State Holds Valuable Cards in Its Fight for a Bigger Share of Casino Money

For all that Gov. Arnold Schwarzenegger ridiculed the smoke and mirrors of his predecessor’s last state budget, his own budget proposal this month has been properly derided as having a full complement of numerical sleights of hand.

But there is one number in the governor’s budget that may be getting a bum rap. This is the $500 million in revenue sharing that Schwarzenegger said he hoped to obtain from the state’s Indian casinos.

Most budget commentators have relegated this to the fantasy realm. State Legislative Analyst Liz Hill, in her brief survey of the proposed budget two weeks ago, observed that the money “may not be fully achievable.” That sounds like a diplomatic way of informing the governor he’s living in dreamland.

The tribes, for the record, have been sticking to a position that boils down to: “Not one cent for tribute.” Anthony Miranda, chairman of the California Nations Indian Gaming Assn., called it an affront to the principle of tribal sovereignty during his group’s annual conference last week in Palm Springs. “Governments do not tax other governments,” he said.

Duly noted. But the most successful gaming tribes in California now have concerns that go beyond communal principles: They have thriving businesses to nurture. Given their need for further expansion, the governor’s goal looks eminently achievable. If he’s made any mistake in this part of his budget, it may be that he’s set his sights too low.

Let’s stipulate that I am not judging whether it is equitable, historically or otherwise, for California to demand a share of the tribes’ action. I recognize that the tribes are extremely touchy about any suggestion that they haven’t contributed enough to the state’s economy because their casino businesses don’t pay income tax. In fact, if you want to feel as welcome at a gathering of tribal leaders as Paul O’Neill would be at the annual reunion of the George W. Bush Old Boys Club, just repeat Schwarzenegger’s campaign jape about the tribes not paying the state a “fair share” of their gaming revenues.

But governments don’t assess revenues based on what’s “fair.” They do so by finding categories of payers they can hit with a bill and make it stick, whether by blandishment or threat. In this case, it seems clear that the state holds a few cards that some tribes would pay money to have in their own hands. As Bernard Shaw might have said, we’re now just dickering over the price.

The most important thing to understand about Indian gaming in California is that the industry is not monolithic. The tribes may speak with a single voice on issues equally dear to all -- such as their distaste for a proposed voter initiative allowing slot machines at card clubs and racetracks -- but their interests diverge on other issues, including expansion.

Under the terms of the 20-year gaming compacts effectively reached between the state and 61 tribes in 2000, each tribe is entitled to deploy up to 2,000 slot machines. (A total of 58,000 are currently installed statewide.) But many tribes can fully satisfy their local markets with only a few hundred machines. There’s no reason for them to renegotiate their compacts as the governor proposes, just to turn over a share of their receipts to the state.

But at least 12 tribes have topped out at the maximum 2,000 slots in markets that could profitably support twice as many, or more. At busy casinos like the Pechanga resort in Temecula, patrons often have to wait on line for an available machine. Any casino manager would rather pay out a big jackpot every day than even to think about all that capital sitting idly in customers’ pockets. Because the existing compacts place the state under no obligation to allow these properties to exceed the limit, Sacramento has plenty of leverage to demand something in return.

Another card in the state’s hand is connected with some successful tribes’ desire to move the expiration dates of their compacts beyond 2020. Any responsible business should be planning more than 20 years ahead, but the compacts make that impossible. “Our business partners would like more certainty,” Richard Milanovich, chairman of the Palm Springs-based Agua Caliente band of Cahuilla Indians, told me last week. (He was referring mostly to the banks that have fattened up on construction loans to the tribes.)

This shows good business sense, for who knows what the tribes’ political standing might be a couple of decades from now? By 2020, California voters might have had their fill of casino expansion. There could be a bluenose governor in Sacramento intent on eradicating all sin. The state might be facing a worse fiscal crisis than today’s. Tribes desperate to protect their investments in casinos, resort hotels and Vegas-style showrooms could be extorted for billions. Better to lock in the best terms now, while they can.

Finally, there’s the so-called card club initiative, which backers hope to place on the November ballot. Under the initiative’s provisions, the tribes would lose their exclusive right to offer slot machine gambling to the public if they refused to cede 25% of their slots revenues to the state. In that event, 11 card clubs and five racetracks would be permitted to install up to 30,000 machines, from which they would contribute 30% to the state budget, or an estimated $1 billion.

The tribes say this threat to their monopoly on slots gaming has begun to cost them; banks that fell all over one another to offer them construction loans at the prime rate two years ago are now quoting prime plus 2%, and acting as though they’re doing the Indians a favor. So it’s no surprise that the tribes are already gearing up to fight the measure -- six of the best-heeled have pledged $9 million, presumably as seed money.

But it’s plain that their relationship with California voters is a lot more equivocal today than it was in 2000, when the Indian gaming initiative Proposition 1A cruised to victory on a wave of public sympathy. The dream of economic self-sufficiency, which was the theme of the Prop 1A campaign, is now reality for many tribes, in spades. It won’t be so easy for them to play the poverty card this time around.

They also know that last year’s recall election hurt them deeply. Tribal leaders resent how Schwarzenegger tried to demonize them as wealthy tax evaders during the recall. But any group that flings $10 million in donations around in a statewide election, as the tribes did, is going to pay for its largess with public mistrust. “The tribes are taking a look at what it might take to help rebuild our image,” Miranda acknowledges.

If they can’t stifle the initiative in the crib, the next best thing would be to get Gov. Schwarzenegger to oppose it publicly. “If the governor comes out against the ballot initiative, it’s dead,” says Michael Lombardi, a well-connected tribal advisor. That’s another hint for Schwarzenegger to name his price.

So here are the possible elements of a deal: The state offers the hungriest tribes more slot machines and an early extension of their existing compacts. The governor agrees to square his shoulders against the card-club initiative. (It would be wise for him to can the “fair share” cracks for a while too.)

In return, the state gets money for the budget. It’s probably crucial that the cash come from the additional slots rather than the existing machines. That’s because the latter would require changing the terms of the existing compacts, which the tribes will resist as an infringement of their sovereignty. Since they won’t care for calling the payment a tax, either, let’s call it something else--how about “The California Tribes Entirely Voluntary but Contractually Stipulated Economic Recovery Sop,” or CalTEVBCSERS for short?

What’s left is to negotiate the number of new slots and the size of the, er, stipend.

Tribal officials have been arguing that the California market could support another 20,000 to 30,000 slots. Sharing $500 million a year of the profits from these machines would be no stretch--the sum comes to about $16,700 annually from each of 30,000 machines, for example. It’s safe to say that the annual profit from each machine would land somewhere between Nevada’s average of about $60,000, and Connecticut’s average of more than $120,000. I’d guess it would be closer to the latter, since the new machines would presumably go in the busiest locations, which are coming to resemble Connecticut’s two huge, glitzy, very busy Indian casino resorts.

The governor’s goal, therefore, could be met by ceding 14% to 28% of the revenues of the new machines. Setting aside all the talk of fair shares and sovereign rights, as a pure business proposition wouldn’t the big tribes in hot markets view the acquisition of 30,000 new slots as a bargain at that price?

Some of the tribes are signaling as much, as subtly as they can. For the record, they’re talking tough. But as Lombardi told me during last week’s tribal conference: “I think Arnold Schwarzenegger will find there’s a deal to be had.”

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Golden State appears every Monday and Thursday. You can reach Michael Hiltzik at [email protected], and read his past columns at latimes.com/hiltzik.