about how reasonable and necessary a given expense was to a particular activity. As a result, fights between the division and the operators and charities occurred regularly. Mr. Poshard stated that in the final analysis, little more than the statutory floor was obtained for the charities at considerable cost in money and goodwill. He noted that the state had used a substantial amount of resource trying to chase down expenses. Mr. Poshard addressed the question of how other states and provinces dealt with the issue. He explained that some governments established a minimum percentage of gross rather than adjusted gross and did not concern themselves with policing expense to determine reasonableness; they took a percentage of the gross figure. Some governments set a higher amount to go to charities. Mr. Poshard turned to a slide dealing with multiple- beneficiary permittees (MBP) and operator activities in 1995 and 1996. He addressed a trend the department had observed in charitable gaming over the past few years. He stated that a substantial amount of the non-compliance was the result of the MBPs. Mr. Poshard explained the difference between an MBP and an operator. An operator was an individual who decided to conduct gaming activity for profit and contracted with charities in order to do so. First, the operator had to come to the state, take a test, post a bond of $25,000 to $100,000, obtain a license, and conform to a strict standard of 30 percent of 10 percent of the adjusted gross income. Failure to do so resulted in the department revoking the right to participate. The statutes stipulate that the department "shall revoke the license of an operator who does not meet the minimums." The operator also made all the capital investment necessary to open a facility and contracted with charities to run the games. Mr. Poshard continued that an MBP, in contrast, consisted of two to six charities that got together and decided to run their own activities for themselves. The mechanism was developed to encourage charities to run their own games; however, one charity would often not want to take on the significant expense (including capital start-up costs to lease a facility and purchase supplies, and to hire a manager, bookkeeper, and employees to run the games). The problem was that the MBP option had become a loop-hole that people used to avoid being an operator. Instead, they got two to six charities to form an MBP and hired them as a manager. Then, when the charities wound up out of compliance, the division's recourse was to revoke the permits of the charities involved, and the manager of the MBP needed only to get more charities and do the whole thing again. Mr. Poshard directed attention to the charts representing the entire MBP and operator activity for 1995 and 1996 for the entire state. He pointed to a row representing the gross receipts from the gaming activity. The second row represented the adjusted-gross income; the next listed the allowable expenses (what the expenses would be limited to by holding the expenses to the 70 percent and 90 percent expense limitations required by statute and multiplying the 70 and 90 percent by the adjusted gross). The next row showed the actual expenses reported on the 1995 and 1996 annual financial statements filed with the department. The next row represented the minimum statutory net proceeds, or the amount of money the charity should have gotten if they had received the full 30 and 10 percent. The next row had the reported net proceeds, which was what they reported on their annual financial statement, determined by deducting the expenses from the adjusted gross. Then there were the payments from permittees, or the amount that actually got paid to the charities, which was sometimes very different from the net proceeds. Mr. Poshard noted that the figures on the chart were compiled from the 1995 and 1996 annual financial statement and were not audited figures. They did not necessarily balance in all instances, but were the figures reported. He stressed that the figures in red denoted expenses, net proceeds, and payments to permittees that were out of compliance by an amount greater than 1 percent. There were several instances of non-compliance that were negligible amounts; those were not depicted in red. Mr. Poshard detailed that the figures on the first page listed six operators in the Anchorage area. The minimum statutory net proceeds on the first one was $12,698; the reported net proceeds was $15,330. The expenses were less than the 70 percent. The payments to permittees were $12,779. In the example, the operator paid the minimum statutory net proceeds, but paid something less than the reported net proceeds. Mr. Poshard suggested that the committee pay attention to the comparison of operators and MBPs and instances of non- compliance. He turned to MBPs in the Anchorage area, and pointed to one that was out of compliance by $700. For another, the minimum statutory net proceeds the charities should have gotten was $378,000; the charities received about $298,000, and the MBP was out of compliance at about $80,000. For another MBP, the charities should have received net proceeds of $514,000, but received about $377,000. Mr. Poshard provided comparisons for several other MBPs. One MBP had an adjusted gross of $986,000 on a gross of $6.9 million; expenses should have been limited to $719,000 but were $982,000; minimum statutory net proceeds should have been $267,000 to the charities, but the charities received just over $11,000 for 1996. Mr. Poshard pointed to other locations. In 1995, one operator represented the same location as two MBPs; for 1995 the operator was substantially in compliance, and in 1996, the MBP activities included actual expenses of $579,000, about $140,000 more than the statutory limitation. Charities should have received about $188,000, but got just under $50,000. In another instance, the charities should have received $316,000, but received only $172,000. Mr. Poshard noted that the trend continued in other locations. He pointed to operators in Fairbanks, who were in compliance; the first MBP was a non-filer for 1996, another was less than the reported net proceeds but more than the minimum. He underlined another MBP example in Juneau. The minimum statutory net proceeds that the charities should have gotten (had the MBP stayed with the expense limitation) was $287,000, but the charity got only approximately $64,000. He noted an operator who was out of compliance in 1996; the operator's license had been revoked. Mr. Poshard pointed to operators all over the state who were substantially in compliance except for an operator in Valdez that underpaid the charities by about $4,000. Mr. Poshard addressed the recommendations of the governor's task force. In 1995, Governor Knowles appointed a Charitable Gaming Task Force that reviewed all statutes and regulations associated with charitable gaming and came up with recommendations. He highlighted three: 1. It was the clear intent of the legislature that operators and MBPs meet the same standards for returns to the permittees; therefore, the task force unanimously recommended the division take steps to ensure that happened. 2. The task force strongly recommended that all requirements for conducting and reporting should be clearly and simply spelled out and enforced. 3. The task force unanimously recommended that immediate steps be taken to establish a level playing field in the gaming industry where all market participants were required to meet the same minimum net percentages for like activities. Mr. Poshard noted that the division supported the bill but had a list of things that were not in the bill. The bill would address the first recommendation in establishing the same percentages. The bill would also simplify the accounting and auditing and simplify reporting requirements. The bill would take steps towards leveling the playing field, although the division believed additional things could be done. Mr. Poshard surveyed common complaints about the current gaming program: · The division had to police permittees and operators. · Audits were slow and contentious. · Accounting for gaming activities was difficult and financial reports were complex. · There was no incentive for efficiency for operators because the charities paid all the expenses. · Prohibitive financial interest requirements intruded into the business affairs of those involved in gaming. Requirements necessitated the division looking into personal lives. · There was an uneven playing field between operators and self-directed gaming. · Often, the department's only enforcement tool was to suspend or revoke a charity's permit, even though the charity was not responsible for the instance of non- compliance. Mr. Poshard believed the larger objective of the legislation would be to change the way the public benefited from gaming. He listed attributes of the provision, maintaining that the bill intended to: · Be a revenue-neutral bill; · Simplify reporting by basing the charity's share on a percentage of gross instead of net proceeds; · Allow the department to maintain its current oversight with a reduced budget; · Help ensure charities consistently receive what they should; · Provide profit incentives for operators; · Remove the need for prohibitive financial intersections; and · Provide for revocation of gaming participants who fail to meet minimum percent of gross requirements. Mr. Poshard added that the bill would also allow operators to pool. He provided more information about pooling. Currently, a hypothetical operator that contracted with eight charities to sell pull-tabs and run bingo games on their behalf committed to a substantial amount of accounting work. Each pull-tab game bought was expensed to a particular charity; all the profits of the game were due to the charity. The operator had to account for every ticket sold for the particular game and allocate a portion of the expenses associated with the sale of the game to the charity. Each different session of a bingo game was often conducted on behalf of a different charity, so each session had to be accounted for separately. A bad night could result in a charity getting nothing; a good night could result in more than the minimum. Mr. Poshard continued with how the proposed legislation would affect pooling. An operator would account for the total operation, total sales, total expenses, and would apportion equal expenses based upon the gross amount apportioned to a particular organization. Net proceeds would be paid to the charity accordingly. The accounting burden would be eased and simplified. Mr. Poshard noted that other percentages-of-gross proposals had come before the legislature. In the past, arguments had been used against some of the bills. He listed some of the arguments that had been made, along with responses: · Argument 1: The current 30 and 10 percentages were too high and too difficult to achieve. The percentage of gross was higher and would not work because there was not enough profit left for an operator. · Response: The bill was intended to be revenue-neutral and to preserve the status quo. · Argument 2: Elasticity. Increasing the money to the charities and the money to the state would force a decrease in prizes to the players, which would cause people not to play and kill the gaming industry. · Response: Charitable gaming was not the only form of gaming in Alaska. There was no competition from other types of gaming such as casinos or horse-racing. Alaska was already 5 percent above the national average for prize tabs. The bill was intended to be revenue-neutral and should not affect prize pay-offs. · Argument 3: The playing field was not level; it should be and the proposed bill would not do it. · Response: The proposed bill would help to level the playing field by establishing the same requirements for all gaming entities and provide for revocation of those who were not in compliance. · Argument 4: The state should not be using gaming to increase revenues. · Response: The bill was intended to be revenue neutral and not derive more money for the state. · Argument 5: Net proceeds should not be increased because that would put operators out of business and charities would suffer. · Response: The bill was intended to be revenue neutral. · Argument 6: Statutory penalties were needed for failure to make or pay minimum net proceeds. · Response: The bill would establish easily-applicable penalties for charities that did not meet the minimum requirements by providing for revocation. The charities would be given new tools to monitor MBP activities by requiring monthly reports to the charities for MBPs and operators. The amount due could be easily calculated by multiplying by the correct percentage, rather than having to look at the expenses and determine whether they were reasonable and necessary. Mr. Poshard concluded that the proposed legislation would make needed programmatic changes to simplify oversight of gaming by simplifying accounting and audits and making them a percentage of gross. The bill would also allow the department to administer the gaming program more efficiently. He underlined that the department strongly supported the bill. Senator Parnell questioned how much the state derived in tax revenues from gaming. Mr. Poshard responded that the state derived approximately $2 million per year. The amount in 1996 was just under $2.2 million. Senator Parnell queried the FY 98 budget for policing and regulating the gaming industry. Mr. Poshard replied that the FY 98 budget had been cut to just over $600,000. The budget the year prior had been $913,000. Senator Parnell pointed out that the state spent $913,000 to bring in $2 million. He asked what direction tax revenue would go if no statutory changes were made. He wondered whether tax revenue as well as revenue to charities would be lost because of the reduced ability to police the industry. Mr. Poshard responded that the state would bring in roughly the same amount whether the legislation passed or not. He detailed that a substantial portion of the $2.1 million [in tax revenue] was derived from the 3 percent tax on pull-tabs. He reminded the committee that the tax was collected by the distributors when the pull-tabs were sold. A little over 20 distributors remitted monthly payments to the state; there was not a problem with distributors. The rest of the amount collected by the state was through permit and license fees; he did not think those amounts would change much either. He opined that the net-proceeds fee might change slightly, but that amount represented only about $170,000 of the total. Senator Parnell questioned why the legislation should be passed if the state would receive the same amount. He wondered whether the charities would receive the same amounts as well. Mr. Poshard responded that the current system used to monitor activities was cumbersome and contentious. He pointed to an increasing trend of non-compliance, which required more and more resource to police. In light of the recent budget cuts, which had reduced staff from 13 to 7, the department believed it was necessary to take the steps to simplify the accounting and auditing in order to maintain the current level of oversight. Mr. Williams (?) added that he did not view the program as a tax program; it would bring in a little revenue, but the state's primary involvement was to protect the interests of the charities and ensure gaming as a charitable operation rather than gambling for profit. He believed the bill addressed the issues. Senator Parnell asked whether the bill would allow the state to protect the charities because of increasing non- compliance. Mr. Williams thought there could be a stronger likelihood of maintaining the status quo rather than fighting the trend of increasing non-compliance. Senator Parnell queried the relationship between enforcement costs and tax revenue in other states. Mr. Poshard did not have the information but offered to prepare something comparing the cost of regulation versus the amount of activity. Co-chair Sharp commented that the state's revenue did not come from the operations, but the charities depended on the operations and were affected ten-fold by a dollar loss. Mr. Williams agreed. Representative Martin pointed out that the materials showed that pull-tabs currently contributed 10 percent. He expressed concerns about how little charity received in Alaska compared to other states. Mr. Williams noted that the amount shown was the average. In Alaska, there were also bar owners who ran games on behalf of charities; they paid a higher percentage (70 percent of the ideal net). In addition, there were organizations that paid more than the minimums. He anticipated that there would be much debate about the correct percentages. Representative Martin questioned the ability to remain revenue neutral, which might not be fair to charities. Mr. Poshard believed the intent of the bill was not to change the amount of money going to the charities, the state, prizes, or participants; the intent was to change the system used to derive the portions of the pie. Representative Martin argued that one of the purposes was to raise revenue for the department to oversee the program. Mr. Poshard responded that the department was not advocating an increase in state revenues, although public benefit was derived from the gaming system. Co-chair Sharp opened public testimony. JOHN LOPEZ, OPERATIONS MANAGER, ALASKA BINGO SUPPLY, ANCHORAGE, stated concerns about the revenue-neutral proposal. He thought the actual percentages were lower than the percentages shown in the proposal and that the percentages were too high in certain sections of the bill. He opined that the numbers were off by one or one-half point; operations were run by dollar amounts, not percentages. He questioned how many operations would be rendered out of compliance if the percentages were applied. He also protested the annual fee that would be required on gaming activity, which would not be revenue-neutral for his organization. Mr. Lopez referred to another chart showing that Alaska was first or second in the nation as far as actual dollars returned per-capita for charity in net. He thought the issue could be viewed from different angles. He noted correspondence related to elasticity of dollars and the percentage-of-gross concept that included warnings about the difficulty of management and enforcement. He referred to an increase put on state tax of gross receipts in 1993 in North Dakota that had resulted in an 8 percent drop in gross-receipt activity. The net affect had been less money to the charities. Mr. Lopez recommended more study and research. He referred to "playbacks" in pull-tabs; when profitability was increased, the payback factor was lost and the result was less participation in gaming. JOE NYQUIST, OPERATOR, FAIRBANKS AND ANCHORAGE, reported that he had the first operator license issued in Alaska and had seen many changes in regulations over the years. He testified that he supported the concept of simplifying and leveling the playing field but had concerns about the pull- tab percentages. He pointed out that he had spent a lot of money to come up with a computer system to adjust to the current requirements. He noted that he paid over the percentage back on his gross. Co-chair Sharp asked about bingo. Mr. Nyquist thought the return on bingo was high because donated buildings and lower overhead created an unfair advantage. RANDY KOELSCH, OPERATOR, FAIRBANKS, spoke in support of the enforcement of any rules adopted. He stated that the percentages appeared reasonable, but the problem was in setting percentages of ideal gross and not allowing for changes that evolved in gaming. [SFC-97, Tape 154, Side A] JACK POWERS, OPERATOR, ANCHORAGE, testified in support of charitable gaming and described the operations and players. He thought the activity was good indoor entertainment. He spoke to the community aspects of bingo and noted that he had raised hundreds of thousands of dollars for non-profit organizations. He referred to charts that had been presented and opined that there was a difference between operators and operations. He thought the MBPs were the big problem because the playing field was not level. He was experienced in the industry and noted that he had five bingo halls in Anchorage and employees with benefits. He expressed upset over a statement that had been made about his accounting as "legal but unorthodox." He stressed that he was in compliance and was sad that the department budget had been cut. He supported policing and fairness. He described the percentage of gross he thought he could live with: 6 percent on pull-tabs and 1.5 percent on bingo. He thought the playing field had to be leveled if the state wanted a higher percentage. He believed competition was using grant money to augment losses. He wanted more non- profits to be involved. Mr. Powers argued that percentage-of-gross could not be a "magic number" state-wide because circumstances were different in different places. He told the committee that he sold a bingo sheet for 50 cents because one group in Anchorage had decided to lower to price to 50 cents because they had help paying the rent and employees and did not need to make a profit. On the other hand, the same bingo sheets were sold elsewhere in Fairbanks for $3.00, while he still got only 50 cents. Co-chair Sharp maintained that the committee wanted as much information as possible before introducing the bill. BOB WOLTING, FAIRBANKS, spoke in support of the legislation and thought it was time for change in the regulations. He informed the committee that he was the executive director of a bingo operation. He provided his credentials in government and management. The operation was re-organizing and wanted to bring in recipients of the funds as members of the board of directors. ANN MCELREA, SOLDOTNA (via teleconference), reported that she was member-in-charge of an operation. She noted that the organization's pull-tabs were purchased with 14 to 20 percent ideal net. She asked whether they would have to pay more tax. She also wondered why some places sold pull-tabs from fishbowls where the whole series was not in at one time, and yet there were surcharges for the complete series. She commented that the intent of the bill was not to raise revenue for the state, and yet it would take more than two times what it cost to operate. EARL MICKELSON, COMMANDER, AMERICAN LEGION POST, KODIAK (via teleconference), spoke in support of the treatment of the three entities involved in gaming, especially the separation of the treatment of operators from multiple beneficiary permittees from organization that conducted their own sales. He stated that he represented the later. He wanted a level playing field. Mr. Mickelson directed attention to Section 4 on page 4, lines 20 and 21 and the words "raffle or lottery" and noted that on page 3 the words were "raffle and lottery." He questioned the different meanings. Mr. Mickelson disagreed with Section 13, page 8, lines 21 and 22. He maintained that the proposed legislation would provide for different treatment by authorizing multiple limits of activity based on the number of permittees being accommodated by an operator or an MBP. He opined that as a charity, they did not want to be in the same situation as operators and vendors, when there was an intermediary without direct association with the charitable organization. He wanted entities such as the Elks and VFW to have certain liberties, particularly when sales were to members only. He returned to Section 13, and said they had been taxed 10 percent delivery or payment, but there was no payment, since they were the charity. He had no quarrel with the percentages on pull-tabs or bingo, but thought the additional 10 percent was unnecessarily restrictive. He questioned how the provision would function related to raffles and door-prizes. LARRY HACKENMILLER, VENDOR, FAIRBANKS (via teleconference), noted that most testimony did not deal with vendors or bar owners. He thought the legislation should be based on existing practices. He provided his history of experience with pull-tabs. In 1986, he had been the first Alaskan to sell pull-tabs under the existing regulation. Before that, it was private clubs. Regulations were updated. At one time, bars were selling pull-tabs for permittees and charging any odd percentage they wanted, because of a lack of regulation. When operators came into the picture, there was a problem at first, because a lot of the operators were using charitable gaming to get rich. Legislation was adopted that required a bond of $25,000 to $100,000. Vendors or bar owners could not afford that, but there was a lot of revenue from them. In order to correct the situation, a procedure was set up and vendors had to pay 70 percent of the ideal net up front, before the pull-tabs were delivered. He noted that DOR did not speak of problems with vendors, such as non-compliance. The basic solution to the problem was based on inventory. Mr. Hackenmiller thought the pull-tab solution (he did not want to speak to bingo or raffles) was to set the situation up the way it was set up with vendors. The bonding requirement could be dropped for operators if the percentage was charged up-front. Mr. Hackenmiller spoke to problems he had with the current draft of the bill. He pointed to page 11 (at the top) and referenced contracts with the vendor: "the permittee will receive no less than 16 percent of the ideal gross." He argued that currently the permittee got 70 percent of the ideal net. He provided an example of a situation that was hurting vendors, even though vendors were causing no problems for DOR. He identified a set of pull-tabs called the "Criss-Cross 950." The gross was $2,184. The permittee got 70 percent ($241), and he got 30 percent ($103). Under the new proposal, if he paid 16 percent of the gross, he would have to pay [permittees?] $349, or $5 more than the actual net. He thought a system that already worked would be eliminated. He wanted to know where the 16 percent came from. Mr. Hackenmiller asserted that the idea behind charitable gaming was that charitable groups could make money to support their needs. When he first started, he had done it for nothing. There were 23 bars in Fairbanks that also did it for nothing. Operators moved in and started taking percentages, so bars started taking percentages. He wanted the groups to retain 51 percent for pull-tabs. He suggested running the program like it was done with vendors. KENT HARTZBERG, EXECUTIVE DIRECTOR, BONIFACE BINGO, ANCHORAGE, testified that he had experience as an auditor for charitable gaming, so he had been on both sides. He understood what the department wanted and thought the legislation had some good points. However, he felt that it would create more problems than it would solve. He felt that the department had not been user-friendly. The reporting requirements were so complicated that even he could not follow them, in spite of his experience. He thought the problem was that the department had not been working with the charities, MBPs, or operators. Mr. Hartzberg suggested that the bill could level the playing field by giving the MBPs the same reporting requirements as the operators. He thought the percentages were up for debate, whether at 30 percent of adjusted gross for pull-tabs or 10 percent for bingo. He thought the percentage paid from bingo should increase. He referred to the unrelated business income tax (UBIT) that the federal government would be glad to put on pull-tabs; the state also had taxes. Bingo, on the other hand, was not taxable for both the federal and state portions. Increasing the amount returned to the charities would result in more actual dollars. He did not think the increase would affect sales. Mr. Hartzberg referred to the tax on net proceeds. He reported that his charity would pay $1,000 in 1996; the percentages would result in payment of $1,600. He was concerned about the state increasing its take when the prime objective was more money to the charities. He thought there were ways to accommodate the department and the charities. Co-chair Sharp noted the problems of working with averages. TOM DEWHIRST, ANCHORAGE, stated that the concept of the bill had great merit, but he had concerns. He thought the bill was like the old gross-receipts tax, an attempt at a level playing field, another good idea that did not work and that was abolished in the 1970s. He believed the reason the idea did not work was that it did not take into consideration the fact that different operations had different costs and different profit margins. A person with a low profit margin had to do a high volume and had to pay more taxes; they could show loss and still be subject to the tax. A person with 100 percent mark-up and low volume had a low tax. Mr. Dewhirst believed that vendors and self-run charities should get 20 percent of the gross; there were no additional costs involved. He did not believe the legislation took the economy or theft into consideration. He referred to a person who stole at least $25,000 from two charities; the cost to prosecute the person was twice that amount. The charity was hurt and its license revoked. He thought there should be different classes of charities and the money should be collected at the distributor level. Mr. Dewhirst felt that every time regulations were changed, there were adjustment costs and fewer funds for the charities. Representative Martin asked a question about 501(c)(3) charities. Mr. Dewhirst clarified that he was talking about 501(c). He thought every charity in the state should have 501 status so that the charity dollars were not paid to the federal government. Representative Martin commented in support of the 501(c) status. GEORGE WRIGHT, MEMBER-IN-CHARGE, ALASKA NATIVE BROTHERHOOD, JUNEAU (via teleconference), noted that the Alaska Native Brotherhood camp was a non-profit organization. He reported that he was on the governor's task force and that many of the issues being discussed had been covered by the group. There had been much discussion about leveling the playing field in the bingo and pull-tab business. They also had talked about pooling. He thought that the draft of the legislation was headed in the right direction and he agreed with most of the items. However, he pointed out that there was a local problem in Juneau related to sales tax on the gross sales of the pull-tabs. Currently, they were getting about 51 percent of every dollar deposited in the bank, or 82 percent of the total net. In other words, the city had $47,000 in sales tax and the charity got $19,000. He thought the issue needed to be addressed. Mr. Wright referred to the section of the bill related to redefining gross receipts to exclude local sales tax collected. He thought the city should go into business if they wanted tax dollars to give to other charities. Mr. Wright commented that the bingo percentages in the bill were a good starting point, but he thought the percentage should be higher; going up to 5 percent of the gross could level the playing field in Anchorage. He thought a monster had been created in Anchorage with the bingo awards. DON SKEWIS, VENDOR, ANCHORAGE, testified that he gave around $70,000 to $90,000 to charities each year. He thought the operator, MBP, and vendor were the same. He viewed bingo as a different class and a necessary social event for people who did not drink. He believed bingo provided a service to the community. Mr. Skewis thought there was a solution to the problems through putting tax on the top of the game, and getting the money there, and giving the charity money up front. The bookkeeping costs would be gone and there would be no auditing. He referred to a bill that was related to the lottery. Thirty percent off the top would be given to the charities, the state would get 15 percent, municipalities would get 25 percent; the vendor would take 30 percent. He was concerned that every time the legislation was revised, the vendors (the bars) got less and less. He knew the numbers on bingo had to be different. He wondered why operators were treated differently than vendors. [SFC-97, Tape 154, Side B] Mr. Skewis reiterated concerns. He pointed out that Las Vegas did not get involved in regulating. There was a discussion about the political difficulties of the issue. ASHLEY REED, CHARITABLE GAMING ASSOCIATION OF ALASKA, ANCHORAGE, spoke to past fights about charitable gaming. He expressed confusion and wanted to know which section of the bill would create a level playing field. He argued that nothing in the bill would create a level playing field. He did not think there was a simple answer. He disagreed with DOR statements that there was no gambling competition. He argued that there was illegal gambling activity in Anchorage and he thought it was naïve to think there was not. When the laws were changed to limit the size of prizes, the illegal gaming establishments benefited. Mr. Reed suggested learning more about the different types of operations. Each of the operations had different cost structures. Bingo gathered 100 people in the room; it would be easy to sell pull-tabs to those people who were already gathered to play games. There were Elks clubs and other fraternal organizations that had a jar sitting on the counter of the bar. There were stand-alone operations in malls that had higher costs. He argued that "leveling the playing field" was an impractical solution. Mr. Reed referred to discussion with staff that revealed a lack of understanding of the complexities in a given community. Small non-profits could not compete with bigger, better-known organizations with political connections. Small groups could get together and get a reasonable return. Mr. Reed suggested studying and identifying the different types of organizations and cost structures, then applying a scale in order to level the playing field. Representative Martin asked who he represented. Mr. Reed answered the Charitable Gaming Association; he did not know all the individual members of that. Representative Martin asked whether the organization he represented had met and told him what to say. He wondered if the organization had a permit. Mr. Reed responded in the affirmative. Representative Martin queried another organization with the same name. Mr. Reed replied that there was another organization with the same name; he assumed it did the same thing as his. Representative Martin stated that he was worried about groups that came under the phony disguise of charities. Mr. Reed pointed out that the organization could not pay him through pull-tabs. Representative Martin asked how the organization generated its money. Mr. Reed responded that he did not know. Mr. Reed described discussion at the end of the prior legislative session when the DOR budget was cut. He pointed to activity by Representative Martin in the House State Affairs Committee. There had been four or five hearings, but the more the committee got into the bill, the more they understood how complex the issue was. He opined that the consensus of the committee at that time was that a simplified-percentage bill would not work and would not serve the industry or the charities well. He reiterated his concerns. DAVE HAMMOCK, GENERAL MANAGER, PUBLIC RADIO STATION KBBI, HOMER (via teleconference), testified that KBBI was a permit holder and that he was the member-in-charge. He agreed that it would be difficult to create a solution for the broad range of organizations. He agreed strongly with Mr. Hackenmiller, who had spoken as a vendor. The radio station also had a permittee-vendor relationship; it had a pull-tab operation, bought directly from the wholesaler, and provided pull-tab games to a local licensed establishment. Every time the pull-tabs were dropped off, KBBI received a check for 70 percent of the ideal net. Mr. Hammock informed the committee that for KBBI, the current system worked. He felt good about the rate of return and stated that the transaction was simple. He was interested in anything that would simplify the paperwork and recording requirements. Mr. Hammock referred to numbers mentioned by Mr. Hackenmiller. He was not sure what games Mr. Hackenmiller was using; KBBI currently got 70 percent of net. He said that given the games they currently used, there was a difference in that under a 16 percent of ideal gross, they would get between $30 and $89 less per game. They estimated an average annual sale of games of about 50 games to vendors; over a year, there would be a net reduction of $1,500 to $4,400 in income, or 5 to 15 percent reduction. Gaming accounted for about 5.5 percent of their total annual income, but that was equal to one employee and was important. Mr. Hammock added that charitable gaming was a very competitive enterprise, and not just between operators. There were a limited number of vendors available to the radio station, and there were many other charitable non- profit organizations in Homer interested in the same activity. He stated that the minimum set by statute would become the level that organizations like KBBI got. They might not be able to compete with other non-profits. He emphasized that 17 to 20 percent would be better than 16 percent. He understood that the situation could be different for other operators and other games. Mr. Hammock discussed concerns about the definition of "charity." He pointed out that KBBI did not collect money and give it to the poor, but was an authorized and recognized non-profit institution. He understood there could be abuses of charitable status, but hoped the legislature would carefully consider who could be a permittee and not put too many strictures on the definition of charity. Mr. Hackenmiller continued with earlier testimony interrupted by technical difficulties. He stated that a higher percentage ticket would be a marketing tool for a non-profit group. He noted that the system he used worked and suggested paying up front to eliminate red tape. He urged using the vendor program as a model. Mr. Lopez referred to the comment about paying up front and asked whether a distributor would be expected to collect the money for the charity. He maintained that there was no protection for distributors that collected tax money; they got stuck with paying the money to the state. He wanted protection in the bill. Representative Martin commented that testimony had shown that different people seem to charge different amounts for the same box of pull-tabs. He asked for elaboration. Mr. Lopez responded that geography affected costs, including delivery costs. Co-chair Sharp welcomed written testimony on the issue. He commended the department's work on the legislation. He stated his intent to simplify the reporting process. Adjournment The meeting was adjourned.