Auditor Of Public Accounts
State Auditor Crit Luallen releases report on Kentucky Department of Charitable Gaming
State Auditor Crit Luallen today released a briefing report on the Kentucky Department of Charitable Gaming, which regulates the state’s second largest gaming industry.
In 2007, charitable gaming had $489 million in gross receipts, making it second to the Lottery, which brought in $744 million, and just ahead of horseracing, which produced $470 million.
The report, which examines 2001-2007 data, recommends the department conduct regular audits of charitable organizations, maintain a state registry of gaming volunteers, and include a broader range of information in its annual report for the benefit of the gaming community.
Currently, Kentucky law does not require nor has the department adopted a policy to perform scheduled audits to ensure the more than 750 charitable organizations are consistently monitored. Audits or investigations are only initiated as a result of a gaming complaint.
In 2007, Kentucky licensed 758 charitable organizations. According to the report, the department’s audit branch assigned 16 audits in 2007. In April 2008, the investigation branch had 15 open cases from 2005, 48 open cases from 2006, 44 open cases from 2007 and 10 cases in 2008.
The report notes that without an audit, the financial data provided to the department is self-reported and not verified.
Additionally, the report recommends the department strengthen its guidelines toward financial reporting by the organizations, which have no deadlines toward making revisions to their financial statements.
Because some professional volunteers are able to personally benefit by engaging in collusion and criminal activities, the report recommends the department better monitor volunteer information in order to protect the interests of the charities. Kentucky law does not require the department to maintain a state registry of gaming volunteers to properly track and monitor volunteer activities.
“With a large number of charities in Kentucky relying on gaming proceeds, it’s important that the department strengthen its controls and oversight of the charitable gaming industry to ensure every possible dollar goes toward these charitable causes and is not lost to dishonest schemes,” Luallen said.
Lawmakers established charitable gaming in 1994 after Kentucky voters approved a 1992 constitutional amendment to permit charitable gaming.
Of the top 10 states in charitable gaming gross receipts, Kentucky is the only state that provides funding solely to its regulatory agency and is not structured to provide additional revenue for other governmental purposes.
The department is funded through a fee on gross receipts paid by the licensed organizations. On July 1, 2008, the 0.53 percent fee was raised to 0.60 percent.
In 2006, the department had 44 staff positions, including investigators, accountants and attorneys, to oversee charitable gaming in Kentucky. Due to recent state budget cuts, the staff has been reduced to 42 employees.
According to the department, additional staff could help decrease the continual backlog of cases.
The department, located in the Public Protection Cabinet, regulates gaming conducted by churches, schools, bands, sports programs, veterans groups, fire and rescue departments, arts organizations, animal welfare groups, and history or museum organizations.
Organizations are licensed to perform bingo, charity game tickets or “pull-tabs,” raffles, casino nights, and school or church fundraising festivals or picnics. According to the department, 76 percent of charitable gaming revenue in 2007 was derived from “pull-tabs,” 20 percent from bingo, two percent from raffles and two percent was from special events.
Kentucky saw a decrease in receipts and in attendance statewide in 2007, despite being one of the top ranked states nationally in charitable gaming activity.
In 2001, gross receipts were at $607 million but declined to $489 million by 2007, a $118 million decrease over the seven-year period. Likewise, attendance dropped from 5.4 million in 2001 to 4.3 million by 2007, a difference of 1.1 million gamers.
A declining economy, higher gas prices and recent smoking bans are suggested by the department as the reasons for reduced gaming activities.
Kentucky counties, however, experienced mixed results in charitable gaming attendance over the last five years (2003-2007).
Shelby, Fleming, Muhlenberg, Rowan and Henderson counties were the top counties that had a 10-percent or more increase in attendance, while Mercer, Clay, Johnson, Breckinridge and Marshall counties had the highest percentage of decreased attendance from 2003-2007. (See report for complete listing.)
While the state saw gross receipts and attendance drop, the overall percentage of proceeds to charities increased from 54.7 percent in 2001 to 61 percent in 2007.
Kentucky’s total average prize payout decreased from 85.5 percent in 2001 to 82.5 percent in 2007. According to the report, a large prize payout allows charitable organizations to compete with casinos and the lottery.
To ensure that charities receive a portion of the receipts from charitable gaming, Kentucky law requires that, after prize payouts are made, at least 40 percent of the remaining gaming receipts be retained for charitable purposes. According to the report, 92 percent of charitable organizations complied with this law in 2007.
The report lists the organizations reporting $1 million in gross receipts that violated gaming law by not retaining 40 percent of the net proceeds for their charities.
The Auditor’s Office conducted a file review for six of the organizations that fell below the 40-percent mark. While it appeared that all of the organizations had been notified of their violations, two organizations were missing corrective action plans.
One of these organization’s file was also missing documentation of required training and evidence of a quarterly review by the department. Three of the organizations had their licenses suspended or surrendered.
The report suggests the department provide additional information in its annual report such as a data analysis of several years of charitable gaming financial activity, statistics regarding various regulatory activity and names of organizations that do or do not return the legal amount of their receipts to the charities.
Additionally, the report notes Kentucky does not publicly fund awareness and treatment of gaming problems.