PSRB Partner Chris Braun is featured in this month’s Indiana Food & Fuel Association’s Magazine discussing the legislative proposal he is drafting for the Indiana General Assembly’s 2023 Season.

2023 Legislative Priorities

IFFA Focused on Increasing Lottery Retailer Commission and Expanding ELTF Coverage

 In January, the Indiana General Assembly will reconvene in Indianapolis for the 2023 regular session. The Indiana Food & Fuel Association is principally focused on two issues this legislative session: 1) increasing the Hoosier Lottery’s ticket sales commission paid to retailers and 2) expanding Excess Liability Trust Fund (ELTF) coverage to include select aboveground storage tanks as well as the removal and upgrade of older underground storage tank systems.

Priority 1: Increase Lottery Commission

For fiscal year 2021, the Hoosier Lottery paid $117.5 million to lottery retailers in ticket sales commissions and bonuses and made a record-setting transfer to the state of Indiana. The lottery’s surplus revenue for the year — $375.5 million — was nearly 25 percent more than anticipated, according to the Hoosier Lottery’s 2021 annual report.

With its recent success, the lottery should be able to accommodate a reasonable increase to its retailer sales commission, said Scot Imus, executive director of IFFA. Currently, the sales commission rate paid to retailers is 6 percent for scratch-off tickets and draw games, like Powerball, Mega Millions and Hoosier Lotto. Imus believes the rate should be increased to 8 percent.

Retailers face rising operating expenses, primarily labor costs and payment card fees. These card fees are usually 2 percent or 3 percent of the purchase price, and more customers are using credit cards to purchase lottery tickets, cutting into retailers’ commission. In addition, the Hoosier Lottery appears poised to move to an online lottery system, and such a move has the potential not only to reduce lottery ticket sales at brick-and-mortar stores but also to reduce in-store foot traffic and other sales for retailers.

An online state lottery in Indiana is certainly possible considering the legalization of online sports betting in 2019 and the current push for internet casino gaming, which includes digital versions of slot machines, tables games and other typical casino games that can be played on smartphones or personal computers.

Internet casino gaming — or “igaming” — would provide between $341 million and $943 million in estimated tax revenue for the state of Indiana over three years, according to a July 2022 report prepared by Spectrum Gaming Group for the Indiana Gaming Commission. The report also stated that, based on data from states with internet casino gaming and lotteries, “it appears that there is a distinction made in the mind of the player between lottery and igaming. As such, Spectrum foresees little impact on the Hoosier Lottery from the potential introduction of igaming.”

Nevertheless, the Hoosier Lottery will likely pursue a move to an online lottery system through legislation. Previously, the State Lottery Commission of Indiana believed it had existing authority under state statute to sell games online without express consent from the legislature.

According to Indiana Code 4-30-3-7, the state lottery commission is tasked with governing the operation of the state lottery, including “[t]he method to be used in selling tickets [and] … [a]ny other matters necessary or desirable for the efficient or economical operation of the lottery or for the convenience of the public.”

“The lottery was trying to say that the authorization in 1989 was so broad that it did not need to get approval from the General Assembly to bring its games online,” Imus said. “AOL was not popular until the mid-1990s. The first iPhone was released in 2007. To think the General Assembly had ever thought that players could use handheld devices to play is absurd. We raised that concern with legislators.”

During the 2022 regular session, the General Assembly passed a bill that explicitly prohibited the lottery from offering online games until the legislature allowed for it, said Mathew Norris, attorney at Krieg DeVault in Indianapolis and lobbyist for IFFA.

“We know the lottery is going to make an effort to pass legislation this year to specifically allow for them to sell online. If that is indeed the case, then we will also ask the legislature to increase the commission to 8 percent if the lottery has not agreed to otherwise,” he said.

The lottery retailer sales commission must be at least 5 percent based on state regulations, and the State Lottery Commission of Indiana increased the rate to 6 percent years ago. Enough time has passed that it makes sense to revisit what constitutes an appropriate commission rate, Norris insisted.

“We expect to see bills introduced that would allow the casinos to offer igaming and would allow the lottery to offer online games,” he said. “Chances of passage are unknown at this point in time, but certainly it will be a topic of discussion. I think that either they will both pass or they will both fail.”

Priority 2: Expand ELTF Coverage

The ELTF helps provide federally required financial assurance for underground storage tank (UST) owners and operators to recover environmental investigation and cleanup costs and to pay third-party claims resulting from leaking UST systems. The ELTF is funded through tank registration fees paid by UST owners and operators and a 1-cent oil inspection fee collected by the state for every gallon of gasoline or diesel sold in Indiana.

Several years ago, legislators wanted to take $40 million from the ELTF, which had a balance of roughly $90 million at the time, and divert those monies to revitalization projects unrelated to USTs in undisclosed metropolitan areas, recalled Christopher J. Braun, partner at Plews Shadley Racher & Braun LLP and general counsel for IFFA.

“Fortunately, that raid was thwarted as the ELTF’s balance was under considerable financial strains at the time due to Indiana’s very high cost of UST cleanups,” he said.

In 2015, the national average for UST cost to closure was $157,347, and Indiana’s cost to closure was more than double the national average at that time, Braun said. Furthermore, Indiana’s cost to closure was the third-highest for all state UST funds in the nation, and two to three times higher than neighboring states Illinois, Kentucky and Ohio, he added.

To address this situation, in 2016, the Indiana Department of Environmental Management (IDEM) commissioned an actuarial and managerial audit to assess the health and viability of the ELTF. The audit also provided recommendations to improve management of the ELTF and the payment of claims. One of the findings of the audit was that, unless IDEM adopted changes to the ELTF, the fund would be insolvent in 10 years, Braun explained. As a result, IDEM adopted and began implementing the recommendations.

IDEM began by focusing on closing sites and issuing No Further Action letters for sites where the cleanup had been ongoing for 10 years or more and the ELTF had already paid more than $1 million in environmental costs. For the remaining sites, IDEM implemented three audit recommendations: 1) evaluate all claims for reasonableness and cost-effectiveness, 2) improve loss prevention activity through the UST compliance program, and 3) apply risk-based corrective action, including the use of institutional controls such as environmental restrictive covenants.

“For the next three years in a row, from 2016 through 2018, Indiana had the dubious distinction of being the most expensive state in the United States for UST cleanups,” Braun said. “The high-water mark was fiscal year 2017 when Indiana’s average cost to closure was $524,638, ranking Indiana as the most expensive state in the United States to cleanup UST sites. By comparison, California was No. 2 at $350,000.”

By fiscal year 2020, IDEM had made progress, as the average cost to closure in Indiana had dropped to $298,292 — albeit still high when compared with neighboring states’ average cost to closure: $117,000 in Ohio, $85,000 in Illinois, and $79,000 in Kentucky, Braun pointed out. However, as a result of IDEM’s adoption of the audit recommendations, the number of ELTF claims and the costs to achieve regulatory closure for the UST sites have declined significantly. This has resulted in a current fund balance of approximately $150 million, with a monthly surplus of more than $2 million, he noted.

“We want to protect the fund. If people are looking to spend that balance in ways not fully consistent with its purpose, that would be problematic for us,” Imus said. “If the fund was not there, our members would have to buy private insurance, which is very, very expensive. Our members are spared that expense, and, as a result, sites in Indiana are cleaned up.”

Instead of waiting for another attempt by legislators to draw from the ELTF for unrelated projects, IFFA is proposing two substantive legislative changes to expand ELTF coverage in ways consistent with the fund’s intended purpose.

IFFA is proposing that ELTF coverage be extended to include aboveground storage tanks at bulk plants that have been used to store and distribute fuel for retail purposes. Many of these aboveground storage tanks have been around for 50 years or more. Refineries would not be included in this coverage.

IFFA would also like the ELTF to be used to defray very high costs for UST owners by paying for the removal of old storage tank systems and sharing the costs for the installation of new UST systems. Historically, the ELTF has been used to cover the costs of leaking UST system cleanup, not UST system removal and upgrades. Yet Indiana has about 1,300 USTs that are 30 years old or older, Braun noted.

“What we are starting to see — and we have seen it four or five times this year already — is that when these old tanks give way, they give way in a big way,” he said. “They become catastrophic releases and costs hundreds of thousands, and often millions, of dollars to cleanup. Under the IFFA proposal, UST owners and the ELTF would be proactive in removing and upgrading these old UST systems before they fail.

“There are 35 other states that have underground storage tank funds. We would be the first state in the union to expand our coverage to include aboveground tanks, and we would be the first state to proactively assist financially with UST compliance and prevention by helping defray the significant costs of new systems going in and old tanks being taken out,” Braun said.

Over the past two years, as a result of IDEM’s adoption of the audit recommendations, the ELTF has paid out about $15 million annually in environmental claims while receiving more than $40 million in revenue, Braun said. Expanding ELTF coverage would draw down the fund’s balance, but that is the point — to use the fund to protect the environment by cleaning up leaking storage tank systems and by preventing releases from old UST systems from happening.

“As long as we stay well north of $25 million in the fund, which is statutorily required as a reserve, we are in very good financial shape for the ELTF,” Braun stated.

The state of Indiana has a $1 billion surplus, so legislators have sufficient reserves available to fund their legislative priorities without siphoning funds from the ELTF.

“But two years from now, who knows where it might be?” Braun said.

“In two more years, if we do not do anything differently, we are going to have $200 million sitting in the coffers, and that puts a bull’s-eye on the ELTF,” he said. “We would much rather be proactive and figure out ways to continue to expand the number of cleanups in Indiana by including bulk plants while continuing to encourage compliance by UST owners to upgrade the more than 1,300 USTs that are 30 years old or older and avoid catastrophic petroleum releases, which harm the environment and require multiyear investigations and cleanups.

“The ELTF program has far and away been the most successful cleanup program in Indiana’s history as it has funded the cleanup of hundreds, if not thousands, of UST sites throughout the state of Indiana,” he continued. “The goal now is going to be to continue this very successful cleanup program and convince the legislature that these legislative proposals to expand the ELTF are wise expenditures.”

Conclusion

For the 2023 legislative session, IFFA has set its sights on two legislative priorities: increasing the lottery retailer sales commission and expanding ELTF coverage. Both the commission increase and the coverage expansion have the potential to benefit Hoosier fuel and convenience retailers as well as the state of Indiana, which generates lottery revenue through its partnership with retailers, and Indiana residents, who enjoy cleaner water and soil thanks to responsible ELTF management. Now IFFA awaits what legislators have to say on the matters.

Stay Up to Date on Legislative Issues

During the Indiana General Assembly’s 2023 regular session, stay up to date on legislative happenings that directly impact Hoosier fuel and convenience retailers.

• Reach out to your state senators and representatives, and let them know how proposed legislation could affect your business. During the upcoming session, tell your legislators how bills that increase the lottery retailer sales commission and expand Excess Liability Trust Fund coverage could provide a boost to your fuel stations and convenience stores. To find your legislators, visit https://iga.in.gov/legislative/find-legislators/.
• Watch for communication from the Indiana Food & Fuel Association with updates about the lottery retailer sales commission, Excess Liability Trust Fund coverage expansion and other legislative issues relevant to the industry.
• Attend IFFA’s Statehouse Day and Legislative Luncheon to meet Indiana state legislators and discuss the issues that are most important to your business and the fuel and convenience industries.
• Stay abreast of industry issues by attending industry events, like the IFFA Annual UST Compliance & Technology Summit, which was held in October and included a presentation about proposed changes to Excess Liability Trust Fund coverage.
• Track the status of proposed bills, find session information and more at https://iga.in.gov/.

For fiscal year 2021, the Hoosier Lottery brought in more than $1.7 billion in total operating revenue and paid retailers $117.5 million, or about 6.7 percent of total revenue.

Source: Hoosier Lottery 2021 annual report

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