The 5 Cent Empire

Native American tribes parlayed legalized gambling into a $22 billion lifeline. Now states want a piece of the action.

Recent events in California seem to support that assertion. During the nasty recall election in 2003, then–gubernatorial candidate Schwarzenegger promised he would tap tribal gaming revenues to help plug the state’s budget deficit. The eventual winner, Schwarzenegger held up Foxwoods as the appropriate model. “During the campaign, the governor pointed to Connecticut,” says Darrel Ng, a spokesman for Schwarzenegger. “That was our high-end.”

To strengthen his hand, Schwarzenegger ran television advertisements portraying tribes as special-interest groups that avoided paying taxes. He was right; they don’t pay taxes. Then again, neither does Belgium or any other sovereign nation. The damage was done, though. “We took a lot of PR hits,” acknowledges Vincent Duro, vice chairman of the San Manuel Band of Mission Indians, in Highland, California. “We got bashed pretty good.”

Following the 2003 election, the governor convinced a handful of native nations to revisit their compacts. To help get the tribes to the table, Schwarzenegger offered to lift the cap on the number of slot machines they can operate in their casinos. “The governor said, ‘If you want to expand, let’s talk about the issues,’” explains Ng. “Local communities needed more protection. And there needed to be more clarity on how patron disputes were settled.”

Boosting the number of slots was a shrewd bit of horse-trading, one aimed at mollifying both tribes and fiscally minded lawmakers. The quid pro quo does not sit well with antigambling groups, however. Hills of Focus on the Family believes that states like California are becoming addicted to gaming revenues. “The state will become dependent upon it, putting gambling money toward vital expenditures,” he cautions. “It’s going to be a hard and painful process to remove that tumor from around the vital organs.”

To date, Schwarzenegger has signed off on 18 new or renegotiated tribal compacts. (Many await ratification, however.) The deal with the San Manuel, signed by the governor in August, is typical of the reworked arrangements. The amended compact allows the tribe to add as many as 5,500 new slots in its casino on its 820-acre hillside reservation. That would put the San Manuel operation in the same league as Foxwoods, the world’s largest gambling establishment — assuming, of course, the tribe has enough flat land for an additional parking lot.

In return, the San Manuel agreed to boost the percentage of net-win revenues it shares with the state. Under the tiered setup, the tribe will more than double the revenue share on its existing 2,000 slots to $45 million annually. If the tribe adds 3,000 slots beyond that, it will pay the state 15 percent of the net win on those machines. The rate then jumps to 25 percent on the next 2,500 slots. The California Department of Finance reckons that if the San Manuel puts all 7,500 machines into operation, the state will take in $7.2 billion over the 20-year life of the compact. Tom Harman, a state senator and member of the National Council of Legislators in Gaming States, thinks it’s a fair arrangement: “[The amended compacts] are definitely a shot in the arm to the state budget.”

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