I was asked by a legislator to comment on a change to the star rating system being proposed by the GCB (see attached). Below is what I sent back to the legislator.
Thank you for the opportunity to review this. It took me some time to understand what the changes would mean and how they were getting at it.
Here is some background on the GCB proposal. This proposal from the GCB changing the current star rating system is similar in design to what was in the tax bill last year along with our tax reduction. The message from the legislature then was that the state would give us tax relief (a 10% reduction) along with the tightening up of the star rating system (with GCB input) in return. The concern of some was that we would take that relief and put it into expenses, not donations. After voicing our concerns about what we viewed as an unwarranted increase we decided that we would not let our objections get in the way of tax relief. Our belief was that if there was a marked increase in the number of charities going on probation that there might be a change to the formula down the road.
It now appears that the goal of the GCB is to tighten up the star rating system without tax relief being tied to it.
I compared the current star system to the proposed star system using the GCB FY2020 figures. The current star system was suspended for FY2020 due to COVID (at ACM’s urging and ultimate support of the GCB and Governor). Normally there are roughly 40 to 50 organizations on probation in any given year. FY2020 had 85 organizations that would have been on probation using the current star rating system. The increase would have been due to COVID and the shutdown. Charities do not know when they might be shut down again and are reluctant to spend down their accounts worried that they will not have the money to restart or get through another shutdown. Many will be paying a UBIT penalty to both the federal and state this year because of that.
The proposed star system changes things. Again using the FY2020 numbers, 98 organizations would have been put on probation, which is double from the previous average of 40 to 50. Normally there are roughly 13 VFW/Legion Posts that would be on probation and that number does not appear to change with the proposed system.
The proposed star rating system has at its core the belief that charities are expense heavy. I do not believe that to be true. Almost all of our expenses are fixed. Cost of games, rent and wages are all set by market forces or state/federal statute. The one area that there is flexibility is gambling manager pay. Our detractors will tell you that we need to do our work on a volunteer basis. In a perfect world I may not disagree with them. But the reality is that getting people to work twenty to forty hours per week at no pay is no longer feasible.
I also question whether the state has thought about putting more organizations on probation. I added up what that group of 98 paid in taxes/fees in FY2020 and (if my math is correct) it comes to over $18 million.
We understand the desire to have more money go into donations, we want that too. We are just not sure that the proposed rating change does that. Without any accompanying tax relief the change would be additional pressure on charities to cut expenses where there is really very little to cut.
We would also request that the star rating system be suspended for FY2021 that is now more than half over and has had us go through another shutdown. Now is not the time to have our operations judged when there is nothing that even resembles normalcy. Even under the current system the number of organizations that would end up on probation will grow much higher than 85.
You might ask the GCB what their predictions are for the number of charities that would be on probation under the proposed changes to see if it differs much from what I see.
In closing, if the proposal becomes statute we would be judged solely on our donations against our expenses. Taxes, which are our largest outlay, would no longer be counted. In my opinion taxes are our biggest issue, not our expenses. We are not going to get people to work for free and the vast majority of our gambling managers are not getting rich doing that job. After paying our expenses (53% of what we get to the bank) and taxes (27% of what we get to the bank) we have 20% left for donations. Our costs and taxes go up every year. We currently net 3 cents on every dollar wagered, that number has gone down every year for the past eight years. This proposed change will not stop that slide.
Again, thank you for the opportunity. Any questions, please advise.
GCB recommended updates to 349.15 star rating system under 21-01933 as of 25 January 2021 (1).pdf