BILL ANALYSIS Date of Hearing: May 10, 1994 AB 2803 ASSEMBLY COMMITTEE ON GOVERNMENTAL ORGANIZATION Curtis R. Tucker, Jr., Chairman AB 2803 (Isenberg) - As Amended: May 3, 1994 SUBJECT California Gambling Control Commission. DIGEST Existing law, the Gaming Registration Act, requires every person owning šor operating a gaming club to first register with the Attorney General and šprohibits any city or county from allowing the operation of a gaming club šwithout valid registration. Applicants for registration must provide šdetailed information on their financial and personal history, and šregistration may be denied for past criminal activities. Existing law makes any person who plays, deals or operates any game of šfaro, monte, roulette, lansquenet, rouge et noire, rondo, tan, fan-tan, šseven-and-a-half, twenty-one, hokey-pokey or any banking or percentage game šplayed with cards or dice for money or anything of value guilty of a šmisdemeanor. This bill repeals the Gaming Registration Act and enacts the Gambling šControl Act with the following provisions: 1) Legislative Intent Provides that public trust and confidence that permissible gambling will not endanger the public health, safety, and welfare requires a comprehensive measure to be enacted to ensure that gambling is free from criminal and dishonest elements and that it is conducted honestly and competitively. Provides that the intent of the Legislature is to provide uniform, minimum standards of regulation of permissible gambling activities and gambling establishments. 2) Local Control Authorizes cities and counties to impose more stringent controls than imposed by the Act, and to permit any local tax or fee not inconsistent with the Act. 3) Gambling Control Commission Establishes a five member commission appointed by the Governor, subject to Senate confirmation. Terms are for five years and no member can be an elected official or an official of a political party. Members receive per diem of $100 per day. The Commission has an executive director who is empowered to appoint necessary staff and clerical personnel. AB 2803 4) Powers of Commission The Commission is empowered to adopt regulations, approve licenses, approve certain financial transactions of licensees, impose conditions on licensees, and revoke, suspend, or take disciplinary action against licensees. 5) Division of Gambling Control Establishes a Division of Gambling Control in the Department of Justice to investigate applicants for licensure, and to investigate, inspect, and audit all licensees and licensed premises to determine compliance with provisions of the Act. 6) Regulations The Commission is required to adopt regulations which include: a) Information to be furnished by applicants for licensure; b) Requiring applicant to deposit application fee with division to cover investigative costs; c) License requirements for individuals, corporations, partnerships, and holding and intermediary companies; d) Requiring licensees to report and keep records on significant transactions involving cash or credit; e) Requirements governing the manufacture and sale of gambling equipment; f) Requiring the exclusion of undesirable persons from gambling establishments; g) Requiring licensees to keep certain records, perform audits, and make periodic financial reports; h) Providing for disapproval of deceptive game rules or advertising by a gambling establishment. i) Requiring the safeguarding of assets and revenues; and j) Requiring the manner in which compensation from games and gross revenue must be reported. The Division is empowered to adopt regulations reasonably related to its - continued - AB 2803 Page 2 AB 2803 duties. The adoption, amendment and repeal of regulations by the Commission or the Division are specifically exempted from the requirements of the Administrative Procedures Act, and instead, provisions are provided for notice and hearing requirements for proposed regulations. 7) Licensing Every person owning or proposing to own or operate a gambling establishment must apply for and receive a license, including corporations and partnerships. All persons who are officers, directors, and shareholders of a corporate license, individual partners of a partnership license, key employees of a licensee, and persons receiving a percentage share of a gambling establishment's revenues must be individually licensed and endorsed on the owner's license. The commission may require any shareholder owning securities in a publicly- traded holding company, any person furnishing services or property to a gambling establishment for payments based on earnings or profits from gambling, any landlord or owner of real estate used by a gambling establishment and any person doing business on the premises of the gambling establishment to either be found suitable, to be registered or licensed. Persons manufacturing or distributing gambling equipment in the state must obtain a gambling manufacturer's or distributor's license. The division is required to investigate an applicant's qualifications and the commission must approve or disapprove the application. 8) Local Ordinances and Table Limits The commission is required to deny any license for an establishment located in a city or county that does not have an ordinance governing hours of operation, patron security and safety, location of establishments, wagering limits, and the number of gaming tables allowed at an establishment and within the governmental jurisdiction. The commission may deny a license if the proposed establishment or expansion of gambling would unduly create a law enforcement problem in a neighboring city or unincorporated area or would cause an undue concentration of licenses in a market area and the applicant fails to show public convenience or necessity would be served by issuance of a license. 9) Restrictions on Corporations, Partnerships, and Holding and Intermediary Companies. Corporations must be incorporated in California, however, holding and intermediary companies may be chartered in other states or countries. Commission must approve security interest and disposition of interests of licensees. Licensees may be disciplined and licenses revoked for engaging in business with unlicensed persons or firms. 10) Work Permits. - continued - AB 2803 Page 3 AB 2803 Requires employees of gambling establishments to have work permits issued by the division or a city or county as a condition of employment. Work permits may not be issued to and must be revoked for persons found to have committed an offense prohibited by the Act, committed a felony, committed any embezzlement or larceny against a licensee, or been convicted of any offense outside of the state relating to gambling. 11) Disciplinary Provisions. Commission may limit, condition, suspend or revoke a license for violation of the Act, and may impose fines up to $20,000 for each separate violation. The Commission may issue emergency orders against a licensee if it finds it necessary for the immediate preservation of the public welfare. 12) Criminal Acts. A person placed on a list of persons to be excluded from gaming establishments who knowingly enters an establishment, a person willfully failing to report or pay any licensee fee, or permitting any person under the age of 18 to be in a gaming establishment is guilty of a misdemeanor. Any person willfully violating cash transaction requirements is punishable by imprisonment for not more than one year, or by a fine of not more than $5,000, or both. 13) Fees. Creates the Gaming Control Fund for the support of the commission and division. Establishes fee schedule as follows: licenses with 1-5 tables, $300 per table; 6-8 tables, $500 per table; 9-14 tables, $1,250 per table; 15-25 tables, $2,500 per table, and 26 or more tables, $4,200 per table. A schedule of fees based on gross revenues is established for clubs exceeding designated revenues, regardless of the number of tables. Fees for background investigations are based on actual costs. Provides that if all fees collected exceed $6 million during a fiscal year, the excess shall be refunded to licensees on a pro rata basis. 14) Local Governments. Re-enacts requirement allowing establishment of a gaming establishment if permitted prior to January 1, 1984, or after that date, approved by vote of the electorate of a city or county. FISCAL EFFECT The measure would generate an estimated $3.5 million annually to the šGambling Control Fund for support of the commission and division based on šthe number of tables in gaming clubs now registered with the Attorney šGeneral. This does not include revenues which would be charged for the š - continued - AB 2803 Page 4 AB 2803 costs of background investigations, which for the Nevada Gaming Commission šare about 30 percent of its total budget, nor does it include fees from šgaming clubs which have applications pending and can be expected to be šregistered or licensed later this year or early next year. These new šlicense fees could increase revenues up to an additional $2 million šannually. COMMENTS 1) Purpose According to the Attorney General, legal card club gaming has experienced major increases in both the number of establishments and tables during the past few years with virtually no regulation or control. Concerned that widespread money laundering and revenue skimming can occur without effective regulation, the Attorney General argues that an investigative and administrative apparatus similar to the Nevada Gaming Commission with adequate staffing is an absolute necessity, and will become even more so in the event of widespread Indian Gaming. Currently, the Office of Gaming Registration in the Department of Justice is staffed with 2.5 positions and is budgeted for $250,000 annually. 2) Interlocutory Challenges: A Real Concern? Out of concern by the Attorney General that the adoption of regulations would be plagued with countless legal challenges by the gaming industry, the measure provides that a court shall not grant any injunctive or declaratory relief or administrative mandamus against the commission or division for a faulty or illegal action concerning the adoption of regulations or the enforcement of the law unless it can be proved by "clear and convincing" evidence that the commission or division abused its discretion or exceeded its jurisdiction. Normally, the burden of proof required in these instances would only be a preponderance of the evidence, which is the standard the commission or division must prove in any action against a licensee or applicant. Will a "clear and convincing" burden of proof effectively preclude challenges of wrongful acts committed by the division or commission? The courts have defined "clear and convincing" evidence to be "...that evidence which is so clear, explicit, and unequivocal as to leave no substantial doubt and which is sufficiently strong to command the unhesitating assent of every mind" (117 Cal. App. 2d 379). 3) Exemption From the Administrative Procedures Act. Regulations adopted pursuant to this measure would be exempt from the requirements of the Administrative Procedures Act (APA) including any review by the Office of Administrative Law (OAL), and, instead, adoption would be in accordance with a highly abbreviated set of - continued - AB 2803 Page 5 AB 2803 standards contained in the measure. Why is exemption from the APA necessary? Do the alternative procedures provide sufficient opportunity for public input and review of proposed regulations? All regulations adopted in the first nine months of the commission's existence are deemed to be emergency regulations and will take effect without a public hearing. For the emergency regulations to remain valid, a public hearing of their adoption need only be held sometime prior to July 1, 1996, which could be almost a year and a half after their initial adoption. It is expected that most, if not all, of the commission's šlengthy body of initial regulations will be adopted as emergency šregulations. Given the wide plenary powers granted this appointed commission and executive branch agency, are there adequate checks and balances in this measure to prevent abuses from such an extraordinary delegation of rule making authority? 4) Timely Issuance of Licenses. Licensing agencies literally hold economic life or death power over a business license applicant, and there have been instances of abuse by agencies refusing or failing to issue a license in a reasonable period of time. This measure provides that to the "extent practicable," all applications shall be acted upon within 180 days after submission. However, if the investigation has not been completed in this period, the division must inform the applicant of the status of the investigation and when it's expected to be completed. Should this bill contain a provision similar to that found in the Gaming Registration Act requiring registration to be deemed issued 180 days after submission of an application in order to provide a check on potential agency abuse? 5) Fee Schedule Are the license fees for large gambling establishments reasonably related to the cost of regulating the establishment, or are they excessive? At a license fee cost of $4,200 per gaming table, the annual fee for a 200 table club would be $840,000. The Attorney General estimates that a minimum of $3.5 million is needed to cover the operational costs of the commission and division not including the cost of application investigations. It is unclear why this level of funding is needed to regulate 275 clubs statewide of which 95 percent have only one to six tables each. - continued - AB 2803 Page 6 AB 2803 Date of Hearing: April 19, 1994 SUPPORT Attorney General California State Sheriffs' Association OPPOSITION None registered. Britton McFetridge AB 2803 445-3451 Page 7 ago