Back to Video Lottery Terminal Inititaive of 2004
Government and People
GOVERNMENT OF THE DISTRICT OF COLUMBIA
BY FAX AND GOVERNMENT MAIL
May 27, 2004
Mr. Kenneth J. McGhie
RE; "Jobs, Education, and Healthcare Lottery Expansion Initiative of 2004" (AP-04293) (MID 119598)
Dear Mr. McGhie:
This is in reply to your April 27, 2004 letter, in which you invite this Office to address whether the "Jobs, Education, and Healthcare Lottery Expansion Initiative of 2004" (the "Initiative") is proper subject matter for an initiative in the District of Columbia (the "District"). The intent of the Initiative is to expand the District lottery by allowing "Video Lottery Terminals" ("VLTs") in the District, to charge a 25% net revenue usage fee for each VLT, to affirm the location for the initial VLTs, to permit only one licensee (the "Licensee") to operate VLTs at the initial location for ten years and to set forth the requirements for permitting additional licensees to operate at additional VLT locations after ten years. In addition, the Initiative specifies how the fees and other monies received from the VLTs by the District of Columbia Lottery and Charitable Games Control Board (the "Lottery Board") are to be deposited and initially used and strongly recommends how the District is to spend the net proceeds thereof.
The Initiative would amend D.C. Official Code § 3-1301 et seq. (2001) by adding new sections 3-1350 through 3-1371.
District law provides that "[tjhe term 'initiative' means the process by which the electors of the District of Columbia may propose laws (except laws appropriating funds) and present such proposed laws directly to the registered qualified electors of the District of Columbia for their approval or disapproval." D.C. Official Code §1-204.101(a) (2001). The Board of Elections and Ethics (the "Board") is to refuse to accept a proposed initiative measure if the Board finds that it is not a proper subject of initiative pursuant to Title IV of the Home Rule Act1 or if, among other things, "[t]he measure presented would negate or limit an act of the Council of the District of Columbia pursuant to § 1-204.46." D.C. Official Code §1-1001.16(b)(1) (2001). D.C. Official Code § 1-204.46 (2001) sets forth the process for adoption by the District Council of the District's budget request for approval by Congress.
The D.C. Court of Appeals found that, in adopting the "laws appropriating funds" exception to the initiative right, members of the Council:
Convention Center Referendum Committee v. District of Columbia Board of Elections and Ethics, 441 A.2d 889, 912 (D.C. 1989) (en banc). The court also noted that the Council was concerned that the "electorate not use the initiative to launch the appropriations process." Id. Thus, the court held that the "laws appropriating funds" exception prohibits "the electorate from using the initiative to 1) adopt a budget request act or make some other affirmative effort to appropriate funds...." Id. at 913-914.
Two years later, the D.C. Court of Appeals held that "laws appropriating funds" can mean "laws allocating funds." Hessey v. District of Columbia Bd. of Elections & Ethics, 601 A.2d 3, 18 (D.C. 1991) (en banc). Thus, the court held that "a measure which would intrude upon the discretion of the Council to allocate District government revenues in the budget process is not a proper subject for initiative... whether or not the initiatives would raise new revenues." Id. at 20.
The Initiative attempts to avoid the restriction on appropriating and/or allocating District funds by recommending the uses of the VLT Net Revenues. (Initiative § 3-1353(b)). However, the Initiative provides that Gross VLT Fees shall be deposited in the Lottery and Charitable Games Fund, and Gross VLT Funds are defined as all "funds, fees, fines or other revenues collected by the [Lottery] Board with respect to the licensing, operation, administration, or regulation of VLTs, including but not limited to all VLT Usage Fees collected pursuant to the [Initiative]." (Initiative § 3-1351(a)). Then, pursuant to the Initiative, these funds are first used to pay the Lottery Board's administrative and capital expenses. in conducting activities under the Initiative. (Initiative § 3-1353(a)). Although this is almost identical to the current statutory scheme regarding deposit of lottery proceeds (D.C. Official Code § 3-1312 (2001)), only the Council can so allocate District funds, and only the Council can determine how District funds are to be expended.
The Initiative specifies that each licensee (not the Lottery Board) is to install a central computer to monitor the VLTs. (Initiative § 3-1358(3)). The costs thereof are to be paid by the Lottery Board over a three-year period by deducting the amortized amount from the VLT Fees to be paid to the District. (Initiative §3-1358(6)). This constitutes an improper designation of how District funds are to be allocated,2 although one may argue that the District is receiving only net proceeds from the license such that, in contrast to the funds in the prior paragraph, the amounts deducted are not yet District funds.
The Initiative requires that each VLT is to have a memory chip approved by the Certification Company (as designated in the Initiative and who can be a licensee) but owned by the District. (Initiative § 3-1359(5)). The Initiative does not specify who is to pay for the memory chips. If it is the District, this constitutes an improper designation of how District funds are to be allocated.
The Initiative allocates District funds, and we find that there is a reasonable possibility that a court would find that the Initiative is not the proper subject for an initiative in the District of Columbia. Thus, we believe that there are grounds for the Board to reject the Initiative as written.
D.C. Official Code § 1-204.106 (2001) specifies that the short title and summary of an initiative proposed by the Board shall "accurately reflect the intent and meaning of the proposed... initiative."3 The Initiative tries to "sell" the proposal to the voters by promising monies for education and health purposes while trying to avoid the prohibition on appropriating District funds by making the proposed use of the funds only a recommendation. Legally, this may be sufficient, but there are grounds for concern that, without a clear explanation of the dichotomy, the voters may be confused when signing the petitions and when voting. The problems are as follows:
The Initiative prohibits additional locations for VLT operations for ten years after issuance of the Initial License (not the earlier Initial Temporary License) (Initiative § 31357(a)), and any additional locations must be approved by a two-thirds majority of the Council.4 (Initiative § 3-1357(b)), Furthermore, Initiative § 3-1360 specifies that a licensee is to pay the District an annual fee of 25% of Net VLT Proceeds and that there "shall be no other license, tax, fee, levy or other charge assessed against VLT Operations and/or Net VLT Proceeds by the District of Columbia for licensure." Although the Council has the legal authority to amend the Initiative if it becomes law, these actions impermissibly restrict the ability of future Councils to act.5
The Initiative specifies that each approved VLT location can operate up to 3500 VLTs. (Initiative § 3-1358(1)). It specifies the sole initial site. (Initiative § 3-1350(7)). It permits a licensee to conduct auxiliary services, "including, but not limited to the provision of parking facilities, food service, or lodging service, on land adjacent to or within a reasonable distance of the Designated VLT Site." (Initiative § 3-1358(2)). The above may appear to be a grant to the Licensee of certain rights to conduct certain operations at a certain size without having to comply with District zoning and other land use restrictions (but probably does not exempt the Licensee from the need to comply with the building code). This inference is reinforced by Initiative § 3-1358(7), which section specifies only that any facility at which VLT operations are conducted pursuant to a license "shall be in compliance with all laws, rules, and regulations of the District of Columbia concerning the permissible signage for commercial facilities at the location of the facility." This specific reference to compliance with one area of the District Code without any references to other similar areas could cause legal disputes.
The Initiative grants unlimited access to inspect all VLTs and related VLT equipment to the Lottery Board (Initiative § 3-1358(5)), but the initiative contains no similar right for the Lottery Board or the Chief Financial Officer ("CFO") to examine the licensees' books and records. This is particularly relevant because the District is to receive a net fee (defined in Initiative § 3-1350(13) as "the total of all cash and property received by a Licensee from VLT Operations minus the amount of the Payout."). The need for the Lottery Board and the CFO to examine the books is more significant because the Payout is defined as "premiums, merchandise, prizes, promotional complementaries or anything of value provided via a voucher and/or Electronic Card, which the player of a VLT may be entitled to receive as a result of the playing of the VLT." (Initiative § 3-1350(14)).
Both the central computer system to be furnished and installed by the Licensee (Initiative § 3-1358(3)(B)) and the memory chips to be approved by the Certification Company (Initiative § 3-1359(5)) comprise a significant portion of the methods available to calculate the revenues and Payouts from the VLTs. In addition, the VLTs are to be serviced by Manufacturers or Service Technicians (as defined in the Initiative). This creates a concern because Initiative § 3-1365 states:
Because the definitions of "Certification Company" (Initiative § 3-1350(2)), "Electronic cards," which are smart cards or cards containing integrated computer chips and specifically exclude credit cards issued by any person other than a Licensee (Initiative § 3-1350(4)), "Manufacturer" (Initiative § 3-1350(11)), "Permit" to participate in VLT Operations and/or the provision, repair, maintenance and servicing of VLTs and related equipment and supplies (Initiative § 3-1350(15), "Principal" (Initiative § 3-1350(18)) and "Service technician" (Initiative § 3-1350(19)), do not prohibit any conflicts of interest, the licensee can be the party installing, maintaining, servicing and verifying the equipment.
Except for the 25% VLT Usage Fee, Initiative § 1360 states that "no other license, tax, fee, levy or other charge [may be] assessed against VLT Operations and/or Net VLT Proceeds by the District of Columbia for licensere." It is unclear whether VLT
Operations also include the auxiliary functions permitted under the Initiative such as food service and parking. Initiative § 3-1359(22) defines VLT Operations as "the use, operation, offering, or conduct of VLT gaming by a Licensee in accordance with the provisions of the [act]." Normally, that would imply just the gaming operations, leaving the other operations subject to normal District taxation, but the Initiative grants a Licensee the right to conduct "auxiliary" services, thus clouding the question of whether they constitute a part of the overall VLT Operations.
The Initiative § 3-1350(18) definition of "Principal" is unusual. It provides that banks, regulated mutual funds or other regulated financial institutions are not Principals if they hold their interests for investment purposes only and own less than a majority of the voting rights in the Licensee. This means that if an owner holds only a 49.99% voting interest in the licensee but is a 99% owner of the licensee, the owner will not be screened for suitability to hold a license or even listed in the application as a Principal of the licensee. Furthermore, the Temporary Initial License application does not even require identification of any of the Licensee's Principals.
The Temporary Initial License and the Initial License can only go to the Licensee because, in both cases, the applicant must have more than 50% control of the only authorized site. Yet, although the Licensee is not identified in the Initiative, and although the Initiative "requires" that the Licensee must apply for the Temporary Initial License, the application for a Temporary Initial License is "deemed complete" and the Temporary Initial License must be granted if the Licensee submits a sworn affidavit that the Licensee is, "at the time of application, not 'unsuitable' for a License...." (Initiative § 31355(b)(1)). Thus, the Lottery Board is not permitted to determine the suitability of the Licensee but must rely on an affidavit from the Licensee. To drive that point home, Initiative § 3-1363 specifically exempts the applicant for the Temporary Initial License from having to meet the suitability standards.6
Although the application for the Initial License does allow the Lottery Board to investigate the suitability of the Licensee, the Temporary Initial License remains in effect until the Initial License is granted or, if denied, all appeals have been completed. That will be some time, because Rules must be adopted before the application for an Initial License can be submitted.
Initiative § 3-1371 provides that violations of the proposed act result in a fine of $10,000 per violation, but that does not specify if the violations apply to each VLT or if they accumulate daily. This could mean an insignificant fine if an illegal facility is operated for a long period of time.
The Initiative contains typographical errors and does not fully comply with Council drafting requirements, including, but not limited to, the presentation as amendments to the D.C. Official Code instead of the organic act. In addition, some cross-references to sections in the Initiative are incorrect.
Finally, although the items listed under "Other Concerns" do not warrant the Board's rejection of the Initiative pursuant to District law, we have included these items to identify the drafting and legal shortcomings that we would identify if we were asked to provide a legal sufficiency review of the Initiative.7
Should you have any questions regarding this letter, please contact either Stephen B. Lyons, at 724-5094, or me at 727-3400.
OFFICE OF THE GENERAL COUNSEL
May 28, 2004
Kenneth J. McGhie, General Counsel
Re: "Jobs, Education, and Healthcare Lottery Expansion Initiative of 2004"
Dear Mr. McGhie:
Section 16(c)(3) of the District of Columbia Election Code of 1955, effective June 7, 1979 (D.C. Law 3-1; D.C. Official Code § 1-1001.16(c)(3)), allows the Board of Elections to consult with this office to ensure that initiatives are in the proper legislative form. In addition, you have asked if the proposed initiative is the proper subject for an initiative. I have reviewed the proposed initiative for compliance with the requirements of District law, including the Initiative, Referendum, and Recall Charter Amendments Act of 1977, effective March 10, 1978 (D.C. Law 2-46; D.C. Official Code § 1-204.101 et seq.), the Initiative, Referendum, and Recall Procedures Act of 1979, effective June 7, 1979 (D.C. Law 3-1; D.C. Official Code § 1-1001.01 passim), and judicial interpretations of these statutes. Based on this review, it is my opinion that as currently drafted, the initiative is not a proper subject for an initiative under District law because it is a law appropriating funds, and a measure that would negate or limit an act of the Council relating to the budget.
The proposed initiative contains all the requirements of a proposed law -- a short title, an enacting clause, substantive sections prescribing standards of conduct, and an effective date clause; however, its numbering is not consistent with that used for District of Columbia laws. These inconsistencies do not affect the validity of the initiative.1 Moreover, the short title and summary statement of the proposed initiative are misleading. The measure, in an attempt to survive the prohibition against proposing a law appropriating funds in an initiative, "strongly recommends", but does not, and could not require that new revenues be dedicated to a Public School Fund, or a Senior Citizens Prescription Drug Benefits Fund.
The power of initiative is co-existent with the power of the legislative branch to enact legislative acts except that it is not as extensive, because it cannot involve a law appropriating funds. This limitation is further clarified in the Initiative, Referendum, and Recall Procedures Act, effective June 7, 1979 (D.C. Law 3-1; D.C. Official Code § 1-1001.02), which provides that a proposed initiative is not a proper subject for initiative if "[t]he measure would negate or limit an act of the Council of the District of Columbia pursuant to section 446 of the Home Rule Act (D.C. Official Code § 1-204.46)." Section 446 of the Home Rule Act sets forth the process by which the Council enacts the budget for the District of Columbia, and transmits the budget to the President and to Congress. The proposed Jobs, Education, and Healthcare Lottery Expansion Initiative of 2004, according to the summary submitted with the legislative text, amends the Lottery and Charitable Games Control Act to authorize the licensing of Video Lottery Terminals and designate revenues from the operation of video lottery terminals for recommended distribution equally to Funds to be established for the benefit of the D.C. Public Schools, Senior Citizens Prescription Drug Benefits, and the General Fund.
Law Appropriating Funds
The Initiative, Referendum, and Recall Charter Amendments Act of 1977, effective March 10, 1978 (D.C. Law 2-46; D.C. Official Code § 1-204.101 et seq.), defines an initiative as:
In Convention Center Referendum Comm. v. District of Columbia Bd. of Elections & Ethics, 441 A.2d 889, 917 (D.C. 1981), the court states that "(a)ll seven judges (indeed, all nine) do agree that the Charter Amendments' exception barring initiatives for "laws appropriating funds" prohibits the electorate from attempting to fund an authorized program." This initiative attempts to do just that. Ten years after the Convention Center case, an en banc Court of Appeals, in Hessey v. District of Columbia Bd. of Elections & Ethics, 601 A.2d 3 (D.C. 1991), further clarified that the "laws appropriating funds" exception to the right of initiative also prohibited "acts allocating funds", including measures such as the proposed initiative which establish new funds, or restrict the "discretion of the District government's elected officials to allocate revenues ..." Id. at 18. See also Dorsey v. Board of Elections and Ethics, 648 A.2d 675 (D.C. 1994) (initiative granting amnesty for traffic fines would affect or relate to the budget process in a broad manner constituting a law appropriating funds prohibited by D.C. Official Code § 1-204.101(a)); District of Columbia Bd. of Elections & Ethics v. Jones, 481 A.2d 456 (D.C. 1984) (Board of Elections and Ethics properly rejected the proposed District of Columbia Unemployment Compensation Initiative of 1984 because it would have violated the laws appropriating funds exception and would have negated or limited a budget act of the Council by forcing the District into making interest payments and seeking additional appropriations for employer contributions to the unemployment compensation fund after the Council had passed laws to prevent such appropriations and expenditures.).
Section 3-1351 (a) of the proposed initiative requires that "all funds, fees, fines, or other revenues collected by the Board with respect to the licensing, operation, administration, or regulation of VLTs ... shall be deposited in the District of Columbia Lottery and Charitable Games Fund." Section 3-1351(b) states that these revenues "shall be disbursed from the Lottery Fund according to that section. Section 3-1360 provides that disbursements from the fund shall be made pursuant to section 3-3150.3 Section 1350 of the proposed initiative is the definitions section. Section 1353, entitled "Disbursements from Lottery Fund" is probably the correct cross reference for this citation. This funding and allocation scheme cannot, under District law, be accomplished by an initiative.4
Negating or limiting an act of the Council
The proposed initiative may also `negate or limit an act of the Council pursuant to section 446 of the Home Rule Act, and thus not be the proper subject of an initiative.' The most recent budget approved by the Council establishes priorities among competing programs and projects. It even contains a contingency plan for the application of any additional revenues, none of which are the dedication of new revenues to the Lottery Fund.6 The initiative, if approved, would have the effect of limiting, or negating these actions, as those terms have been construed by the D.C. Court of Appeals.
Section 3-1351(b) of the proposed initiative would restrict expenditures to those made for the purposes specified in the initiative. ("Fees shall be disbursed from the Lottery Fund according to the terms of this section"). These requirements would affect the Council's ability to prioritize and allocate funds among competing programs.7 The District of Columbia Court of Appeals has interpreted this "negate or limit an act of the Council" language to mean that an initiative could not be used to negate or limit the provisions of a Budget Request Act passed by the Council, because the Council had preserved its ultimate control over the allocation of revenues. The court specifically stated that an initiative:
Hessey v. District of Columbia Bd. of Elections & Ethics, 601 A.2d at 15. The proposed Jobs, Education, and Healthcare Lottery Expansion Initiative of 2004 seeks to do precisely what the Court of Appeals has said is prohibited - require that additional revenue be devoted to the Lottery Fund, and that revenues from this source be devoted to certain purposes. For that reason, it is not the proper subject of an initiative.
This office is aware of concerns raised that the proposal may violate federal gambling prohibitions applicable to the District of Columbia. See, e.g., 15 U.S.C. §§ 1171 - 1178, ("Johnson Act") which prohibits the possession and operation of certain "gambling devices" as defined in the act, in certain jurisdictions, including the District of Columbia. Given that the Court of Appeals has cautioned that courts should decline to consider pre-election challenges to the constitutionality or legality of an initiative in all but the most extreme cases, it is doubtful that the Board of Elections could reject the initiative on this basis. Committee for Voluntary Prayer v. Wimberly, 704 A.2d 1199, 1202 (D.C. 1997); citing Hessey v. Burden, 615 A.2d 562, 574 (D.C. 1992). Thus, no opinion is expressed as to whether the proposed initiative would violate the Johnson Act, or any other provision of federal law.
Because this initiative interferes with the appropriation power to identify revenues and allocate them among competing programs and activities, it violates the appropriation limitation on initiatives under D.C. Official Code § 1-204.101(a), would negate or limit a budget act of the Council under D. C. Official Code § 1-1001.16(b)(1)(D), and therefore is not a proper subject for an initiative. See, Hessey v. District of Columbia Board of Elections and Ethics, 601 A.2d 3, 18 (D.C. 1991) (en banc).
cc: Honorable Linda W. Cropp, Chairman
Footnotes to letters
1. Title IV of the Act of December 24, 1973, 88 Stat. 785-811, Pub. Law 93-198.
2. Arguably, because this commits the District to three years of expenditures under a "contract" with the Licensee, it violates the Antideficiency Act (31 U.S.C. §§ 1341, 1342, and 1349 to 1351, and 1511 through 1519). However, although D.C. Official Code § 3-1336(g) (2001) specifies that "(c]ontracts awarded by the (Lottery] Board for more than one year shall not be governed by the provisions of the Antideficiency Act," that exemption from a federal law was adopted by the Council, not by the Congress. 3 Note that the person submitting the Initiative need only file a summary statement and short title; there is no requirement that they be accurate. D.C. Official Code § 1-1001.16(a)(1) (2001).
4. It appears that this requirement means just what it says, not two-thirds present and voting but two-thirds of the full Council.
5. The Council can amend the language of the Initiative if it becomes low, but that may spark a lawsuit from the Licensee based on its expenditures in reliance on certain expectations.
6. The Lottery Board is granted the discretion to determine the content of the application for the Initial License (subject to the requirement that the Licensee can be the only applicant), but that discretion is not provided to the Lottery Board regarding the content of the application for the Temporary Initial License.
7. We are not, in this letter, commenting on the policy issues raised by the Initiative.
1. It is noted that the organic act, the Law to Legalize Lotteries, Daily Numbers Games, and Bingo and Raffles for Charitable Purposes in the District of Columbia, effective March 10, 1981 (D.C. Law 13-172; D.C. Official Code §§ 3-1301 et seq., and 22-1716 et seq.) ("Lottery and
Charitable Games Control Act ") was an Initiative act that was approved by voters on November 21, 1980. The numbering scheme in the organic Lottery and Charitable Games Control Act was inconsistent with the style and numbering of Council acts when it was approved.
2. See also section 2(a) of the Initiative, Referendum, and Recall Procedures Act of 1979, effective June 7, 1979 (D.C. Law 3-1; D.C. Official Code § 1-1001.02), which contains the same definition for an initiative.
3. Section 3-1360 further restricts the ability of the District to derive revenue from VLTs, stating that: "There shall be no other license tax, fee, levy or other charge assessed against VLT Operations and/or Net VLT Proceeds by the District of Columbia for licensure."
4. This office is aware that some of the language in the proposed initiative is similar or identical to that in the Lottery and Charitable Games Control Act, which itself was adopted as an initiative measure. The Lottery and Charitable Games Control (Initiative) Act predates the Court of Appeals decision which makes it clear that the proposed funding and allocation scheme is invalid.
5. D.C. Official Code § 1-1001.16(b)(1)(D).
6. See, e.g., the "Pay-As-You-Go Contingency" appropriations title, and the "Revised Revenue Estimate Contingency Priority" appropriations title in the Fiscal Year 2005 Budget Request Act, approved by the Council on May 14, 2004 (Bill 15-765) ("If the Chief Financial Officer for the District of Columbia certifies through a revised revenue estimate that funds are available from local funds, such available funds shall be expended as provided in the Contingency for Recordation and Transfer Tax Reduction and the Office of Property Management and Library Expenditures Act of 2004, approved by the Council of the District of Columbia on 1st reading, May 14, 2004 (Bill 15-768), including up to $2,000,000 to the Office of Property Management, and up to $1,200,000 to the District of Columbia Public Library.").
7. This analysis does not consider whether the fiscal impact statement requirements imposed by section 602(c)(3) of the District of Columbia Home Rule Act, approved December 24, 1973 (87 Stat. 813; D.C. Official Code § 1-206.02(c)(3)), applies to initiatives, or if the requirement applies, the timing of the submission of the statement. Section 602(c)(3) requires that the Council "submit with each Act transmitted ... an estimate of the costs which will be incurred by the District as a result of the enactment of the act. .." for each of the first four years the act is in effect.
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