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Gaming Guru

Rod Smith

Tribal Gambling's Threat Nears with Expansion Talks

28 January 2004

NEVADA -- Nevada casinos are likely to face major challenges sooner rather than later based on the rapid progress of initial negotiations to expand tribal gaming in California, Wall Street analysts said Tuesday.

Gaming experts here agreed there are substantial legal and economic issues involved that argue Nevada should move aggressively to protect its flank from California casinos.

"We should be pushing the envelope. We should be telling (Gov.) Arnold (Schwarzenegger) how much money Nevada spends in California. We spend more than we take," University of Nevada, Las Vegas professor and casino industry expert Bill Thompson said. "If Arnold wants to pursue policies that will hurt our economic prospects, we should tell him we can build first-rate research parks, even though I'd start by approaching him in a gentlemanly way."

However, Gov. Kenny Guinn's spokesman, Greg Bortolin, said even though the issue of tribal gaming is on the state's radar, no conversations are under way or planned between the two states.

Seven American Indian tribes this week began serious, closed-door negotiations with Schwarzenegger's representatives to provide added gaming revenues to the state in return for looser slot caps and protection for exclusive rights to operate casinos in California, analysts said.

"We think his chances for getting additional revenues in exchange for looser slot caps and exclusivity are very real," Bear, Stearns & Co. analyst John Mulkey said. "The initial discussions, from our contacts (in the tribes), appear to be running very smoothly."

Facing a $15 billion budget deficit, the Schwarzenegger administration is asking tribes for $500 million in new payments.

"Both sides of the table understand what the other side wants to get out of the renegotiations," he said.

However, Thompson said the Indian Gaming Regulatory Act of 1988 specifically said tribal casino revenues cannot be taxed, directly or indirectly, and the tribes lack the authority to give up their own federal rights.

In addition, the federal statute prohibits states from entering compacts except to let recognized American Indian tribes offer forms of gambling other residents of the same states can offer.

Therefore, tribal gaming in California violates federal law both by imposing fees on casino revenues and by allowing the tribes to operate casinos when other Californians cannot.

Tony Cabot, a partner in Las Vegas law firm Lionel, Sawyer & Collins, said both issues are serious and agreed Nevada has substantial legal and economic interests that need protecting.

However, he said there has been no serious challenge to California's efforts to get around the law because both the state and the tribes have been satisfied with their arrangements.

Gaming interests spent $5 million to sway California voters against Proposition 5, which legalized tribal gaming in 1998, although tribes have been on the defensive politically since the recent recall election when they spent $13 million on losing gubernatorial candidates.

"The question for Nevada now is does the state get standing to intervene in what is a California issue and a federal issue. There's not a lot we can do," said Cabot, who is chairman of Lionel, Sawyer & Collins' gaming practice group.

For that reason, Thompson said Nevada needs to make more political noise and, with the other 10 states in which casino gambling is legal, take its case to the White House.

The Viejas, Pala, Rumsey, Morongo and United Auburn tribes -- the four bands considered most successful at operating casinos -- as well as the Pauma, Rumsey and Lytton tribes are now involved in the closed-door maneuvering.

"Several of them are more than willing to exchange the revenues for more slots as well as boxing out card clubs permanently," he said.

Indian casinos now pay about $140 million a year into two state funds, but most of that money is redistributed to small and nongaming tribes.