California gaming poised for expansion

Feb 10, 2004 6:42 AM

Despite pending initiatives that could change the ground rules, tribal gaming in California is poised for expansion that could make the Golden State the number one gaming market in three-to-five years.

Within the next few weeks, negotiators for newly-elected Governor Arnold Schwarzenegger and eight tribes are expected to hammer out an agreement that would expand casino gambling operations while dramatically increasing payments to the state.

"Governor Schwarzenegger is comfortable with the legitimacy of tribal gaming and willing to authorize the growth of tribal gaming," said Howard Dickstein, a Sacramento attorney who represents some of the tribes.

Dickstein, among a panel of experts at last week’s American Gaming Summit, added that the negotiations have been "constructive, hopeful and conducted in an atmosphere of mutual respect."

California currently has 107 tribal governments, with 53 tribes operating casinos. Of those, about 20 run medium to large operations and have the financial resources to expand.

The tribes are negotiating to remove the limit of 2,000 slot machines per casino. (There are currently about 55,000 slot machines in California.) They also want prohibitions against high stakes games like craps and roulette lifted.

Equally important, Dickstein said, is the tribes’ desire to extend their compacts. Most tribes negotiated 20-year compacts beginning in 1999. Tribes want the compacts extended to at least 60 years, which would allow them more flexibility in arranging long-term financing.

The state of California, in return, is seeking up to $500 million from tribal casinos to help reduce a $14 billion budget deficit in 2004-05, and 15 percent of gaming revenues annually for future budgets.

"So far, the tribes are looking favorably at the negotiations," said Anthony Miranda, chairman of the California Nations Indian Gaming Association. "The (state negotiators) are doing what they said they were going to do."

In addition to the renegotiation of tribal compacts, there are pending ballot initiatives that could change the gaming landscape in California.

The first is a measure called the Gambling Revenue Act of 2004, which would allow for an additional 30,000 slot machines to be placed in 11 card clubs and five racetracks, if California tribes do not agree to give the state 25 percent of their gaming revenue.

Dickstein said the measure is a "heads we win, tails you lose" situation because it’s virtually assured not every tribe would agree to the 25 percent tax.

"It will never happen," Dickstein said. "The bottom line is, the state will get an additional 30,000 slots within 90 days of the initiative’s passage, and not one penny will go toward balancing the state’s budget."

The backer’s of the initiative have until mid summer to get 600,000 signatures in order to put the measure on the November ballot.

There are two other gaming initiatives, neither of which is given much chance of becoming law. The first, submitted by the Agua Caliente tribe of Palm Springs, would give tribes almost unlimited gaming in exchange for an agreement to pay the state’s 8.84 percent corporate income tax rate.

The other, filed by a consumer advocacy group, would raise the limit on slot machines from 2,000 to 3,000 per tribe, but also require tribes to pay a "fair share" of revenue to the state.

Regardless of the outcome of the ballot initiatives, gaming in California is expected to continue to expand exponentially.

Tribal gaming in California is estimated to generate about $6 billion in gross revenue annually. But, experts say, that figure could double within five years.

"With just a 10 percent increase in capacity, the business could be driven up from 25 percent to 30 percent per year," said Stephen Szapor, CEO of the Innovation Group, a gaming consulting firm. "In addition, by the year 2010 about 4 million people are expected to move to California, many of whom will be in the 50-65 years age bracket."

Even with an expansive gaming market, California isn’t expected to adversely impact Las Vegas tourism, according to Andrew Zarnett, a gaming and lodging expert with Deutsche Bank Securities.

"The effect of California gaming is mostly being felt in ”˜distant’ Nevada markets such as Reno and Laughlin," Zarnett said. "Las Vegas will actually benefit from the expansion of gaming in California."

Zarnett said tribal gaming is attracting many new customers, a large percentage of whom would probably travel to Las Vegas after an initial visit to an Indian casino.

"The tribal casino could serve to whet their appetites," he said.