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The Bureau of Gambling Control and California Gambling Control Commission
Their Licensing Processes Are Inefficient and Foster Unequal Treatment of Applicants

Report Number: 2018-132

Figure 1
License Types Correspond to Individual Roles in Card Rooms

The figure portrays card room patrons engaging in a card game with card room and third-party licensees. The card game is taking place at a playing table on which each player has their hand of cards and money chips. A card room owner owns all or a portion of a card room. Card room owners contract with third-party business owners to provide players and funds to initiate certain types of games. Similar to card room owners, a third-party owner owns all or a portion of a third-party business. Both card rooms and third-party businesses have supervisors present in the card room. Card room supervisors require a key employee license and they supervise card room staff, such as dealers. Those staff who have access to restricted gaming areas must hold a work permit license. Third-party supervisors provide or direct gambling funds to the third-party players. Third-party players are authorized to play in games and are tasked with paying winners and collecting from losers. The figure demonstrates that the third-party player sits next to the card room dealer as a game is played. Card rooms can offer specific games under a set of rules approved by the bureau.

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Figure 2
The Bureau, the Commission, and IGLS Share Licensing Responsibilities

Figure 2 is a chart that lists relevant responsibilities of the bureau and IGLS within the Department of Justice and how it connects to the responsibilities of the commission. The bureau is a division within the Department of Justice and key licensing responsibilities include performing licensing background investigations, issuing reports and licensing recommendations, and investigating card rooms and casinos. IGLS also resides within Justice and its key licensing responsibilities include reviewing license-related legal documents and contracts and representing the bureau at evidentiary and other administrative hearings. The commission, a separate, independent entity, makes final licensing decisions, holds licensing meetings where it approves most license applications, conducts evidentiary hearings for more involved application decisions, and revokes licenses based on violations found during bureau investigations.

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Figure 3
The Bureau Has a Structure and Process for Reviewing License Applications

The figure identifies the bureau's two divisions: administration, compliance and enforcement; and licensing. The figure focuses on the licensing division, which includes the intake and application review units. The intake unit receives license applications. Upon receipt, the intake unit verifies any required payment of application fees and then transfers the application to the appropriate manager in the application review unit. The three application review units are card room, games, and third-party. The card room unit is the largest of the three comprised of 32 positions, followed by third-party unit and games unit at 29 position and eight positions respectively. These position totals include vacancies and only include positions funded by the Gambling Fund. To note, the games unit and intake unit have the same manager, but are different units. The manager is included in the position count of the intake unit. Once the application is assigned to staff in the application review unit, staff asses the application for completeness, request missing information from the applicant, perform background investigation and draft the report. The unit manager then reviews the report before the bureau sends the report and recommendation to the commission.

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Figure 4
The Bureau's Background Investigation Process Can Include Numerous Steps

The bureau reviews the applicant's fingerprint results history as part of identify any criminal. If the applicant has a criminal history, the bureau requests certified court documents. The bureau also submits and reviews the results of a number of database inquiries, including from the Department of Motor Vehicles and the Association of Law Enforcement and Intelligence Units Gaming Index. The bureau verifies prior gaming employment and may conduct a financial review of the applicant that includes a review of credit reports and bank statements. It is important to note that this list does not include all of steps the bureau takes in its background investigations, nor does it perform all of these steps for all applicants.

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Figure 5
In Most Cases, the Bureau Did Not Meet Required Time Frames for Processing the 23 Applications We Reviewed

After receiving an application, the bureau is required to notify the applicant that the submitted application form is complete within 5-20 days. Of the applications we reviewed, the bureau did not meet this requirement 77 percent of the time, only doing so successfully for three of 13 applications for which this requirement applied.

Further, the bureau is required to notify the applicant that the supplemental information is complete within 30-45 days of receiving the application. However, the bureau did not met this requirement 92 percent of the time and only met it for one application in our review of 12 for which this requirement applied.

Lastly, the bureau must complete its review of an application within 180 days of receiving it or provide a status update to the applicant. However, the bureau exceeded the 180-day time frame for 70 percent of the applications we reviewed, only completing seven applications within 180 days, and failed to provide a status update to any of the 16 applicants whose application review exceeded 180 days.

It is important to note that the length of time the bureau has to notify applicants whether their applications and supplemental information is complete varies by license types. Because not all license applications have these notification requirements, not all of the above time frames apply to all 23 applications we reviewed.

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Figure 6
As a Result of Declining Productivity, the Bureau Has Continued to Have a Sizeable Number of Pending Applications

The figure consists of a bar graph that illustrates five different application statistics for the bureau over the last four fiscal years: the number of new applications received, the number of reviewed applications, and the number of abandoned or withdrawn applications—which are applications for which the bureau receives notice that the applicant is no longer employed or where the applicant has requested to withdraw the application. The bureau believes that a majority of abandoned applications are third-party registrants who do not submit a license application. Finally, the figure presents the number of pending applications at both the beginning and the end of the fiscal. Pending applications are all applications that have not been reviewed, regardless of their age.

Over the four fiscal years we reviewed, the number of incoming applications the bureau received each years was fairly consistent, ranging between 5,263 and 5,683. In fiscal year 2014-15, the bureau began the year with 2,588 pending applications and received 5,263 new applications over the course of the year. It reviewed 3,651 applications and had 1,504 applications withdrawn or abandoned, ending the fiscal year with 2,696 pending. During fiscal year 2015-16, the received 5,552 incoming applications. It reviewed 4,941 applications, had 1,154 applications withdrawn or abandoned, and ended the year with 2,153 pending applications. During fiscal year 2016-17, the bureau received 5,683 incoming applications. It reviewed 5,566 applications, had 279 applications withdrawn or abandoned, and ended the year with 1,991 pending applications. Lastly, during fiscal year 2017-18, the bureau and received 5,300 incoming applications. It reviewed 4,145 applications, had 1,339 applications withdrawn or abandoned, and ended the year with 1,806 pending applications as of June 2018.

The line graph, which covers the same period of time, demonstrates that the number of applications reviewed annually per filled licensing staff position has steadily decreased from 146 applications per staff in fiscal year 2014-15 to 70 applications per staff in fiscal year 2017-18. During the same period, card room and third-party licensing staff more than doubled from 25 staff in 2014-15 to 59 staff in 2017-18. Despite the increased number of staff positions, the bureau continues to see a persistent number of pending applications due to its declining productivity.

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Figure 7
The Bureau's and Commission's Licensing Expenditures Have Increasingly Exceeded Licensing Revenue

Figure 7 is a bar chart comparing total revenue from licensing fees and background investigation deposits with the bureau's and commission's estimated licensing expenditures. For fiscal year 2013-14, the bureau's licensing expenditures were approximately $4.4 million, and the commission's expenditures were approximately $500,000; these total expenditures exceed the nearly $4 million in total licensing revenue. For fiscal year 2014-15, the bureau's and commission's combined licensing expenditures nearly equaled total licensing revenues at roughly $5.3 million. However, in the following three years, licensing expenditures increasingly exceeded licensing revenue. In fiscal year 2015-16, bureau and commission licensing expenditures were $6.1 million and $500,000 respectively, compared to total licensing revenue of approximately $4.5 million. In fiscal year 2016-17, bureau licensing expenditures totaled approximately $9 million and commission's $450,000, compared to total licensing revenue of about $4.7 million. In 2017-18, the bureau's licensing expenditures were approximately $9.3 million and commission's estimated expenditures total approximately $580,000, and total licensing revenue was $4.2 million.

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Figure 8
Nonlicensing Regulatory Fees Significantly Overcharge for the Activities They Fund

Figure 8 is a bar chart comparing total revenue from nonlicensing regulatory fees with the bureau's and commission's estimated nonlicensing expenditures. In fiscal year 2013-14, the bureau and commission expended $3.7 million and $2.4 million, respectively, on nonlicensing regulatory activities. However, revenue generated by nonlicensing regulatory fees intended to cover the costs these activities was significantly higher than expenditures, totaling over $15.6 million. In fiscal year 2014-15, the bureau's and commission's nonlicensing regulatory expenditures were $4.8 million and $2.5 million, respectively, and nonlicensing regulatory revenue for the year was slightly more than $16 million. In fiscal year 2015-16, the bureau's and commission's nonlicensing regulatory expenditures were $3.5 million and $3 million, and nonlicensing regulatory revenue totaled $17.4 million. In fiscal year 2016-17, the bureau's and commission's nonlicensing regulatory expenditures were $5.3 million and $2.7 million, and revenue increased to over $18.7 million. In fiscal year 2017-18, the bureau's and commission's nonlicensing regulatory expenditures were approximately $4.1 million and $2.8 million, respectively, and nonlicensing regulatory revenue was nearly $19 million, slightly higher than the previous year.

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Figure 9
The Gambling Fund's Surplus Has Doubled Over the Past Five Fiscal Years

The figure is a line graph showing actual total revenues, expenditures, and resulting fund balance for the Gambling Fund between for the period from fiscal year 2013-14 through 2017-18, with projected numbers for fiscal years 2018-19 and 2019-20. The figure shows that, due to revenues consistently exceeding expenditures, the fund balance has more than doubled from June 2014 through June 2018, increasing from $30 million to $61 million. Further, the surplus is projected to reach $97 million by June 2020, with the additional increase in fiscal year 2019-20 due largely to the proposed repayment of $29 million from the State's General Fund for outstanding loans out of the Gambling Fund.

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Figure 10
Bureau Licensing Staff Spend Only a Fraction of Their Time Performing Billable Activities

Figure 10 is a horizontal bar chart that depicts the amount of billable, nonbillable, and noncase hours that bureau staff reported during fiscal year 2017-18. The bureau's licensing staff can charge their time to the following three categories: billable time, which should be used to charge at least six case-related hours per day, when appropriate, against the applicant's background deposit; nonbillable time, which should be case-related hours not charged against the applicant's deposit because staff do not feel the applicant should pay for the work in question, such as time spent re-familiarizing with a case; and noncase time, which should be used for case-related time totaling less than 15 minutes, or for up to one hour of personal time per day for noncase tasks, such as checking voicemails.

The graphic shows that licensing staff reported spending only a fraction of their time during fiscal year 2017-18 performing billable activities. The bureau's licensing staff reported 12 percent of their time as billable time, compared to 40 percent reported as nonbillable time. Further, licensing staff reported nearly half their time—48 percent—as noncase time. At the bureau's rate of $76 per hour, these hours represent costs of $841,000 in billable time versus $3.5 million and $2.9 million in noncase and nonbillable time, respectively.

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