Could Connecticut include indirect expenses in its assessment for regulating tribal casino gaming?

Plain-English summary

In September 1998, Connecticut’s AG advised the Division of Special Revenue that the Mashantucket Pequot Gaming Procedures allowed recovery of indirect as well as direct state costs for regulating gaming operations and conducting authorized investigations at Foxwoods. The procedures used the phrase “reasonable and necessary costs” without defining it. The AG read that phrase in light of the purpose of reimbursing the state for ongoing oversight expenses and ordinary cost-accounting practices.

Direct costs were those identifiable with a specific regulatory project, such as assigned staff time or travel. Indirect costs were shared agency expenses that supported multiple activities and could not reasonably be charged directly to one project. The AG pointed to federal cost principles and the state comptroller’s accounting manual for calculation methods. He did not supply a dollar amount or bless every overhead charge; the assessment still had to be reasonable and necessary, with finance staff applying accepted accounting methods.

State regulators at the time

The agency could include appropriately allocated indirect expenses in the annual assessment and should consult its accountants on the calculation.

Tribal finance officials at the time

The opinion addressed the categories of recoverable oversight cost, while retaining the procedures’ reasonableness and necessity limits.

Currency note

This opinion was issued in 1998. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Q: Did “reasonable and necessary” mean only direct expenses?
A: No. The AG said it also encompassed indirect regulatory costs.

Q: Could the agency set any overhead percentage it wished?
A: The opinion called for prevailing accepted accounting practices and did not fix a rate.

Q: What work did the assessment cover?
A: The cited procedures addressed state gaming regulation and law-enforcement investigations under the gaming arrangement.

Background and statutory framework

The division asked how to calculate reimbursement under section 11 of the federally prescribed gaming procedures. The AG compared the language with common accounting treatment and cost principles under the Indian Gaming Regulatory Act.

Citations and references

Federal statute: 25 U.S.C. § 2710(d)(3)(c)(iii).

Source

• Landing page: https://portal.ct.gov/AG/Opinions
• Opinion page: https://portal.ct.gov/ag/opinions/1998-formal-opinions/george-f-wandrak-division-of-special-revenue-1998015-formal-opinion-attorney-general-of-connecticut

Original opinion text

George F. Wandrak, Division of Special Revenue, 1998-015 Formal Opinion, Attorney General of Connecticut

Attorney General's Opinion

Attorney General Richard Blumenthal

September 28, 1998

George F. Wandrak

Acting Executive Director

Division of Special Revenue

555 Russell Road

Newington, CT 06111

Dear Mr. Wandrak:

This is in response to your request for opinion pertaining to reimbursement of regulatory costs under the Mashantucket Pequot Gaming Procedures, 56 Fed. Reg. 24996 (May 31, 1991) (Procedures). You ask whether the Procedures, which allow you to assess the Mashantucket Pequot Tribe (Tribe) for "reasonable and necessary costs" of regulating and investigating operations at Foxwoods, include reimbursement of indirect as well as direct costs. For the following reasons, we answer your question in the affirmative.

Section 11 of the Procedures, as you point out, provides for State assessment for State costs of oversight. This section provides, in pertinent part, as follows:

(a) Imposition of assessment for State regulatory expenditures. The State shall annually make an assessment sufficient to compensate the State for the reasonable and necessary costs of regulating gaming operations and conducting law enforcement investigations pursuant to this compact. Such assessment shall include any costs of fringe benefits for personnel due and owing to the State Comptroller and shall be net of fees received with respect to the submission of gaming service enterprise registrations pursuant to section 6 of this compact.

Procedures, Sec. 11(a).

The Procedures do not define the term "reasonable and necessary costs." These are not technical terms, having at all times the same meaning, but general or descriptive terms which may have varying meanings according to the circumstances used. Boston Molasses v. Molasses Distributors Corp., 274 Mass. 589, 594, 175 N.E. 150 (1931). In this circumstance, these terms were proposed by the State during the compact negotiation/litigation process required by the Indian Gaming Regulatory Act (IGRA). 25 U.S.C. § 2710(d)(7)(B)(iv). The assessment language was intended to cover the costs of licensing and regulating gaming "in such amounts as are necessary to defray the costs of regulating such activity." 25 U.S.C. § 2710(d)(3)(c)(iii). Pursuant to IGRA these terms were prescribed by the Secretary of the Interior in lieu of a compact. 25 U.S.C. § 2710(d)(7)(B)(vii).

In this context, it is clear that these terms were intended to reimburse the State for the additional and on-going expenses it would be expected to incur as a consequence of performing its duties under the Procedures. In defining this term in a variety of comparable circumstances, this term repeatedly has been found to require reimbursement of not only direct costs,1 but indirect costs2 as well. This result is based on proper and accepted accounting practices which include indirect as well as direct costs when calculating costs where the term is otherwise undefined. See e.g., Gordon Form Lathe Co. v. Ford Motor Co., 133 F.2d 487, 500 (6th Cir. 1943) (manufacturing); Allis-Chalmers Mfg. Co. v. United States, 165 F.2d 495, 497 (7th Cir. 1948) (government program of reimbursement); Pacific Portland Cement Co. v. Westvaco Chlorine Products Corp., 77 F.Supp. 406, 409 (N.D. Cal. 1948) (contract for sale); B.F. Goodrich v. Betkoski, 99 F.3d 505, 528 (2nd Cir. 1996) (environmental cleanup); NTN Rearing Corp. of America v. United States, 747 F.Supp. 726, 743 (CIT 1990) (Tariff Act valuations). The use of direct and indirect costs in calculating total costs comports with standard accounting practices. United States v. R.W. Meyer, Inc., 889 F.2d 1497, 1504 (6th Cir. 1989) citing C. Horngren & G. Foster, Cost Accounting: A Managerial Emphasis, 20-36 (6th Ed. 1987).

Moreover, as you point out, in the specific field of reimbursement of government program costs, the general rule is that indirect as well as direct costs are chargeable unless the specific program directs otherwise. See Office of Management and Budget Circular A-87, Cost Principles for State, Local and Indian Tribal Governments (Rev. 5/4/95 as further amended 8/29/97), 62 Fed. Reg. 45934 (1997), Attachment A. The rules established in Budget Circular A-87 are specifically applicable to federally recognized Indian Tribal governments, such as the Mashantucket Pequot Tribe. These rules are reiterated in light of Connecticut government financial reporting systems in the Indirect Cost and Fringe Benefit Recovery Procedures Manual (Office of the Comptroller, 1991), Attachment B.

Therefore, in response to your question, under the Procedures, we believe that your agency should make an assessment sufficient to compensate the State for the reasonable and necessary costs of regulating gaming operations and conducting your agency's investigations which includes indirect as well as direct costs. The agency should employ the prevailing proper and accepted accounting practices in arriving at the assessment. Your agency should consult with your accountants in identifying how to make the calculations.

Very truly yours,

RICHARD BLUMENTHAL

ATTORNEY GENERAL

Robert F. Vacchelli

Assistant Attorney General

RB/RFV/bjo

Footnote.

1 Direct costs, in the context of State agency charges, are defined as follows:

Direct Costs are those which are incurred for, and can be identified with, the specific projects, programs, or activities of an agency or institution and can be charged directly to such activities with a reasonable degree of accuracy and without an excessive amount of accounting effort. Examples include such costs as the salary and fringe benefits of an individual working on a specific project, travel costs for the purpose of a program, or computer time billed to a project.

Indirect Cost and Fringe Benefit Recovery Procedures Manual (Office of the State Comptroller, 1991).

2 Indirect costs, in the context of State agency charges, are defined as follows:

Indirect Costs, in contrast, are those that have been incurred for purposes common to a number or to all of the specific projects, programs, or activities of an agency or institution, but which cannot be identified and charged directly to such projects, programs, or activities with a reasonable degree of accuracy and/or without an unreasonable amount of accounting effort.

Procedures Manual, Id.