Performance audit, Arizona Department of Gaming

              State of Arizona
Office
of the
Auditor General
PERFORMANCE AUDIT
Report to the Arizona Legislature
By Douglas R. Norton
Auditor General
ARIZONA
DEPARTMENT
OF
GAMING
April 1999
Report No. 99-5
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
DOUGLAS R. NORTON, CPA
AUDITOR GENERAL
DEBRA K. DAVENPORT, CPA
DEPUTY AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
April 9, 1999
Members of the Arizona Legislature
The Honorable Jane Dee Hull, Governor
Mr. Stephen Hart, Director
Arizona Department of Gaming
Transmitted herewith is a report of the Auditor General, A Performance Audit of the
Arizona Department of Gaming. This report is in response to a May 27, 1997, resolution
of the Joint Legislative Audit Committee. The performance audit was conducted as part
of the Sunset review set forth in A.R.S. §§41-2951 through 41-2957.
The report recommends that state officials, including the Governor and Legislature,
determine whether the Department’s current regulatory stance is the optimal approach
for monitoring Indian gaming operations in Arizona. Though the Department employs
extensive oversight activities that are well designed for ensuring the integrity of gaming
operations, its approach is among the most extensive and costly in the nation. Further,
since the tribal-state gaming compacts negotiated between the State and tribes do not
clearly delineate the extent of state oversight or provide the State with any sanction
authority to enforce compliance, disagreement exists in Arizona between the
Department and several tribes regarding what level of involvement the State should
have within Indian gaming. In light of such disagreement, the report recommends that
state policymakers decide if the current approach best meets the State’s needs or if a
different, less extensive approach is warranted. Regardless of the approach chosen, the
report strongly recommends that the Department continue working to improve
relations with tribal officials to ensure a more effective sphere of gaming regulation.
The report also contains findings about the gaming device assessment fees tribes pay
for state oversight activities and about the Department’s certification process for
vendors providing services to gaming operations. Specifically, the report recommends
that the Department, as the State’s representative, work with tribes to renegotiate the
April 9, 1999
Page -2-
gaming device assessments tribes pay to fund the Department’s oversight activities. Such
negotiations are important because without them, the Department’s operating budget could
be threatened and inequities between tribes may result. The Department could foster such
negotiations by providing more specific information to tribes about its use of these fees. The
report also notes that the Department has made several improvements to its process used to
investigate and certify vendors providing services to tribal gaming operations and recom-mends
that the Department consider implementing several additional changes to further
streamline the process.
As outlined in its response, the Department takes no position on the first finding which
is primarily addressed to the State’s policymakers. The Department does agrees with
the second and third findings and has agreed to implement the recommendations to the
extent it is able to do so within the provisions of the current compacts.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on April 12, 1999.
Sincerely,
Douglas R. Norton
Auditor General
Enclosure
i
SUMMARY
The Office of the Auditor General has conducted a performance audit of the Arizona De-partment
of Gaming pursuant to a May 27, 1997, resolution of the Joint Legislative Audit
Committee. This audit was conducted as part of the Sunset review set forth in A.R.S. §§41-
2951 through 41-2957.
The Legislature established the Arizona Department of Gaming (Department) in 1995 to
monitor Indian gaming operations on behalf of the State of Arizona. Formal agreements re-quired
by federal law known as tribal-state gaming compacts, negotiated between the State
and tribes seeking to conduct gaming activities, provide a regulatory framework whereby
the State and tribes share responsibility for maintaining the integrity of Class III gaming op-erations.
These compacts are unique because they provide the State with an active role within
tribal affairs, whereas the State generally has very limited jurisdiction on tribal lands.
The Department has 56 employees who perform a variety of functions to meet the State’s
compacted responsibilities. These employees carry out compact enforcement activities such
as gaming device inspections, and certification activities such as background investigations
on individuals and companies who wish to provide services to gaming operations.
State Should Review
the Department’s Role
(See pages 9 through 16)
State officials should determine whether the Department’s current regulatory stance is the
optimal approach for monitoring Indian gaming operations in Arizona. The tribal-state
gaming compacts negotiated between the State and the tribes do not clearly delineate the
extent of state oversight, nor do they provide the State with any sanction authority to enforce
compliance. As a result, disagreement exists in Arizona between the Department and several
tribes regarding what level of involvement the State should have within Indian gaming.
Audit work revealed that the Department’s extensive oversight activities are well designed
for ensuring the integrity of Class III gaming operations. For example, at each gaming facility,
the Department performs pre-operation inspections, randomly inspects gaming devices
every 4 weeks, conducts compact compliance reviews every 18 months, and maintains an
ongoing presence through its investigators, who visit casinos on a weekly basis to inspect
operations and investigate possible compact violations. These activities are generally well-designed
and are accepted practices among gaming regulators. Further, based on Depart-ment
records, they effectively identify compact violations at gaming facilities.
ii
The Department’s approach is, however, among the most extensive nationally. The Depart-ment
has more staff monitoring Indian gaming than any other state and maintains a larger
budget than states with comparable numbers of casinos. The Department also conducts its
activities more frequently than most other states.
Although the Department operates an extensive regulatory program, it lacks the authority to
impose sanctions for noncompliance and must rely on voluntary compliance by casino op-erators
or enforcement actions by tribal regulators. This is especially significant because tribal
officials do not always agree that compact violations identified by the Department are, in-deed,
violations.
In light of the issues related to state oversight activities, state policymakers should decide if
the Department’s current approach best meets the State’s needs and the intent of the com-pacts
or if a different approach is warranted. State officials may want to retain the current
approach because it allows the Department to quickly identify potential threats to gaming
operations and the public. However, state officials may opt for a more targeted oversight
approach. Under such an approach, the Department would continue to conduct its current
activities, but in some cases at a less frequent rate. The frequency of activities would be based
on the violation history of each gaming operation, and the experience and expertise of the
tribal regulatory body. As a third alternative, state officials may decide that the Department
should play a much more limited oversight role. Several states and the federal government
allow some tribes to completely self-regulate their operations.
Regardless of the approach chosen by state policymakers, the Department should continue
working to improve its relations with tribal officials. Gaming regulation is unique in that it
requires two distinct, sovereign governments to work together as co-regulators. The De-partment’s
dependence on the cooperation of tribal regulators makes it essential that effec-tive
working relationships exist. The Department should strengthen these relationships by
consistently holding quarterly meetings with tribal officials to identify and resolve issues as
they arise, and by continuing to improve the information provided to tribal officials regard-ing
the Department’s enforcement activities. According to the agency’s new Director, im-proving
relations with tribes is a high departmental priority.
The Department Should Work
with Tribes to Reach an
Agreement on Gaming Device
Assessment Fees
(See pages 17 through 20)
A tribal-state gaming compact provision requiring that the State and tribes renegotiate tribal
assessment fees after the compact’s first two years has not been met. The compacts initially
required that tribes pay an assessment fee of $500 per gaming device to fund the Depart-ment’s
enforcement activities. The amount of this fee was arbitrary since the costs of state
iii
oversight were unknown. The compacts include a provision requiring that fees be renegoti-ated
once the costs of state oversight became clearer. Despite this provision, assessment fees
have not been renegotiated for most tribes, even though 13 of the 17 compacts have been in
effect for more than 2 years. Most attempts to renegotiate fees have resulted in an impasse
though, according to Department officials, two tribes have renegotiated the fee and agreed to
pay the $500 assessment for the duration of the compact.
The inability to renegotiate fees could threaten the Department’s operating budget, and
could also result in inequities between tribes. To date, assessment fees have exceeded the
amount needed to fund Department operations, and the surplus has been returned or cred-ited
to the tribes each year. However, the amount of the revertment has declined as the De-partment’s
costs have increased. If this trend continues, the Department may soon experience
a shortfall in revenues.
In order to foster renegotiations, the Department should consider providing more specific
information to tribes about its use of these fees. Specifically, the Department could revise the
quarterly expenditure reports the compacts require so that they include more detail about its
expenditures. Since providing more details may increase its administrative costs, the De-partment
should consult with tribal officials to determine the appropriate balance between
the competing needs for more information and for minimizing costs.
Finally, the Department, as the representative of the State, should work with tribal officials to
generate amended or new compact language that identifies a tangible and fair basis from
which fees can be renegotiated. Current compact language requires that fees be renegotiated
based on the “actual and projected costs and expenses incurred for State regulation enforce-ment
duties.” If interpreted to mean that every Department expense is subject to separate
negotiation, this language could make it difficult to complete negotiations with each of the 17
tribes. Further, because the cost of regulation depends on the extent and frequency of regu-latory
activities, negotiation based on this language could falter over disagreements about the
need for specific Department activities.
Improved Vendor Certification
Process Can Be Further
Streamlined
(See pages 21 through 26)
The Department should consider making additional refinements to its process for certifying
vendors that provide services for tribal gaming operations. Currently, the Department, per
compact requirements, certifies businesses that provide more than $10,000 in goods and
services to a gaming operation in any given month. The certification process helps to ensure
that only those companies that are found to be suitable under the provisions of the compact
are permitted to conduct business at Class III tribal casinos. Compacts do not specify how the
Department should carry out the certification process, but only list the offenses that would
iv
justify denying certification. The Department developed an investigative process designed to
identify these offenses. Initially, the Department subjected all vendors to the same level of
investigation, but now varies the level of review depending on the services provided and the
risks associated with these services.
During the audit, several tribal officials and vendors identified concerns about the certifica-tion
process. However, recent changes to the process should address many of these concerns.
For example, a more streamlined investigation process now in place for many types of ven-dors
should alleviate complaints that the process is too onerous for certain types of vendors.
Similarly, recent Department practices of providing monthly certification status reports to
tribal officials, and of more thoroughly itemizing the invoices vendors receive for investiga-tive
costs, should help to allay concerns raised by vendors.
The Department may wish to consider implementing additional changes to further stream-line
this process. For example, the Department could consider reclassifying additional ven-dors
so that they require less extensive investigations, automatically certifying vendors who
received comparable certification from other states, certifying only vendors of gaming-related
services, or altering the monetary threshold required for certification. Several of these
suggestions would require amended compact language. Further, the Department should
carefully assess the risks associated with any of these refinements before implementing them.
Other Pertinent Information
(See pages 27 through 31)
During the audit, other pertinent information was collected regarding the status of cases in
the dispute resolution process. Due to the complexities related to regulating gaming, dis-putes
sometimes arise between the Department and tribes. Under such circumstances, they
enter a dispute resolution process prescribed by the compacts. It appears that this process is
used much more frequently in Arizona than in other states with Indian gaming. In fact, there
are currently five pending cases in arbitration or litigation. These disputes cover a wide range
of issues. For example, one dispute concerns whether tribal assessment fees should be used
to pay the State’s legal costs. Another is about whether the Department has to provide tribes
with advance notice for device inspections. As of December 1998, there were seven pending
cases, some of which were long-standing, meaning that potentially serious matters were not
being quickly addressed. Additionally, the Department’s legal costs steadily increased be-cause
of these disputes. However, the Department settled two cases being litigated with
separate tribes in 1999.
v
Table of Contents
Page
Introduction and Background.............................................................. 1
Finding I: State Should Review
the Department’s Role...................................................................... 9
Appropriate Role for
State in Regulating Indian
Gaming Not Well-Defined................................................................................................... 9
Department’s Regulatory Tools Are
Well-Designed for Ensuring
Integrity of Gaming Operations......................................................................................... 10
Department’s Approach Among
Most Extensive Nationally................................................................................................... 11
Alternative Oversight
Approaches Exist.................................................................................................................... 12
State Should Determine
How to Best Monitor
Indian Gaming........................................................................................................................ 14
Regardless of Approach,
Department Should Work with Tribes
to Improve Cooperative Relationship............................................................................... 15
Recommendations................................................................................................................. 16
Finding II: The Department Should Work
with Tribes to Reach an Agreement
on Gaming Device Assessment Fees ............................................ 17
Most Fees Have Not
Been Renegotiated.................................................................................................................. 17
Providing More Cost Information
Could Facilitate Negotiations.............................................................................................. 18
vi
Table of Contents (cont’d)
Page
Finding II: (cont’d)
Department Making Progress
Toward Renegotiating Fees................................................................................................. 19
If Possible, Compact Language Should Be
Clarified or Changed for Fee Renegotiations.................................................................. 19
Recommendations................................................................................................................. 20
Finding III: Improved Vendor Certification
Process Can Be Further
Streamlined........................................................................................ 21
Vendor Certification
Process...................................................................................................................................... 21
Problems Identified with
Certification Process .............................................................................................................. 23
Improvements to
Certification Process .............................................................................................................. 24
Recommendation.................................................................................................................. 26
Other Pertinent Information.................................................................. 27
Dispute Resolution
Process...................................................................................................................................... 27
Disputes Costly
and Long-Standing................................................................................................................ 27
Some Current
Disputes ................................................................................................................................... 28
Sunset Factors........................................................................................ 33
Agency Response
vii
Table of Contents (concl’d)
Page
Tables
Table 1 Arizona Department of Gaming
Status of Tribal Gaming in Arizona
As of November 1, 1998...................................................................... 4
Table 2 Arizona Department of Gaming
Statement of Revenues, Expenditures, and
Changes in Fund Balance
Years Ended or Ending June 30, 1997, 1998, and 1999
(Unaudited)............................................................................................ 6
Table 3 Arizona Department of Gaming
Vendor Classifications ........................................................................ 22
Table 4 Arizona Department of Gaming
Cases in the Dispute Resolution Process
As of March 1999.................................................................................. 31
viii
(This Page Intentionally Left Blank)
1
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted a performance audit and Sunset review of
the Arizona Department of Gaming pursuant to a May 27, 1997, resolution of the Joint Leg-islative
Audit Committee. This audit was conducted as part of the Sunset review as set forth
in A.R.S. §§41-2951 through 41-2957.
The Arizona Department of Gaming (Department) was established in 1995 to regulate and
monitor Indian gaming on behalf of the State of Arizona. Previously, from 1992-1995, a divi-sion
within the Department of Racing handled this function. The Department’s stated mis-sion
is to protect the public by ensuring the integrity of the Indian gaming industry. Formal
agreements, called tribal-state gaming compacts, negotiated between the State and tribes,
provide a regulatory framework for the operation of Class III gaming activities conducted on
Indian lands. The Department carries out the State’s responsibilities as prescribed in the
compacts. Department staff monitor gaming operations to ensure compliance with compact
provisions and certify gaming employees and providers of gaming services to prevent un-suitable
individuals or companies from becoming involved in Arizona’s gaming industry.
Each tribe must establish a Tribal Gaming Office to perform similar functions on its behalf.
Federal Law Establishes
Basic Regulatory Structure
for Indian Gaming
In 1987, the Unites States Supreme Court rendered a decision entitling Indian tribes to con-duct
gaming on their lands if a state does not expressly prohibit all forms of gaming. In re-sponse
to this decision, Congress enacted the Indian Gaming Regulatory Act of 1988 (IGRA).
IGRA supports the promotion of tribal economic development while establishing basic
regulations and outlining federal, state, and tribal enforcement responsibilities for Indian
gaming. IGRA defines three classifications of Indian gaming, each with a different regulatory
structure.
n Class I Gaming (regulated exclusively by tribes)—Tribes exclusively regulate Class I
gaming, including social games or gaming related to tribal celebrations or ceremonies.
n Class II Gaming (regulated by tribes with federal oversight)—Tribes regulate Class II
gaming, such as bingo and certain card games. The National Indian Gaming Commission
(NIGC), created within the Department of the Interior, provides federal oversight of Class
II games.
2
n Class III Gaming (regulated by tribes with state oversight)—IGRA requires states and
tribes to regulate all other forms of gaming, defined as Class III games, such as electronic
gaming devices, keno, pari-mutuel wagering, and lotteries.
IGRA also restricts how tribes can use revenues derived from gaming operations. Tribes may
use revenues to fund tribal government operations, promote tribal economic development,
make donations to charitable organizations, and help fund local government operations.
Additionally, a tribe may choose to give a percentage of revenues directly to its members. In
Arizona, tribes have used gaming revenues for many of these purposes including hiring po-lice
officers, building medical facilities and community centers, and improving utility serv-ices.
States Usually Have Limited
Involvement in Tribal Affairs
Oversight of Class III gaming activities is one of the few areas of tribal affairs over which
states have any regulatory responsibility. Due to the reservations’ status as sovereign nations,
states have only limited jurisdiction over tribal affairs. For example, states generally lack ju-risdiction
over criminal and civil cases on reservations, lack authority to regulate traffic and
safety laws, and cannot impose taxes on tribal governments. However, IGRA established a
regulatory framework for Class III gaming that provides states with the authority to monitor
such Indian gaming activities within their borders. IGRA attempts to balance a state’s right to
maintain public health and safety with a tribe’s right to promote economic development and
self-sufficiency. Thus, both states and tribes conduct activities necessary to regulate gaming.
Development of Gaming
Compacts in Arizona
Was Highly Contentious
Indian gaming in Arizona had a turbulent beginning. The State initially refused to negotiate
compacts with tribes until ordered to do so by a federal court after several tribes sued the
State in 1992 for violation of IGRA. Despite this court order, the State could not reach agree-ment
with the tribes. As a result, the Department of the Interior intervened. The Secretary of
the Interior mediated negotiations that finally resulted in eight signed compacts in June 1993.
Though various states have needed federal assistance to resolve state-tribal differences, and
some states with Indian gaming have been unable to agree on compacts with tribes, only one
other state (Connecticut) required this level of federal intervention to secure compacts. The
State eventually signed tribal-state compacts with a total of 17 tribes, each containing basic
provisions in the following areas.1
1 Two of the 17 tribes with compacts no longer operate casinos.
3
n Compacts place limits on types of games and number of gaming devices—The
compacts permit the following Class III gaming activities: gaming devices (slot ma-chines),
keno, lottery, off-track pari-mutuel wagering, and pari-mutuel wagering on
horse and dog racing. The compacts limit the number of gaming facilities and gaming
devices based on a tribe’s enrolled membership. Tribes with 4,000 or fewer members can
operate 2 casinos with a total of 475 devices. Larger tribes can open more casinos with
additional devices. Further, a tribe can operate no more than 500 devices at each facility.
See Table 1 (page 4), for a list of tribes with compacts and the extent of their gaming op-erations.
n Tribes have specific regulatory responsibilities—Tribes are solely responsible for the
operation and management of all gaming activities. They must establish a tribal gaming
office, independent of the tribal government, to regulate gaming and enforce compliance
with compact provisions on the tribe’s behalf. The tribal gaming offices inspect gaming
facilities, approve internal control systems for the gaming operations, investigate sus-pected
compact violations, and license gaming employees, casino management compa-nies,
manufacturers of gaming devices, and providers of gaming services.
n State has monitoring role—The compacts set forth a monitoring role for the State. Like
the tribal gaming offices, the Department also monitors all gaming operations for com-pact
compliance. Further per compact provisions, the Department must also investigate
and certify all non-tribal gaming employees, casino management companies, suppliers
and manufacturers of gaming devices, and providers of gaming services. The Depart-ment
conducts background investigations and makes recommendations to tribes re-garding
licensing tribal members but does not actually certify them.
n Other provisions—The compacts establish other provisions such as fees for state certifi-cation,
reporting requirements between the State and tribes, a dispute resolution process,
and technical standards for Class III gaming activities. After ten years the compacts can
be extended for additional five-year terms or new compacts can be negotiated. The first
compacts will expire in 2002.
Budget and Staffing
Gaming device assessment fees and certification fees fund the Department’s operations.
Tribes are assessed $500 per gaming device per year. The compacts set initial certification fees
that range from $150 for gaming employees to $1,500 for casino management companies.
Investigative costs that exceed the initial fee must be paid by the applicant. Revenues from
both sources are deposited into the Permanent Tribal-State Compact Fund established by
A.R.S. §5-601(F). The Legislature appropriates money from the Fund for Department opera-tions,
and any gaming device assessment fee revenue remaining in the Fund at the end of the
Table 1
Arizona Department of Gaming
Status of Tribal Gaming in Arizona
As of November 1, 1998
Compacted Tribe
Number of
Tribal
Members
Compact
Date
Number of
Sites1
Authorized
Current
Number of
Sites
Number of
Devices1
Authorized
Current
Number of
Devices
Ak-Chin Indian Community 575 1993 2 1 475 475
Cocopah Tribe 774 1993 2 1 475 475
Colorado River Indian Tribes 3,095 1994 2 1 475 331
Fort McDowell Mohave-Apache Indian Community 849 1993 2 1 475 475
Fort Mojave Indian Tribe 997 1993 2 1 475 171
Gila River Indian Community 11,550 1993 3 2 900 900
Hualapai Tribe 1,562 1994 2 Closed 9/95 475 0
Kaibab-Paiute Tribe 245 1994 2 Closed 9/96 475 0
Pascua Yaqui Tribe 8,299 1993 3 1 900 500
Quechan Indian Tribe 2,419 1993 2 1 475 475
Salt River Pima-Maricopa Indian Community 6,202 1998 3 1 700 250
San Carlos Apache Tribe 10,500 1993 3 1 900 500
Tohono O’Odham Nation 18,061 1993 4 1 1,400 500
Tonto Apache Tribe 103 1993 2 1 475 318
White Mountain Apache Tribe 12,000 1993 3 1 900 496
Yavapai-Apache Tribe 1,200 1993 2 1 475 458
Yavapai-Prescott Indian Tribe 139 1993 2 2 475 475
Total 78,570 41 17 10,925 6,799
1 The number of authorized sites and devices is based on a tribe’s population. Tribes with populations of 4,000 or fewer members are allowed 2 sites and a
total of 475 devices. Tribes with 4,001 to 8,000 members are authorized 3 sites and a total of 700 devices, and tribes with 8,000 to 16,000 members are
allowed 3 sites and a total of 900 devices. Tribes with more than 16,000 members may have up to 4 sites and a total of 1,400 devices.
Source: Arizona Department of Gaming document “Status of Tribal Gaming in Arizona as of 11/1/98.”
5
fiscal year is returned to the tribes or applied to the following year’s gaming device assess-ment.
The Legislature appropriated $4,505,200 to the Department for fiscal year 1998-99. See
Table 2 (page 6) for the Department’s Statement of Revenues, Expenditures, and Changes in
Fund Balance for Years Ended or Ending June 30, 1997, 1998, and 1999 (unaudited).
The Department has 56 full-time equivalent (FTE) positions to fulfill the State’s responsibili-ties
set forth in the compacts. Forty of these positions are assigned to the following five com-pact
enforcement units:
n Games and Devices Compliance Unit (6 FTE)—These staff verify that electronic games
comply with the technical standards set forth in the compacts.
n Tribal Gaming Affairs Unit (7 FTE)—These staff are assigned to specific tribes and per-form
weekly on-site inspections of casinos and investigate suspected or actual compact
violations.
n Compliance Audit Unit (6 FTE)—These staff conduct extensive compact compliance
reviews for each casino every other year.
n Corporate Investigations Unit (8 FTE)—These staff conduct background investigations
on all casino management companies, suppliers and manufacturers of gaming devices,
and providers of gaming services as required by the compacts.
n Applications/Records Unit (13 FTE)—These staff conduct background investigations
on non-tribal individuals seeking state certification and on tribal members to make rec-ommendations
for tribal licensure. The unit also maintains all individual certification rec-ords
and provides computer support services for the Department.
Eight of the remaining 16 positions reside in the Department’s Administrative Division. The
Division is responsible for accounting, budget, purchasing, vendor billing, and processing
administrative hearings resulting from the certification process. The remaining eight posi-tions
are as follows: the Executive Director, a Public Information Officer, a Legislative Liai-son,
and five Enforcement Support staff who provide clerical services for the Enforcement
Division.
Since fiscal year 1995, the Department’s budget has tripled and the size of its staff has dou-bled,
although the number of gaming facilities and devices in the State has not grown to the
same extent. According to Department officials, when it was a new agency the Department’s
activities were focused on gaming operation start-up, but once the gaming operations were
established it required additional staff and budget to conduct the continuing activities re-quired
by the State’s compacted responsibilities.
6
Table 2
Arizona Department of Gaming
Statement of Revenues, Expenditures, and Changes in Fund Balance
Years Ended or Ending June 30, 1997, 1998, and 1999
(Unaudited)
1997
(Actual)
1998
(Actual)
1999
(Estimated)
Revenues:
Compact enforcement, regulation, and certification
fees1 $3,940,145 $4,122,913 2 $4,508,000
Expenditures:
Personal services 1,798,878 2,052,883 2,311,100
Employee related 372,436 411,618 514,800
Professional and outside services 300,964 295,284 465,200
Travel, in-state 173,423 130,198 165,000
Travel, out-of-state 74,043 62,454 136,000
Other operating 479,311 483,994 656,300
Capital outlay 13,006 16,825 35,600
Arbitration 272,556 319,340 220,000
Total expenditures 3,484,617 3,772,596 4,504,000
Excess of revenues over expenditures 455,528 350,317 4,000
Other financing uses:
Reversions to Indian tribes 3 605,515 269,381
Operating transfers out4 6,015 2,577 4,000
Total other financing uses 611,530 271,958 4,000
Excess of revenues over (under) expenditures and
other uses (156,002) 78,359
Fund balance, beginning of year 517,743 361,741 440,100
Fund balance, end of year 5 $ 361,741 $ 440,100 $ 440,100
1 Compact enforcement and regulation fees are based on gaming device assessments as established by tribal-state
gaming compacts. These fees support the Department’s enforcement and regulation functions. Certification and
renewal fees are assessed to persons seeking employment at a gaming facility and vendors providing gaming
services costing more than $10,000 per month. These fees support the Department’s certification functions.
2 Excludes $177,500 due from one tribe.
3 Includes amounts applied to gaming assessments due in the next fiscal year, in accordance with the compacts.
The tribes can choose to have monies returned to them at fiscal year-end or have the monies applied to gaming
assessments due in the next fiscal year. 1999 reversions to Indian tribes cannot be determined until the end of the
fiscal year.
4 Transfers are made to the Office of Administrative Hearings for appeals services provided during the certification
process.
5 Fiscal year-end fund balances consist of working capital and certification fee balances for certifications not com-pleted
at year-end.
Source: The Uniform Statewide Accounting System Revenues and Expenditures by Fund, Program, Organization, and
Object and Trial Balance by Fund reports, the State of Arizona Appropriations Report, and the Department’s
Tribal Revertment schedule for the years ended June 30, 1997, and 1998; and Department-estimated financial
activity for the year ending June 30, 1999.
7
Litigation and Access Issues
Affected Audit Scope
Audit work focused on the Department’s compact enforcement responsibilities. Specifically,
the Department’s regulatory activities, such as compact compliance reviews, device inspec-tions,
and certification activities, were reviewed.
The audit faced several scope limitations. First, several important issues regarding Indian
gaming are currently in arbitration or litigation and therefore not amenable to review. For
example, cases pending involve the Department’s authority to conduct unannounced gam-ing
device inspections and whether poker is an allowable game under the compacts (see
Other Pertinent Information, pages 27 through 31, for the current status of all pending cases).
Second, compact provisions do not provide the Auditor General with access to tribe-specific
information, such as investigative or monitoring reports. Reviewing this information is criti-cal
to analyzing and documenting the Department’s performance enforcing compact re-quirements.
However, 10 of the 17 tribes with compacts gave the Auditor General permis-sion
to review enforcement files maintained by the Department. Finally, while the audit’s
scope is limited to the Department, the tribes are mutually responsible for ensuring the integ-rity
of Indian gaming in Arizona. It is difficult to assess the impact of the Department’s ac-tivities
on Indian gaming when the Department comprises only part of the regulatory struc-ture.
Thus, while audit work and the subsequent recommendations were focused on the De-partment,
effective gaming regulation in Arizona also depends on tribal regulatory activities.
Working within these limitations, auditors employed the following methods to determine
the Department’s performance:
n Interviewing Department staff to document processes related to monitoring compact
compliance and certifying gaming companies and observing Department activities, such
as machine inspections and compact compliance reviews;
n Interviewing tribal government officials, tribal gaming officials, and/or casino operators
at 13 of the 15 tribes operating gaming facilities1;
n Reviewing Department correspondence and all relevant reports regarding gaming device
inspections, compact compliance reviews, and other regulatory activities for the ten tribes
granting auditors permission;
1 Tribal or casino officials from the following tribes were interviewed: Ak-Chin Indian Community, Cocopah
Indian Tribe, Colorado River Indian Tribes, Fort McDowell Mohave-Apache Indian Community, Fort Mo-jave
Indian Tribe, Gila River Indian Community, Quechan Indian Tribe, San Carlos Apache Tribe, Tohono
O’Odham Nation, Tonto Apache Tribe, White Mountain Apache Tribe, Yavapai-Apache Tribe, and Yavapai-
Prescott Indian Tribe.
8
n Reviewing Department certification files for both individuals and vendors and inter-viewing
19 vendors to document their experiences obtaining certification;1
n Surveying gaming officials in 18 states with Indian gaming and interviewing gaming of-ficials
in Nevada and New Jersey to determine how non-Indian gaming is regulated;2 and
n Reviewing literature and interviewing gaming experts, federal gaming officials, and fed-eral
law enforcement authorities to document the history, current status, and risks associ-ated
with Indian gaming.
This report presents findings and recommendations in three areas:
n The need for state officials, including the Governor and Legislature, to review the De-partment’s
oversight role;
n The inability to meet a compact provision requiring the State and the tribes to renegotiate
the gaming device assessment fees charged to tribes to cover the Department’s regulatory
costs; and
n Additional changes the Department should consider to further streamline its vendor cer-tification
process.
The report also includes information regarding the status of cases in the dispute resolution
process.
This audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the Arizona Department of Gaming
Director and staff, tribal government officials, tribal gaming offices, and casino staff for their
cooperation and assistance throughout the audit.
1 The types of vendors contacted included gaming equipment manufacturers and suppliers, financiers, food
service, change cart and coin counter, janitorial service, advertising, and entertainment companies.
2 The following states were contacted: Colorado, Connecticut, Idaho, Iowa, Kansas, Louisiana, Michi-gan,
Minnesota, Montana, Nevada, New Jersey, New Mexico, New York, North Dakota, North Caro-lina,
Oregon, South Dakota, Washington, and Wisconsin.
9
FINDING I
STATE SHOULD REVIEW
THE DEPARTMENT’S ROLE
The State needs to determine whether the Department’s current regulatory stance is the most
optimal approach for monitoring Indian gaming operations in Arizona. The compacts be-tween
the State and the tribes do not clearly delineate the extent of the State’s regulatory role.
The Department uses regulatory tools that are well designed to ensure the integrity of gam-ing
operations, but compared with other states, its actions are among the most extensive and
frequent. Regardless of whether the State decides to retain the current approach or change it,
efforts should be taken to ensure a more cooperative regulatory relationship between the
State and the tribes.
Appropriate Role for
State in Regulating Indian
Gaming Not Well-Defined
As noted previously, the federal Indian Gaming Regulatory Act of 1988 (IGRA) established a
regulatory structure for gaming that is shared between states and tribes. This has led to a
national debate over the appropriate state role in regulating Indian gaming. Organizations
with an interest in Indian gaming, such as the National Indian Gaming Association and the
National Governor’s Association, disagree about what this role should be. Further, federal
agencies and courts have not provided clear guidance. Federal agency officials with the U.S.
Department of Justice, the Bureau of Indian Affairs, and the National Indian Gaming Com-mission
have stated that tribes should be the primary regulators, but have not specified the
appropriate level of state oversight. By contrast, the National Governor’s Association and
some experts assert that the State should be the primary regulator. Additionally, federal
courts have been examining this issue since before IGRA’s passage, without a definitive
resolution.
Mirroring this national debate, disagreement also exists in Arizona about the appropriate
state oversight role. While gaming compacts assign extensive regulatory responsibilities to
the tribes and authorize the State to monitor compliance, they do not clearly outline the
State’s role, nor do they provide the State with any sanction authority to enforce compliance.
While tribal officials support a state role within Indian gaming, most believe that such a role
should be limited to occasionally monitoring activities rather than performing regulatory
functions on a day-to-day basis, because tribal gaming offices serve as the primary regulators
of gaming activities. Several tribes maintain Tribal Gaming Offices with annual budgets of
10
over $1 million. Conversely, Department officials believe such an approach is warranted be-cause
of the Department’s duty under the compacts to protect the public. They note the ap-proach
also assists tribal regulatory bodies and casinos to safeguard tribal assets in a high-risk,
cash-intensive industry.
Department’s Regulatory Tools
Are Well-Designed for Ensuring
Integrity of Gaming Operations
The Department employs extensive oversight activities for monitoring Indian gaming. These
activities appear to be well-designed and effective in identifying gaming operations’ poten-tial
compact violations.
Department conducts extensive monitoring activities—The Department’s enforcement ac-tivities
reflect its philosophy of thorough regulation. For example, at each gaming facility, the
Department performs a pre-operation inspection, and inspects all gaming devices prior to
operation. In addition, it randomly samples and inspects 50 gaming devices at each casino on
a monthly basis, and conducts a comprehensive compact compliance review approximately
every 18 months. For these reviews, Department officials use a standard instrument to ex-amine
tribal compliance with every compact provision. Further, the Department maintains
an ongoing presence through its investigators, who visit casinos weekly to inspect operations
and investigate suspected or actual compact violations.
Regulatory procedures sound—The Department’s enforcement activities are generally well-designed,
and consistently implemented, and effectively identify occasional problem areas
with gaming operations. As with tribal regulatory activities, the Department’s procedures are
intended to ensure the fairness of gaming activities and the safety of patrons as well as to
prevent organized crime from infiltrating casinos. Gaming device inspections, surveillance
log reviews, employee background checks, and other Department procedures are accepted
practices among gaming regulators, including those in such states as Nevada and New Jer-sey
as well as those within tribal governments.
Procedures effectively identify violations—Audit work revealed that the Department’s ac-tivities
effectively discover weaknesses that can be corrected to ensure the integrity of opera-tions.
For example, violations discovered in compact compliance reviews and weekly inves-tigator
visits include vendors providing services without state certification, the absence of a
posted emergency evacuation plan, tribal gaming ordinances that require revision, and the
failure to provide the Department with a list of persons barred from the casino for unaccept-able
behavior. Similarly, gaming device inspections discover violations of technical stan-dards,
such as requirements to keep computer logic boards locked and to fill out an access
form every time an employee opens a device.
11
Department’s Approach Among
Most Extensive Nationally
Under the direction of Arizona’s former Governor, the Department adopted a regulatory
position focused on carefully monitoring gaming operations on a day-to-day basis to ensure
that compact provisions are met. As a result, the Department’s size and costs are greater than
gaming agencies in comparable states. Further, the Department carries out its enforcement
activities much more frequently than most other states. However, when violations occur, the
Department must rely on voluntary compliance by casino operators, or enforcement actions
by tribal regulators, since it lacks any sanction authority over gaming operations.
Activities costly—To carry out its enforcement activities, Arizona uses a larger staff and in-curs
higher costs than gaming departments in other states with similar numbers of gaming
operations. Of the states with 10 or more compacted Indian gaming operations, Arizona’s
gaming department staff and expenditures are by far the highest.1 The Department’s staff
and expenditures grew rapidly during its first two years of operation, doubling and tripling,
respectively. According to Department officials, in the agency’s first year of operation its re-sources
were focused on gaming operation start-up, and additional staff were required to
carry out continuing activities to comply with compact provisions regarding established op-erations.
High frequency of activities—While its activities are consistent with best practices nationally
for both gaming and Indian gaming regulation, the Department conducts them more fre-quently
than most other states. Though some states, such as Nevada and Washington, con-duct
activities as frequently, they differ from Arizona because they have the authority to im-pose
sanctions for noncompliance. The Department has not determined the optimal fre-quency
for its enforcement activities, but instead conducts them based on what staffing al-lows.
For example, the Department initially conducted random monthly inspections of 100
gaming devices rather than 50, until it determined that such a high number of inspections
were not feasible. Further, the Department, through its investigators who make at least
weekly visits to each facility, maintains a much more visible presence on-site at gaming op-erations
than most other states.
Department must rely on voluntary compliance—Even though the Department employs
comprehensive enforcement activities, its lack of sanction authority over gaming operations
limits its overall effectiveness. Though these activities can detect alleged compact violations,
the State has no recourse, outside of legal action, to force gaming operations to address them.
As a result, the Department must rely on casino operations’ voluntary compliance and the
assistance of tribal regulators. In many cases, tribal officials concur with and quickly address
compact violations identified by the Department. However, in other cases, tribal officials dis-
1 In 1998, 5 other states had 10 or more compacted gaming operations: Washington (10), Minnesota
(18), Wisconsin (21), Michigan (15), and New Mexico (11). At the time of the audit, New Mexico had
not yet begun regulatory activities. The other 4 states ranged from 2 to 12 staff, compared to Ari-zona’s
56, and from $125,000 to $1.7 million in expenditures, compared to Arizona’s $3.8 million.
12
agree with alleged compact violations. Usually such disagreements stem from differing in-terpretations
of compact provisions. Such disagreements are not easily resolved and some-times
result in legal disputes (see Other Pertinent Information, pages 27 through 31).
Alternative Oversight
Approaches Exist
Other states with Indian gaming adhere to a wide spectrum of oversight approaches and, as
a result, have wide variances in the resources they allocate to monitor operations. Only a few
states employ comprehensive oversight activities similar to those the Department uses, while
other states employ the same types of activities but conduct them less frequently. Finally,
some states rely mostly on tribal self-regulation. Additionally, the National Indian Gaming
Commission is currently allowing some tribes to self-regulate their operations for Class II
games.
States with strong oversight positions—Several states adhere to proactive regulatory posi-tions,
including Nevada, Oregon, and Washington. While the type and frequency of their
oversight functions vary, they all maintain a strong presence within gaming operations. For
example,
n Oregon—The Oregon Department of State Police oversees Indian gaming. Oregon ap-pears
to conduct activities similar in type and frequency to those used by the Department.
Oregon staff conduct annual comprehensive compact compliance reviews and randomly
inspect gaming devices monthly. The state also inspects all gaming devices prior to in-stallation.
However, the state assigns 21 staff to monitor 8 gaming operations containing
3,865 devices, which is about a 35 percent lower ratio of staff-to-devices than the Depart-ment’s
(56 staff and 6,799 devices). Like Arizona, Oregon lacks enforcement options and
relies on voluntary compliance.
n Nevada—Although it has much greater enforcement authority than Arizona, and the
majority of its workload consists of non-Indian gaming operations, the Nevada Gaming
Control Board resembles Arizona’s Gaming Department in its approach to gaming regu-lation.
In two of Nevada’s three Indian gaming facilities, compacts allow the state to con-duct
the same oversight activities as are conducted for non-Indian gaming facilities.
These activities include weekly reviews of surveillance systems, informal inspections of
operations, and comprehensive compliance reviews every three years. The state has the
authority to seize devices, resolve patron disputes, and impose fines for noncompliance.
In the third Indian gaming facility, the state allows the tribe to self-regulate the operation
because its casino contains only gaming devices.
n Washington—Washington’s compacted Indian gaming operations do not have slot ma-chines,
but do operate card games, wheel games, pari-mutuel gambling, and lottery
13
games. The Washington State Gambling Commission extensively regulates these gaming
activities by maintaining a weekly presence at gaming operations during which staff re-view,
among other things, the casino’s compliance with compact provisions, internal
controls, and gaming operation surveillance systems. As in Nevada, the state has the
authority to resolve patron disputes and impose fines or penalties for noncompliance.
States with moderate oversight functions—Some states use the same type of oversight ac-tivities
employed by those states with strong oversight approaches, such as compliance re-views
and device inspections, but do not conduct them as frequently. As a result, these states
employ fewer staff and maintain smaller budgets than the Department. For example:
n Wisconsin—The Wisconsin Division of Gaming, housed within the State Department of
Administration, has a staff of 10 with an annual budget of approximately $850,000 to
oversee 17 casinos containing 13,000 gaming devices (nearly double the 6,799 devices in
Arizona’s casinos). The Division conducts annual compact compliance reviews and occa-sionally
inspects a random number of devices (approximately once a year at each facility).
The state does not have the authority to impose sanctions for noncompliance.
n Minnesota—Minnesota’s Department of Public Safety oversees Indian gaming opera-tions.
The state employs two staff with an annual budget of approximately $300,000 to
monitor 17 casinos with 12,500 devices. Staff review annual financial audits, conduct in-vestigations,
and randomly inspect gaming devices. However, during fiscal year 1997, the
Department tested only 427 devices and conducted a total of 13 undercover investiga-tions
of blackjack games.
n Michigan—Michigan’s Gaming Control Board monitors gaming operations in the State
using two staff with an annual budget of $175,000 to oversee 17 casinos with 7,100 gam-ing
devices. The State reviews annual financial reports and occasionally inspects gaming
devices. State officials visit each casino on a quarterly basis.
States with limited oversight functions—Many states provide only limited oversight of In-dian
gaming and rely mostly on tribal self-regulation. For example, compacts limit South
Dakota’s ability to inspect each of the 8 Indian gaming facilities in the State to a maximum of
100 hours per year. North Dakota monitors 5 casinos with an annual budget of under
$100,000. Further, several states with limited Indian gaming, such as Colorado, Idaho, and
North Carolina,1 do not commit any full-time staff for monitoring Indian gaming. In fact,
state officials from Colorado and Idaho indicated that they allow the tribes to completely self-regulate
their gaming activities.
1 These states have two, four, and one Indian gaming operation(s), respectively.
14
Federal government promoting tribal self-regulation—The National Indian Gaming Com-mission
is currently promoting enhanced tribal self-regulation of gaming activities by issuing
“Certificates of Self Regulation” to tribes that meet prescribed regulatory requirements for
Class II games.1 Once certified, federal oversight of Class II games on reservations diminishes
significantly, thereby allowing the Commission to focus its oversight efforts on tribes that are
unable to meet these requirements.
State Should Determine
How to Best Monitor Indian Gaming
State policymakers should review the Department’s current regulatory approach to deter-mine
if it best meets the needs of the State and the intent of the compacts or if a different ap-proach
is warranted. It may be a good time to examine this issue since the State now has
some experience with Indian gaming and because gaming compacts begin to expire in just a
few years. Any changes should be made with caution to ensure risks to the state gaming op-erations
and gaming patrons do not increase to an unacceptable level. The State should con-sider
the following options.
n Maintain current approach—The State may want to consider retaining the current ap-proach
with some refinements. Even though the current approach is costly compared to
most other states, it also has some tangible benefits. For example, the approach allows the
State to quickly identify potential threats to Indian gaming operations and, thereby, assist
tribes to ensure the integrity of their operations. Further, the Department’s current activi-ties,
such as compliance review and device inspections, are consistent with national
gaming regulatory standards.
n Adopt a more targeted approach—Alternatively, the Department could adopt a tar-geted
oversight approach. Under such an approach, the Department would continue to
conduct its current enforcement activities but the frequency of the Department’s en-forcement
activities would be directly correlated to a casino’s violation history and the
tribal gaming office’s level of experience and expertise. Several tribes maintain large tribal
gaming offices with substantial budgets. For example, 1 tribal gaming office maintains a
staff of 50 with an annual budget of $3.5 million. Other tribes maintain gaming offices
with staffs of 17 to 32 people and annual budgets of over $1 million. Many of these tribal
gaming offices conduct enforcement activities similar to those of the Department, such as
device inspections, employee licensure, and internal control reviews and audits. How-ever,
some tribal gaming offices have limited staff and budgets, and cannot conduct such
extensive oversight activities.
1 The commission monitors Class II Indian gaming activities such as bingo and card games, while
states monitor Class III Indian gaming activities such as slot machines and lotteries.
15
As a result, the Department could develop a system that would allow it to formally assess
the performance of each gaming operation over time and account for differences among
them so that resources could be better allocated. Under such a system, the Department
would conduct fewer oversight activities at casinos with good performance records and
sophisticated regulatory bodies. This would allow the Department to use its resources to
assist and monitor gaming operations that have not yet established expert regulatory en-tities.
n Limit state role—A third alternative would be to significantly diminish the Depart-ment’s
role. Rather than conducting its current enforcement activities, the Department
would mostly rely on tribal self-regulation and would only occasionally monitor gaming
operations to determine if compact provisions are being met. Such a change should not
alter the Department’s certification activities. Further, the Department would retain the
same authority it currently has to investigate and review casino operations at any time.
Regardless of Approach,
Department Should Work with Tribes
to Improve Cooperative Relationship
Regardless of whether the State decides to retain the current approach or not, efforts should
be made to improve relations with tribal officials to ensure more cooperative regulation. The
IGRA established a unique regulatory system where two sovereign governments agree by
compact to work together as co-regulators over Indian gaming activities. The ability of tribal
and state officials to maintain sound working relationships is critical to the success of this
unusual regulatory structure, reflected by compact language that prescribes regular meetings
between state and tribal officials as well as a dispute resolution process. Maintaining good
communications with tribal officials is especially important to the Department since it does
not have any authority to impose sanctions on gaming operations for violating compact pro-visions
and must instead rely on voluntary compliance. As a result, the Department should
work with tribal officials to improve its cooperative relationship with several tribes.
Specifically, the Department could enhance its communication with tribal officials by con-tinuing
to hold quarterly meetings, as required by compact, that focus solely on identifying,
discussing, and resolving problems before legal disputes arise. Though these meetings have
been held in the past, evidence suggests that they were not completely effective for address-ing
and resolving many existing issues between the Department and tribes. Further, the De-partment
should continue to improve information provided to tribes about its enforcement
policies and activities. Recent improvements the Department made to its compact compli-ance
reports serve as a good example of how better and more detailed information could be
provided to tribes. Finally, the Department, as the representative of the State, should work
with tribes to identify ambiguous compact provisions and attempt to clarify such provisions
based on consensus building and upon a common understanding. According to the agency’s
16
new Director, improving tribal relations is currently a high Departmental priority witnessed
by his recent efforts to meet with tribal officials throughout the State.
Recommendations
1. State policymakers, including the Governor and Legislature, should determine the ap-propriate
regulatory philosophy for the Department, and direct the Department to act in
accordance with this philosophy. In making this determination, policymakers should
consider the following three alternatives:
n Option 1—Taking a strong regulatory approach toward all Indian gaming operations (the
Department’s current practice).
n Option 2—Varying the approach according to the violation history of the Indian gaming op-eration,
or according to the effectiveness of the associated tribal gaming office.
n Option 3—Limiting the Department’s role in all Indian gaming operations to occasional
monitoring.
2. If state policymakers select the second option, the Department should:
a) Create a model for determining the appropriate frequency of monitoring activities according
to violation history or tribal gaming office effectiveness. It should consider:
1) Maintaining its current high-frequency monitoring activities at gaming operations where
violations exceed a predetermined level or where the tribal gaming office lacks the capac-ity
to effectively enforce regulations.
2) Reducing monitoring activities at gaming operations where violations do not exceed pre-determined
levels and where the tribal gaming office has the capability to effectively en-force
regulations.
3. The Department should work to improve relationships with tribal officials by:
a) Continuing to hold quarterly meetings with tribal gaming office representatives to identify,
discuss, and resolve problems.
b) Continuing to seek opportunities to improve information provided to tribal officials regarding
Department policies and activities, as the Department did by making its compact compliance
review report more informative.
c) Working with tribes to identify ambiguous compact provisions and clarifying such provisions
based on consensus building and upon a common understanding.
17
FINDING II
THE DEPARTMENT SHOULD WORK
WITH TRIBES TO REACH AN AGREEMENT
ON GAMING DEVICE ASSESSMENT FEES
A compact provision requiring that the State and tribes renegotiate the assessment fees paid
by tribes to fund the Department’s enforcement activities has not been met. Compacts re-quired
these fees to be renegotiated two years after their enactment. However, most fees
have not yet been renegotiated. The inability to renegotiate new fees has some detrimental
impacts on both tribes and the State. Therefore, the Department should consider providing
more specific cost information to tribes in order to foster renegotiations. Finally, the Depart-ment,
as the representative for the State, should consider working with tribes to generate
improved compact language that identifies a more tangible fee renegotiation process.
Most Fees Have Not
Been Renegotiated
The State and tribes have not fulfilled a compact requirement to renegotiate the fees tribes
pay to fund the State’s regulatory activities. The compacts initially required that tribes pay an
assessment fee of $500 per gaming device per year to fund the Department’s regulatory ac-tivities.
According to the original drafters of the compacts, gaming device assessment fees
were arbitrarily set at $500 per machine since the actual costs of state oversight were un-known.
The compacts include a mechanism to address the costs of state oversight once these
costs became clearer. The compacts require that:
“After the initial two (2) years, the regulatory assessment per Gaming Device shall be renego-tiated
by the Tribe and the State based upon actual and projected costs and expenses incurred
for State regulation and enforcement duties pursuant to this Compact.”
Although 14 of the 17 compacts have been in effect for more than two years, only two of the
fees have so far been renegotiated. Attempts made by both tribal and Department officials to
renegotiate assessment fees have generally resulted in an impasse though, according to De-partment
officials, two tribes have agreed to pay the $500 assessment for the duration of the
compact.
A continued inability to renegotiate fees could threaten the Department’s operating budget,
and could also result in inequities between tribes. To date, assessment fees have exceeded the
18
amount needed to fund Department operations, and the surplus has been returned or cred-ited
to the tribes each year. However, the amount of the refund has declined, dropping from
$605,515 out of a total of $2,764,673 collected in fiscal year 1997 to $269,381 out of a total of
$2,819,063 collected in fiscal year 1998. If this trend continues and fees are not renegotiated,
the Department will soon experience a shortfall in revenues.
Futhermore, the failure to renegotiate these fees has a detrimental impact on tribes that con-tinue
to pay their full assessment. Three tribes reduced the amounts they paid to the De-partment,
citing the compact’s renegotiation requirement as justification. Though one tribe
has since agreed to pay the full assessment, two others continue to pay a reduced amount
throughout the year and then make up the difference at the end of the fiscal year based on
the actual costs incurred by the Department to monitor their operations. As a result, these
tribes have the use of these monies throughout the fiscal year while tribes that pay the full
assessment at the beginning of the year do not. Further, should any tribes reduce their pay-ments
to an amount less than the costs incurred by the State to monitor their operations, the
Department may be unable to refund the correct amount at the end of the fiscal year to tribes
paying the full assessment.
Providing More Cost
Information Could
Facilitate Negotiations
Although the Department provides quarterly expenditure reports to tribes as required by the
compacts, and allows tribal representatives to review supporting documentation at the De-partment,
the information provided may not be sufficient for the purpose of negotiating new
fees based upon “actual and projected costs and expenses.” According to some tribal officials,
the reports are too general in nature, and the Department does not adequately identify costs
associated with individual tribes. The Department could provide more specific information
to tribes in order to foster renegotiations and to alleviate suspicions some tribal officials hold
regarding the Department’s spending practices. However, to avoid unnecessary increases in
the administrative costs of tracking and reporting expenditures, the Department should
work with tribal officials to determine the appropriate balance between the competing needs
for more information and for minimizing costs.
Cost information provided to tribes could be enhanced in two ways:
n Including more specific expenditure information on quarterly reports—Currently,
the quarterly expenditure reports show general categories such as “personal services”
and “professional and outside services,” and do not provide information about the nature
of expenses included in the category totals. For example, a reviewer of the reports cannot
determine how much of the personal services category derives from compact compliance
reviews, gaming device inspectors, or other specific casino monitoring activities.
19
n Identifying individual tribal costs more fully—Although the Department tracks some
expenditures attributable to specific tribes, nearly all of its expenditures (86 percent in fis-cal
year 1998) are allocated proportionally based on the number of gaming devices oper-ated
by each tribe. Because casinos vary in their costs to regulate based on size of opera-tions,
location, and other factors, fuller identification of costs might facilitate negotiation
of more appropriate fees for individual tribes.
Since providing more detail could result in increased administrative costs for tracking ex-penditures
and preparing reports, the Department should solicit input from tribal officials
regarding the level of detail desired.
Department Making Progress
Toward Renegotiating Fees
Recent policies adopted by the Department’s new leadership should aid fee renegotiation
efforts. In fact, the Department recently entered fee renegotiations with one tribe in Decem-ber
of 1998. In addition to making renegotiations a priority, the Department has changed its
position on negotiating separate fees for individual tribes. Previously, the State held that fees
must be uniform for all tribes, although the actual costs varied by casino. This position made
successful renegotiations less likely, since all 17 separate negotiations would have to end in
agreement for the exact same fee. Currently, the Department’s Director adheres to the posi-tion
that fees can vary by tribe based on their individual costs for state oversight.
If Possible, Compact Language
Should Be Clarified or Changed
for Fee Renegotiations
The compact language stating that the assessment fees must be renegotiated based on the
“actual and projected costs and expenses incurred for State regulation and enforcement du-ties”
is problematic. State officials hold that the Department’s actual costs are not subject to
negotiation because the Legislature, rather than the Department or tribes, determines the
Department’s necessary costs through the state appropriation process. In fact, the previous
Governor informed tribal officials from one tribe that any comments regarding the Depart-ment’s
costs should be directed to the Legislature during the annual budget-setting process.
This compact language could make it difficult to complete negotiations, if interpreted to
mean that every Department expenditure is subject to separate negotiation. Further, because
the cost of regulation depends on the oversight duties conducted, negotiation based on this
language could falter over disagreements about the need for specific Department activities.
Alternatively, even if such negotiations were successful they could conflict with the State’s
ability to independently carry out its oversight duties, since the nature and extent of Depart-
20
ment activities are influenced by the amount and allocation of its authorized expenditures.
Therefore, the Department, as the representative of the State, should consider working with
tribes to generate amended or new compact language that specifically identifies a tangible
and fair basis from which fees can be renegotiated.
Recommendations
1. The Department should consider providing more detailed cost information to tribes.
Since providing such information could increase the Department’s costs, Department of-ficials
should meet with tribal officials to solicit input on the specific level of detail the
tribes desire and are willing to pay for.
In providing additional detail, the Department should consider:
a) Including descriptions of various activities on quarterly assessment reports;
b) Classifying expenditures by activity on the quarterly expenditure reports; for exam-ple,
creating an expenditure category for gaming device inspections and compact
compliance reviews;
c) Identifying and providing more detail about costs incurred to monitor tribes indi-vidually.
Accomplishing this may require modifying the time accounting process the
Department uses to capture additional detail about employee activities.
2. The Department, as the representative of the State, should consider working with tribes
to amend compact language that specifically identifies a tangible basis from which fees
can be renegotiated, and should endeavor to include such language in new compacts
when the existing compacts expire.
3. The Department should continue the renegotiation efforts with tribal officials.
21
FINDING III
IMPROVED VENDOR CERTIFICATION
PROCESS CAN BE FURTHER
STREAMLINED
The Department should consider making additional refinements to its process for certifying
vendors that provide services for tribal gaming operations. In response to concerns from
some tribes and vendors that certification was slow, cumbersome, and overly expensive, the
Department made some changes to streamline the process and make it more open. However,
additional options exist for streamlining the process, such as automatically certifying vendors
who have successfully undergone comparably stringent certification processes from other
states.
Vendor Certification
Process
The Department certifies manufacturers and suppliers of gaming devices and providers of
gaming services to ensure that unsuitable companies are not conducting business at tribal
casinos. While the Department will only certify a vendor sponsored by a tribe, once certified,
these vendors may conduct business with any tribe in the State. The compacts define gaming
services as the provision of:
“any goods or services, except for legal services,…in connection with the operation of Class III
Gaming in a Gaming Facility, including but not limited to equipment, transportation, food,
linens, janitorial supplies, maintenance, or security services for the Gaming Facility, in an
amount in excess of $10,000 in any single month.”
The compacts do not specify how the State should certify vendors, but lists only what of-fenses
would justify denying certification. Therefore, the Department developed an investi-gative
process designed to identify these problems. Investigations typically involve inter-viewing
high-level company officials and key personnel, conducting criminal background
and credit checks, and reviewing financial information, such as tax returns. In fiscal year
1998, the Department certified 98 vendors and denied certification for 7 vendors.
Initially, the Department subjected all vendors to the same level of investigation, but now
classifies vendors into one of five categories with varying levels of review required for certifi-cation
based on the nature of gaming services being provided. This system allows the
22
Table 3
Arizona Department of Gaming
Vendor Classifications
Classification Description
Current Number
of Vendors1
A Management contractors, consultants, financiers, gaming device manu-facturers
or suppliers, and any providers with direct access to restricted
areas in the gaming facility.
54
B Providers of security systems, gaming supplies, computer services, cur-rency
equipment, signage, cash register/point of sales, gaming device
locks, alarms systems, and ATM devices.
42
C Providers that are currently regulated by other state or federal agencies
in which a background investigation is conducted such as insurance
companies, banks, and liquor license sales. The Department reviews the
investigative files of regulatory agency and asks for more information
only if warranted.
8
D Services that can be provided within or without the gaming facility such
as advertising, uniforms, office supplies, construction companies, print-ing,
gaming furniture, travel agents, food service, gift shop, vehicle sales,
landscape companies, etc.
188
E Exempt from certification process. Providers approved by the Depart-ment
Director, such as television or radio advertising, or entities doing
advertising business in association with and under the rules of the Major
League Baseball Association, National Basketball Association, etc.
N/A
1 Includes both vendors already certified and those currently being investigated.
Source: Arizona Department of Gaming State Certification Classifications.
Department to more effectively use its resources to investigate companies providing higher-risk
services. Table 3 identifies the five classes of vendors and the number and type of ven-dors
in each class. The Department more thoroughly investigates Class A vendors, who pro-vide
services critical to the integrity and fairness of casino operations and games, such as ca-sino
management contractors or gaming device manufacturers and suppliers. The Depart-ment
also thoroughly investigates Class B vendors who provide a variety of services includ-ing
computer and security system services (see Table 3). For these vendors, Department staff
conduct a more comprehensive financial review, including visits to the company’s head-quarters,
even if they are located out of the state or country. Once permanently certified,
companies are required to renew their certification annually.
23
Problems Identified with
Certification Process
During the audit, several tribal officials and vendors identified concerns with the Depart-ment’s
certification process. Tribes requested more clarification about the process and ques-tioned
the length of time it takes some vendors to become certified. Vendors, on the other
hand, were more concerned with certification costs.
Tribal concerns—Several tribal officials complained that the certification process is too long
and cumbersome, impacting their ability to obtain services. For example, while vendors that
provide services critical to the integrity of gaming operations, such as gaming equipment
manufacturers, may be accustomed to submitting to state certification requirements, other
vendors that do not contract exclusively with casinos, such as food service providers, may be
unwilling to undergo a lengthy or expensive certification process. This could potentially limit
the pool of available vendors for certain services.
Additionally, some tribal officials expressed frustration with recent Department policies re-quiring
certification for certain vendors who were not previously required to obtain certifica-tion.
While the compact specifies that all vendors contracting for supplies or services of more
than $10,000 a month must be certified, the Department initially lacked enough staff to in-vestigate
all vendors. However, as the Department increased the number of staff assigned to
the certification unit, it has required additional types of vendors to obtain certification. For
example, the Department recently began requiring construction companies to obtain certifi-cation.
Further, the Department is considering requiring insurance and audit companies to
be certified after they develop an application form for companies regulated by other state or
federal agencies.
Some tribal officials also expressed confusion about how the Department classifies vendors
into the five categories. They do not understand the differences between some of the catego-ries
nor how certain types of vendors are included in each class. Further, many do not see the
need for the Department to certify vendors that do not provide services critical to the integ-rity
and fairness of casino operations and games, such as food service and janitorial compa-nies.
However, current compact language requires that all vendors providing more than
$10,000 per month in services be certified. Finally, certain tribal officials also were frustrated
that the current system lacks an explicit mechanism for dealing with emergencies, such as
repairs to their facilities.
Vendor concerns—Some vendors also cited concerns with the process. During the audit, staff
interviewed a total of 19 vendors across classifications. These vendors described a wide range
of experiences with Arizona’s process, from complete satisfaction to intense frustration. Ven-dors
satisfied with the certification process believed that it is consistent with gaming industry
standards. Other vendors, especially vendors not providing services critical to the integrity
and fairness of casino operations and games, reported that the Department requested an ex-cessive
amount of information for certification.
24
Vendors more commonly complained that the Department did not provide sufficient infor-mation
about the costs associated with certification. Certain vendors thought the cost to ob-tain
certification was reasonable, while others found it excessive. Many wanted to know up-front
what it would cost to obtain state certification. According to the compacts, vendors
must pay all of the Department’s costs incurred during their investigation prior to obtaining
certification.
While vendors pay an initial fee ($1,500 for Class A vendors and $150 for other types), inves-tigative
costs often exceed these amounts, depending on the extent of the review. The De-partment
bills vendors monthly for costs that exceed the initial fee. However, since total certi-fication
costs vary considerably between vendors even within the same classification, De-partment
officials cannot provide vendors with the exact amount required to obtain certifica-tion
upon receiving an application. For example, according to Department billing data, one
Class B vendor paid approximately $900 for certification while another paid over $10,000.
Similarly, one class D vendor, an advertising firm, paid approximately $93 for certification
while another, a provider of kitchen equipment, paid over $1,000. According to a Depart-ment
official, differences in cost result from problems identified during an investigation that
need to be further reviewed prior to granting certification.
Some vendors also stated that the Department’s monthly billing statements lack sufficient
detail about costs incurred. These vendors wanted to know how much time was spent and
what activities were conducted to investigate their company.
Improvements to
Certification Process
Several recent changes to the certification process should address many of the concerns
raised by tribal officials and vendors. However, the Department should consider whether
additional changes would further improve the process without exposing tribal gaming op-erations
to a greater risk of infiltration by unsuitable companies.
Recent improvements implemented by the Department—The Department has recently taken
several steps to address many of the concerns raised by tribes and vendors. First, the De-partment
streamlined the investigation process for Class D vendors (those providing services
that are not critical to the integrity and fairness of casino operations and games). The De-partment
now requires less information from these companies and conducts less extensive
investigations. Previously, Class D vendors had to submit the same information as vendors
providing direct gaming services, such as financial statements, other gaming licenses, tax
returns for the last three to five years for both the company and its owners, articles of incor-poration,
stock certificates, and fingerprint cards for owners and key personnel. Now Class D
vendors must submit only an application, information release forms, and fingerprints.
25
Second, the Department now subjects more vendors to the streamlined investigation process.
In January 1998, the Department reclassified several Class B vendors as Class D vendors such
as office supply, janitorial supply, food service and advertising companies. As a result, as
seen in Table 3 (see page 22), the majority of vendors, 64 percent, are now classified as Class
D vendors. Finally, the Department began providing monthly certification status reports to
tribes. As of April 1998, tribes receive information on the status of individual vendors’ appli-cations
and a report indicating the classification, status, assigned investigator, and key dates
for each vendor.
The Department recently revised its vendor billing system. As of August 1998, the Depart-ment
provides more detailed monthly bills to vendors. Bills now detail the exact time spent
by investigators on an application. Further, they include detail on other costs, such as phone
calls.
Other potential changes—The Department may wish to consider implementing additional
changes to the vendor certification process suggested by tribal officials, vendors, and gaming
regulators in other states. Several would require changes to the compacts.
For example, the Department could:
n Classify additional vendors as Class D vendors—The Department could reclassify
additional vendors not providing gaming services critical to the integrity and fairness of
casino operations and games, such as computer service vendors, as Class D vendors,
thereby subjecting these vendors to a less stringent review process.
n Automatically certify vendors who have received comparable certification from
other states—The Department could automatically certify vendors already certified by
other states that have investigation processes as stringent as Arizona’s. For instance,
gaming officials in North Dakota automatically certify vendors who have obtained certi-fication
in Nevada, New Jersey, or South Dakota. Similarly, Connecticut officials do not
investigate vendors certified by the New Jersey Division of Gaming Enforcement.
n Certify only vendors of gaming-related services—The Department could certify only
vendors providing services critical to the integrity and fairness of gaming operations.
Compact language would have to be amended to allow such a change. Several states cer-tify
only vendors who provide services critical to the integrity of Class III gaming, such as
gaming device manufacturers. State officials in Connecticut, Kansas, Minnesota, New
Mexico, Nevada, North Dakota, Oregon, Washington, and Wisconsin certify only com-panies
providing these critical services. For instance, in these states, office supply and
janitorial companies are not investigated or certified. Further, the Department could re-tain
the authority to investigate these vendors when deemed necessary. The Department
could also develop formal policies that account for emergency situations, such as facility
repairs.
26
n Altering the monetary threshold for certification—Finally, the Department could raise
the certification threshold above $10,000 monthly for either all vendors or only for those
providing services not critical to the integrity of gaming operations. Alternatively, the
Department could use an annual, rather than monthly, monetary threshold for certifica-tion.
For example, in New York, all vendors providing services critical to the integrity of
gaming operations are certified as well as all other vendors that do not provide services
critical to the integrity of operations and that provide more than $50,000 in services annu-ally.
In New Jersey, state officials conduct a limited investigation of non-gaming related
vendors providing between $500 and $75,000 in services annually, while those providing
more than $75,000 in services are subject to a more comprehensive review. Using a larger,
annual monetary threshold would allow casinos to more easily contract with one-time
vendors, such as major repair companies who may charge more than $10,000, but only
for one-time services. Either change would require amending the compacts’ certification
requirements.
Department officials should continually assess the risks associated with various vendor types
to determine if a less stringent process is appropriate based on their experiences in the first
few years of operation and because they adhere to one of the most stringent certification pro-cesses
in the country. If found to be appropriate, the Department could implement certain
changes immediately and/or request amendments to the compacts in order to implement
other changes.
Recommendation
1. The Department should assess the risk associated with each vendor type and consider
making further changes to its vendor certification process as appropriate.
a) Changes could include streamlining the investigation process for additional vendors
and/or granting reciprocity to vendors certified in other states.
b) If deemed appropriate, the Department would need to negotiate amendments to the
compacts to make additional changes, such as certifying only vendors providing
services critical to the integrity and fairness of gaming operations and/or changing
the monetary threshold for certification.
27
OTHER PERTINENT INFORMATION
As part of the audit of the Department of Gaming, auditors examined the status of cases in
the dispute resolution process. Currently, the Department has five cases pending in arbitra-tion
or litigation.
Dispute Resolution
Process
Due to the complexities related to gaming regulation, disputes sometimes arise between the
Department and the tribes. When tribes and the Department disagree over compact provi-sions,
they can attempt to resolve disputes through informal negotiations. For those disputes
that cannot be resolved informally, the compacts prescribe a mechanism for dispute resolu-tion,
“…if the Tribe or the State believes that the other party has failed to comply with the require-ments
of [the Compact], the party asserting non-compliance shall serve written notice to the other
party.” Once a notice of noncompliance has been issued, the compact allows for a meeting of
voluntary resolution to take place, including representatives from the State and tribe. If the
dispute is not resolved to the satisfaction of the parties, “…the dispute shall be adjudicated
through arbitration in Arizona or such other place as the parties may agree.”
The dispute resolution process in Arizona appears to be used more frequently than in some
other states with Indian gaming. The audit team contacted 18 of the states with compacted
Class III gaming, 3 of which do not have a formal dispute resolution process in place. For the
remaining 15 states, 12 have never invoked their dispute resolution process. For states that
have invoked the process, disputes have concerned such issues as the timeliness of licensing
employees and tribal revenue sharing.
Disputes Costly
and Long-Standing
The State and four tribes have invoked the dispute resolution process over several issues.
There are currently four cases in arbitration and one case in litigation. In addition, there were
two other cases previously in litigation that were recently settled. Current disputes concern
differing compact interpretations and range from disagreements over allowable games to
who is responsible for paying the State’s legal costs.
Once in the dispute resolution process, cases last for years. In fact, one case was in the dispute
resolution process for nearly three years until a settlement was reached in February 1999. The
28
long-standing nature of such cases means that potentially serious matters are not being
quickly addressed.
Additionally, the Department’s legal costs have steadily increased because of these disputes.
For example, the Department expended approximately $487,000 over a 2-year period for its
recently settled case against the Tohono O’Odham Tribe.1 Overall, the Department expended
$242,325 in fiscal year 1997 and $318,754 in fiscal year 1998. In fact, the Department received a
supplemental appropriation of $220,000 from the Permanent Tribal-State Compact Fund to
cover its arbitration expenses in fiscal year 1998.
Some Current
Disputes
The following issues are currently in the dispute resolution process.
n State’s legal costs—The Colorado River Indian Tribes are contesting the State’s policy
for paying its legal costs incurred from disputes. The compacts state that:
“The costs of arbitration shall be borne equally by the parties, with one-half of the ex-penses
charged to the Tribe and one-half charged to the State. The parties shall bear
their own costs and attorney’s fees associated with their participation in the arbitration
unless the decision of the arbitrator shall specify otherwise.”
The Department currently uses monies from the Tribal-State Compact Fund to pay its le-gal
costs. Tribal officials contend that, since the fund is comprised of gaming device as-sessment
fees, tribes are paying for both their own legal costs as well as the State’s legal
costs resulting from the dispute resolution process. Under these circumstances, tribal offi-cials
argue that the tribes lack incentive to enter the dispute resolution process and that
the Department has no incentive to avoid the process if possible. Further, tribal officials
believe that the Department’s policy of billing all tribes for these costs as a shared expense
is unfair since not all tribes are involved in the disputes. Some tribal officials believe that
the Department’s legal costs should be paid from State General Fund revenues. Although
only one tribe is formally contesting this issue, many tribes expressed concern over the
matter. Department officials contend that monies deposited in the Tribal-State Compact
Fund are state monies to be used to pay for all state expenses incurred from monitoring
Class III Indian gaming activities.
1 According to Department officials, the Tribe reimbursed the State for approximately half of the legal
costs incurred for this litigation. This money was then reverted to the tribes.
29
n Advance notice for device inspections—The Colorado River Indian Tribes and Ak-
Chin Indian Community are disputing the Department’s policy of advanced notice for
inspections of gaming devices. The compacts state that:
“Agents of the State Gaming Agency shall be entitled to enter the non-public areas of
any Gaming Facility licensed by the Tribe after such state agents have provided proper
identification…(and) given notice to the Tribal Gaming Office…”
The compacts do not specify what constitutes notice. Tribal officials contend that some
advance notice is necessary because gaming operations need to ensure that enough staff
are present to accommodate Department inspectors and to maintain regular gaming op-erations.
Without such notice, tribal officials believe these inspections unduly interfere
with gaming operations, which is prohibited by compacts. Department officials contend
that they provide adequate notice when they arrive at the casino. Additional notice could
diminish the intent and effectiveness of surprise inspections.
n Multi-player gaming devices—Another issue currently in litigation concerns multi-player
gaming devices. The Gila River and Ak-Chin Indian Communities have jointly
entered litigation against the State regarding multi-player gaming devices, which allow
five players to play at once. However, since the device has only one random number gen-erator,
the tribes consider them to be a single gaming device. The compacts state that:
“Each electronic game of chance must have a true random generator which will determine
the occurrence of a specific symbol or specific number to be displayed on the video screen
where such symbol, card, or number is wholly or partially determinative of the outcome of
the game…”
The litigation resulted because the Department changed its initial position regarding
these devices. Initially, Department officials considered these devices as single machines.
Subsequently, some tribes purchased and installed these machines. However, in 1996,
under a new Director, the Department reversed its position by adopting a policy that
counted each device as five machines rather than one. Tribes took exception to this policy
change since compacts limit the number of devices allowed at each casino.
n Poker—The Gila River Indian Community has entered into arbitration with the Depart-ment
over poker games. Tribal officials contend that poker is a Class II game that is not
subject to state regulation. The National Indian Gaming Commission supports this posi-tion.
However, Department officials contend that poker as played in the gaming facilities
is an unauthorized Class III game.
30
n Employee certification—There are other issues in the dispute resolution process re-garding
the certification of employees. For instance, the Ak-Chin Indian Community is in
arbitration over whether employees who work exclusively in Class II gaming and have
access to non-public areas of the casino require state certification. Additionally, the Colo-rado
River Indian Tribes are disputing whether the tribe is required to submit renewal
applications for gaming employees who are tribal members, since the State does not cer-tify
these staff. Table 4 (see page 31), provides further information about the current
status of the cases in arbitration and litigation.
Table 4
Arizona Department of Gaming
Cases in the Dispute Resolution Process
As of March 1999 1
Plaintiff Defendant
Year
Action
Initiated Nature of Case
Legal
Action
Taken Status
Colorado River Indian
Tribes
Director and the Ari-zona
Department of
Gaming
1996 Arbitration based on the tribes’ objection to paying
the State’s legal costs and conducting unan-nounced
machine inspections.
Arbitration; litiga-tion
as of August,
1996.
One settlement will resolve
both issues.
State of Arizona Ak-Chin Indian Com-munity
1996 State brought action to allow unannounced ma-chine
inspection and to require the certification of
employees who have access to non-public areas of
the casino.
Arbitration Department is currently pre-paring
a memorandum of
understanding.
Colorado River Indian
Tribes
Arizona Department of
Gaming
1997 Arbitration based on whether the tribe must sub-mit
renewal applications for the certification of
tribal member gaming employees.
Arbitration Awaiting selection of a third
arbitrator.
Gila River and Ak-Chin
Indian Communities
Director and Arizona
Department of Gaming
1997 The tribes sued to prevent the Director from
threatening to act against the state certification of
any corporation or individual, and to determine if
the tribes are authorized to operate multi-player
devices.
Litigation The Department dismissed as
a defendant; however, case
remains against the Director of
the Arizona Department of
Gaming and is currently being
reviewed by the court.
Gila River Indian Com-munity
Arizona Department of
Gaming
1998 The tribe took action to determine whether poker
is considered Class II gaming that is not subject to
state regulation, or Class III gaming that is subject
to state regulation.
Arbitration State selected a third arbitrator
in August 1998.
1 In February 1999, the Department reached an agreement with the Tohono O’Odham tribe, resolving litigation that had been initiated in 1996. The State had
sued to close the tribe’s casino, alleging multiple violations, and the tribe had counter-sued. The agreement allowed the casino to remain open, and re-solved
questions regarding the violations and the costs of litigation.
Source: Arizona Department of Gaming.
31
32
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33
SUNSET FACTORS
In accordance with Arizona Revised Statutes (A.R.S.) §41-2354, the Legislature should con-sider
the following 12 factors in determining whether the Arizona Department of Gaming
should be continued or terminated.
1. The objective and purpose of establishing the Department.
Laws 1995, Chapter 76, established the Arizona Department of Gaming to carry out
the State’s responsibilities as outlined in the federal Indian Gaming Regulatory Act
and in the tribal-state gaming compacts. The Act requires that states enter tribal-state
gaming compacts with tribes who conduct Class III gaming activities. These compacts
establish a shared regulatory framework endowing both the State and tribes with re-sponsibilities
related to ensuring the integrity of gaming operations. As discussed in
the Introduction, the Department employs a number of activities to meet its compact
responsibilities. Currently, the State has entered gaming compacts with 17 tribal gov-ernments
throughout Arizona.
2. The effectiveness with which the Department has met its objective and purpose
and the efficiency with which it has operated.
Activities the Department uses appear to be effective for meeting its oversight respon-sibilities.
These activities are well-designed and consistently implemented, and mirror
practices used by other states to monitor gaming operations. For example, the De-partment
conducts regular inspections of gaming operations, including the testing
and inspection of gaming devices; conducts investigations of alleged compact viola-tions;
and investigates and certifies gaming employees as well as vendors providing
services. Inspection functions are conducted frequently and certification investiga-tions
are ongoing. The Department has recently improved and streamlined some of
these functions, such as compact compliance reviews and its certification process (dis-cussed
in Finding III, see pages 21 through 26). These activities provide the State with
detailed information about Indian gaming activities and allow the Department to help
tribes to ensure the integrity of their gaming operations.
As discussed in Finding I (see pages 9 through 16), determining how efficiently the
Department operates is problematic because of the current debate about the Depart-ment’s
role in regulating Indian gaming. This debate stems from ambiguous tribal-state
gaming compacts that do not clearly define the extent of the State’s role and
authority. Tribal officials argue that the Department could meet its compacted re-
34
sponsibilities without conducting its current day-to-day regulatory activities that re-quire
substantial staff resources and contend that some Department activities, such as
machine inspections, duplicate the activities conducted by tribal regulatory entities.
Department officials contend that the State’s current oversight activities and the fre-quency
of these activities are appropriate because they help the Department to protect
the public and to assist tribal regulatory bodies and casinos to safeguard tribal assets.
They also believe that some activities such as vendor certifications are performed
more efficiently by the Department than by tribes.
As discussed in Finding I (see pages 9 through 16), the Department’s extensive en-forcement
activities have some high costs compared to other states. In fact, the De-partment
is one of the largest state gaming agencies in the nation and has more staff
overseeing Indian gaming operations than any other state. It has grown rapidly since
its inception. The Department’s staff doubled and its budget tripled in a two-year pe-riod
after its inception in 1995. This growth did not coincide with a significant increase
in Indian gaming. Department officials attribute this growth to the newness of the
agency and concede that the Department did not initially conduct all necessary ac-tivities
to meet its compacted responsibilities because it lacked adequate resources.
Determining whether the Department is operating efficiently is directly linked to
what oversight level of Indian gaming state policymakers desire. If state leaders want
to continue the current oversight level, then the Department is operating fairly effi-ciently
since its activities are well-designed and consistently implemented. However,
if state leaders believe that such extensive oversight activities are not warranted, the
Department will have to streamline its operations by decreasing its activities and re-ducing
its costs.
3. The extent to which the Department has operated in the public interest.
Despite the dispute regarding the appropriate state oversight role, the Department
operates in the public interest by monitoring tribal gaming operations. The Depart-ment
has implemented activities designed to identify criminal activity and to ensure
the safety of gaming patrons. For example, device inspections ensure the games are
fair and certification activities prevent criminal elements from infiltrating gaming op-erations.
These activities help the Department to comply with federal and state stat-utes
related to Indian gaming. Further, they complement the regulatory activities
conducted by tribal gaming offices.
35
4. The extent to which rules and regulations promulgated by the Department are
consistent with the legislative mandate.
The Department has not promulgated any rules or regulations. In 1996, the Legisla-ture
amended A.R.S. §5-601(D), exempting the Department from the state rulemaking
requirements of Title 41, Chapter 6. According to Department officials, the Depart-ment
cannot follow the state rulemaking process rules since it must adhere to provi-sions
outlined in the compacts.
5. The extent to which the Department has encouraged input from the public be-fore
promulgating its rules and regulations and the extent to which it has in-formed
the public as to its actions and their expected impact on the public.
As mentioned previously, the Department is exempt from the rulemaking require-ments
of Title 41, Chapter 6. According to Department officials, the Department in-forms
the public of its activities through news releases, published articles, and by
speaking to community service groups and other organizations. In addition, the De-partment
disseminates information consistent with public record laws. Compacts
prohibit the Department from disseminating tribal proprietary information and other
tribal documents to the public.
6. The extent to which the Department has been able to investigate and resolve
complaints within its jurisdiction.
Tribal-state gaming compacts limit the Department’s ability to investigate and resolve
complaints. For example, the Department has authority under the tribal-state com-pacts
to investigate complaints involving compact provision violations and to investi-gate
complaints of illegal activities at Indian casinos. However, the Department does
not have the authority to investigate and resolve patron disputes involving casinos.
7. The extent to which the Attorney General or any other applicable agency of
state government has the authority to prosecute actions under enabling legisla-tion.
Under A.R.S. §5-602, the Department’s enabling legislation, and A.R.S. §11-952, the
Department has the authority to enter into intergovernmental agreements with other
public agencies, including the Attorney General’s Office for legal services. The Attor-ney
General’s Office, on behalf of the Department/State, has the authority to take ac-tion
against the tribes for compact violations and to represent the Department in ad-ministrative
hearings regarding state certification.
36
8. The extent to which the Department has addressed deficiencies in the enabling
statutes which prevent it from fulfilling its statutory mandate.
In accordance with federal law, tribal-state gaming compacts, rather than state statute,
dictate the conditions and terms for state involvement within Indian gaming. As a re-sult,
the Department’s enabling statutes are narrow in scope and cannot be amended
to override negotiated compact provisions since the State does not generally have ju-risdiction
on tribal lands. Therefore, only deficiencies in the negotiated compacts, not
enabling statutes, may prevent the Department from fulfilling its statutory mandate.
As a result, the Department can only address perceived deficiencies with the com-pacts
by entering negotiations with tribal officials to amend them.
Despite this limitation, the Department has sponsored legislation in the past to ad-dress
perceived deficiencies in its enabling statutes. For example, Laws 1996, Chapter
203 exempted the Department from state rule-making requirements. Department offi-cials
contend that this exemption was necessary because the Department must adhere
to the specific provisions of the compacts. The Department also sponsored unsuccess-ful
legislation that would have provided the Department with the ability to assess
civil fines to those companies that violate compact provisions. Department officials
argued that a civil fine structure would allow companies to pay fines in lieu of com-plete
suspension or revocation of state certification.
9. The extent to which changes are necessary in the laws of the Department to
adequately comply with the factors listed in the Sunset law.
As noted in Sunset Factor 8, tribal-state gaming compacts, rather than state statute,
dictate the conditions and terms for state involvement within Indian gaming.
10. The extent to which the termination of the agency would significantly harm the
public health, safety, or welfare.
Terminating the Arizona Department of Gaming could have a detrimental impact on
the public’s welfare. The Department conducts a number of activities designed to di-minish
threats to the integrity of Indian gaming. By eliminating the Department, the
State would have no ready mechanism to monitor gaming operations and, thereby,
could not ensure that tribal gaming operations meet compact gaming requirements
and standards. Further, the State has already entered gaming compacts with 17 tribal
governments. Eliminating the Department would cause the State to be out of compli-ance
with compact provisions negotiated with each tribe since it is assigned various
responsibilities.
37
11. The extent to which the level of regulation exercised by the Department is ap-propriate
and whether less or more stringent levels of regulation would be ap-propriate.
It is difficult to ascertain whether the Department exercises the appropriate level of
regulation since compact language does not define the proper level of state oversight.
Compacts only require that the State “monitor” operations to ensure compliance with
compact provisions and that such monitoring should “not unduly interfere” with
tribal gaming operations.
Because of this ambiguous compact language, two divergent positions exist regarding
the ideal level of state regulation for Indian gaming. As discussed in Finding I (see
pages 9 through 16), and Sunset Factor 2 (see pages 33 through 34) Department and
tribal officials differ regarding the appropriate level of regulation to be exercised by
the State. Department officials contend that, while its current level of oversight is ap-propriate,
the Department requires additional authority to support its enforcement
activities. Conversely, several tribal officials believe that the Department currently
over-regulates gaming operations.
A review of other state gaming agencies does not provide definitive criteria about
what the proper level of state regulation should be since these states employed a wide
range of regulatory practices. A few states adhere to practices similar to those used by
the Department. However, in most of these cases, the state gaming agency has sanc-tion
authority over tribal gaming operations, unlike the Department. Many other state
gaming agencies conduct less frequent and extensive oversight activities of Indian
gaming operations and some states rely on tribal self-regulation.
12. The extent to which the Department has used private contractors in the per-formance
of its duties and how effective use of private contractors could be ac-complished.
The Department uses private sector contractors for a variety of purposes. For exam-ple,
the Department hired external auditors to design an audit program based on
compact provisions for its compact compliance review process. The Department also
utilizes the services of private legal firms. These firms assist the Department with ar-bitration
and litigation cases with tribes. As discussed in the section on Other Perti-nent
Information (see pages 27 through 30), costs associated with these cases have in-creased
significantly. For example, the Department expended $318,754 in legal fees
alone in fiscal year 1998. In addition, the Department uses consultants to provide in-house
training for its employees. The Department also has a contract with the Federal
Bureau of Investigation for conducting criminal background checks on gaming em-ployees.
(This Page Intentionally Left Blank)
Agency Response
April 6, 1999
Mr. Douglas R. Norton, Auditor General
State Office of the Auditor General
2910 North 44th Street, Suite 410
Phoenix, Arizona 85018
Dear Mr. Norton:
On April 2, 1999, we received your revised report regarding the Office of the Auditor
General’s performance audit of the Arizona Department of Gaming. The Department’s final
response to the findings and recommendations is set forth in the attached document.
This Department will be giving careful consideration to your recommendations. Where
possible, those recommendations will be implemented. For example, your report suggests
discussing with the Tribes ambiguities in the compacts and making clarifications thereto. To that
end, I am enclosing a copy of my March 11, 1999, letter that I provided to Tribal leadership,
suggesting proposed amendments to the compacts to clarify certain ambiguities. We are
currently in the process of setting up follow-up meetings with the Tribal leaders to obtain their
input on these proposals.
Thank you for this opportunity to respond to the Auditor General’s draft report. On
behalf of the Department, it was a pleasure working with your auditors. We greatly appreciate
their professionalism and cooperation during the course of the audit.
Sincerely,
Stephen M. Hart
Director
SMH\ll
Enclosure
cc: Penny Taylor Moore
Edwin J. Grohe
March 11, 1999
Dear Tribal Representative:
I want to thank you for attending today’s meeting. I appreciate the opportunity to
speak with you concerning House Bill 2062 and to listen to your comments.
I believe that HB2062, in its current form, could improve long term cooperation
between the State and the Tribes as individuals would become familiar with both parties’
approaches to gaming. I hope that you feel the same way and share my belief that the
interests of the Indian Tribes of Arizona and the State of Arizona are best served through
communication, cooperation and mutual respect.
I hope that this is but the first of a number of meetings between Tribal
Representatives and the Department of Gaming concerning the issues which arise and
interest all of us involved in Indian Gaming. I would like to suggest that we hold another
meeting in thirty (30) to sixty (60) days and work together to set a specific date for the
meeting, a location for the meeting and an agenda.
During my meetings over the last month with various Tribal Representatives and
Executive Directors of Tribal Gaming Agencies, people have frequently suggested that
improvements should be made to the Tribal/State compact provisions concerning gaming
employee licensing and certification, as well as the surveillance of gaming facilities. In
response, I have attached to this letter copies of the following documents:
1. Proposed Gaming Compact Amendment re: Limited
Gaming Employees; and
2. Proposed Gaming Compact Amendment re: Video
Surveillance and Security System.
I hope that these draft proposed amendments interest you and we
can discuss them, among other items, at our next meeting. Please note
that, while I have taken the liberty of preparing the first draft of the above
documents, the documents are merely drafts intended to stimulate
Thursday, March 11, 1999
Page two
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discussion and comment. Towards that end, I invite any and all
comments. It would be helpful to have any written comments within the
next thirty (30) days, and it is my hope that we will be able to meet shortly
after that to discuss these and any other gaming issues which may be of
interest to us all.
Thank you for your consideration.
Sincerely,
Stephen M. Hart
Director
SMH/rr
Attachments
1
STATE OF ARIZONA
ARIZONA DEPARTMENT OF GAMING
202 EAST EARLL DRIVE, SUITE 200, PHOENIX, ARIZONA 85012
PHONE (602) 604-1801 FAX (602) 255-3883
JANE DEE HULL STEPHEN M. HART
Governor Director
AUDIT REPORT RESPONSE
I. Finding: State Should Review the Department’s Oversight Role
Response
This finding is directed to State policymakers, including the Governor and Legislature. Therefore,
it would not be appropriate for the Department to take a position on this finding. However, since its
inception the Department, following the requirements of the compacts, has carried out the State’s
philosophy of having a strong state regulatory presence in the Indian gaming industry in Arizona. We
agree with the Auditor General that the Department’s regulatory tools are well designed for ensuring the
integrity of Indian gaming operations.
Department’s Regulatory Role
The Department’s regulatory role is set out in the tribal-state compacts. The compacts expressly
provide that the Department “has the regulatory responsibility over Gaming Activities which is
specifically set out in this Compact.”1 To clarify, the compacts do not provide for the Department to have
an “oversight” role. As the Department indicated to the audit team, nowhere is the term “oversight” used
in the compacts to describe the Department’s regulatory role. Rather, the compacts authorize the
Department “to monitor the Tribe’s Gaming Operation to ensure that the operation is conducted in
compliance with the provisions of the Compact” including those governing the nature, extent, and
conduct of the gaming activities; public health, safety, and welfare; and ensuring the integrity of the
Indian gaming industry.2 To that end, the Department, on behalf of the State, conducts regular inspections
of the gaming operations, including the inspection and testing of gaming devices and related equipment;
conducts investigations on all compact violations and suspected violations by gaming employees;
performs compact compliance reviews to monitor the tribe’s compliance with all the provisions of the
compact; and performs compliance testing of the gaming operations for standard minimum internal
controls unique to the gaming industry.
In addition, under the compacts, the Department is responsible for issuing state certification for
non-tribal individuals seeking employment in a Class III gaming facility and companies seeking to
provide gaming services to such facilities in an amount greater than ten thousand dollars ($10,000.00) in
any given month. The Department also makes recommendations with respect to tribal members seeking
employment in Class III gaming facilities. As part of the certification process, the State is authorized to
conduct background investigations in order to ensure that unsuitable individuals and companies are not
involved in Arizona’s Indian gaming industry.
1 Section 6, Standard Form Compact
2 Section 7, Standard Form Compact
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Although the Department’s regulatory role is clearly specified in the compacts, the manner in
which it is conducted is not. Consequently, the Department implemented effective and efficient
procedures, set forth above, to carry out its responsibilities under the compacts. As the Auditor General
points out in his report, these procedures are generally well designed, consistently implemented, and are
accepted practices among state and tribal gaming regulators. They effectively identify compact violations
at gaming facilities and problem areas within the gaming operations that can be corrected to ensure the
integrity of the operations. As indicated in the report, the Department’s procedures are intended to ensure
the fairness of the gaming activities and the safety of patrons, as well as to prevent organized crime and
other illegal activities from infiltrating the gaming activities.
Comparisons with Other States
Because tribal-state compacts vary from state to state both in the gaming activities permitted and
the scope of regulation for the state and the tribe, it is difficult to compare the staff and budget of one state
gaming agency to that of another. One factor to consider is the number of gaming facilities and their
geographical locations. For instance, the 21 staff members in the Oregon Department of State Police that
regulate Indian gaming monitor only 8 gaming facilities with 3,865 devices compared to Arizona’s 19
gaming facilities with 7,222 devices.
Another factor is how long the state gaming regulator has been in existence. Arizona’s State
Gaming Agency, the precursor to the Department, was established in 1992. Many of the state gaming
agencies such as Oregon, Washington, and New Mexico came into existence much later. Accordingly,
they may be behind the Department in staff and budget resources, which effects their ability to conduct all
the regulatory activities required under the compacts, similar to where the Department was in 1995. The
Department has since moved into the forefront of state regulators in Indian gaming. It has assisted other
state gaming agencies such as Washington and New Mexico, by providing training and guidance in
regulating Indian gaming.
An additional factor to consider in comparing staff and budgets of state gaming regulators is the
amount of gaming revenue generated by the gaming facilities. For instance, according to a recent GAO
report, Atlantic City had $3.9 billion in gross gaming revenue in 1997. The New Jersey Division of
Gaming Enforcement & Casino Control Commission had a staff of 731 to provide state regulation of the
12 gaming facilities located in one city generating this revenue. In comparison, Indian gaming revenue in
Arizona for 1998 was estimated to be $800 million to $1 billion, approximately one fourth of Atlantic
City’s gaming revenue for 1997. However, Arizona’s gaming agency had a staff of only 56 to provide
state regulation of the 17 gaming facilities located across the state generating this revenue. More telling is
New Jersey’s expenditures for gaming regulation in 1997, which were $53.7 million compared with
Arizona’s expenditures in 1998 in the amount of $3.7 million. Comparing New Jersey and Arizona is
appropriate in that they are very similar in their monitoring and enforcement activities, as well as their
mutual philosophy in having a strong state regulatory presence over the gaming activities.
Basis for State’s Philosophy
The State’s philosophy in maintaining a strong and extensive regulatory presence is based on a
number of reasons. Under the compacts, the State has a duty to protect the health, welfare, and safety of
the patrons in the gaming facilities. In addition, the State has a duty to protect the public by ensuring the
integrity of the gaming activities. The tribes benefit from State regulation of the gaming operations,
including its internal controls, which is essential in protecting tribal assets. The gaming operations benefit
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from the Department’s monitoring of the gaming devices, surveillance, internal controls, and
investigations of compact violations by gaming employees. Further, the Department’s regulatory
presence is efficient and cost effective for the tribes when considering the number of gaming facilities and
devices in operation in Arizona and the amount of revenue they produce. Given the high risk and cash
intensive nature of the gaming industry, the tribes and the State benefit from a system of checks and
balances which the dual regulatory framework provides.
Cooperation Through Communication
To help facilitate the dual regulatory system established in the compacts, the Department has
frequent meetings and almost daily communications with the tribal gaming offices and gaming operators.
These are necessary to address and resolve enforcement issues as they arise. Further, Department tribal
gaming affairs staff spend a portion of their week at the gaming facilities, which serves to keep open the
lines of communication regarding compact enforcement activities and to develop a cooperative
relationship with the tribal regulators and gaming operators. Also, as noted in the Auditor General’s
report, it enables the Department to quickly identify potential threats to Indian gaming operations and
thereby, assists tribes to ensure the integrity of their operations. The Department has had and continues to
have quarterly meetings with the tribes, as required by the compacts, to address general issues. Some
tribes have requested biannual meetings as permitted by the compacts rather than quarterly meetings. As
always, the Department strives to accommodate the tribes’ requests.
II. Finding: The Department Should Work With Tribes To Reach An Agreement On Tribal
Assessment Fees
Response
The finding of the Auditor General is agreed to, and the audit recommendations will be
implemented to the extent the Department has authority to do so, that such recommendations are not in
violation of the compacts, and, if appropriate, that the tribes support the recommendations.
Pursuant to the tribal-state compacts, the State has the responsibility to renegotiate the gaming
device assessment fees. That notwithstanding, the Department, on behalf of the State, successfully
renegotiated the gaming device assessments with the Fort McDowell Mohave-Apache Indian Community
(1996) and the White Mountain Apache Tribe (1996). The State and the Tohono O’odham Nation have
commenced renegotiation of the gaming device assessment and have agreed to conclude that process
promptly.
The Department agrees with the Auditor General’s recommendation that the State should continue
the renegotiation efforts with tribal officials. The Department has, on behalf of the State, repeatedly
invited the other compacted tribes to begin the renegotiation process, but has received little, if any,
response to the invitations.
With respect to the information provided to the tribes in the quarterly statements, the Department
agrees with the Auditor General’s recommendation that the Department should consider providing more
detailed cost information to the tribes. However, the current amount of detail provided is fairly extensive.
It includes an itemized statement of shared expenses, which are those regulatory costs incurred by the
Department necessary to carry out the duties in the compacts. It also includes an itemized statement of
4
direct expenses, which are those regulatory costs incurred by the Department with respect to a specific
tribe. The statements do not include the cost of certification activity since those expenses, per compact,
are the sole responsibility of the individual and vendor applicants. The level of detail provided in the
quarterly statements is limited, however, by the State’s accounting system, i.e. the Uniform Statewide
Accounting System (“U.S.A.S.”) and by the Department’s internal accounting system. The Department is
in the process of purchasing a new accounting system that will provide more detail in the quarterly
statements. In addition to the quarterly statements, the Department makes available other documents such
as receipts, travel claims, purchase orders, and more in support of the Department’s regulatory costs.
The Department agrees with the Auditor General’s recommendation that the Department, on
behalf of the State, should consider working with the tribes to amend compact language that specifically
identifies a tangible basis from which fees can be renegotiated, and should endeavor to include such
language in new compacts when the existing compacts expire.
III. Finding: Improved Vendor Certification Process Can Be Further Streamlined
Response
The finding of the Auditor General is agreed to, and the audit recommendation will be
implemented to the extent the Department has authority to do so, that such recommendations are not in
violat