Some career moves are worth the gamble. Just ask James LaPorte, who recently left his job as the CFO of a public oil company to become the director of finance for the Little River Casino Resort.
In LaPorte’s new role at the Manistee, Michigan, tribal gaming facility, he’s discovered to his surprise and delight that business decisions must maintain a “delicate balance” between profitability and social responsibility. A good word for these efforts, LaPorte says with pride, is “honorable.”
LaPorte’s career move also happens to be a homecoming. Unlike his predecessor, who was recruited from inside the gaming industry, LaPorte is a Native American and a member of the Little River Band of Ottawa Indians — a family connection that still appears to be the exception in the booming multibillion-dollar industry.
Lately, tribal gaming has been one of the most wide-open career opportunities for senior finance executives. Drake Harris, director of the newly established Indian Gaming CFO Association and the former CFO of a tribal casino, expects to have 40 members signed up by April. (LaPorte, for the record, prefers the term “Native American gaming.”)
Many tribes across the nation are expanding into resort businesses; other tribes are adding new gaming facilities, especially in California. So regardless of tribal ties, there’s strong demand for finance talent. Ty Huff, CFO at the Jackson Rancheria Casino in California, had several recruiters trying to steal him away from the same position at another casino. The industry is growing so quickly, says Huff, that “the talent pool has really been stretched.”
The casinos certainly have plenty of money to spread around. A total of 330 tribal gaming operators generated $14.5 billion in revenue for fiscal years ending in 2002, according to the most recent data provided by the National Indian Gaming Commission, an independent federal regulatory agency of the United States. That’s a significant increase from the $8.5 billion in revenue generated by 297 operators in 1998. Today, 48 of the 50 states have Indian gaming in some form.
On the face of it, tribal gaming seems like a terrific career opportunity for finance executives, and tribal sovereign immunity also appears to lift many regulatory burdens. But what should finance executives of public companies really expect — from the regulators, the banks, the capital markets, and the tribal councils — when they take charge of the casino business of a sovereign nation? Says LaPorte, “This isn’t Corporate America.”
In one sense it’s not America at all. The industry owes its very existence to the sovereign status of the tribes, which also precludes the payment of federal or state income or sales taxes. Sovereign immunity also prevents a bank from taking legal recourse — let alone taking possession of Indian land — should a tribe default on a loan or go bankrupt.
Yet over the past five years, financial institutions have been increasingly happy to partner with tribal casinos. One reason would be that tribes are willing to incorporate limited waivers of sovereign immunity into lending agreements; another would be the growing track record of tribes repaying their lenders. What really puts a smile on a banker’s face, however, is the success of big-name resorts like Foxwoods and Mohegan Sun — and the fact that tribal casinos are cash-rich enterprises. “We can usually get quite a few banks competing for our business,” says Huff.
Steven Stallings, director of Native American banking services at Wells Fargo, says most of the bank’s existing clients are looking at building out their establishments into more-resort-oriented properties that include hotel rooms, golf courses, spas, and entertainment facilities. An increasing number, he adds, are diversifying outside of the gaming business altogether.
Wells Fargo has about $1.7 billion in commercial lending commitments and outstanding obligations in tribal gaming, but Stallings know his customers — and he isn’t worried about the interest payments. “You want to know your borrower well,” he says. “We want to know the CFO as well as the owner, and the tribal council representing the owner.”
Tribes have other potential sources of financial support, too. Some of the more established are loaning money to other, needier tribes. And for those tribal nations that are having trouble hiring CFO talent and getting funding, management companies such as Lakes Entertainment will offer to get a casino off the ground in exchange for a percentage of the casino’s net income.
A handful of casinos have set up their operations outside tribal entities so they can sell stock and raise capital in the public markets. Mohegan Sun made its first bond offering in 1995, issuing $175 million in senior notes. Today the casino essentially operates as a public company, issuing quarterly reports to the Securities and Exchange Commission and complying with the Sarbanes-Oxley Act as well as the industry’s own strict guidelines.
Jeff Hartmann became CFO of the Mohegan Sun Casino in late 1996. Since then Hartmann has tapped the high-yield public markets in 1999, 2001, 2002, and most recently in July 2003, with a $331 million offering at 6.75 percent. Last year Mohegan also renewed a $391 million bank credit facility.
For Hugh Lordon, CFO of the Oneida Nation’s Turning Stone Casino in upstate New York, it’s enough of a challenge to “pass muster” with lending institutions. “People are very interested in seeing that the deals are well thought out, [that] you have the financial models and the logic to the master plan. Nobody sees this business as magic.”
On the contrary, lenders are undoubtedly encouraged by the intense regulations imposed on tribal casinos. Despite the perception that sovereign immunity might suggest, says Huff, “the regulation is much higher and much more prevalent in tribal gaming.”
Mohegan’s Hartmann, who was recruited from his post as vice president of finance at neighboring Foxwoods Resort Casino, can count 40 inspectors and officials on site on any given day. They include representatives from the National Indian Gaming Commission, which ensures compliance with the industry’s minimum internal controls, as well as regulators from the Connecticut division of special revenue. Then there are the auditors: Mohegan’s internal audit is outsourced to Ernst & Young, while PricewaterhouseCoopers is the designated external auditor.
The tribal council, which for this purpose operates much like a board of directors and audit committee, is also very involved in daily operations at many casinos. “They want to make sure we do them justice,” explains Jackson Rancheria’s Huff. “It’s their name on the door.”
John O’Brien, CFO at Foxwoods, also notes that outside of not issuing public debt, there are few if any management differences between tribal casinos and major non-tribal resorts such as the Bellagio and the MGM, which also have procedures and reporting federal requirements appropriate to their large cash transactions. “Our regulations were mirrored after the Atlantic City regulations that are considered to be the strictest in the industry,” he says. (Accordingly, suggests O’Brien, finance executives from outside the field altogether might find it easier to get started in the hospitality, retail, or entertainment operations of a casino. “When you get into the gaming,” says O’Brien. “it’s critical to have the experience.”)
And given the elaborate security, surveillance, and internal controls, adds O’Brien, “cash shortages [and the employees responsible] would literally be discovered within a matter of hours.” After minor shortages on several occasions, Foxwoods had “the ability to go back in time and retrace what exactly occurred,” says O’Brien. “People-watching-people-watching people control,” he calls it.
Business Intelligence, Dollar by Dollar
That information stream in real time, or nearly so, doesn’t flow only to the security office. Turning Stone’s Lordon, for one, knows how many dollars are moving on the casino floor hour by hour — and if he asks, minute by minute — though he may total up the profit-and-loss just once a week. Most CFOs get incident reports highlighting issues on the floor every morning.
Many casinos are also considering the advantages of replacing coins and tokens with magnetic-strip cards, particularly at the slot machines. Turning Stone was the first casino to operate in a totally cashless environment, says Lordon, who notes that the card system makes available “a tremendous breadth of operating information.”
And the downside to all this real-time information? Many CFOs in the business are always on call. Asked what keeps him up at night, Mohegan’s Hartmann replied, “my credit department beeping me on credit decisions.” From the perspective of the players — that is, the customers — Hartmann has direct oversight of the casino, and he makes himself available 24/7 for the occasional credit-limit question.
Share and Share Alike
As sovereign nations, tribal casinos are exempt from federal and state income taxes. Depending on their compacts with individual states, however, some casinos are still obliged to share revenue. Foxwoods and Mohegan Sun, for example, pay 25 percent of the revenue from their slot machines to Connecticut.
In California, all eyes are on Arnold Schwarzenegger. Shelley Lamar, controller at the Black Oak Casino, is keeping close watch on how the newly elected governor handles tribal compacts; early in his campaign, Schwarzenegger had talked of applying a gaming tax to help the state’s economy. “That could affect the industry as a whole,” she notes. “If things changed in the taxation rules, there would be less money going out to the [Native American] community.”
Tribes often rely on the proceeds from casinos and other businesses to help pay for the needs of the community as a whole, from health care to government operations. And for tribal casinos, the rising cost of health care is just as troublesome as it is in Corporate America. Mohegan Sun, for example, notes in its most recent quarterly report that its margins have suffered because of increased medical, state unemployment, and workers’ compensation costs. The Mohegan tribe does well by its members nonetheless; its subsidiary, The Tribal Gaming Authority, generated $311 million in EBITDA in fiscal 2003, and the Mohegan Sun casino gave a dividend to the tribe of $60 million.
Indeed, social consciousness is a strong element within the casino operation. Jackson Rancheria treats its employees “very much as family members,” says Huff. “It’s not all about cutthroat expense-cutting and profit-at-all-costs. It’s really about getting there with happy employees that enjoy the trip and love working there, and creating businesses that not only employees but tribal council[s] will be happy with.”
Many tribes, especially those that are expanding or diversifying, split the responsibility for the financial well-being of the tribe from the oversight of the gaming operations. At Turning Stone, however, Lordon is responsible for the financial health of both the Oneida Indian Nation and the casino. That means being very discriminating when so-called investment opportunities come his way, says Lordon, because the tribe is positioning itself to support the well-being of future generations. “There’s [an incorrect] perception in some cases that there’s just a lot of money here,” he adds, “and a lot of money looking for a home.”
All those responsibilities, says Huff, can work senior finance executives to the bone, especially at a casino in its startup phase. He worked for seven years at Spirit Mountain Casino, ultimately as the CFO. But when he joined the management team just two weeks before the casino opened, it was as the controller, and during those first two weeks, he recalls doing about a year’s worth of accounting and writing policies and procedures. “The first year and a half, I don’t think I worked anything short of 12-hour days, six days a week,” adds Huff. “It was fun, though.”