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Agenda Item # 20

BOARD MEMORANDUM

RECOMMENDATION:

Adopt an oppose position for Propositions 68 and 70, two competing measures appearing on the November 2004 general election ballot relating to the expansion of casino-style gambling across California. Even though the wording of these ballot measures do not make reference to transportation, their passage would reverse provisions in the FY 2005 state budget package authorizing up to $1.5 billion in transportation funding. This is because the source of these revenues are bonds backed by proceeds from renegotiated tribal gaming compacts that are valid only if both Propositions 68 and 70 are defeated.

BACKGROUND:

Transportation funds have been drawn upon repeatedly over the last few years to help cover state General Fund deficits.   In fact, approximately $3.3 billion has been borrowed from various transportation accounts to balance the state budget.

Part of the FY 2005 state budget agreement included the enactment of AB 687 (Nuñez) to begin to repay some of these outstanding loans.   Specifically, AB 687 authorizes the state to issue up to $1.5 billion in bonds back by tribal gaming revenues generated through the ratification of tribal gaming compacts that were renegotiated by the Schwarzenegger Administration with five Native American tribes.  The renegotiated compacts allow these five tribes to expand their gaming activities in return for contributing more of their net proceeds to the state, as well as in return for agreeing to conduct environmental reviews and to mitigate for off-reservation impacts resulting from their operations.

AB 687 calls for transferring the first $1.214 billion in bond proceeds to the Traffic Congestion Relief Fund (TCRF) to be distributed in the order shown in the chart below; but it also authorizes repayment of additional outstanding transportation loans to the General Fund should more revenues become available as other tribes renegotiate their compacts.

For the San Francisco Bay Area, these revenues would translate into approximately $126 million in State Transportation Improvement Program (STIP) funds, and $39 million for local streets and roads.   In addition, the $290 million provided for the TCRP would be for new project allocations, the first since November 2002.

Under the provisions of AB 687, bond proceeds exceeding $1.214 billion would be deposited in the Transportation Deferred Investment Fund and distributed in the following priority order:

• The outstanding amount that still needs to be repaid to transportation programs as a result of the suspension of Proposition 42 in FY 2005.

• The outstanding amount that still needs to be repaid to transportation programs as a result of the suspension of Proposition 42 in FY 2004.

The availability of these revenues for transportation depends upon the failure of Propositions 68 and 70.   The five tribal gaming compacts negotiated by the Governor and ratified by the Legislature would be null and void if the voters approve either one of these ballot measures.

Proposition 68, the “Gaming Revenue Act of 2004,” is backed by a coalition of card clubs and racetracks.   It specifies that within 90 days of the measure’s passage, all tribes with existing compacts must agree to pay 25 percent of their revenues to the state or lose their monopoly on casino-style gambling in California.   Currently, 61 tribes have gaming compacts with the state, making it extremely difficult and unlikely that all of them would renegotiate their compacts in this manner and timeframe.  Their failure to do so would authorize up to 30,000 new slot machines to be divvied up among various card clubs and racetracks, including Golden Gate Fields in Berkeley, California Grand Casino near Concord and Bay Meadows in San Mateo.

These gambling establishments would then pay local governments 33 percent of their net winnings from their slot machines.   The first 3 percent of this amount would be split between cities and counties on a point-of-sale basis.   The remaining 30 percent would be distributed to local governments as follows:

• 50 percent to counties to provide services for abused and foster care children.
• 35 percent to local governments for additional sheriffs and police officers on a per capita basis.
• 15 percent to local governments for additional firefighters on a per capita basis.

The five renegotiated tribal gaming compacts include specific provisions that tie their fate to that of Proposition 68.   Specifically, they provide that if the state allows non-tribal entities, such as card clubs or racetracks, to offer gambling on their facilities, then the tribes have the right to declare their compacts null and void, and to stop making payments to the state.   Under this situation, there would be no revenues to back the $1.5 billion in transportation bonds.

Proposition 70, the “Indian Gaming Fair Share Revenue Act of 2004,” is sponsored by the Agua Caliente Band of Cahuilla Indians in Palm Springs.   It authorizes Native American tribes to enter into 99-year compacts with the state to levy the corporate tax rate (8.8 percent) on casinos in exchange for protecting the current tribal monopoly on casino-style gambling, lifting the 2,000 slot-machine-per-tribe cap, and allowing tribal casinos to operate craps and roulette tables, which are now banned.

According to the Legislative Analyst’s Office, the revenue impact of Proposition 70 to the state probably will be lower under the new compacts negotiated in accordance with the ballot measure since the amount allocated to the state would be modified from a per-machine contribution to a contribution based upon the income generated by the machines.   In addition, the new compacts negotiated under Proposition 70 would remove provisions from existing compacts that require tribes to negotiate with local governments regarding community impacts and, therefore, would likely reduce payments to local governments.

The five renegotiated tribal gaming compacts are silent on Proposition 70.   However, if this ballot measure passes, the five tribes would have the option of signing new compacts that would provide them with a 99-year term of unlimited gambling in exchange for contributing the corporate tax rate.   Since these terms are more favorable with regard to gaming expansion and contain limited provisions related to local governments or the environment, the tribes would have a strong financial incentive to do so.

DISCUSSION:

In May 1999, the California Transportation Commission (CTC) published a 10-year needs assessment of the state’s transportation system, roughly estimating unfunded transportation needs at $117 billion.   In response, then-Governor Gray Davis and the Legislature worked together to enact the Traffic Congestion Relief Act of 2000.  This act provided $6.8 billion in new funding for transportation over a six-year period by transferring revenues generated by the state’s sales tax on gasoline from the General Fund to the Transportation Investment Fund.  Historically, these revenues were used to support general state government programs.  The Traffic Congestion Relief Act also included a method for distributing these revenues among the more than 140 TCRP projects specifically listed in the legislation, as well as among the STIP, local streets and roads, and the Public Transportation Account.

In March 2002, 70 percent of the electorate approved Proposition 42, a legislative constitutional amendment that permanently dedicated gasoline sales tax revenues to transportation infrastructure needs.   However, Proposition 42 also included provisions that allow the transfer of such revenues from the General Fund to the Transportation Investment Fund to be suspended in any given fiscal year if the Governor declares that the transfer would negatively impact general government programs and if two-thirds of both houses of the Legislature concur.

Because of persistent state budget deficits since the enactment of the Traffic Congestion Relief Act, none of the gasoline sales tax revenue promised by the act for transportation (approximately $1.1 billion a year) has been transferred from the General Fund to the Transportation Investment Fund and made available to address the state’s huge transportation infrastructure needs.

In response, the CTC suspended all new allocations for TCRP projects in December 2002.   TCRP projects with allocations approved by the CTC prior to December 2002 were kept going through the continuous borrowing of regular gas tax revenues from the State Highway Account.   However, this borrowing, combined with the fact that federal transportation dollars have not been flowing in the amounts projected, put such a strain on the State Highway Account that the CTC was forced to suspend all new allocations for programmed STIP projects during FY 2004.  The commission also was forced to sharply reduce allocations for state highway rehabilitation projects under the State Highway Operations and Protection Program (SHOPP).

The outlook for FY 2005 is turning out to be even more severe.   The slower-than-expected flow of federal transportation funds and the lack of Proposition 42 revenues have imperiled all categories of transportation project allocations.   Pursuant to the CTC’s latest estimate, the State Highway Account will have only enough cash to sustain $500 million in project allocations through December 2004, an amount that is less than one quarter of the planned $2.2 billion in allocations for the fiscal year.  Given these circumstances, the CTC has made it clear that it would not be able to resume STIP or TCRP project allocations, issue any new GARVEE bonds, or continue SHOPP project allocations.  However, this situation would change if Propositions 68 and 70 were defeated by the voters this November.

Because the passage of Propositions 68 and 70 would jeopardize up to $1.5 billion in transportation funding anticipated for FY 2005, we recommend that the Board of Directors oppose both of these ballot measures.

ALTERNATIVES:

The Board of Directors could decide to support Proposition 68 or 70, or could opt to take no position on either ballot measure at this time.

FISCAL IMPACT:

There is no immediate fiscal impact associated with this recommendation.

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