HD22 - Review of the Charitable Gaming Commission

Executive Summary:
In May 2002, the Joint Legislative Audit and Review Commission (JLARC) approved a study of the Charitable Gaming Commission (CGC). This review was made in response to study requests by the Governor's Chief of Staff, the Secretary of Administration, and the Charitable Gaming Commission itself. The study resolution adopted by JLARC directed its staff to address the following issues:

• Is the organization and management structure for the agency adequate to achieve its statutory objectives?

• Does the Charitable Gaming Commission have the authority and the structure necessary to adequately oversee agency management and operations?

• Does the agency have sufficient resources to implement its statutory mission?

• Does the agency have adequate staffing to implement its statutory mission?

In 1995, the General Assembly created the Charitable Gaming Commission, moving oversight of bingo and other legal forms of charitable gambling from local governments to the State. The Charitable Gaming Commission consists of seven citizen members representing different areas of the Commonwealth. Members serve four-year staggered terms. The Commission is classified as a "supervisory" board with the power to appoint the agency head (in this case, the Executive Secretary), approve the agency's budget submission, and approve the rules and regulations governing charitable gaming. The Commission is served by a staff of 26, including the Executive Secretary. These staff conduct the licensing, training, audit, and enforcement activities of the Commission.

The Charitable Gaming Commission operates primarily with funds received from permit fees submitted by gaming organizations and a 1.125 percent levy on the gross proceeds of regulated organizations. The Commission began fiscal year 2002 with a balance of $1,990,677. The agency collected $3,245,825 in fees and interest in FY 2002 and spent $2,193,265, leaving it with a balance of $3,043,237.

Since its creation, the Charitable Gaming Commission has been largely successful in achieving two of its major objectives: the prevention of gaming fraud and increasing the percentage of gross gaming proceeds that are used for charitable purposes. In the area of enforcement, the CGC has played a role in the successful prosecution of 25 out of 33 criminal cases, providing a credible deterrent to the kinds of gaming fraud that led to its creation. The percentage of gaming proceeds used for charitable purposes has increased from an estimated three percent prior to State control to approximately 13 percent.

Despite these successes, the Charitable Gaming Commission needs improvement in a number of areas. The JLARC staff review found that the overall structure and staffing of the agency are not sufficient for it to adequately implement its statutory mission of ensuring uniform compliance with the charitable gaming statutes. Training and audits of charitable organizations are inadequate, and staff oversight of organizations is inconsistent. In addition, poor records management makes it difficult to assess some aspects of· the organization's performance.

Charitable Gaming in Virginia

Charitable gambling was first legalized in Virginia in 1973. Largely as a result of local bingo scandals and criminal prosecutions in the early 1990s, however, the General Assembly transferred the regulation of gambling for charitable purposes from local governments to the State. During the 1995 session of the General Assembly, the State centralized the oversight of charitable gaming with the creation of the Charitable Gaming Commission. On July 1, 1996 the Charitable Gaming Commission assumed statewide control over gambling activities conducted by charitable organizations.

Charitable gaming consists principally of bingo games, various forms of instant bingo or "pull-tabs," and raffles. These games of chance generate substantial revenues for the charities that administer them. In all, 611 charitable organizations were licensed, as of November 2002, to conduct charitable gaming in Virginia. In the fiscal year ending September 30, 2001, an estimated $307 million in gross proceeds from charitable gaming were collected. (The CGC indicates in its 2001 Annual Report that $348 million was generated in gaming proceeds. The $348 million includes revenue from charitable organizations exempt from the regular reporting requirements of the CGC.) An estimated $40 million (about 13 percent) of the gross proceeds were used for charitable purposes. (Again, the CGC's 2001 annual report lists approximately $49 million contributed to charity, which includes charitable contributions from the exempt organizations mentioned previously.)

Organizations are required by the Code of Virginia to dedicate set percentages of their proceeds to charitable activities, depending on how much money they gross from charitable gaming activities. For example, an organization operating a bingo game grossing over $500,000 per year would have to allocate 12 percent or a minimum of $60,000 to its "use of proceeds" charitable requirement. While 12 percent may not seem to be an exceptional amount, it consists of about half of the "net" of a charitable game. Typically, a game returns about 75 percent of gross to players, thus only about 25 percent, of the gross remains for supplies, rent (if applicable), other expenses, and charitable purposes. In FFY 2001, charitable gaming organizations reported approximately $306 million in various expenses. Charitable gaming funds may be used for prizes, gaming expenses, business expenses, and charitable purposes. The figure on page iii summarizes the expenditure of charitable gaming revenue as reported for FFY 2001.

The most common form of charitable gaming is a bingo operation. Players participate by marking off randomly called numbers from bingo cards that are purchased at the game. Multiple rounds and variations of the game can be played. When a player covers the appropriate numbers, she calls out "Bingo!" and is given a cash prize (usually the maximum of $100). The duration of a gaming session is usually three hours and culminates with a "coverall" game (where all the numbers on the bingo card are marked off) with a maximum prize of $1,000. The prize amounts are set by law and have not been raised since 1979.

In addition to the traditional bingo game that is played, instant bingo tickets and pull-tabs are sold. Instant bingo and pull-tabs are defined in the Code of Virginia as paper cards with pre-printed concealed letters, numbers, or other symbols that determine whether or not the game is a winner. Pull-tabs are a form of instant bingo that are sold only in the private social quarters of organizations. Revenue from the sale of pull-tabs is no longer regulated by the Commission as a result of legislation passed in 2001. As shown in the figure on page iv, more revenue is actually raised by instant bingo games and pull-tab games than by traditional bingo.

Is the Organization and Management Structure for the Agency Adequate to Achieve Its Statutory Objectives?

No, the organization of the agency is problematic, in part because field staff are frequently part-time employees working from their homes. This results in little accountability to central office management, few opportunities for training, and reportedly lower productivity. Additionally, the structure of the agency results in the inefficient use of staff resources. For example, the roles of inspectors and auditors overlap - both are responsible for observing the conduct of charitable gaming activities and for examining the financial records of organizations.

The agency's lack of a records management policy and its poor record keeping protocols also contribute to management inadequacy. Agency records are not maintained in a central location and are not easily accessed by all staff. The accuracy of agency records is also inconsistent.

While charitable gaming organizations largely report satisfaction with the Commission's oversight of charitable gaming activities, other evidence indicates that the Commission's ability to provide effective oversight is frustrated by its inadequate attention to providing systematic training opportunities and support -to charitable gaming organizations. The lack of effective training has resulted in focusing on unintentional violations of the Code of Virginia and regulations, when resources should be concentrated on investigations into deliberate wrongdoing. Adequately ensuring that charitable gaming organizations understand the requirements of the statutes and regulations should be the first step in enforcing compliance with these provisions.

The management structure of the agency is also problematic. The appointment of the Executive Secretary by the seven-member part-time supervisory board results in this position having dual accountability to the board and to the Administration. The supervisory board meets only six times a year, at times without full attendance from the members. Members lack knowledge or expertise in charitable gaming and are highly dependent on their staff. Staff turnover is also a problem. The Commission has appointed four executive secretaries since its creation, each serving an average of less than two years. Partially as a result of this turnover in agency administration, the Commission has been inconsistently managed.

Additionally, this review found that the agency's protocols with respect to regulating the gaming community have been inconsistent with the requirements of the Code of Virginia and that there are improvements needed in the consistency and uniformity with which the Commission implements and follows its own procedures.

Does the Charitable Gaming Commission Have the Authority and Structure Necessary to Adequately Oversee Agency Management and Operations?

Yes, the Commission does have adequate authority to oversee agency management and operations, but its structure impairs its ability to exercise this authority. Although the Commission is set up in statute as a supervisory board, because its members serve on a part-time basis, are situated throughout the State, and meet only six times a year, the Commission has not effectively utilized its supervisory power over the agency. Indeed, members lacked an understanding of their authority to appoint the Executive Secretary, one of their primary duties. Additionally, members rely heavily on the agency staff and the Executive Secretary to update them on the status of charitable gaming in the State. Further, some members acknowledge that the agency has undertaken actions that should have been supervised more closely by the board, such as drafting legislation.

Does the Agency Have Sufficient Resources to Implement Its Statutory Mission?

No, the Commission does not currently have access to sufficient resources to implement its statutory mission. Although the agency reports having a $3 million balance in its current budget, it is restricted from using these resources due to actions taken in response to the current fiscal crisis faced by the Commonwealth. Additionally, the agency's budget has been reduced by 22 percent in both FY 2003 and FY 2004. This has caused the agency to eliminate its training efforts, restrict other activities, reduce staff hours, and lay off personnel.

Does the Agency Have Adequate Staffing to Implement Its Statutory Mission?

No, the agency does not have adequate staffing at this time. The reduction of both the FY 2003 and FY 2004 budgets by 22 percent forced the Commission to eliminate four full-time positions. This resulted in laying off two classified personnel. To meet the demands of the budget reduction, the agency has deferred hiring additional employees.

In particular, the Commission lacks sufficient enforcement and audit staff to fulfill its statutory mission. The enforcement and audit functions are essential in ensuring uniform compliance with the charitable gaming statutes. The enforcement division lost two full-time special agents as a result of budget reductions, leaving the agency with one part-time and two full-time agents to handle the 14 open criminal investigations and respond to other reported problems.

The Commission also has only two full-time and two part-time field auditors to analyze the financial records of the more than 600 organizations identified as needing an audit. In 2002, the Commission audited a total of 70 organizations, most of which were identified in a previous year as needing an audit. As shown on the table on page vi, Commission staff have audited only 26 of 632 organizations newly identified in calendar year 2002 as needing an audit.

This is problematic, as most completed audits show some degree of noncompliance with gaming statutes or regulations. Out of 75 audits conducted between October 2001 and September 2002, 54 organizations were found to be underreporting revenues by an average of $116,141, or a total of $6.3 million. Such underreporting represents an opportunity for fraud and the potential loss of substantial revenues for charitable purposes.

Three Structural Options Proposed

In addition to the specific recommendations included in the main body of the report, JLARC staff developed three policy options that the General Assembly may wish to consider to address the deficiencies identified during the study. Under the first option, the State would continue to have the Commission operate as it is currently structured, since it has been relatively successful in meeting the overall goals of managing charitable gaming activities. Under the second option, the Commission would be re-designated as an advisory board, with the appointment of the Executive Secretary transferred to the Governor. Under the third option, given the similarities between the two agencies, the Charitable Gaming Commission would be merged with the Lottery Department to form a "Department of Charitable Gaming and the Lottery." Advantages and disadvantages of each option are discussed in Chapter IV of this report.

Option (1). Continue the present structure of the Charitable Gaming Commission, but make improvements to the management of the agency.

Option (2). Modify the Charitable Gaming Commission governance structure by designating it as an advisory board, with the appointment of the Executive Secretary made by the Governor.

Option (3). Consolidate the Charitable Gaming Commission with the State Lottery Department.