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Rod Smith

California Plans May Impact Nevada

28 November 2003

The course California elects to take on expanding gambling to clip the state's budget deficit has industry experts concerned about the possible impact on Nevada.

At least one industry expert is warning that political leaders in Nevada need to make the case that the economies of the two states are linked and increased gambling in California could hurt them both.

Moves to expand California gambling are gaining momentum. Ten of the 94 California Indian tribes that have or want to expand casinos said Nov. 21 they are willing to negotiate terms for new gaming opportunities. And preliminary documents were filed Wednesday with the state attorney general's office for a ballot initiative to allow horse tracks and card rooms to add Las Vegas-style gambling, an issue on which Gov. Arnold Schwarzenegger has remained neutral.

University of Nevada, Las Vegas professor and casino industry expert Bill Thompson, however, warned there is peril in expanded gaming for both California and Nevada.

"California gambling is local market-based. It's like Station (Casinos). This kind of gambling is adverse to economic development for a number of reasons," he said.

"Heading the list, it doesn't bring any new money into California. Second, it diverts money from existing businesses in California," Thompson said.

Further, if Schwarzenegger and political leaders plan to divert money from Nevada, they will fail (to stimulate the economy), he said.

"The money California gamblers already spend in Nevada is returned in retail sales in California," Thompson said. "Our economies are tied together. We sell entertainment and we buy products with the money we get. We don't exploit California. We trade with California, and it's good for both of us."

"The political leadership of California needs to think in terms of macroeconomics, in terms of money flows. Schwarzenegger said in his campaign he wanted more money flowing into California and (added) gambling isn't the way to do it," he said.

"And political leaders in Nevada, with honesty and integrity, need to make the case our economies are linked together, and our relationship is symbiotic, not exploitative," Thompson said.

Joe Greff, gaming analyst at Fulcrum Global Partners, said it is still too early to predict the outcome of any tribal negotiations because Schwarzenegger has not made his position clear, some tribes are trying to form a consensus and other tribes are lobbying for their individual interests.

However, Wall Street analysts agreed added competition from casinos in California could be particularly harmful to operators in Reno, Laughlin and downtown Las Vegas.

Bear Stearns analyst John Mulkey, who recently finished a fact-finding trip to California that included meetings with tribal and political leaders, said two alternatives are emerging as the most likely policies for the new governor to expand casinos, either of which could help cut the state's deficit, but either of which would result in a "potentially dramatic increase in gaming positions statewide."

On the one hand, Schwarzenegger could propose new compacts allowing unlimited slots, based on demand, with the tribes sharing slot revenues with the state based on a percentage somewhere in the mid-teens.

"We believe the financial decision to sign such a new compact would be an easy decision for several northern tribes, while it may be much harder to swallow for many of the southern tribes (in more competitive jurisdictions). The BIA (Bureau of Indian Affairs), in our view, would be the biggest obstacle to such a compact unless the tribes received exclusivity," Mulkey said.

The major hurdle with new compacts would be opposition from the BIA, whose role in compact negotiations would be to prevent tribes from signing unfair revenue-sharing deals, he said.

"(However), if the governor were to tie gaming exclusivity to the slot tax, we believe the BIA could be on board with this revenue-share proposal," Mulkey said.

The governor could also propose nontribal gaming as leverage against tribes, Mulkey said.

"While we believe the governor is not likely to actively push for destination resort gaming expansion off reservations, we doubt he would actively stand in the way of (the) ballot initiative to allow slot machines at a handful of racetracks and nearly a dozen card clubs," Mulkey said.

In the end, Mulkey predicted it is most likely Schwarzenegger will create a new standard compact and let any tribe that accepts its expanded gaming and revenue sharing provisions sign the agreement with the state.