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GOVERNMENT OF THE DISTRICT OF COLUMBIA Office of the Attorney General 1350 Pennsylvania Avenue, N.W., Suite 409, Washington, D.C. 20004 Phone (202) 727-3409 Fax (202) 724-6590 Attorney General BY FAX AND GOVERNMENT MAIL June 3, 2004 Mr. Kenneth J. McGhie RE: "Lottery Expansion Initiative of 2004" (AP-04-293B) (MID 119598) Dear Mr. McGhie: This is in reply to the June 2, 2004 email from Terri D. Stroud of your office inviting this Office to address whether the revised "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, in its "Findings and Purposes," the Initiative strongly recommends how the District is to spend the VLT usage fees received by the District. The Initiative would amend D.C. Official Code §3-1301 et seq. (2001) by adding now sections 3-1350 through 3-1369. Legal BackgroundDistrict law provides that "[t]he 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 N of the Home Rule Act1 or if, among other things, "(the 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)(l) (2001). D.C. Official Code §1-204.46 (2001) seta faith 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 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. Thus, the Carat stated that:
Id at 914. Thus, the question is whether an initiative makes an affirmative effort to appropriate or allocate fields or whether it only establishes substantive authorization for a new project The test is whether the initiative requires expenditure for a program or leaves the funding mechanism to the Council's discretion; i.e., does the initiative contain "self-actuating funding mechanisms" that would force the District to seek additional appropriations. Finally, the night of initiative is to be construed liberally, such that only the limitations in the law clearly or compellingly implied maybe used to deny that right. Hessey v. Burden, 584 A.2d 1 (D.C. 1990), on subsequent appeal, 615 A.2d 562 (D.C. 1992). Appropriations ConcernsThe Initiative corrects the appropriations concerns expressed in our May 27, 2004 letter to you. The Initiative attempts to further avoid the restriction on appropriating and/or allocating District funds by limiting its recommendation regarding the District's use of the VLT usage fees to the Findings and Purposes and deleting the recommendation from the proposed act. (Prior Initiative §3-1353(b)). Thus, the primary remaining question is whether the Initiative requires expenditures for a program, thus mandating that the Council appropriate funds for that program. The Initiative grants the Licensee a "right" to locate and operate up to 3400 VLTs in the District. Although the District of Columbia Lottery and Charitable Games Control Board (the "Lottery Board") bas no discretion in granting the Temporary Initial License to the Licensee (Initiative §1353(c)), and although the Council can vote not to permit additional VLTs in the District, the Lottery Board will incur administrative expenses if the Initiative is adopted. The Lottery Board would be required to prepare regulations, to review the application for the Initial License, to review and approve additional VLT sites and operators for Council approval after ten years and to monitor, administer and regulate the operations of the initial VLT facility. The Council can choose not to appropriate funds to the Lottery Board for VLT administrative purposes, thus forcing the Lottery Board either to conduct VLT administrative activities out of current and ongoing appropriations for administrative purposes or to Ignore VLT administration. Although the Initiative specifies how the Lottery Board is to administer the VLT program, it is doubtful that litigation could force the Council to appropriate funds for such purposes. The Initiative does not appear to appropriate or allocate District funds in such a manner 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 the Initiative is a proper subject for Initiative in the District. Other Concerns.D.C. Official Code §1-204.106 (2001) specifies that the short title and mummery of an initiative proposed by the Board shall "accurately reflect the intent and meaning of the proposed...initiative."2 The proposed Summery Statement tries to "sell" the proposal to the voters by stating that the Initiative "will encourage development and job creation in an underdeveloped section of the District." Although it may be a desired by-product of the Initiative, development and job creation are not the primary purposes of those who proposed the Initiative; their purpose is to obtain an exclusive license to operate a VLT facility at a site they have chosen. However, D.C. Official Code §1-1001.16(c)(1) (2001) directs the Lottery Board to prepare "a true and impartial" Summary Statement which "shall not intentionally create prejudice for or against the measure." The proposed Summary Statement fails to accurately describe the intent and meaning of the Initiative because it is silent regarding the fact that the Initiative is special interest legislation granting an unnamed Licensee an exclusive ten-year right to operate VLTs at a site specified by that entity for a designated fee to the District. Because the Initiative grants the Licensee the exclusive right to operate a VLT facility in the District for ten years, and because the Council must approve any additional facilities by a two-thirds vote of its members, the primary (and possibly only) result of the Initiative will be to allow the Licensee to build its VLT facility. However, because the Initiative is worded in global terms such that one must read and comprehend the entire document to understand the actual result of the Initiative's indirect language, the special purpose nature of the Initiative is not readily apparent to the untrained eye. Thus, if the voters rely on the proposed Summary Statement, they may not understand the full intent and meaning of the Initiative. D.C. Official Code § l-204.106 (2001) permits any citizen to petition the Superior Court to correct any inaccurate Summary Statement, and given that opposition to the Initiative has been expressed before the petition drive has begun,3 the Summary Statement should accurately reflect the complete intent and meaning of the Initiative. The Initiative prohibits additional locations for VLT operations for ten years after issuance of the Initial License (not the earlier Initial Temporary License) (Initiative §3-1355(a)), and any additional locations must be approved by two-thirds majority of the members of the Council.4 (Initiative §3-1355(b)). Fmthermore, Initiative §3-1360 specifies that a licensee is to pay the District an annual fee of 25% of Net VLT Proceeds. 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 §3-1356(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 §3-1356(2)). The above may appear to be a grant to the Licensee of curtain rights to conduct certain operations at a certain size without having m 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). Both the central computer system to be furnished and installed by the Licensee (Initiative §3-1356(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 §3-1363 states:
The "Certification Company" (Initiative § 3-1350(2)) cannot be affiliated with a licensee or any Principal of a licensee. However, relationships involving a 'Manufacturer" (Initiative §3-1350(11)) or a "Service technician" (Initiative §3-1350(19)) are restricted only to the extent that neither can be a licensee, but either can be affiliated with the licensee or a Principal of a licensee. Thus, the Lottery Board may have little control over interrelationships among a licensee, Principals of a licensee, principals of a licensee who are not defined as Principals and various entities working on and being paid by (so as to reduce net proceeds) the facility. Furthermore, the Lottery Board cannot insist on its own certification of the Certification Company or the Manufacturer because it must accept authorization issued by any State. The Initiative §3-1350(18) definition of "Principal" 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 equity in a licensee.6 This means that if such an entity holds a 49.99% ownership interest (this is not precluded by the limitation to "investment purposes") in a licensee, that bank, mutual fund or financial institution will not be screened for suitability to hold a license or even listed in the application as a Principal of a licensee. Furthermore, the Temporary Initial License application does not require identification of any of the Licensee's Principals, only that the Licensee certify that the Principals (apparently without having to name them) are not unsuitable. 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 disqualified from being a Licensee...." (Initiative §3-1353(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 §3-1361 specifically exempts the applicant for the Temporary Initial license (the Licensee) from having to meet the suitability standards.8 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 §3-1369 provides that violations of the proposed act result in a fine of $10,000 per violation, but that dose 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. 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.9 Should you have any questions regarding this letter, please contact either Stephen B. Lyons, at 724-5094, or me at 727-3400. Sincerely, RJS/sbl 1. Approved December 24, 1973, 88 Stat. 783-811, Pub. Law 93-198. 2. 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). 3. See "D.C. Slots Backers Start Ballot Drive," The Washington Post, June 3, 2004. p. B5. 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 law, but that may spark a lawsuit from the Licensee based on its expenditures in reliance on certain expectations. 6. Even the Certification Company can be affiliated with investors who are not deemed "Principals" of a licensee. Yet, any combination of two banks, mutual funds or financial institutions, could result in 99.98% combined ownership in a licensee while neither of these owners are "Principals" of the licensee. 7. A number of entities are identified as current owners of various parcels of the land where the Licensee will locate the facility (Initiative § 1350(7)), but they are not identified as being part of the Licensee and appear to be used to identify the land. The Licensee does not have to own the land, it only has to have a right to buy or lease it. 8. 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 granted to the Lottery Board regarding the content of the application for the Temporary Initial License. 9. We are not, in this letter, commenting on the policy issues raised by the Initiative or whether it may violate federal law. |
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