Gambling in Minnesota: A Short History

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Gambling ..............................................................16 Charitable Gambling For Whose Benefit? .....................................................................19 Canterbury Ups and Downs ...........................................................................................21 Indian Gaming Outgrows the Bingo Parlor ...................................................................29 With Congressional Blessing, Indian Gaming Takes Off ..............................................31 The Voters Say Yes to a Lottery ....................................................................................34 Lottery Revenues and What to Do With Them .............................................................37 Department of Gaming Comes and Goes ......................................................................39 Gambling in the Mainstream .........................................................................................40 1992-1997: Gambling Moratorium ...........................................................................................41 The Moratorium Withstands a Host of Challenges .......................................................41 The Video Lottery Controversy .....................................................................................44 The Advisory Council Advises No Change ...................................................................47 Racing Returns to Canterbury ........................................................................................47 Charitable Gambling 4Reversing the Reforms .............................................................49 Indian Casinos Dominate the Gambling Scene .............................................................50 Gambling is Dealt into the Stadium Game ....................................................................52 Charitable Gambling: Achieving the Industry Agenda ................................................55 Dealing with Compulsive Gambling .............................................................................56 1999 and After: The Post-Moratorium Era ..............................................................................59 Canterbury Gets a Card Club .........................................................................................59 Casinos and Racinos Come to the Fore .........................................................................61 The Mega-Casino Emerges ............................................................................................63 Upheaval at the Lottery ..................................................................................................66 The Compacts Back in the Spotlight .............................................................................69 The Legislative Auditor Again Reviews Gambling ......................................................74 The Internet, Telecommunications, and the Future of Gambling ..................................75 Conclusion: A Persistent Ambivalence .....................................................................................78 Endnotes ............................................................................................................................... .........82 Index ............................................................................................................................... ...............93 House Research Department March 2005 Gambling in Minnesota Page 1 Gambling in Minnesota 1945-2005: Timeline Charitable Gambling Horse Racing State Lottery Tribal Casinos Other 1945 Bingo legalized for first time 1947 Gov. Youngdahl 9s anti-slot machine law enacted 1963 Bingo law amended to limit compensation to workers 1964 New Hampshire creates first modern state lottery 1967 New York becomes first large lottery state 1971 Bill to legalize pari- mutuel betting reaches floor of both houses for first time 1972 First lottery bill introduced in Minnesota 1976 Bingo law amended to require local licensing, regulate use of profits 1978 Paddlewheels, tipboards, raffles legalized Bill for constitutional amendment to allow pari-mutuel betting nearly passes House 1981 Pull-tabs legalized U.S. Court of Appeals says tribes may conduct bingo on Indian land without state regulation; bingo parlors appear on Indian reservations in Minnesota 1982 Legislature passes bill to put pari- mutuel betting amendment on the ballot; voters approve in November More bingo parlors open on Indian land, including Mdewakanton Sioux near Prior Lake and Prairie Island near Red Wing House Research Department March 2005 Gambling in Minnesota Page 2 Charitable Gambling Horse Racing State Lottery Tribal Casinos Other 1983 Legislature approves pari-mutuel enabling legislation and creates Minnesota Racing Commission 1984 Legislature transfers regulation and licensing from local governments to Charitable Gambling Control Board; gambling tax enacted Legislature legalizes possession of cvideo games of chance d (video poker, etc.) but not gambling on them 1985 Deadline for exchanging local licenses for state licenses extended after gambling board is swamped with applications Canterbury Downs opens in Shakopee for first season of racing Bill to legalize casino in Ely rejected 1986 Pull-tab tax becomes tax on ideal gross Canterbury Downs total wagering peaks at $134 million Fond du Luth bingo parlor opens in downtown Duluth Video gaming machines begin to appear in tribal casinos 1987 Local governments allowed to tax charitable gambling Canterbury Downs shows signs of financial strain and requires new infusion of cash; owners unsuccessfully seek tax relief from legislature U.S. Supreme Court rules in Cabazon decision that tribes could conduct any gambling form that a state permits, without state regulation 1988 Gross receipts approach $500 million; most gambling board functions shifted to Administration Department Canterbury Downs given significant tax relief as tax basis shifts from total wagering to total takeout; mandated share of takeout dedicated to purses increased Legislature puts state lottery amendment on ballot; legislation dedicates half of revenue to environmental trust fund, half to Greater Minnesota Corp. Voters approve amendment in November Congress passes Indian Gaming Regulatory Act affirming legal basis for gaming on tribal land; authorizes tribal-state compacts for casino-style gambling House Research Department March 2005 Gambling in Minnesota Page 3 Charitable Gambling Horse Racing State Lottery Tribal Casinos Other 1989 Gross receipts exceed $1 billion; gambling board becomes agency of Department of Gaming; newspaper articles raise questions about uses of gambling proceeds; 13- member board replaced by 6- member board plus gaming commissioner; combined receipts tax imposed on pull-tab and tipboard revenues Out-of-season simulcasting legalized; track ownership files for bankruptcy; track put up for sale Lottery legislation enacted with lottery as division of Department of Gaming; lottery put under supervision of lottery director with advisory board George Andersen named first lottery director State signs compacts with 7 tribes for video gambling Legislature creates Department of Gaming with commissioner sitting on gambling and lottery boards and racing commission Legislature increases penalties for gambling on video games of chance 1990 Charitable gambling criticized by Attorney General and office of Legislative Auditor for lax enforcement, lack of accountability, and spending on noncharitable purposes Legislature passes reform bill to require posting of pull-tab winners, tighten lawful purpose expenditures, increase enforcement resources Track bought by Detroit investors, who enter into partnership with Ladbroke International to manage the track; winter simulcasting begins Minnesota State Lottery begins sales in April; sales begin with instant tickets; on-line games added in August Legislature redirects lottery profits, reducing environmental trust fund to 40 percent, Greater Minnesota Corp. to 25 percent, and remainder to infrastructure Legislature proposes constitutional amendment to guarantee environmental trust fund 9s 40 percent share for 10 years; voters approve in November State signs video compacts with 2 more tribes Federal magistrate rules that state must negotiate compacts with tribes for blackjack, based on state 9s cprivate social bet d exemption Compulsive gambling program created in Department of Human Services, funded through lottery proceeds Legislature ends licensing of video games of chance and instead classifies them as illegal gambling devices House Research Department March 2005 Gambling in Minnesota Page 4 Charitable Gambling Horse Racing State Lottery Tribal Casinos Other 1991 Legislature begins reversing reforms by relaxing pull- tab posting requirement Legislature passes bill to legalize off- track betting; racing commission approves rules for telephone betting Lottery profits reallocated again, with 60 percent of net proceeds dedicated to state general fund Lottery proposes, then withdraws plan for Nintendo home lottery play State signs video compacts with last 2 tribes State signs compacts with 11 tribes for blackjack Department of Gaming abolished; racing commission, gambling board, lottery made independent 1992 Off-track betting and telephone betting declared unconstitutional by state supreme court; racing commission declines to approve simulcasting for 1993 without commitment from Ladbroke for live racing Minnesota joins multi-state Powerball game 14 casinos operating on Indian land offering video gambling and blackjack; gross wager estimated at $1 billion or more Congress prohibits states from licensing or operating sports betting; grandfathers existing systems First compulsive gambling treatment program using state funds opens 1993 Without simulcasting days approved, Canterbury Downs closes for the year Irwin Jacobs buys track, but quickly puts it back up for sale Curt and Randy Sampson lead ownership group buying track Number of casinos grows to 17, total wager estimated at $5 billion Legislative effort to legalize video lottery in bars hits high point as issue is tied to fishing rights on Lake Mille Lacs 1994 Legislature passes constitutional amendment to allow off-track betting, but voters narrowly reject it Canterbury Downs operates as simulcasting-only facility Video lottery in bars rejected House Research Department March 2005 Gambling in Minnesota Page 5 Charitable Gambling Horse Racing State Lottery Tribal Casinos Other 1995 Canterbury Downs, renamed Canterbury Park, reopens with live racing season of 51 days Legislature abolishes lottery board Attorney General tells legislature that it would little chance of winning a lawsuit to invalidate federal law prohibiting sports betting Advisory Council on Gambling report to legislature recommends no new forms of gambling, no major change in existing forms 1996 Tax relief granted as legislature allows refunds on taxes paid on unsold boxes of pull-tabs Legislature grants additional tax relief by exempting first $12 million in takeout from pari- mutuel tax Lottery reaches $375 million in total sales for FY 1996 1997 Allowable expenses raised to 65 percent of gross profit for bingo, 55 percent for other forms Sanctions against organizations on premises where illegal gambling occurs relaxed Special legislative session to deal with stadium issues, including options to fund stadiums with gambling revenue, ends with no agreement 1998 Lawful gambling taxes reduced by 5 percent 1999 Additional 5 percent reduction in gambling taxes Legislature authorizes card club for Canterbury Park where betting on cunbanked d card games is allowed 2000 Gambling taxes again reduced by additional 5 percent Card club opens at Canterbury House Research Department March 2005 Gambling in Minnesota Page 6 Charitable Gambling Horse Racing State Lottery Tribal Casinos Other 2003 Licensed gambling organizations assessed new regulatory fee of 0.1 percent of gross receipts to fund gambling regulation Minnesota House passes bill to allow cracino d at Canterbury, but Senate rejects plan Minnesota Center for Environmental Advocacy criticizes lottery, claiming its performance in returning state revenue is below average Legislative Auditor undertakes study of lottery operations Red Lake, White Earth bands propose partnership with state for metro area casino; legislature fails to approve Caesar 9s Entertainment proposes massive casino project at Mall of America; bill is withdrawn before vote Total national volume of Internet wagering estimated at $5.7 billion 2004 Lottery director George Andersen found dead in January, death later ruled a suicide Legislative Auditor report issued shortly thereafter criticizes several lottery contracts and business arrangements but finds no evidence of illegal acts Legislature creates task force to study lottery organization Michael Vekich named interim lottery director, later succeeded on permanent basis by Clint Harris Gov. Pawlenty proposes tribes share revenues with state, suggests cother gambling options d if they decline Mille Lacs tribal chair Melanie Benjamin proposes new relationship between tribes and state, suggests that tribal gaming revenue be used for nontribal purposes including stadiums or assistance to local governments, nonprofits, or other tribes Tribal leaders critical after governor intensifies efforts to seek other gambling options 2005 Lottery task force report advocates reestablishment of lottery board but with mostly advisory function Legislative Auditor releases program evaluation report on gambling, recommends improved oversight over charitable gambling House Research Department March 2005 Gambling in Minnesota Page 7 1945-1981: Legalizing What 9s Already Going on Almost every attempt to write a history of gambling, however limited in scope, begins with the observation that gambling is among the oldest of human activities. Gambling in one form or another has existed in virtually every human society, often with little regard to whether or not it is officially proscribed. As one history has noted, cWhether gambling is a basic human instinct or not has been argued long, and often loudly, without a positive resolution. But, be it instinctive or cultural, gambling has been pervasive in human society throughout time. d 1 While the urge to gamble is probably older than written history, in Minnesota the urge to suppress gambling is older than statehood. The 1851 territorial legislature enacted strict prohibitions against all forms of gambling. 2 The prohibition that still influences the state 9s gambling policy was contained in the state 9s first constitution adopted in 1858: The legislature shall never authorize any lottery or the sale of lottery tickets. Article XIII, section 5. For nearly a century, gambling statutes faithfully carried out this stern injunction by making not just lotteries but all forms of gambling illegal. The First Bingo Law Minnesota 9s first cautious venture into legalized gambling came in 1945 with a legalization of nonprofit bingo. Charitable, fraternal, and other nonprofit associations were allowed to conduct the game as long as the proceeds cdid not inure to the profit of any individual. d 3 The conducting organization was required to give 30 days advance notice of each game to its local governing body, which could prevent it by passing a resolution. It is interesting to note how many of the elements of this brief act can be found in current Minnesota law. Bingo can still be conducted only by nonprofit organizations, individuals are still not supposed to profit from it, and local governments can still veto it. Another element of this law was its artful evasion of the constitutional prohibition against lotteries by the simple mechanism of declaring bingo not to be a lottery, despite the presence in the game of the three essential elements 4consideration, prize, and chance 4that have almost universally defined a lottery. Slot Machines Driven Out Minnesota law may have left no room for commercial gambling, but in the post-World War II era its presence in some parts of the state was pervasive despite its illegality. An estimated 8,000 illegal slot machines were being operated in Minnesota 4 and the annual revenue from these machines was estimated at $4 million (equivalent to about $35 million today). 5 Many of the machines were operated in resort areas with little interference from local law enforcement. Gov. House Research Department March 2005 Gambling in Minnesota Page 8 Luther Youngdahl, who in his 1946 campaign had made clear his intention to stamp out slot machines, succeeded in passing legislation in 1947 that made the possession of a gambling device grounds for revocation of any of the violator 9s business licenses, including its liquor license. 6 Controversial at the time, the new law was largely successful in driving slot machines out of the state (some resorts replacing them with signs reading cLuther Was Here d), and Youngdahl went on to be re-elected as governor twice. Further Attempts to Regulate Bingo Sixteen years would go by until the legislature addressed the problem of gambling again, and when it finally did so in 1963 it was in phrases that, in light of subsequent developments, seem almost quaint. The 1963 bingo law 9s declaration of policy deplored the cincreasing commercialization in the conduct of bingo d as being ccontrary to public policy and deleterious to the morals of the citizens of the state. d The stated intent of the act was to limit bingo to ca mild form of social recreation d intended to raise funds for charitable purposes and not for private profit. The actual content of the law had less lofty ambitions, serving only to limit compensation for bingo sessions to $8 per person. 7 Another law change in 1963, part of a massive recodification of the state 9s criminal statutes, was little noticed at the time but would eventually have a significant effect on casino gambling in Minnesota. The new criminal code maintained the longstanding prohibitions against gambling but made an exception not only for bingo but also for cprivate social bets not part of or incidental to organized, commercialized, or systematic gambling. d 8 In 1976, the legislature made its first venture into detailed gambling regulation by passing an extensive bingo regulation law that was based largely on the existing St. Paul bingo ordinance. 9 It implicitly recognized that previous legislative attempts to control bingo had not been entirely successful, stating in its first section that the purpose of the new law was to cclosely regulate and control d bingo and to prevent ccommercialization of bingo. d For the first time, organizations conducting bingo were required to obtain a license from local governments and to report to the local regulating agency and their members annually on use of bingo proceeds. Net profits (gross receipts after prizes and expenses) were limited to clawful purposes, d which were defined in very broad terms to include religious, educational, charitable, patriotic purposes, fostering worthy public works, clessening the burdens of government, d and improving or maintaining the sponsoring organization 9s real property. Bingo prizes were limited to $100 per game except for higher stakes ccoverall d games. Total prizes for a single bingo occasion were limited to $2,500, or $3,000 for occasions where a coverall game was played. Bingo occasions were limited to two per week per organization. Compensation, raised from $8 to $12 per occasion, could only be paid to members of the House Research Department March 2005 Gambling in Minnesota Page 9 organization or their spouses. Each organization was required to have a bingo manager who would be responsible for the organization 9s games. The 1976 law attempted to address in more specific terms a question that had previously been dealt with only in general ones 4specifically, for whose benefit is bingo being conducted? Several provisions were intended to prevent individuals from profiting from bingo. Expenditure of bingo proceeds could only be made for prizes and for reasonable and necessary expenses including supplies and equipment, rent, and utilities. In an attempt to ensure that lessors did not have a vested interest in maximizing gambling, organizations conducting gambling on leased premises were required to have a lease, the terms of which could not provide for rental payments based on a percentage of gambling receipts or profits. The limitation of net profits to lawful purposes, while written mostly in generalities, was intended to further advance the principle that bingo profits were not to benefit individuals who were involved in conducting the games. The 1976 law opened what turned out to be a long-running debate over use of net gambling profits on the conducting organization 9s building. Improving, maintaining, and repairing an organization 9s own building was designated as a lawful purpose, but using net profits to erect or acquire a building was not, unless the building would be used for another lawful purpose. One aspect of keeping charitable gambling strictly for charitable purposes was making organizations accountable for the gambling conducted in their name. Each organization was required to have at least one bingo manager who would be responsible for the conduct of bingo and for its gross receipts. Managers were required to be bonded. Another provision prohibited the person who kept the gambling accounts for an organization from being the same person who kept the organization 9s other accounts. All expenditures of gambling net profits had to be approved by the organization 9s membership. The first three decades of bingo regulation were clearly intended to legalize and regulate an activity that had been going on for many years. The same pattern was followed as bingo regulation gradually turned into charitable gambling regulation. In 1978, the legislature expanded the list of legal forms of charitable gambling to include raffles, paddlewheels (a kind of wheel of fortune), and tipboards (punchboards). 10 In each case, the addition was a recognition of a form of gambling that was already widespread despite being illegal. The regulatory system for these forms was essentially the same as for bingo, with licensing still being handled at the local level. Unintended Consequences Little notice was taken in 1981 when charitable gambling law was amended again to allow pull- tabs as a form of lawful gambling. At the time pull-tabs were considered only a minor part of the gambling picture. But when the legalization of pull-tabs was combined with another little- noticed provision from the 1978 law that allowed charitable gambling to be conducted in licensed liquor establishments, the conditions were created for a dramatic increase in the volume of charitable gambling. House Research Department March 2005 Gambling in Minnesota Page 10 The original intent of the law allowing charitable gambling in licensed bars and restaurants, which was an exception to the general statute that prohibited any kind of gambling in those establishments, was to legalize charitable games in the clubrooms and post headquarters of fraternal and veterans organizations that held club liquor licenses. It was soon interpreted to allow organizations to rent space in bars and restaurants for placement of booths to sell pull-tabs, or to sell pull-tabs at the bar itself. This more than any other development led to the explosive growth of charitable gambling in the 1980s. House Research Department March 2005 Gambling in Minnesota Page 11 1982-1992: Creating A Gambling Industry At the beginning of the 1980s Minnesota still thought of itself largely as a gambling-free state. As late as 1984, a press release from Gov. Rudy Perpich 9s office could still describe bingo as cthe only major form of gambling that is legal in Minnesota. d 11 By the end of the decade casual references to a cgambling industry d were widespread. For-profit gambling had been legalized, state-operated gambling was imminent, the charitable gambling industry was the largest in the country, full-fledged casinos had sprouted around the state, and Attorney General Hubert H. Humphrey III could write that cwe are on a gambling binge, the consequences of which have yet to be fully recognized or acknowledged. d 12 Few such drastic changes in the cultural and political landscape have happened in so short a time. It can still be argued as to whether Minnesota underwent a fundamental social change during this decade or whether the changes were simply a matter of legal supply catching up with pent-up demand. Pari-mutuel Betting Bill Passes Proposals to legalize pari-mutuel betting on horse racing had been legislative perennials throughout the 1960s, occasionally given hearings and then quietly buried. It therefore came as something of a shock to both supporters and opponents when a pari-mutuel betting bill reached the floor of both bodies in 1971. When the bill was eventually sent back to committee normality appeared to have been restored, but the proposal had made a degree of progress that would not be reversed. The turning point may have been 1978, when pari-mutuel supporters adopted a novel approach. Most courts in other states had taken the position that pari-mutuel betting was not a lottery, so that constitutional prohibitions against lotteries would not be a bar to legalizing it. The proposal 9s supporters nonetheless argued that there was enough uncertainly surrounding the question to justify a constitutional amendment that would resolve the matter and allow, but not require, the legislature to legalize pari-mutuel betting. The decision to seek a constitutional amendment was as much a political as legal calculation, since supporters believed that there was more support for pari-mutuel betting among the general public than in the legislature. Instead of becoming enmeshed in arguments about the corruption of morals and the undermining of the work ethic that had previously dominated debates about legalizing commercial gambling, the supporters simply advocated cletting the people decide. d The 1978 bill to put pari-mutuel betting before the voters as a constitutional amendment came within a few votes of being approved by the House, the closest any pari-mutuel bill had ever come to passage. Its eventual approval began to appear inevitable, and in 1982 the question finally appeared on the general election ballot. If its presence was the result of a political calculation it turned out to be a shrewd one, because while the pari-mutuel amendment was House Research Department March 2005 Gambling in Minnesota Page 12 passed by the legislature with only a few votes to spare in each house, it was approved by the voters by almost a two-to-one margin. The amendment authorized the legislature to legalize and tax con-track pari-mutuel betting on horse racing, d restrictive language that eventually would have major implications for the racing industry. The 1983 Legislature responded with legislation that created a nine-member Minnesota Racing Commission to issue racetrack, betting, and occupational licenses and to regulate both horse racing and betting. A tax was imposed of 1.75 percent of the first $48 million in betting handle in a year and 6 percent on handle above that amount, plus a 40-cent admissions tax and one-half of the breakage (the amount left over from each pari-mutuel payout after it is rounded down to the nearest dime). The tax revenue would go into the state 9s general fund, but 1 percent of the total handle was dedicated to a Minnesota Breeders Fund to give incentives to the state 9s breeding industry. Fears that the industry would quickly become overbuilt led to a limitation of a single racetrack in the seven-county metropolitan area. In later years this restriction would be modified to allow a harness track in the metropolitan area if it were located at least 20 miles from the thoroughbred track. Some of the authors of the 1983 pari-mutuel bill had expected that the racing commission would focus primarily on the qualifications of the applicants rather than the location of the track when awarding the single racetrack license. There were seven applicants for the first license and the eventual location of the track became one of the racing commission 9s prime concerns. The decision eventually came down to a choice between sites in Woodbury in the east metro area and near Shakopee in the southwest metro. By a single vote, the Shakopee applicants were awarded the license. The State Takes Over Charitable Gambling Regulation Within a few years of passage of the 1976 bingo bill, a sentiment had grown in the legislature that charitable gambling had expanded far faster than had been originally expected and that it had outgrown the control system enacted that year. Local enforcement of licensing requirements appeared spotty, with some jurisdictions enforcing the licensing requirement and others ignoring it. Adding to the concern was a belief that the state sales tax, which theoretically applied to gross receipts from charitable gambling, was going uncollected because the state Department of Revenue had no reliable records of what organizations were conducting gambling. In 1984, the legislature responded by transferring primary control of charitable gambling from local government to the state. 13 A new 13-member Charitable Gambling Control Board was created to take over licensing functions and to adopt rules for the conduct of gambling and handling of gambling proceeds. All organizations conducting gambling were required to obtain an annual license from the board. Distributors of gambling equipment (including pull-tabs, bingo paper, paddlewheels, and tipboards) were also required to be licensed, and all gambling equipment was required to be registered. House Research Department March 2005 Gambling in Minnesota Page 13 The sales tax on charitable gambling gross receipts was eliminated and replaced by a new tax of 10 percent of gross gambling receipts minus prizes, to be collected by the board. With charitable gambling averaging about an 80 percent prize payback rate, the tax worked out to about 2 percent of gross receipts. At the behest of Gov. Perpich, the tax was originally dedicated to one of his pet projects, a state school of the arts, but within a year that dedication had been rescinded and the money redirected to the general fund. Local authorities, while stripped of authority to issue licenses, still retained considerable power over charitable gambling. All state-issued licenses had to be submitted to the city or county having jurisdiction before becoming effective, and could not be issued if disapproved by the city council or county board. Local governments were given the power to adopt gambling regulations that were more stringent that state regulations, up to and including prohibition of gambling. Video Games of Chance Legalized In the same 1984 session in which the Gambling Control Board was created, the legislature began one of its odder forays into gambling policy when it legalized the possession and operation of video poker machines in bars and restaurants without actually permitting gambling on them. 14 The 1984 law did not introduce these machines into Minnesota, since they were already widespread here and elsewhere. They were coin-operated video games that simulated poker, blackjack, or other common gambling games. In statute they were called cvideo games of chance d but in legal circles they were widely known as cgray area games d since their legal status was often ambiguous. They could at least in theory be used solely as amusement devices since they did not pay out any coins or tokens or directly award anything but free games. Players accumulated credits that could be used for free games but which could also be redeemed by the game operator (usually a bar) for cash, making them gambling devices. This dual use made it necessary for law enforcement agents to actually see payoffs being made on the machines in order to allow their seizure as gambling devices and prosecution of their operators. Many law enforcement agencies regarded gambling as a victimless crime and gambling enforcement as a low-priority activity, so the machines flourished in many locations around the state. However, some agencies were still regarding them as illegal per se and seizing them as gambling devices, leading the games 9 distributors to seek legislation to allow their possession. The law came down on both sides of the issue. It allowed establishments with liquor licenses to obtain licenses from the Department of Public Safety to possess video games of chance on the premises, but it continued to prohibit any gambling on them. The state licenses were sufficient to clarify the games 9 legal status and prevent their seizure, thus achieving the distributors 9 main objective. The state was less successful in achieving its objective of preventing gambling on the machines, since it was obvious that the machines 9 sole appeal to players was as gambling devices. Attorney General Humphrey, who had opposed the law, said later that cAs predicted, illegal payoffs on video games of chance have become commonplace in many areas of the state. d 15 House Research Department March 2005 Gambling in Minnesota Page 14 The legislature eventually recognized this reality and voted in 1989 to increase the penalty for making payoffs on video games of chance to the level of a gross misdemeanor, and for the first time made accepting payoffs a misdemeanor. 16 A year later state licensing of the machines was terminated and the machines were classified as gambling devices, meaning that their mere possession would be illegal. 17 The 1990 law brought an end to the state 9s adventure with legalizing gray area games, but the episode would have long-lasting consequences. As noted elsewhere in this history, it provided one legal basis for the presence of video gambling devices on Indian reservations and thus helped to create a massive new gambling industry. Implementing the New Charitable Gambling Law Almost from the beginning the process of implementing the 1984 charitable gambling law was plagued with problems. The law had an effective date of March 1, 1985, and provided that all local charitable gambling licenses were to expire the previous day. It was assumed that all licensed organizations would by then have obtained state licenses from the board. This in turn was based on the assumption that the board would be functioning by midsummer 1984. However, the appointments to the board by Gov. Rudy Perpich were not completed until October 8 of that year and the first meeting not held until October 22. The board began life with a budget of $50,000 and a staff of 12. The deadlines set in law required the board to issue over 1,800 organizational licenses in just over three months. The avalanche of applications forced the 1985 Legislature to delay the expiration date for local licenses until July 1, 1985, to give the board 9s staff time to catch up with the backlog. In the years following the creation of the board, gambling grew at an almost dizzying pace. This rise was fueled largely by growth in pull-tabs, which almost as soon as they were legalized supplanted bingo as the most popular form of legal gambling. Pull-tabs moved into more and more bars and restaurants as licensed organizations expanded the scope of their operations and cities dropped their opposition or amended their ordinances to allow them. The extraordinary growth continued until the early 1990s when the number of new locations hit a plateau. House Research Department March 2005 Gambling in Minnesota Page 15 The need to make up for lost time meant that the board was playing from behind for much of the decade. By 1988 gross receipts from gambling were approaching $700 million and the board was issuing over 3,400 organization licenses annually, along with 67 manufacturer and distributor licenses. Some of the administrative pressure was relieved in 1987 when the responsibility of collecting the tax on pull-tabs was transferred to the Revenue Department. Charitable Gambling Gross Receipts 1985-1991 - 200 400 600 800 1,000 1,200 1,400 1985 (partial) 1987 1989 1991 Fiscal Year $ millions The board 9s annual report for 1988 predicted that the rapid expansion of charitable gambling would soon reach an end: The growth of lawful gambling will plateau when all successful organizations have been licensed and all profitable gambling premises have been leased. That time is not far off. 18 There was nonetheless widespread agreement that the board and its staff were approaching a crisis point. Concerns were growing that the agency could not keep up with the job of making rules, passing on licensing applications, and regulating several thousand gambling locations. As Gaming Commissioner Tony Bouza 9s 1991 report described the situation, cProbably no one could have foreseen the exponential growth that would occur and which would overwhelm the feeble resources allocated to its regulation. d 19 The board 9s executive secretary Roger Franke requested a management report from the Department of Administration 9s management analysis division, and the report, completed in July 1988, highlighted numerous administrative and regulatory problems. It found a lack of long-range planning, an inability to provide organizations with accurate and timely information, inadequate communication within the agency, low staff morale, insufficient staff training, and an overall absence of written policies. 20 Gov. Perpich responded to the report with an executive order in August 1988 that shifted all the administrative functions of the board to the Department of Revenue, leaving the board only with authority of issuing licenses and disciplining licensees. His main reason was that the change would allow the state to ccope more effectively with the overwhelming growth in charitable gambling. d 21 The 1989 Legislature responded to these problems by reorganizing the state 9s gambling control functions. 22 It created an entirely new Department of Gaming that would encompass separate divisions for charitable gambling, pari-mutuel racing, and the newly created state lottery. The Charitable Gambling Control Board was renamed the Gambling Control Board and the nine- House Research Department March 2005 Gambling in Minnesota Page 16 member board replaced by a board consisting of six appointees of the governor and the commissioner of the new department. The 1989 law resulted in Minnesota having what the Legislative Auditor 9s office described as cone of the more complicated regulatory structures for lawful gambling d in the country. 23 The restructured board retained authority to adopt rules, approve gambling equipment, and issue, renew, revoke, and suspend licenses for organizations, distributors, manufacturers, and bingo halls. The Revenue Department took over responsibility for collection of all gambling taxes and also for conducting gambling audits. The director of the gambling board was made a gubernatorial rather than a board appointee. Criticism and Reform of Charitable Gambling Almost as soon as the 1984 law had been implemented the legislature began making changes in charitable gambling regulation. In 1986, organizations were limited to spending not more than 40 percent of the gross profit (gross receipts less prizes and taxes) on expenses for gambling other than bingo, and not more than 50 percent for bingo. These limits were raised the next year to 45 percent and 55 percent respectively. Also in 1987 the legislature gave the board substantial new authority to issue cease and desist orders against licensees who were violating or about to violate the law or the board 9s rules. Many local governments were resentful of the state 9s 1984 takeover of charitable gambling licensing and regulation and soon began urging the legislature to give them a greater role. In 1987 the legislature allowed local governments to impose a local gambling tax of up to 3 percent of gross profit as long as the revenue was dedicated solely to gambling regulation. It also validated the local practice of requiring organizations to make contributions to specified clawful purposes d within the locality, but limited these mandated contributions to not more than 10 percent of an organization 9s total net profit. Local governments were prohibited from requiring any donations to local government itself, clearly demonstrating a determination not to allow cities and counties to use mandatory contributions as a backdoor method of taxation. The internal difficulties of the Charitable Gambling Control Board were a major factor in the legislature 9s extensive 1989 reorganization, but they aroused relatively little public attention. Charitable gambling 9s low profile was abruptly raised later in 1989. A series of newspaper articles late in the year raised questions about the use of charitable gambling net profits, including payments to two legislators and expenditures for lobbying activities. 24 The problem sufficiently concerned legislative leaders that they created a bipartisan task force to study charitable gambling regulation. In early 1990, a report from the attorney general 9s office stated: The potential for widespread corruption exists in the lawful gambling industry. Investigations had disclosed fraud in the sale of pull-tabs and jar tickets, fraudulent reporting and a skimming of proceeds and significant abuse in the expenditure of gambling profits. These problems are compounded by the lack of House Research Department March 2005 Gambling in Minnesota Page 17 individual accountability under the lawful gambling law and the acute lack of financial and human resources to effectively regulate the industry. 25 At about the same time the legislature received an evaluation of lawful gambling from the legislative auditor 9s program evaluation division that found numerous shortcomings in charitable gambling regulation, including the following: Less than 10 percent of gross receipts being spent for charitable purposes Inappropriate deductions for gambling expenses A high risk of fraud and misappropriation of gambling receipts Millions of dollars possibly missing from gambling bank accounts Little likelihood that misuse of gambling proceeds would be detected Insufficient state and local enforcement efforts and auditing 26 The most common perception of charitable gambling was that it was cout of control. d Minneapolis Star Tribune columnist Jim Klobuchar wrote, cAs a serious regulator of gambling, the gambling commissions of Minnesota function at the same level of comic ferocity as Inspector Clouseau assaulting the Parisian underworld . d 27 In a memorable phrase, Gaming Commissioner Tony Bouza referred to charitable gambling as a ccancerous pizza that has grown and throbbed. d Of pull-tabs in particular he wrote: Every study [of pull-tabs speaks] of extensive problems of skimming, theft, insider trading, inappropriate expenditures and contributions and a general blurring of the altruistic purposes [envisioned] in the origins of the industry. 28 In 1989, the legislature had showed its frustration with the gambling control board by ending the terms of all 13 members and replacing them with a new board of six members plus the new Commissioner of Gaming. In 1990 it went further and passed a far-reaching reform bill that addressed many of the most frequently voiced criticisms of the industry. 29 cInsider trading. d A frequent criticism was that pull-tab buyers were not being given an honest game because pull-tab sellers would too often give favored players tips on which games still had prize-winning tickets that had not yet been sold. Players not so favored would still be buying pull-tabs from cdead games d where all the large prizes had already been won. A 1989 law had made it a misdemeanor for pull-tab sellers to give information to any player that would result in an unfair advantage, 30 but the practice persisted. The 1990 legislation required every organization to post at each pull-tab booth or other point of sale each major prize that had been awarded from each pull-tab game. Organizations had always resisted posting on the grounds that it would discourage sales in dead games, leaving organizations with large numbers of unsold tickets on which they had already paid a nonrefundable tax, but the pressure for reform had become too strong to resist. The new law also dealt with questions about favoritism in the sale of pull-tabs by requiring organizations to require winners of pull-tab prizes of $50 or more to present identification. The organizations were required to keep winning pull-tabs of $50 or more and the identification of the winner for 30 months. House Research Department March 2005 Gambling in Minnesota Page 18 Lawful purpose expenditures. The use of gambling net profits for purposes whose charitable nature was open to question had been one of the most frequent targets of gambling critics. Only about 8 percent of the gross receipts from charitable gambling in calendar 1989 were actually going to charitable purposes. The legislative auditor 9s report found that about 20 percent of lawful purpose expenditures were going to directly benefit the organization conducting the gambling, mostly for building repair and capital projects including mortgage payments. Commissioner Bouza 9s report observed that some expenditures clooked suspiciously like frills, perks, or pleasures for the members. There is something resembling an edifice complex in the palatial establishments funded by gambling revenues. d 31 One source of the problem was the law 9s extremely vague definition of clawful purpose. d The legislature 9s response was to redefine clawful purpose d more specifically to generally limit it to education, military recognition, youth recreation and sports, religious activities, and support for individuals to relieve sickness, disability, and poverty. Payment of gambling taxes and, more controversially, real estate taxes were also made a lawful purpose. Organizations were required to report all expenditures of net profits monthly to the gambling board, and each expenditure was required to be accompanied by an acknowledgment from the recipient. Accountability. Attorney General Humphrey 9s charitable gambling report had said that the law provided for accountability for licensed organizations but not for the individuals who were actually conducting gambling. In response, the 1990 law required that all gambling managers be licensed and bonded. Training was required for all gambling managers, and licensing qualifications including disqualification for certain offenses were established. Other gambling employees such as pull-tab sellers were required to register with the board and wear identification while working. Relationships with distributors and manufacturers. There had been numerous suggestions that the manufacturers and distributors of pull-tabs and other gambling equipment were exercising too much control over the organizations that actually conducted gambling. The legislature enacted licensing requirements for manufacturers and distributors, prohibited extensions of credit to distributors and organizations beyond 30 days, and prohibited organizations from accepting help from a manufacturer or distributor in finding or recruiting gambling managers. Enforcement. Almost as soon as the gambling board was created, criticism began to be heard that the state was devoting too few resources to enforcement of charitable gambling law and rules. Commissioner Bouza 9s report recounted, cFrom 1985 to 1988 the gross charitable gambling handle increased over 1,000 percent, from $111,389 in 1985 to over $1.2 billion in 1989. The board 9s budget increased by only 82 percent, from $535,000 for FY 1985 to $976,785 for FY 1988. The board 9s staff was increased from 12 to 21. d 32 The legislative auditor 9s report found that organization compliance with board rules was cpoor, d licensing had been largely ineffective in ensuring proper organization conduct, and the level of enforcement offered no incentives for an organization to take responsibility for their gambling operations. House Research Department March 2005 Gambling in Minnesota Page 19 The 1990 law provided a substantial increase in the board 9s complement to 42 positions, 17 fewer than the Perpich administration had requested but still a significant increase. The 1990 law also gave the board new enforcement powers to issue cease and desist orders against actual or potential violations of law or rule and to impose summary license suspensions for certain violations. Following the recommendations of the attorney general, the legislature increased penalties for numerous gambling violations. It was a measure of the legislature 9s frustration with charitable gambling controversies that as part of the 1990 bill it seriously considered abolishing all charitable gambling by June 30, 1993. This sunset clause was intended to be a warning to the industry, since it could only have been lifted if a subsequent legislature decided that the industry was worth saving. In the end the sunset clause was deleted from the bill. The eventual defeat of the sunset clause gave an indication of where charitable gambling stood in the legislature. Although the 1990 reforms touched almost all elements of the industry, they did not demonstrate widespread revulsion against charitable gambling as a whole. The legislature had grown exasperated by the continued revelations of questionable behavior in charitable gambling but it was still mindful that the abuses in Minnesota 9s charitable gambling industry were modest compared to gambling-related scandals in other states that had led to governors being imprisoned and legislative careers destroyed. They also were aware that charitable gambling was still to a significant extent locally based and volunteer-driven. As Sen. LeRoy Stumpf pointed out, cAllegations that the whole system is deteriorating into a Chicago Mafia situation are causing a false perception and hard feelings among dedicated volunteers in our communities. It 9s upsetting a lot of our fraternal, service and community organizations who do a lot of good for a lot of people. d 33 Charitable Gambling For Whose Benefit? Almost from the beginning of legalized charitable gambling the question had been raised in one form or another, cFor whose benefit is charitable gambling being conducted? d The original 1945 law had been written to specify that bingo was legal as long as the profit did not go to any individual, and this philosophy carried over into subsequent law. The 1945 law did not address the question of whether a charitable, religious, fraternal, or other nonprofit organization could conduct gambling to benefit itself, even if no individuals received a share of the profits. Later laws attempted to deal with this question by limiting expenditure of net profits to lawful purposes, but as the account in the above section indicates the definition of lawful purpose was so broad as to leave the question unaddressed. Prominent among the controversies was the practice of organizations using gambling profits to improve or repair their buildings. The 1976 bingo law, along with its very general language recognizing various worthy purposes as lawful purposes, had included the improvement, expansion, maintenance, and repair of real property owned or leased by an organization. House Research Department March 2005 Gambling in Minnesota Page 20 In 1988 the legislature, concerned that too much gambling money was going for buildings rather than charity, eliminated building expenditures as a lawful purpose. Previous law had prohibited use of gambling profits for the erection or acquisition of real property unless the board found that the property would be used exclusively for charitable purposes. This effectively excluded buildings of veterans and fraternal organizations since they were extensively used for social as well as charitable purposes. The 1988 Legislature expanded that restriction to include building improvement, expansion, repair, and maintenance. 34 It softened that restriction somewhat in 1989 when it allowed organizations to spend gambling profits on repair and maintenance of their own buildings if they were used extensively as a meeting place or event location by other nonprofit organizations or service groups (as many veterans posts and fraternal clubs were used in smaller towns). Another recurring debate related to organizations 9 buildings was the use of gambling profits to pay property taxes. The 1989 special session that enacted the combined receipts tax on charitable gambling also included payment of property taxes on buildings owned or leased by a licensed organization as a lawful purpose, but only up to the maximum amount that organizations were allowed under board rules to spend on rent (which at that time was $1,000 per month for most locations). The argument made by organizations for this authorization was essentially the same as for allowing building expenditures from gambling profits, that for many organizations gambling was often the only source of funds for these purposes. The maximum amount of property taxes that could be paid from gambling profits was increased to $15,000 per year in 1991 except for bingo premises, which continued to be limited to the maximum rent allowance. 35 The present limit of $35,000 was enacted in 1995. 36 In 1989 a new charitable gambling tax changed the debate over the beneficiaries of charitable gambling by making it clear that the prime beneficiary was going to be state government. The previous taxes on charitable gambling 42 percent of cideal gross d on pull-tabs and tipboards payable by the distributor, and 10 percent of gross profit on other forms of gambling payable by the organization 4were by 1988 producing nearly $20 million annually to the state 9s general fund. That contribution was substantially increased in 1989 with the enactment of a ccombined receipts d tax on pull-tabs and tipboards. The tax applied only to organizations with pull-tab and tipboard gross receipts over $500,000 per year, which amounted to about one-fourth of all licensed organizations. The tax was on a progressive scale, with rates ranging from 2 percent on combined receipts of $500,000 to $700,000 to 6 percent on combined receipts over $900,000. Unlike the pull-tab tax that was paid by distributors and passed on to organizations, the combined receipts tax would be directly paid by organizations. The combined receipts tax was passed as part of an overall tax bill to help fund extensive property tax relief. It was projected that the tax would bring in about $22 million per year, thus doubling total state tax revenue from charitable gambling. By 1991 state tax receipts from charitable gambling totaled $57 million, or almost 40 percent of net profit. Based on the legislative auditor 9s calculations of net profit expenditure for 1988, this was a level that no other category of lawful purpose expenditure came close to matching. Payment of taxes had far House Research Department March 2005 Gambling in Minnesota Page 21 eclipsed scholarship programs, conservation, youth sports, veterans programs, or any of the other charitable purposes that had once been the principal reason for the existence of charitable gambling. Legislators who devised the combined receipts tax told organizations that they could pay the tax without cutting into charitable contributions simply by reducing their prize payouts, noting that Minnesota 9s prize percentage for charitable gambling was notably higher than in other states. The organizations responded that they had to maintain their prize payouts at existing levels to compete with other forms of gambling, including the state itself in the form of the new state lottery. In calendar year 1990, the first full year with the new tax, the decline in prize payouts was barely perceptible, from 81.54 percent to 81.37 percent. The more precipitous decline was in charitable contributions, which went up in dollar terms from 1988 to 1990 but fell from 9.2 percent to 7.3 percent of gross sales. 37 The state revenue was coming at the expense of charitable contributions rather than gamblers. Canterbury Ups and Downs The opening of Minnesota 9s first pari-mutuel racetrack in June of 1985 was one of the Twin Cities 9 most eagerly awaited events of the mid-1980s. Named Canterbury Downs, the Shakopee track was a $70 million showpiece that could accommodate 30,000 fans. The president of the Thoroughbred Racing Association of North America called it cone of the jewels of racing in the country, d and said it cshould be a benchmark for other states to study. d 38 Its owners projected average daily attendance of 10,500, well above the national average for thoroughbred racing. The first season of racing in 1985 seemed to justify this optimism. In 83 racing days the track drew an average attendance of 13,163, putting it in the top 15 racetracks in the country. A newspaper story headlined cCanterbury a Winner in Maiden Season d reported: A final verdict may be years away, but after one season it is reasonable to conclude that gambling on horses appealed to Minnesotans. At least in its first season, Canterbury Downs was able to compete with the Twins, the Vikings, and walleyes in the continuing quest to provide an entertaining way for Minnesotans to use their disposable income. 39 Just as important for the future of legalized gambling, the story reported that many of the worst fears of an increase in crime that would follow the track 9s opening had not been borne out. Shakopee police chief Tom Brownell said, cI feel the track has not had the anticipated impact on the community from the standpoint of crime as we were led to believe would occur. d 40 One disturbing element was also noted: the average daily betting handle of $1.014 million was almost $200,000 below projections. The average Canterbury fan bet $77 per day, well below the national average of about $120. But the track still showed an operating profit for the first year of about $37,000. House Research Department March 2005 Gambling in Minnesota Page 22 Although many indicators from the first season seemed to point to prosperity for Canterbury Downs, subsequent events suggested that the track had opened several years too late for its early success to be sustained. When the legislature began seriously debating pari-mutuel legislation in the early 1970s horse racing had a near-monopoly on legalized gambling in most of the country, and many of the expectations for the track 9s impact on economic development, tourism, the horse industry in Minnesota, and state tax revenues implicitly assumed that it would continue to do so. But by the time Canterbury Downs opened, charitable gambling was closing in on half a billion dollars in gross sales and full-fledged casinos were appearing on Indian land, soon to look more like Nevada or Atlantic City casinos than the modest bingo parlors from which they sprang. A state-operated lottery was also beginning to look inevitable. In the face of this competition pari-mutuel betting on horse racing was at an inherent disadvantage. As one team of gambling researchers wrote: A very considerable knowledge of the sports involved is required for more than casual participation in pari-mutuel betting. This entry-level knowledge requirement distinguishes pari-mutuel betting from lotteries and casinos: anyone can buy a lottery ticket or pull the handle of a slot machine. In comparison pari- mutuel betting represents a cclosed d aspect to the uninitiated public; the elaborate, ritualized subculture of horse racing and the considerable special knowledge needed to handicap and bet horses are significant barriers to participation . . . 41 Canterbury 9s own financial structure also worked against its long-term success. In the middle of the 1985 season former racing commission member Kris Sanda noted that the track opened with a debt of some $46 million and working capital of about $5 million, and suggested that the former might have been too high and the latter too low to insure the track 9s financial stability. 42 She raised the possibility that Canterbury 9s owners would eventually hav

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