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Proposition 68

Proposition 68:
The Gaming Revenue Act of 2004.

By Chad Salzman

Copyright © 2004 by University of the McGeorge School of Law

J.D., McGeorge School of Law, University of the Pacific
to be conferred May 2006
B.A., History, Arizona State University, 2004

 

Table of Contents

I. Executive Summary
II. Legal Issues
III. Drafting Issues
IV. Constitutional and Statutory Issues
V. Public Policy Issues
VI. Conclusion

I. Executive Summary

In 1988, President Reagan signed the federal Indian Gaming Regulatory Act, granting Indian tribes the right to enter into tribal-state compacts to regulate gambling on Indian land. 25 U.S.C.S. §§ 2701-2721 (LEXIS 2004). Currently, there are more than 249 tribal-state compacts regulating gaming operations in 28 states. National Indian Gaming Association, NIGA Resource Library, http://indiangaming.org/library/index.html (accessed Oct. 1, 2004). California is a party to 64 of these tribal-state compacts. Institute of Government Studies Library, Propositions 68 & 70: Tribal Gaming, http://www.igs.berkeley.edu/library/htProp68&70TribalGaming.html (accessed Oct. 1, 2004).

In an effort to slow the expansion of tribal gaming, Proposition 68, known as The Gaming Revenue Act of 2004, will be on the November 2004, General Election Ballot. Proposition 68 requires Indian tribes who currently have tribal-state compacts to agree to revised compacts. Cal. Prop. 68 §3 (adding Cal. Const. art. IV, §19(h)) (2004), http://www.voterguide.ss.ca.gov (accessed Oct. 14, 2004). These revised compacts will require payment of 25% of each tribal casino’s “net win” to the Gaming Revenue Trust Fund (GRTF). Cal. Prop. 68 §3 (adding Cal. Const. art. IV, §19(h)(1)). Under Proposition 68, if the Indian tribes do not unanimously agree to the revised compacts, the State will have the power to allow up to 30,000 slot machines in card rooms and racetracks throughout California. Cal. Prop. 68 §3 (adding Cal. Const. art. IV, §19(i)). The card rooms and race tracks will pay up to 33% of their “net win” to the GRTF. Id.

Proposition 68 also enumerates how the GRTF will be dispersed. Cal. Prop. 68 §3 (adding Cal. Const. art. IV, §19(j)). The fund will distribute money primarily to local governments throughout the State for additional child protective, police, and firefighting services. California Secretary of the State, California Official Voter Information Guide, Analysis of Proposition 68 (2004). A small portion of the fund will be used for a statewide “responsible gambling” program, and to help subsidize Indian tribes who operate less the 350 slot machines. Id.

II. Legal Issues

A. Current Law

1. Non-Tribal Gaming

California allows gaming on non-tribal land in three forms: card rooms, horseracing, and the California State Lottery. Card rooms are permitted in California through judicial interpretation of the California Constitution. Hotel Employees & Restaurant Employees Internat. Union v. Davis, 21 Cal. 4th 585, 605 (1999). The California Constitution does not directly permit card rooms, instead it only prohibits casinos of the type currently operating in Nevada and New Jersey. Cal. Const. art. IV, §19(e). The California Supreme Court determined that the constitutionally prohibited Nevada and New Jersey type games were all “banked” card games. Hotel Employees & Restaurant Employees Internat. Union, 21 Cal. 4th 585, 605. “Banked” card games are those in which the card room is a player at the table and can win all bets from defeated players, such as twenty-one. California Secretary of the State, California Official Voter Information Guide, Analysis of Proposition 68 (2004). Thus, card rooms are permitted to operate in California as long as they only operate games in which the card room has no stake in the outcome, such as poker. Id.

Today, there are 96 licensed card rooms operating in California. California Secretary of the State, California Official Voter Information Guide, Analysis of Proposition 68 (2004). The State places the responsibility on local governments to approve new card rooms, establish the hours of operation, and regulate the number of tables. Cal. Bus. & Prof. Code Ann. §19960 (LEXIS 2004). Current law limits the expansion of both the number and size of card rooms until January 2010. Cal. Bus. & Prof. Code Ann. §19962.

The second form of non-tribal gaming permitted in California is horse racing. Cal. Const. art. IV, §19(b). The California Constitution authorizes the Legislature to regulate horse races, horse race meetings, and wagering on the results. Id. California is currently home to 6 privately owned racetracks, 9 racing fairs, and 20 simulcast only facilities. A Fair Share for California, The Gaming Revenue Act of 2004, http://www.fairshareforcalifornia.org/facts.html (accessed Sept. 8, 2004). Simulcast facilities do not have live racing, instead they allow betting on televised races in other locations. Id. California collects approximately one percent of the gross amount wagered at any racing event, as well as collecting license fees. Id.

The final form of non tribal gaming permitted in California is the California State Lottery. Cal. Const. art. IV, §19(d). On November 6, 1984, 58% of California's voters approved Proposition 37, the California State Lottery Act. California Lottery, About Us, http://www.calottery.com/about/index.html (accessed Oct. 14, 2004). The Act amended the California Constitution to permit a State lottery. Id. In the 2002–2003 fiscal year, the California State Lottery collected over $2.7 billion from lottery proceeds, approximately $1 billion of which was distributed directly to the California public education system. California Lottery, 2003 Report to the Public, http://www.calottery.com/nc/about/publications/annualreports.html (accessed Oct. 14, 2004). Since its inception the California State Lottery has been economically beneficial to the State and will in no way be affected by Proposition 68. Id.

2. Tribal Gaming

California is currently struggling with the issue of Indian gaming within the framework of the 1988 federal Indian Gaming Regulatory Act (IGRA). 25 U.S.C.S. §§ 2701-2721. The IGRA grants Indian tribes, located within states that permit gaming, the right to enter into tribal-state compacts to regulate gambling on Indian land. 25 U.S.C.S. §2710(b)(1). This Act splits gaming into three classes. 25 U.S.C.S. §2703(6)-(8). Class I gaming is social gaming played solely for prizes of minimal value, and is within the exclusive jurisdiction of the Indians tribes and not subject to the provisions of the IGRA. 25 U.S.C.S. §§2703(6), 2710(a)(1). Class II gaming, includes Bingo and “non–banked” card games, such as poker. 25 U.S.C.S. §2703(7). Class III gaming is all gaming that is not Class I or Class II. 25 U.S.C.S. §2703(8). Class II and Class III gaming are permitted on Indian land only if the land is located in a state which permits such gaming. 25 U.S.C.S. §2710(b), (d).

Article IV of the California Constitution permits Class II and III gaming, in particular the operation of slot machines, lottery games, and banking and percentage card games exclusively on Indian land. Cal. Const. art. IV, §19(f). The IGRA requires that any Indian tribe having jurisdiction over land where Class III gaming is to be conducted request that the State, in which the land is located, enter into negotiations for the purpose of creating a tribal-state compact. 25 U.S.C.S. §2710(d)(3)(A). California law requires that state-tribal compacts be authorized by the Governor and ratified by the Legislature. Cal. Const. art. IV, §19(f). To finalize, the Secretary of the Interior and the Chairman of the Nation Indian Gaming Commission must then approve the compacts. 25 U.S.C.S. §2710(b), (d).

3. Current Compacts

Currently in California, 64 tribes have tribal-state gaming compacts, operating 53 casinos with more than 54,000 slot machines in total. California Secretary of the State, California Official Voter Information Guide, Analysis of Proposition 68 (2004). California signed most of its tribal-state compacts in 1999. Id. Under the 1999 compacts, each tribe may operate no more than two casinos with a maximum of 2,000 slot machines each. Id. Under these compacts, the State collects approximately $100 million dollars annually. Id. The money collected from these compacts is only for purposes specified by the compacts (such as sharing the money with tribes who either have no gaming facilities or operate less then 350 slot machines in total). Id. Under these compacts, the tribes have agreed to prepare environmental studies concerning the addition or expansion of any tribal gaming facility. Id. The 1999 compacts will expire in 2020. Id.

In 2004, 10 tribes signed new or amended tribal-state compacts. California Governor’s Office, Governor Schwarzenegger Signs New Indian Gaming Compacts Meaning Millions for California, http://www.governor.ca.gov/state/govsite/ gov_htmldisplay.jsp?sCatTitle=%20&sFilePath=/govsite/spotlight/august23_update.html (accessed Oct. 3, 2004). Under the 2004 compacts, the tribes may operate more slot machines than permitted by the 1999 compacts. Id. In exchange, the tribes are required to make additional payments for each slot machine added to their facilities. Id. Unlike the 1999 compacts, the money collected under the 2004 compacts may be used for State purposes, in addition to Indian community needs. Id. Under these compacts, the tribes have agreed to prepare more detailed environmental studies concerning the addition or expansion of any tribal gaming facility. Id. Further, the tribes have agreed to negotiate with local governments regarding payments to reduce the negative impact of gaming facilities. Id. These compacts will expire in 2030. Id.

B. Changes Proposed by Proposition 68

Proposition 68, presents two options to Indian tribes, who currently have compacts with the State. Cal. Prop. 68 §3 (adding Cal. Const. art. IV, §19(h), (i)). The first option requires all Indian tribes who have existing compacts, to agree to pay 25% of their “net win” to the GRTF. Cal. Prop. 68 §3 (adding Cal. Const. art. IV, §19(h)(1)). “Net win” is the take from all of the slot machines after prizes are paid out, regardless of possible operating costs. Id. The Indian tribes will have 90 days from the passage of this measure to approve revised agreements. Cal. Prop. 68 §3 (adding Cal. Const. art. IV, §19(i)).

The other option will take effect if all Indian tribes with existing compacts do not unanimously agree to the revised compacts. Id. Specified card rooms and racetracks will be allowed to install as many as 30,000 slot machines in their facilities. Id. These facilities will be required to pay 30% of their “net win” to the GRTF. Cal. Prop. 68 §3 (adding Cal. Const. art. IV, §19(i)(1)(a)). These facilities will also be required to pay 2% of their “net win” to the city, and 1% of their “net win” to the county where they operate. Cal. Prop. 68 §3 (adding Cal. Const. art. IV, §19(i)(1)(d), (e)).

Either option will lead to the creation of the GRTF in the State Treasury. Cal. Prop. 68 §3 (adding Cal. Const. art. IV, §19(j)(1)). The Governor is to appoint a five member board to administer the GRTF. Cal. Prop. 68 §3 (adding Cal. Const. art. IV, §19(j)(2)). Distribution of the fund will be in two payments. Cal. Prop. 68 §3 (adding Cal. Const. art. IV, §19(j)(3)). Use of the initial payment is for three specific purposes: 1) up to 1% will be used for administrative costs; 2) $3 million annually will be used for a “responsible gaming” program; and 3) supplemental payments will be made to Indian tribes who operate fewer than 350 slot machines. Id. Distribution of the remainder is to be in three categories: 1) 50% to counties to provide services for abused and foster care children; 2) 35% to local governments for additional sheriffs and police officers; and 3) 15% to local governments for additional firefighters. Id. The population within the jurisdiction of these local governments will determine all distributions. Id.

C. Comparison To Proposition 70

Proposition 70 is a competing measure also appearing on the November 2, 2004, general election ballot which would give California Indian tribes the right to either amend or sign new 99-year gaming compacts containing provisions for expanding casino size, the number of slot machines allowed, and the types of games permitted. Cal. Prop. 70 §3 (adding Cal. Const. art. IV, §19(h)). These compacts give the Indian tribes the excusive right to operate slot machines, and other Class III gaming in California. Id. Proposition 70 also uses a structure to collect money from the Indian tribes based on the corporate tax rate. Id. Proposition 70 has the opposite purpose and effect of Proposition 68. Instead of slowing the expansion of tribal gaming as Proposition 68 purports to do, Proposition 70 will substantially increase the amount of Indian Gaming in California.

III. Drafting Issues

A. Severability

Proposition 68 contains a severability clause. The severability clause states: “If any provision of this Act… is held invalid or unconstitutional, such invalidity or unconstitutionality shall not affect other provisions… of this Act.” Cal. Prop. 68 §19. This clause is a common provision in many initiatives, used to prevent the invalidation of the entire proposition if one portion is determined to be invalid or unconstitutional. Gerken v. Fair Political Practices Commission, 6 Cal. 4th 707, 714 (1993).

The use of the severability clause in Proposition 68 will be subjected to a three part test established in Gerken. Id. at 715. The California Supreme Court has said that a provision of an initiative is severable if it is grammatically, functionally, and volitionally separable from the rest of the initiative. Id. at 714. A provision is grammatically and functionally separable if the words of the provision are distinct, and the provision to be severed is capable of independent action. People’s Advoc., Inc. v. Super. Ct., 181 Cal. App.3d 316, 331 (App. 3rd Dist. 1986). A provision is volitionally separable if severing the provision would not change the initiative so dramatically that it would no longer be likely that the electorate would have passed the initiative lacking the severed provision. Gerken, 6 Cal. 4th at 715-716.

Proposition 68 amends the California Constitution, adds or changes sections of the California Business and Professions Code, and adds or changes sections of the California Government Code. Cal. Prop. 68 §§3-14 (2004). Each of these separate provisions alters a different portion of California law. These separate provisions of the proposition do not appear to be capable of independent function, as each provisions is required to successfully control the GRTF, and the future operation of California slot machines. Further, it is unlikely that it can be, “said with confidence that the electorate’s attention was sufficiently focused upon the parts to be severed,” to indicate that the proposition would pass in the absence of the severed portions. People’s Advocate, Inc., 181 Cal. App.3d at 333. Each provision of Proposition 68 is interrelated, such that severing one provision would likely cause the other provisions to not adequately achieve the proposition’s goal. Therefore, it is unlikely that severing any provisions of Proposition 68 will pass the Gerken three part test. Thus, it is unlikely that any portion of the proposition is severable.

B. Amendments

Proposition 68 contains an amendment clause. The amendment clause states: “The statutory provisions of this Act may be amended only by a vote of two-thirds of the membership of both houses of the Legislature.” Cal. Prop. 68 §15. The California Constitution generally only allows propositions to be amended, “…by passing another statute that becomes effective only when approved by the electors unless the initiative statute permits amendments… without their approval.” Cal. Const., art. II, § 10(c). This clause in Proposition 68 gives the State Legislature the opportunity to amend the measure without approval by the electorate. Cal. Prop. 68 §15. However, this clause does require a super majority to enact changes, which acts as a procedural safeguard to ensure a difficult amendment process. Id.

C. Inconsistency With Other Ballot Measures

The California Constitution states: “If provisions of 2 or more measures approved at the same election conflict, those of the measure receiving the highest affirmative vote shall prevail.” Cal. Const., art. II, § 10(b). Proposition 68 contains a provision directing the courts to reconcile any statutory provisions that may conflict with another measure to the greatest extent possible, and to give effect to every provision of both measures. California Secretary of the State, California Official Voter Information Guide, Analysis of Proposition 68 (2004). At the time Proposition 68 was placed on the ballot there were no conflicting propositions. Id. However, provisions of the later added Proposition 70 are in direct conflict with Proposition 68. In particular, Proposition 70 grants the Indian tribes the exclusive right to operate slot machines and other Class III gaming in California. Cal. Prop. 70 §3 (adding Cal. Const. art. IV, §19(h)). Proposition 68 would violate this exclusive right provision, by allowing non-tribal slot machine gaming, unless all tribes with existing compacts unanimously agreed to compact amendments. Cal. Prop. 68 §3 (adding Cal. Const. art. IV, §19(i)). Therefore, because these two measures conflict, the measure which passes with the highest affirmative vote will prevail.

IV. Constitutional and Statutory Issues

A. Federal Law

1. Indian Gaming Regulatory Act

The IGRA requires that states shall negotiate with the Indian tribes in good faith to enter into tribal-state compacts. 25 U.S.C.S. § 2710(d)(3)(A). If an Indian tribe believes that the state is not acting in good faith to complete the compact, the tribe may file a motion in Federal court requesting an order requiring the state to negotiate in good faith pursuant to the IGRA. 25 U.S.C.S. § 2710(d)(7)(B)(iii). In determining whether a state has negotiated in good faith, the court may take into account the adverse economic impacts on existing gaming activities, financial integrity, and the public interest. 25 U.S.C.S. § 2710(d)(7)(B)(iii)(II).

It is arguable that provisions of Proposition 68 would create a violation of the good faith requirement of the IGRA. Proposition 68 requires the amendment of all existing compacts to include a provision requiring payment of 25% of the tribe’s “net win” to the Gaming Revenue Trust Fund or thousands of slot machines will be placed on non-tribal land. Cal. Prop. 68 §3 (adding Cal. Const. art. IV, §19(h), (i)). Tribes who currently have compacts, will have to either renegotiate their compacts or suffer the negative economic effect of an expansion of non-tribal gaming. Id. This places the State in a position to force the Indian tribes to choose between the two options, either of which will give the State a positive economic effect, and result in a loss of revenue for the tribes. No on Prop 68, Questions and Answers, http://www.deceptivegamblingprop.com/qa.php (accessed Oct. 1, 2004). Forcing the tribes to choose between two options that both result in a negative economic effect likely demonstrates a lack of good faith on the part of the State, and would thus be a violation of the IGRA.

If Proposition 68 violates the good faith requirement of the IGRA, then the tribes could bring suit in Federal court. 25 U.S.C.S. § 2710(d)(7)(B)(iii). The court could then order the State to negotiate in good faith, which would result in negotiations outside of the restraints of Proposition 68. Id. In essence, this would make the negotiations no different then they are today, and completely nullify Proposition 68.

B. State Constitution

1. Single Subject Rule

California Constitution Article II, Section 8(d) states that “an initiative measure embracing more than one subject may not be submitted to the electors or have any effect.” Cal. Const. art. II. §8(d). The California Supreme Court has interpreted this section of the California Constitution broadly, holding that the provisions of an initiative reasonably related to a common theme or purpose does not violate the single subject rule. Legislature v. Eu, 54 Cal. 3d. 492 (1991). The court has further clarified that an initiative does not violate the single subject rule if the provisions of an initiative are reasonably connected to each other to achieve the initiative’s purpose. Id.

Proposition 68 is about the collection of additional State revenue from gaming. Cal. Prop. 68 §2(a). It purports to collect a “net win” from either the Indian tribes who currently have tribal-state compacts or from non-tribal gaming facilities throughout the State. Cal. Prop. 68 §3 (adding Cal. Const. art. IV, §19(h), (i)). It is arguable that each of the proposition’s two options reflects different areas of State law, tribal gaming, and non-tribal gaming. Id. However, it is likely that the common theme of collecting and redistributing State gaming revenues successfully runs throughout the proposition, thus not violating the State’s single subject rule.

V. Public Policy Issues

A. Proponents

As of October 7, 2004, the official proponents of Proposition 68 conceded. The Sacramento Bee, Prop. 68 Backers Calling it Quits, www.sacbee.com./content/politics/ca/election/v-print/story/11004178p-11921369c.html (accessed Oct. 14, 2004). "No matter how much money we invest and no matter how many ads that we run ... there's not enough time to clarify these issues for the voters," said Rick Baedeker, chairman of the Yes on Proposition 68 coalition. Id. The proponents believe that not participating in any further campaigning will be economically beneficial and give them more time and money to prepare a new initiative for a future election. Id.

In reference to the goals of Proposition 68, proponents claim that the passage of this measure would guarantee California local governments their “fair share” of Indian gaming revenues. A Fair Share for California, The Gaming Revenue Act of 2004, http://www.fairshareforcalifornia.org/facts.html (accessed Sept. 8, 2004). Estimates claim that California Indian tribes generate over $5 billion annually from the slot machines they currently have in operation. Id. If the tribes agree to the revised tribal-state compacts, which include the payment of 25% of the “net win” these slots may pay more than $1 billion annually to the GRTF. Id.

Alternatively, if the tribes do not agree, then 30,000 slot machines will be placed in local horse racing and card room facilities throughout California. Id. Proponents believe that this will increase the overall amount of taxable economic activity in California by diversifying gaming. Id. Further, an increase in accessibility of gaming devices will be beneficial to the State because more people will be able to access this form of entertainment. Id. Finally, an increase in the amount of non-tribal gaming in California would destroy the monopoly Indian tribes hold on slot machine gaming. Id.

Regardless if the Indian tribes agree to the revised compacts, passage of the measure will ensure that the GRTF will begin to collect the “net win” from some California slot machines. Id. The GRTF will distribute the money in accordance with the measure, primarily focusing on abused and foster care children, and the local police and firefighters. Id.

Proponents of Proposition 68 include: Sacramento County Sheriff Lou Blanas, Los Angeles Country Sheriff Lee Baca, and horse racing and card club facilities throughout California. A Fair Share for California, Solution, http://www.fairshareforcalifornia.org/thesolution.html (accessed Oct. 1, 2004).

B. Opponents

Opponents of Proposition 68 argue that passage of this measure will lead to a huge expansion of casino gaming on non-tribal lands. No on Prop 68, Proposition 68 Poses One Fundamental Question to California Voters, http://www.stop68.com/facts_STFGP_FACTS.php (accessed Sept. 8, 2004). Some opponents claim that Proposition 68 means California will quickly surpass Nevada as the nation’s top gambling state. Id.

The main argument of the opponents is that the “fair share” claim by the proponents is nothing more than a marketing ploy by racetrack and card room owners to hide the fact that even if California takes 33% of the “net win” from all new slot machines, they will take the other 67%. Id. Further, big corporate gaming companies in California would likely turn these racetracks and card rooms into giant Las Vegas style casinos. No on Prop 68, Questions and Answers, http://www.deceptivegamblingprop.com/qa.php (accessed Oct. 1, 2004).

Opponents argue it is unlikely that first option of the proposition will take effect and allow the State to simply take a “fair share” from tribes who currently have tribal-state compacts. Id. Opponents believe that the Indian tribes will never unanimously agree to revised compacts within the 90 day period established by the proposition, and thus 30,000 slot machines will be in local racetracks and card rooms by March 2005. Id.

Opponents of Proposition 68 include: Governor Arnold Schwarzenegger, California Police Chiefs Association, California State Firefighters’ Association, more than 30 county sheriffs, California District Attorneys Association, California Coalition of Law Enforcement Association, California State PTA, more than 60 California Indian Tribes, Sierra Club, and California Taxpayers Protection Association. No on Prop 68, Proposition 68 Poses One Fundamental Question to California Voters, http://www.stop68.com/facts_STFGP_FACTS.php (accessed Sept. 8, 2004).

VI. Conclusion

Indian gaming is one of the hottest topics in state politics. With more than two dozen states regulating the growing economic power of Indian gaming, this multi-billion dollar industry is now playing a major role in shaping the nation’s economy. With more than 50 casinos currently in operation, California currently has the biggest share of the nation’s Indian gaming. Proposition 68 either will further regulate and control Indian gaming or will end the Indian’s exclusive rights to engage in slot machine gaming by expanding non-tribal gaming across California. Regardless, if Proposition 68 passes on November 2, 2004, state initiatives will continue to attempt to control this industry as it seeks to find its place in the economic foundation of the United States.