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California State Auditor Logo COMMITMENT • INTEGRITY • LEADERSHIP

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

Report Number: 2018-132

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Department of Justice's Bureau of Gambling Control

April 29, 2019

Elaine Howle
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

Re: California State Auditor Report 2018-132; Gambling Control Fund – Revenues, Expenditures, and Use

Dear Ms. Howle:

This letter serves as the Department of Justice's (DOJ) response to the California State Auditor's (CSA) report titled "Report Regarding the Department of Justice's Bureau of Gambling Control and California Gambling Control Commission." DOJ has reviewed the report, agrees with many of the recommendations, and appreciates the opportunity to respond.

The Bureau of Gambling Control (BGC) within DOJ, in conjunction with the California Gambling Control Commission (CGCC), is responsible for ensuring that legal gambling activities in the State of California are conducted honestly, competitively, and free from criminal and corrupt elements as provided in the Gambling Control Act (Act). The Legislature has declared that all persons having a significant involvement in gambling operations must be licensed and regulated to protect the public health, safety, and general welfare of the residents of the state and that public trust and confidence can only be maintained by strict and comprehensive regulation. The State has authorized BGC to investigate the backgrounds of individuals and entities seeking to own or work in gambling establishments (cardrooms) and Third Party Providers of Proposition Player Services (TPPPPS) and BGC takes this responsibility very seriously. Its investigations lead to findings and recommendations which the CGCC considers to ultimately determine who is suitable to own or work in a cardroom.

The Act requires that individuals working in this highly regulated industry be of good character, honesty, and integrity whose prior activities, criminal record, if any, reputation, habits, and associations do not pose a threat to the public interest of the State or to the effective regulation of controlled gambling. BGC conducts investigations on applicants seeking work permits to work as dealers in cardrooms, key employee licenses to work as managers in cardrooms, licenses to own cardrooms, and registrations and licenses for TPPPPS players, supervisors, and owners. The scope of each background investigation conducted by BGC's licensing analysts varies depending on the license type, applicant, and the complexity of the applicant's history.

1

The level of review in BGC's investigations varies in some respects among different license types according to the degree of influence and control that a position associated with that license type possesses. For example, an investigation for an individual seeking to become a key employee in a cardroom who has decision-making authority will be subjected to a higher level of review than one for an individual seeking a work permit to be a card dealer in a cardroom. Cardroom owners require an even higher level of review given their ability to control the operations of the cardroom, including contracts with outside entities that could influence the operations. Below is a chart that broadly summarizes the scope of the various background investigations.


2
Areas of Investigation Initial Investigation for Individual
Cardroom Third-Party
Work Permit Key Employee Owner Individual Player/Other Supervisor Owner Individual
CA Criminal History X X X X X X
Federal Criminal History X X X X X X
Gaming License Verification X X X X X X
CJIS X X X X X X
LEIU/Gaming Index X X X X X X
DMV X X X X X X
NLETS X X X X X X
Interpol X X X X X X
Employment History X X X X X X
Credit Report/Bank Statements X X X X
Military X X X X
Lexis Nexis X X X X
PACER X X X X
Non-Gaming License Verification X X X X
CLEAR X X X X
Litigation Review X X X X
Contracts/Agreements Review X X X X
FPPC X X
Full Financial Review X X

3

The time it takes to complete an investigation not only varies among the various license types, but also within them. Level I investigations are those that reveal no derogatory information and BGC recommends approval to the CGCC. Level II investigations are those that reveal derogatory information that does not rise to the level of denial and BGC recommends approval to the CGCC. Level III investigations are those that reveal derogatory information and BGC recommends denial to the CGCC. Generally, the higher the level of review, the more complicated and time-consuming the investigation is. Pursuant to statute, BGC must complete applications, to the extent practicable, within 180 days after an application and supplemental information package is determined to be complete. Over the past few years, BGC has been working diligently on reducing the number of licensing applications that exceed the 180-day requirement, which has resulted from inadequate staffing levels in previous years. BGC continues to make progress on these cases and believes that increased efficiencies as recommended by CSA, along with additional resources, will facilitate the completion of these cases so that BGC may work towards its goal of consistently meeting its mandate to complete applications within 180 days to the extent practicable.

Below are charts of the cardroom and TPPPPS units' current workload, as well as a chart showing the number of applications BGC has received and completed over the current and past five fiscal years:

3

Age of Pending Cases as of March 31, 2019

Length of Time Pending Third-Party Provider License Types Total
TPPPPS Company TPPPPS Owner TPPPPS Supervisor TPPPPS Player TPPPPS Contracts / Amendments
Less Than 180 Days 5 7 63 679 4 758
More Than 180 Days 17 105 292 417 0 831
Total Workload 22 112 355 1,096 4 1,589

Length of Time Pending Cardroom License Types Total
Gambling Establishment Cardroom Owner Cardroom Key Cardroom Work Permit Gambling Establishment Table Increase Requests Gambling Establishment Ordinance Reviews
Less Than 180 Days 0 12 36 51 3 1 103
More Than 180 Days 4 185 89 19 1 0 298
Total Workload 4 197 125 70 4 1 401
4

Cases Received and Completed

Workload Type FY 13/14 Actual FY 14/15 Actual FY 15/16 Actual FY 16/17 Actual FY 17/18 Actual FY 18/19* Applications Received based on 3-Yr Average Applications Received based on 5-Yr Average
Renewal Applications Received 1,328 1,765 1,568 1,437 1,208 2,301 1,649 1,656
Initial Applications Received 3,266 3,352 3,811 4,129 3,947 4,067 4,048 3,861
TOTAL APPLICATIONS RECEIVED 4,594 5,117 5,379 5,566 5,155 6,368 5,696 5,517
Percent Increase by Year 11% 5% 3% -7% 24%
Renewal Applications Completed 952 1,395 1,523 1,352 1,208 2,045 1,535 1,505
Initial Applications Completed 2,306 2,244 3,403 4,209 3,107 2,951 3,422 3,183
TOTAL APPLICATIONS COMPLETED 3,258 3,639 4,926 5,561 4,315 4,996 4,957 4,687
Percent Increase by Year 12% 35% 13% -22% 16%

*FY 18/19 Includes 9 months actual data plus 3 months projections.

As of March 31, 2019 the BGC received 1,726 renewal applications and 3,050 initial applications, for a total of 4,776 applications received.

As of March 31, 2019 the BGC completed 1,534 renewal applications and 2,213 initial applications, for a total of 3,747 applications completed.

5

BGC has already implemented many of the recommendations in the report and is actively developing plans to improve billing practices, policies and procedures for application review, tracking case statuses, and efficiency of staff resources. Our responses to the individual recommendations are as follows:

CSA Recommendation to the Legislature:

1) Temporary funding for 32 positions.

Given that the bureau has not achieved the expected benefits from adding 32 additional positions, the Legislature should not approve any requests to make funding for these positions permanent. Instead, the Legislature should extend funding for an additional two years, during which time the bureau should be able to clear its existing number of pending applications. At that point, the Legislature should reevaluate the bureau's long-term staffing needs, taking into consideration the extent to which it has implemented the recommendations in this report.

DOJ Response:

6

DOJ appreciates the recommendation for retention of the 32 positions while it works to implement changes to improve efficiencies and increase productivity in the Licensing Section. However, it disagrees with the recommendation for temporary two-year funding for all 32 positions and, based on recent analyses conducted, believes that permanent funding for the positions—and for additional positions—are necessary because, once those cases exceeding the 180-day requirement are completed, the positions will be needed to handle the ongoing workload within the 180-day period. Moreover, to the extent that BGC requires additional staff above and beyond the 32-position level, BGC will continue to collaborate with the Department of Finance and the Legislature to acquire supplemental resources with permanent funding. BGC expects to receive over a thousand additional applications this fiscal year from the previous year, including a significant increase in the number of renewal applications that must be renewed every two years. Even assuming a significant increase in productivity due to increased efficiencies, current data indicates that BGC will be unable to address the ongoing workload within the required timeframes without the 32 positions and additional staff.

6

Below are charts of the average number of hours spent on investigations for each license type. BGC will be reassessing the average hours per review. However, BGC believes that average hours should be used to determine workload as it takes into account the various levels of complexity of investigations for different types of licenses.

Average Hours Per Review

Workload Type INITIAL RENEWAL
Hours per Review Hours per Review
TP Primary Provider 291.0 71.0
GE Owner-Entity 193.0 77.0
GE Owner-Person 168.0 97.0
TP Owner-Person 147.0 97.0
TP Supervisor 128.0 40.0
TP Owner-Entity 79.0 43.0
GE Key Employee Applications 76.0 34.0
Gambling Establishment 30.0 123.0
Ordinance Reviews 30.0 N/A
GE Work Permit - Initial 27.0 3.0
TP Contracts 25.0 44.0
TP Player 22.0 5.0
GE Table Increase Requests 18.0 N/A
TP Contracts - Amendments 12.5 N/A
TP Other Employee 8.0 Unknown
TP Primary Provider Registration 1.0 1.0
TP Owner Entity Registration 1.0 1.0
TP Owner Person Registration 1.0 1.0
TP Supervisor Registration 1.0 1.0
TP Player Registration 1.0 1.0
TP Other Employee Registration 1.0 1.0

7

Another concern about temporary funding of the positions is the negative impact it may have on BGC's ability to meet its workload demands because it impedes its ability to retain staff. The Licensing analysts are either Staff Services Analysts or Associate Governmental Program Analysts – two classifications that are widely used by all state agencies. Thus, analysts are able to transfer to other departments with vacancies for those classifications. BGC is aware that some analysts are concerned about the expiration of funding for their positions and some have begun looking for job opportunities at other departments.

When positions are vacated, the entire hiring process takes on average six to seven months to complete. Given the confidential nature of the information that the analysts receive to complete the background investigations, part of the hiring process requires BGC staff to undergo background investigations by DOJ. Thereafter, the training process generally takes six months until an analyst is competent to conduct an investigation independently on the least complicated cases, such as work permits and TPPPPS players. Moreover, experienced analysts will assist with training the new analysts, further impacting the work on background investigations. Once analysts are proficient in the least complicated investigations, they may be moved to work on more complicated cases. Accordingly, the impact to retention of Licensing analysts will result in BGC constantly working to fill vacancies and training new staff, at a significant cost, which will negatively impact the efficiencies it is striving to achieve and maintain.

2) Clear statements about need and use of fees in regulations.

To ensure that all fees that generate revenue for the Gambling Fund have clear stated purposes limiting their use, the Legislature should require that when updating fee amounts, the bureau also update its regulations to include clear statements about the need for and appropriate use of each fee type.

DOJ Response:

DOJ agrees with this recommendation. BGC is currently working on evaluating the costs of positions to conduct background investigations and developing regulations to revise the amount of deposits required for investigations. It will include clear statements about the need for and appropriate uses of background-investigation revenue during the regulatory process. Additionally, it agrees that updates to other regulations, including application fees and annual fees set by the Commission, should include these statements as well.

CSA Recommendations to DOJ:

1) Completeness of applications and notifications.

To avoid unnecessary delays in its licensing process, the bureau should, by November 2019, begin reviewing applications for completeness upon receiving them. If it determines that an application is incomplete, it should notify the applicant immediately.

DOJ Response:

5

DOJ agrees with the recommendation and as of April 5, 2019, updated and implemented procedures requiring staff in the Intake Unit to review initial applications for completeness and notify applicants if their applications are complete or incomplete within the required timeframes provided in regulations. DOJ has also updated and implemented procedures as of April 5, 2019, requiring analysts assigned to individual cases to determine if the supplemental information forms are complete and to send the subsequent notifications within the mandated timeframes. Template letters have been created for each notification required for each license type. BGC is also working on automating as many notification letters as possible and determining how it can best utilize existing technology to schedule and track letters to ensure they are sent on a timely basis. BGC will ensure that upgrades to, or replacement of, its current Licensing Information System will include processes to automatically generate and track the notifications. BGC will seek appropriate funding to implement this process.

2) Analysis of delays in background investigation process.

To help it identify which portions of the background investigation process most contribute to lengthy delays, the Bureau should conduct an analysis of its investigation processes by November 2019 and implement procedural changes to improve its timeliness in processing applications.

DOJ Response:

8

DOJ agrees with the recommendation and will conduct an analysis of its investigation process to identify delays that can be addressed. Additionally, BGC will no longer grant extensions to applicants requesting additional time to respond to requests for documents and information unless exceptional circumstances exist. BGC previously granted such requests freely, but will no longer do so to eliminate delays during this process.

3) Strategic plan to address applications.

To ensure that it approaches its remaining backlog strategically and that it establishes accountability for its use of resources, the bureau should develop and initiate a formal plan by November 2019 for completing the remaining backlogged applications. The plan should identify the license types the bureau will target and the order in which it will target them, along with its rationale for the planned approach. The plan should also include clear goals that identify the numbers of applications it will complete and its time frames for doing so.

DOJ Response:

9

DOJ agrees with the recommendation and has begun the development of formal strategic plans for reducing the number of pending cases. BGC has reviewed its current data to determine the appropriate and additional staffing levels in the cardroom and TPPPPS units within the Licensing Section and is working on a plan to adjust resources where they are needed. Until an appropriate staffing level is in place, BGC will prioritize its workload, recognizing that it will need to constantly review and shift staff to address workload demands. BGC will formalize plans and include the issues, goals, and timeframes recommended. In addition, BGC will continue to submit Budget Change Proposals to acquire sufficient staffing resources to address increased workload demands.

BGC has also reviewed the manner in which it distributes work to its Licensing Section analysts. Rather than assigning staff strictly to one of the six types of applications (cardroom owners, cardroom key employees, cardroom work permits, TPPPPS owners, TPPPPS supervisors, and TPPPPS players), BGC is assigning analysts to other types of applications when appropriate to ensure that staff is actively working on background investigations at all times.

4) Prioritization of legal review.

To ensure that its licensing process is transparent and consistent, the bureau should implement formal procedures for prioritizing its completion of legal review of ownership applications. The procedures should specify any circumstances that justify reviewing applications out of the order in which the bureau received them.

DOJ Response:

5

DOJ agrees with the recommendation and as of April 18, 2019, has established formal policy for prioritizing legal review of transactions. As noted in the report, BGC hired a full-time, in-house Deputy Attorney General (DAG) III in October 2018 to assist with the legal review of transactional documents for compliance with laws and regulations, including purchase agreements, trusts, loan agreements, contracts for TPPPPS, and leases. The DAG's responsibilities also include other matters, such as assisting staff with regulations and policy, legislative analysis, legal research, interpretation of the Gambling Control Act, and responses to Public Records Act requests. Prior to hiring the DAG, BGC relied solely on legal services provided by DAGs in the Department's Indian and Gaming Law Section (IGLS). Because of workload demands on DAGs in IGLS, whose priority must be litigation and administrative hearings, BGC hired its own attorney to ensure that transactional reviews could be prioritized and directed by BGC to those transactional documents that require prompt legal review.

5

BGC has implemented a policy to prioritize the DAG's review of transactional matters that are needed to complete licensing recommendations on cardroom and TPPPPS owner applications to ensure both timely completion of applications, as well as fairness to applicants. The policy directs that legal review of transactions related to owner applications must be handled in the order they are received by BGC, with some exceptions, such as the death of current owners who are distributing shares to applicants and requirements in orders or settlement agreements approved by the CGCC that require the transfer of ownership by specified dates. BGC has developed and implemented a similar policy to prioritize work on owner applications. BGC is currently working with IGLS to take back all transactional work that is currently pending and has not yet been reviewed by IGLS DAGs. The policy regarding prioritization of transactions also will be applied to all work that is reassigned to the BGC DAG.

5) Games applications.

To minimize the degree to which its processes to change its regulations may result in the disparate treatment of card room owners, the bureau should temporarily approve or deny its backlogged games applications by July 2019.

DOJ Response:

DOJ agrees with this recommendation and plans to issue temporary approvals or denials within the timeframe suggested.

6) Reporting billable and non-billable time.

To ensure it fairly charges applicants for the cost of its licensing activities, the bureau should establish and implement policies by July 2019 to ensure staff properly and equitably report and bill time, including restricting which activities staff may charge to nonbillable and noncase hours. It should also establish clear thresholds for the proportions of time staff may charge to the various categories, as well as procedures for the bureau's management to review compliance with the pertinent restrictions.

DOJ Response:

5

DOJ agrees with this recommendation and as of April 23, 2019, implemented procedures to ensure the fair and full billing of applicants for the cost of conducting background investigations by BGC. Consistent with the audit recommendation, BGC has revised its policies and practices for billing to ensure that costs are appropriately charged for all investigation work. In addition, it has revised its criteria for non-billable work and developed policy to prohibit any non-billable work on cases unless pre-approved by managers. A report on all non-billable work is generated on a weekly basis and distributed to the Director, Assistant Director of Licensing, and all Licensing Section managers. The first report was generated and distributed on April 24, 2019. Regular meetings are being held to review and discuss all non-billable time to ensure compliance with procedures and to correct any inappropriate authorization of non-billable time. The first meeting was held on April 24, 2019.

5
10

As of April 23, 2019, BGC revised its policies and practices for non-case related work. While it understands the concerns and perceptions of work that is not related to specific investigations, it also notes that the time accounted for by analysts as non-case work was for work related to license applications in general, such as purging and organization of old licensing files; work appropriately assigned to analysts in the Licensing Section, such as updates to licensing procedures and assisting with Public Records Act requests; work for which BGC does not have the authority to bill, such as review of local cardroom ordinances and requests to reduce the number of tables in a cardroom; or work-related activities, such as training and staff meetings. BGC has revised its criteria for non-case work and developed policy to prohibit any non-case work unless pre-approved by managers. A report on all non-case work is generated on a weekly basis and distributed to the Director, Assistant Director of Licensing, and all Licensing Section managers. The first report was generated and distributed on April 24, 2019. Regular meetings are being held to review and discuss all non-case time to ensure compliance with procedures and to correct any inappropriate authorization of non-case time. The first meeting was held on April 24, 2019.

BGC will establish thresholds that indicate estimates for acceptable and unacceptable proportions or amounts of time staff may charge to the various categories within the timeframe suggested.

7) Cost analyses and fees.

To better align the revenue in the Gambling Fund with the costs of the activities that the fund supports, the bureau should conduct cost analyses by July 2020 of those activities. At a minimum, these cost analyses should include the following:

Using this information, the bureau should reset its regulatory fees to reflect its actual costs. Before conducting its fee study, the bureau should first implement our recommendations to improve its processes for assigning applications, ensuring the completeness of applications, and developing time-reporting protocols.

DOJ Response:

DOJ agrees that application fees and annual fees assessed on cardroom and TPPPPS owners should be reviewed to determine the appropriate level, utilizing the factors suggested in order to better align the cost of activities with the revenue in the Gambling Control Fund. Because these fees are imposed pursuant to regulations developed by the CGCC, BGC will work with the CGCC to provide all necessary information to assist in the development of appropriate fees.

With respect to the deposits BGC receives for background investigations, the amounts are being adjusted to reflect current costs of the positions performing the work. BGC will notify cardroom and TPPPPS representatives before any rate modifications are effective. Additionally, as noted above, it is working on developing regulations to revise the amount of investigation deposits required for investigations and will utilize the data available once recommendations are fully implemented to support adjustments to the deposit amounts.

8) Background investigation policies and procedures.

To ensure that its level of review is commensurate to license type, the Bureau should review and revise each of its background investigation policies as needed by November 2019.

To ensure that it treats applicants consistently, the bureau should also begin conducting periodic reviews by November 2019 to determine whether staff are following procedures when conducting background investigations for applicants for all license types.

DOJ Response:

5

DOJ agrees with this recommendation. As of April 25, 2019, BGC updated its procedures to correct some differences noted in the report. As of April 25, 2019, it has also combined procedures for work permits, TPPPPS players and supervisors, and key employees into a single set of procedures, and is currently developing a single set of procedures for cardroom and TPPPPS owner license reviews. These procedures will provide additional consistency among some of the investigation steps involved in each of the license types and will also allow for additional steps for licenses that require a higher level of review. Additionally, BGC will conduct periodic reviews to determine staff's compliance with procedures within the timeframe suggested.

11

While BGC understands the need for consistency among application reviews to ensure fairness, it also recognizes that analysts must ask additional questions and sometimes seek other information or documentation to ensure they can adequately assess an applicant's character and support suitability recommendations to the CGCC. Applicants should be treated fairly and consistently, but analysts should consider more than a single issue or piece of information when making conclusions about an individual's character. One issue may not be the only derogatory finding in an individual's background investigation. For example, BGC may not recommend denial for an individual seeking a key employee license who had a single derogatory finding of a bankruptcy within the last ten years, but it may recommend denial for an individual who had a derogatory finding of a bankruptcy within the last ten years, along with multiple delinquent accounts and a history of charge-off accounts. Likewise, BGC may not recommend denial for an individual with a single derogatory finding of a conviction for driving with a suspended license, but it may recommend denial for an individual with a conviction for driving with a suspended license who admits to driving a car to work every day. Each case must be assessed individually and take into account all information. The analysts are required to use their investigative skills, analytical abilities, and articulate their rationale for recommending approval or denial of applications to the CGCC.

12

While procedural changes have been made, BGC provides the following input on some of the individual issues addressed by CSA:

9) Records retention.

To ensure that it has the ability to justify the results of its background investigations, the bureau should develop a formal record retention policy for application documentation by November 2019. This policy should include rationales for retaining types of documents and should establish a process for ensuring staff compliance.

DOJ Response:

DOJ agrees that BGC must ensure consistent retention of documents for all applications. As of April 22, 2019, BGC simplified its imaging procedures by combining multiple procedures for different license types into one set of procedures. On April 23, 2019, staff was retrained on imaging procedures for files. BGC will develop a formal policy on this matter and include rationales for retaining the various types of documents and a process for ensuring staff compliance within the timeframe suggested.

10) Reconciliation of funds and time reporting.

To ensure that it compensates the Special Distribution Fund for the card room-related enforcement activities for which that fund has paid, the bureau should reconcile the hours due to the Special Distribution Fund at least for the last three fiscal years by November 2019. Moving forward, the bureau should ensure that it provides prompt reimbursement when employees in positions that are funded by one source perform activities that should have been funded by another source.

To ensure that its employees allocate their activities to the correct funding sources, the bureau should formalize policies and procedures by July 2019 that provide clear guidelines to employees when reporting time spent on activities that relate to funding sources other than the funding sources for their positions.

DOJ Response:

DOJ agrees with this recommendation and has already taken steps to reconcile the personnel hours supported by the Gambling Control Fund and the Special Distribution Fund when staff time is split between the two fund sources. BGC began reviewing this matter last year and implemented a procedure to correct the allocation of expenditures quarterly beginning in the second and third quarters of Fiscal Year 2018-19. During this process, BGC provided additional direction to staff in its Compliance and Enforcement Section regarding accurate time reporting, which it has incorporated into policy as of April 26, 2019. Additionally, BGC has corrected expenditures for Fiscal Years 2016-17 and 2017-18 and the first quarter of Fiscal Year 2018-19. BGC will conduct an ongoing review of expenditures after every quarter (three months) and submit requests to reconcile funds between the Gambling Control Fund and the Special Distribution Fund to DOJ's Accounting Office pursuant to a procedure issued on April 26, 2019, outlining this process.

11) Time tracking at cardrooms and casinos.

To ensure that it can provide useful and accurate data on the locations where enforcement employees spent their time, the bureau should equip its time-reporting system by November 2019 with the capability to track all hours employees spend at each cardroom and casino.

DOJ Response:

DOJ agrees with the recommendation and is working to determine the necessary modifications to the current time-reporting systems to track all hours that staff in the Compliance and Enforcement section spends at each cardroom and casino. BGC will seek appropriate funding to implement this process.

Thank you again for the opportunity to review and comment on the draft audit report. If you have any questions or concerns regarding this matter, please contact me at the telephone number listed above.

Sincerely,

STEPHANIE SHIMAZU
Director

For XAVIER BECERRA
Attorney General

cc: Sean McCluskie, Chief Deputy Attorney General
Kevin Gardner, Chief, Division of Law Enforcement
Chris Ryan, Chief, Division of Operations
Chris Prasad, CPA, CFE Director, Office of Program Oversight and Accountability



Comments

CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM THE DEPARTMENT OF JUSTICE'S BUREAU OF GAMBLING CONTROL

To provide clarity and perspective, we are commenting on the bureau's response to the audit. The numbers below correspond to the numbers we have placed in the margin of its response.

1

Although we acknowledge that we expected that the bureau would subject applicants for some types of licenses to more thorough levels of review than others, we go on to state that we found that the bureau's background investigation procedures vary considerably for different types of licenses and do not always reflect the associated level of responsibility.

2

The bureau's presentation of its background investigation procedures in this table is inconsistent with the results of our review. Specifically, as Table 6 demonstrates, the bureau's background investigation procedures for card room owners and third-party players do not contain all relevant database inquiries. The bureau acknowledges this inconsistency, among others.

3

We disagree with the bureau's characterization that it continues to make progress on its backlogged cases, but needs additional resources to complete them all. As we explain, despite already receiving significant staff increases, the bureau has made only moderate progress in reviewing pending applications. Further, although we have not reviewed the bureau's data as of the March 31, 2019 date it reports here, we note that the number of backlogged applications it reports—those older than 180 days—has increased since the December 2018 date of the data we reviewed, from 957 to more than 1,100.

4

We are uncertain how the bureau obtained the numbers it presents in this table, which are slightly different than those we calculated. Specifically, the bureau's numbers for incoming applications for fiscal years 2014–15 through 2017–18 are up to 3 percent lower and its numbers for reviewed applications are 4 percent higher for fiscal year 2017–18 than the audited numbers we present in Figure 6. When the bureau provided its fiscal year 2018–19 budget change proposal to us, which included the same numbers it reports here, we asked for and received the data it used to compile the licensing statistics in the proposal. We then performed an independent analysis of this data to arrive at the numbers we include in this report and in Figure 6. Although we stand by the data and analysis in our report, we also note that the bureau's numbers lead to the same conclusions we reach in our report regarding its decreasing productivity.

5

Throughout its response, the bureau references changes to its policies, practices, and procedures it has made as a result of our recommendations. The changes it describes are very recent—some as recent as the period of the bureau's review of our draft report. Therefore, we have not received and reviewed any documentation to substantiate them. We look forward to reviewing the adequacy of these changes as part of the bureau's 60-day response to our audit report, which should detail its progress in implementing our recommendations.

6

Although the bureau disagrees with our recommendation to extend temporary funding for two years rather than making the funding permanent, it has not provided us with any analysis justifying a permanent staffing level that includes the 32 positions, despite our request. It also did not provide this information in its response. As we state, the bureau has not sufficiently demonstrated the number of permanent card room and third-party licensing staff it needs. Specifically, the bureau has not updated its per-application time estimates for many license types since 2015, and for those it has updated, the bureau's per-application estimates increased significantly. Finally, although the bureau references increases in the number of incoming applications during fiscal year 2018–19, this is not information the bureau provided previously; therefore, we cannot comment on its validity. As we note, the number of incoming applications increased only marginally in fiscal years 2015–16 and 2016–17 and actually decreased in fiscal year 2017–18.

7

Although the bureau expresses concern about temporary funding for the positions because it impedes its ability to retain staff, our review found that the bureau's filled licensing positions increased each year over the period we reviewed from fiscal year 2014–15 through fiscal year 2017–18. Further, although we understand that the bureau may face administrative challenges related to temporarily funded positions, we do not believe that those challenges justify addressing what should be a temporary project—clearing the backlog of applications—with permanent funding. As we state, once it has cleared its pending applications, the bureau is likely to need some of the 32 positions on a permanent basis. However, determining the appropriate number of positions will require the bureau to take steps to improve its productivity and then reassess how many positions it needs on a permanent basis.

8

We are concerned by the bureau's statement that it will no longer grant extensions to applicants requesting additional time to respond to requests for documentation and information unless exceptional circumstances exist. As we state, the bureau has not completed a review to determine what steps of its background investigation process may be contributing to delays. Also, we explain that the bureau's failure to promptly assess the information it requests likely exacerbated overall delays. Consequently, we believe it is premature for the bureau to conclude that applicants' requests for extensions should no longer be granted.

9

The bureau asserts it has reviewed current data to determine appropriate additional staffing levels. As we discuss in comment 6 above, the bureau's current data in this area are outdated, having not been updated for many license applications types since 2015. Its failure to update this data is one of several reasons we discuss throughout the report why the bureau has not sufficiently demonstrated what an appropriate staffing level should be. As we state, once it has cleared its pending applications, the bureau is likely to need some of the 32 positions on a permanent basis. After it clears these applications and takes steps to improve its productivity, it will be better positioned to reassess how many positions it needs. Although implementing a formal plan is an important part of that process, we stand by our recommendation that the Legislature not approve any requests to make permanent any temporary funding for the bureau's positions, and should reevaluate the bureau's long-term staffing needs in two years' time, taking into account the extent to which it has implemented the recommendations in this report.

10

The bureau's response attempts to minimize our finding by stating that the time accounted for by analysts as noncase work was for work related to license applications in general and by providing various other activities for which this time accounts. However, this noncase time represents 45,700 hours of staff time in fiscal year 2017–18—nearly half of all reported staff time in the licensing division. As we state, considering the persistent backlog of applications, we are concerned that staff have reported so much of their time on activities unrelated to reviewing applications and conducting background investigations.

11

The bureau's statement that each case must be assessed individually does not absolve it of its responsibility to ensure that all applicants receive consistent treatment. This need for consistent treatment is especially true since—as we state—the bureau has broad discretion in processing license applications and determining applicants' suitability. Therefore, we stand by our recommendations that it review and revise each of its background investigation procedures and also begin periodically reviewing whether its staff follow those procedures for all license types.

12

We appreciate that the bureau indicates that it has taken steps to address some of the inconsistencies in its background investigation procedures. Although the bureau's response tries to downplay the bad effects of these inconsistencies, we stand by our conclusion that, by failing to ensure its procedures subject applicants to equal treatment and that staff consistently follow those procedures, the bureau risks subjecting some applicants to greater scrutiny than others without justification.

13

The bureau misses the point of our finding. The bureau's response states that these issues would appear in the standard database inquiries for a card room owner applicant. However, our finding, as Table 6 illustrates, is that the bureau's procedures do not consistently require staff to include the results of these inquiries in bureau reports to the commission.



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California Gambling Control Commission

May 1, 2019

Elaine M. Howle, CPA
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

Re: Audit Report 2018-132

Dear Ms. Howle:

The California Gambling Control Commission (Commission) has reviewed the redacted draft California State Auditor's (CSA) report regarding the Department of Justice's Bureau of Gambling Control (Bureau) and the California Gambling Control Commission.

As you are now aware, the Commission is a small, yet highly productive agency. The Commissioners and 29 staff members take great pride in our work and take our role and responsibilities seriously. The Commission-specific recommendations provided are appreciated, and align with our ongoing regulatory efforts. We agree that some of the recommendations would require the legislature to amend existing laws.

In response to the CSA's Commission-specific recommendations identified in the draft report, the Commission submits the following response and important context:

CSA Recommendation:

To prevent delays and the unnecessary use of resources, the commission should, following the Legislature's amendment to the law that we recommend, revise its relevant regulations to specify that it is not required to hold evidentiary hearings unless applicants request that it do so.

Commission Response:

The Commission agrees with this recommendation, in part.

1

The Commission is in support of a recommended change to existing law to allow swifter denial actions – in some circumstances – at a regular public meeting, rather than through a separate evidentiary hearing. As the recommendation and various sections of the report point out, applicants must be afforded due process before the Commission can take adverse action against an individual. When a licensing decision takes longer than the self-imposed 120 days, it is because the Commission is complying with the existing due process requirements of the Gambling Control Act. Existing regulations require the Commission to allow applicants no less than 60 days from the date of hearing notice to prepare for the hearing. This requirement seeks to balance the need for swift action with the opportunity for applicants to prepare for the hearing, particularly the majority of applicants who are not represented by an attorney. The Commission supports potential modifications to timelines so long as the twin goals of speedy action and due process can both be achieved. To that end, we are working to address this issue and posted a public notice about a potential regulatory change to Title 4, California Code of Regulations Division 18 sections 12221.87, 12235, 12342 and 12350. The proposal, in part, would modify these sections so that the Commission takes action on an application within 120 days after the corresponding Bureau report is submitted to the Commission.

2

In addition to maintaining the applicants' continued right to request an evidentiary hearing, it is imperative that the Commissioners also retain discretion to hold an evidentiary hearing when more information is needed to determine the applicant's suitability for licensure. A separate hearing ensures the applicant provides testimony under oath and has an opportunity to submit evidence in support of his or her application. While these aforementioned elements could be introduced at a licensing meeting, it is unclear whether doing so would save time or would simply change the forum where the dialog with an applicant is conducted. For example, an applicant may still want to introduce evidence and call witnesses subject to cross examination. Regardless, the Commission strongly supports exploring potential new ways to adjudicate licensing matters in a fair and efficient manner.

CSA Recommendation:

To ensure it has comprehensive licensing information to determine ongoing workload and staffing needs, the commission should implement procedures for tracking the number of license applications it receives from the bureau each fiscal year and the outcomes of those applications, such as denials.

Commission Response:

The Commission agrees with this recommendation.

3

The Bureau's Licensing Information System (LIS) contains all application data. The Commission has been working with the Bureau on its effort to potentially modify and update LIS. With certain changes, the Bureau's LIS could be utilized to track the number of applications and their outcome. We will continue to support any such effort. In addition, in July 2018 the Commission created an internal database to track information about actions taken at Commission licensing meetings. The Commission will continue to endeavor towards more robust reporting through this database, which will also include the tracking of all licensing outcomes on applications received by the Bureau.

CSA Recommendation:

To prevent unnecessary delays and use of resources, and to ensure its compliance with state law, the commission should, following the Legislature's amendments of the Gambling [Control] Act that we recommend, revise its regulations and policies for conducting evidentiary hearings. These revisions should specify that the commission may vote at regular meetings on a final basis to approve or deny licenses, registrations, permits, findings of suitability, or other matters and that it is not required to conduct evidentiary hearings unless applicants request that it do so.

Commission Response:

The Commission agrees with this recommendation, in part.

4

As stated above, the Commission's hearing regulations are in place specifically to comply with current statutory requirements within the Gambling Control Act, to ensure applicants are provided due process, and provide sufficient time for applicants sent to an evidentiary hearing to prepare their case before the Commission. As stated above, the vast majority of individual applicants are not represented by an attorney or representative. The Commission welcomes a statutory revision that would allow the Commissioners to approve or deny applicants at its regular meetings and also continue to allow for separate hearings when necessary for the Commission to reach a decision or when requested by an applicant.

As it relates to this particular section of the audit report, it's important to provide the following context:

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6
5

In two places, the audit report states that the Commission approves a "majority" of applicants at a regular licensing meeting, but, in fact, the Commission approves 99% of applicants at its regular licensing meetings within the previously mentioned self-imposed 120 day time frame. In other words, only 1% of applicants today require an evidentiary hearing for the Commission to make a licensing decision. In one place, the report more accurately states that the "commission refers only a small fraction of the applicants…to evidentiary hearing." However, in the same section, the report states that seven of the 18 applications reviewed by the CSA were referred to an evidentiary hearing (over 38%). Again, that ratio is not representative of the actual percentage of applicants that are referred to an evidentiary hearing, which is approximately 1% of all applications received. Moreover, this recommendation ignores the very real possibility that most, if not all, applicants that are ostensibly denied would still request an evidentiary hearing as reflected by the large number of applicants who currently request an evidentiary hearing.

CSA Recommendation:

To better align the revenue in the Gambling [Control] Fund with the costs of the activities that the fund support, [redacted text] the commission should conduct cost analyses by July 2020 of those activities. At a minimum, these cost analyses should include the following:

Using this information, the [redacted text] commission should reset their regulatory fees to reflect their actual costs.

Commission Response:

The Commission agrees with this recommendation, in part.

The audit report asserts that existing licensing fees are not high enough to recover the associated expenditures and that the non-licensing fees exceed corresponding expenditures. It is important to highlight that the licensing fees are associated with the application and background fees primarily paid by individual applicants, including individuals who are making minimum wage. In regards to the non-licensing fees being in excess of the corresponding expenditures, these are annual fees paid by owners of the cardrooms and Third-Party Providers of Proposition Player Services businesses. Once the new fees are identified and prior to revising its regulations, the Commission will need to identify the impact any increased fees may have on the industry as a whole—not just owners and businesses, but also the individual applicants.

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8

In any event, the Commission's costs are known and defined. In any discussion of fee adjustment, the Bureau and the Legislature (through the budget process) should evaluate and determine how much it costs to effectively regulate gambling in California. For example, such assessment could help determine the appropriate funding and resources required to protect the public, such as: additional agents for compliance checks; additional analysts to eliminate the existing backlog of licensing applications; additional attorneys to reduce the time associated with conducting legal reviews and handling administrative proceedings; and forensic accountants to analyze increasingly complex financial transactions. This determination by the Bureau, working with the Legislature, is a necessary part of any assessment of the fees used to support the cost of effective regulation. This assessment is complicated by the fact that entities, which are not under the Commission's jurisdiction, will be an essential component of this task. Based on these factors, we anticipate that December 2020 is a realistic completion target date.

10

Regardless of the outcome of this assessment, there are fees that the Commission does not have discretion to change. For example, the non-licensing annual fees are set in statute. In those cases where statutory changes are necessary, the Commission will work with the Legislature on any proposed statutory changes.

CSA Recommendation:

To increase uniformity in the licensing process, the commission should revise its current regulations and submit them to the Office of Administrative Law for public review by May 2020 to address the following areas of inconsistency:

In revising its regulations, the commission should increase consistency across application types while minimizing risk to the public.

Commission Response:

The Commission agrees with this recommendation, in part.

The ongoing revision of the Commission's licensing regulations is arguably its largest and most all-encompassing regulatory package to date – it alone currently stands at approximately 200 pages. For context, the length of all currently enacted Commission regulations stands at roughly 218 pages, meaning that the forthcoming package would affect nearly 92% of all regulations currently adopted by the Commission. This is a significant undertaking not to be taken haphazardly.

The Commission has held multiple meetings with stakeholders and consultations with the Gaming Policy Advisory Committee to ensure the package delivers better consistency across license types and clarifies processes. Each meeting has resulted in significant changes to the package. The Administrative Procedures Act requires agencies to develop regulations that are complex or contain a large number of proposals that would not be easily reviewed during the comment period to involve stakeholders prior to public notice with OAL.

11

We are on schedule to submit these regulatory improvements in June 2020 through a process that ensures opportunity for the public to review and comment on the regulations and for further revisions to be based if necessary. In particular, the Commission works with its partnering agencies and industry to seek input prior to the formal rulemaking process to provide an extra opportunity for engagement and sufficient time for all stakeholders to evaluate the proposal and consider any potential impacts on existing business practices. This process may include multiple periods of public input before noticing a regulation to OAL.

CSA Recommendation:

To ensure that it does not hold hearings that may cause applicants unnecessary harm, the commission should, following the Legislature's revisions of state law that we previously recommended, establish and implement formal protocols for informing applicants how to withdraw their requests for hearings and guiding commission staff when discontinuing the hearing process at the request of applicants.

Commission Response:

The Commission agrees with this recommendation, in part.

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Prior to the audit, the Commission had a policy of what constituted a formal withdrawal of an applicant's request for a hearing, which is noted in the final draft report on page 36. In response to the auditor's recommendation, that policy has now been included in internal written procedures. The Commission also previously provided information on withdrawing a hearing request to applicants in specific circumstances, such as when the applicant didn't show for their scheduled pre-hearing conference. Again, in response to the auditor's recommendation, the Commission has implemented formal protocols to inform all applicants how to withdraw their hearing requests and to guide Commission staff when discontinuing the hearing process.

15

While the Gambling Control Act gives the Commission broad discretion in making determinations about individual applicants, the Commission also strives to avoid unnecessary disclosure of embarrassing or harmful information about an applicant in its published decisions. However, a request by an applicant to avoid the hearing process should not, for the sake of efficiency or consistency, unduly limit the Commission's ability to take evidence submitted by the Bureau on an applicant's suitability (i.e., character, integrity, honesty, or the threat to the effective control of controlled gambling).

15

Simply put, there are circumstances where a decision on the merits is in the best interest of the public, even if an applicant seeks to withdraw their request for a hearing. For example, the public may be better protected by a detailed factual finding on the record for an applicant who was terminated for embezzlement from a gambling establishment, but never criminally prosecuted. Without the discretion to make fact based decisions, even when an applicant seeks to avoid the process, some applicants' misdeeds would go unrecorded and unestablished for possible future applications within the jurisdiction of the Commission and/or others, gambling related or otherwise. This policy is accurately reflected with respect to the limited ability to withdraw an application following the Bureau issuing its recommendation, as mandated by the Legislature, and the broad discretion provided to the Commission in considering the requests (Business and Professions Code Section 19869). Moreover, while evidence can be lost over time, evidence submitted through documents and testimony provided at a Commission's evidentiary hearing is preserved as it becomes part of the official record.

14

Finally, while the Commission strives for efficiency and consistency it also takes seriously the due process protections that ensure an applicant who has requested a hearing is afforded a hearing. Once an application is referred to an evidentiary hearing, the hearing notice time and the process for an applicant to withdraw a request for a hearing are designed to ensure the applicant's due process rights are protected. While this process may not always be efficient, it is necessary to ensure all applicants receive notice and a fair opportunity to be heard. Our revised written hearing notices help ensure that if these applicants later change their mind, they are informed how to officially notify the Commission of their desire to withdraw their request for a hearing.

Thank you for the opportunity to review and comment on the draft audit report. If you have any questions, you may contact me at (916) 263-0700.

Sincerely,

STACEY LUNA BAXTER, Executive Director
California Gambling Control Commission

cc: Commissioners
R. Todd Vlaanderen, Chief Counsel
Adrianna Alcala-Beshara, Deputy Director, Licensing Division
Alana Carter, Deputy Director, Administration Division



Comments

CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM THE CALIFORNIA GAMBLING CONTROL COMMISSION

To provide clarity and perspective, we are commenting on the commission's response to the audit. The numbers below correspond to the numbers we have placed in the margin of its response.

1

The commission conflates the statutory requirements in the Gambling Act with those in its own regulations. The time frames that the commission specifies are of those in its regulations. As we discuss, when the commission amended its regulations in 2015 it established new time frames for cases it refers to evidentiary hearings, requiring a minimum of 60 days advance notice to applicants and an allowance of up to 75 days to issue a decision after the hearings—a total of 135 days. This allowance of 135 days introduced a potential conflict with the 120-day requirement in its existing regulations. Moreover, the commission's proposal to modify regulations will not help address the delays we identified. Instead, the proposed changes would relieve the commission of the current requirement to approve or deny an application within 120 days. Finally, as we state, the commission's regulations allow it to approve licenses during regular meetings, whereas the law requires the same meeting standards for approvals and denials. Therefore, legislative action, which we recommend, is necessary to allow the commission to make needed adjustments to its regulations and policies.

2

We do not agree with the commission's claim that it is unclear whether our recommendation would save time, nor does the recommendation attempt to constrain the commission's discretion for holding evidentiary hearings when necessary. Instead, our recommendation is intended to address the extent to which unnecessary hearings contribute to delays and the use of state resources. As we discuss, the frequency of evidentiary hearings increased from 12 in 2014 to 34 in 2018 and that an evidentiary hearing is generally the second time the commission considers an application. In addition, as we state , of the seven applicants we reviewed whom the commission referred to evidentiary hearings, four informed the commission beforehand that they would not attend the hearings or stopped participating in the prehearing process, yet the commission still held three of those hearing in the applicants' absence. As such, the additional and unnecessary costs in time and resources under the current approach are apparent.

3

The commission provided its internal database to us but, as we note, the commission does not currently have comprehensive data regarding the number of incoming licensing applications or the outcomes of those applications, such as how many it has denied or approved. As such, the need for our recommendation remains.

4

The commission's statement that its hearing regulations are in place specifically to comply with current statutory requirements within the Gambling Act is misleading. The commission's regulations do not fully comply with the Gambling Act because, as we describe in comment 1 above and state, commission regulations allow it to approve licenses during regular meetings, whereas the law requires the same meeting standards for approvals and denials.

5

The commission's critique of our report text and its statement that it approves 99 percent of applicants at its regular licensing meetings are disingenuous. The text we use is appropriate because, as we state, the commission's executive director confirmed that the commission does not currently have comprehensive data regarding the number of incoming licensing applications or the outcomes of those applications, such as how many it has denied or approved. This was the basis for our recommendation that the commission implement procedures for tracking this information—a recommendation with which the commission agrees. Therefore, if the commission possesses this information, it has not provided it to us and we are unable to speak to its validity.

6

The commission misunderstands the purpose of our review. Our selection of applicants for review included both approved and denied applications from a variety of licensing types in order to review the commission's handling of those applications and to determine whether any improper or inconsistent use of the commission's processes contributed to unequal treatment. It was not a statistical sample, as the commission implies.

7

Contrary to the commission's statement about our recommendation, we did consider whether most, if not all, applicants that are denied would still request an evidentiary hearing. As we state, after deciding to hold a hearing, the commission sends a form asking applicants to formally request a hearing. Therefore, applicants wanting to obtain a license will most likely return the form to request a hearing because a hearing represents their only opportunity to be considered for a license. If the commission was able to consider and deny applications at regular meetings, applicants might not insist on additional proceedings. Further, even under the current approach, as we state, four of the seven applicants we reviewed whom the commission referred to hearings subsequently decided not to attend their hearings. Further, as we explain, the number of hearings—and therefore, presumably, hearing requests—increased substantially when the commission began its current approach, from 12 in 2014 to 34 in 2018. Therefore, we stand by the recommendation's potential to increase efficiency.

8

The commission's statement that its costs are known and defined—in the context of the specific activities that correspond to fee amounts—is inaccurate. The reason we took the approach we did to estimate licensing and nonlicensing expenditures, and the reason we make our recommendation, is because the commission had not conducted cost analyses in these areas.

9

We are concerned with the commission's claims about how long it anticipates it will take to implement our recommendation. The recommendation is directed at both the commission and the bureau, and fully contemplates their need to work together to align fees and their uses. However, we take issue with the commission's claim that the need to work together justifies a time frame of more than a year and a half. Ensuring fee amounts are appropriate is not a new responsibility for the commission. However, the commission did not take action regarding its misaligned fees while the Gambling Fund balance more than doubled from $30 million at the end of fiscal year 2013–14 to $61 million at the end of fiscal year 2017–18, as we explain. Also, we discuss that the January 2019 Governor's proposed budget includes loan repayments to the Gambling Fund and that will increase the fund balance to more than $97 million by June 2020—a surplus of more than five times the bureau's and commission's projected annual expenditures. Given the urgency and magnitude of the issue and the commission's lack of action to date, we urge the commission to do all it can to meet the time frame of July 2020 that we set in our recommendation.

10

To clarify the commission's statement, not all nonlicensing annual fees are set in statute. As we explain in the footnote, card room fees are set in the Gambling Act as well as in the commission's regulations. However, nonlicensing fees paid by third‑party company owners, which generate the majority of nonlicensing revenue, are only in the commission's regulations. Regardless, the commission is responsible for ensuring fees are appropriate, and we appreciate that the commission indicates that it will fulfill this responsibility by proposing statutory changes where necessary.

11

The commission appears to disagree with the implementation date of May 2020 of our recommendation for revising its licensing regulations and submitting them to the Office of Administrative Law for public review, as it states that it is on schedule to submit them in June 2020. To increase uniformity in the licensing process and address current consistencies as soon as possible, we urge the commission to do all it can to meet the May 2020 time frame.

12

The commission's response uses page number references from a draft copy of our report. Since we provided the commission the draft copy, page numbers have shifted.

13

The commission's response mischaracterizes our report text as well as its own practices at the time of our audit. The text the commission references does not conclude that the commission had a policy in place regarding what constituted a formal withdrawal of an applicant's request for a hearing. Instead, it relays an explanation by the chief counsel that to cancel evidentiary hearings, the commission requires applicants to explicitly waive their rights to that hearing. Later in the same paragraph, we note that the commission has not established any formal procedures to guide staff on how to handle instances when applicants opt out of the hearing process before the hearings occur, nor for providing explicit instructions to applicants on how to opt out.

Further, the commission's response states that it previously provided information on withdrawing a hearing request to applicants. We reviewed this information during our audit and determined it did not contain clear guidance about how to withdraw from the hearing process. Specifically, the information instructs applicants to contact the commission if they do not plan to attend their hearing or if they would like to withdraw their request for a hearing, but does not make it sufficiently clear that these are two different things; as we state, even though applicants we reviewed told the commission at least two weeks in advance that they no longer wanted to attend, the commission held the hearings in both cases. Further, information the commission provides to applicants instructs them to contact the commission via telephone, even though the commission's chief counsel told us it requires applicants to withdraw their requests in writing.

14

We have not had the opportunity to review these new procedures. As we state, after we shared our concerns with the commission, its executive director informed us that it was taking steps to provide specific direction to applicants, as well as to develop internal procedures. The commission very recently shared its new procedures with us during the period of its review of our draft audit report. As a result of this timing, we are unable to conclude whether those procedures adequately address our concerns; we look forward to doing so during our review of the commission's 60-day response to our audit, which should detail its progress in implementing our recommendations. Also, we note that fully resolving this issue will ultimately require the Legislature to amend the law to allow the commission more flexibility when denying applicants, as we conclude.

15

We take issue with the commission's claim that it strives to avoid unnecessary disclosure of embarrassing or harmful information about applicants in its published decisions; we observed instances in which its decisions included this information unnecessarily. Further, the commission's argument that there are circumstances where a decision on the merits is in the best interest of the public is not responsive to the circumstances that led to this recommendation, despite our clearly stating them in our report. We do not dispute that the commission may reasonably decide an application on the merits, even if an applicant does not participate. In fact, we clearly state that in these instances the commission may need to include details about an applicant's background in its written decision to show the basis for that decision. However, as we explain, we identified two instances in which the commission's written decisions included criminal background information about the applicants even though the commission did not rely on this information in its reasons for denying the applications. These are the situations our recommendation is intended to prevent.





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