Moving the line: As casinos ready for new games, state officials eye a new deal with tribes

In one fluid, motion, Steph Nel produces a small white ball and sends it spinning around the revolving roulette wheel.

“We’ve already had several orders for these,” said Nel, a general manager for TCSJohnHuxley, which had one of several roulette wheels and tables on display at the 2018 Oklahoma Indian Gaming Association trade show in Oklahoma City last week.

Tribal casinos in Oklahoma are already gearing up to offer these new games thanks to a law passed during the last legislative session amending the gaming compacts between the state and American Indian tribes, pending federal approval. At the time the law was passed, Oklahoma was in the middle of its historic teacher walkout, and legislators were desperately looking for a way to send more money to teachers.

And while millions in additional revenue is expected to be brought in by new games like roulette and craps, some are looking toward the casinos’ main source of revenue as a way to boost the state’s coffers — electronic gaming.

In about a year — July 2019 — a 180-day window will open that allows the state and the tribes to renegotiate the amount of money the state gets from tribal gaming operations.

While some state officials have expressed interest in increasing the state’s take of tribal gaming revenue when that window opens, some tribal groups and advisors have bristled at the idea of increasing the “exclusivity fee” rate on gaming operations.

And even if an agreement is reached between the tribes and the state increasing the fee rate, there’s no guarantee that the agreement would be approved by the U.S. Bureau of Indian Affairs, which must sign off on any gaming agreements between tribes and states.

The situation is a complex one, and hundreds of millions of dollars hang in the balance. And whatever deal, if any, is struck next year will likely be in place for another 15 years before rates can be negotiated again.

On one hand, the state has experienced revenue failures and budget cuts to state government and education for the past few years, causing even Republican lawmakers to try and find additional sources of revenue. The state is also home to by far the highest number of tribal casinos of any state in the nation, but has among the lowest “exclusivity fee” rates and fewest restrictions on tribal gaming operations.

On the other, gaming tribes have invested heavily in building the state’s current gaming infrastructure and used the revenue from gaming to diversify into other business areas, providing thousands of jobs and economic investment around the state. And if a tribe decides that it isn’t making enough money from the electronic games offered under the compact because of higher exclusivity fees, there’s no guarantee that it won’t make a shift towards types of games from which the state gets no money.

The question of whether to increase gaming exclusivity fees has been referred to as “The next GPT,” referencing the political fight in Oklahoma about whether to raise the state’s gross production tax to help fund education and other government functions. Some lawmakers and newspaper editorial boards have called for using sports betting as a chip to play in negotiating higher rates on electronic games, which generates the bulk of gaming revenue collected by the state.

But, according to gaming experts, many tribes are lukewarm about adding sports books to their list of gaming options thanks to the technical complexities of running one, monthly volatility and generally low profit margins.

Gov. Mary Fallin’s office says it is leaving the decision of whether or not to begin negotiations next year up to the next administration.

Two of the three remaining gubernatorial candidates have expressed interest in opening negotiations for higher exclusivity rates. However, the state has also seen a high turnover rate for legislators in the last few years, meaning that many will be going into the next session with little to no experience or knowledge of what the compacts entail.

A “Multi-variable” equation

Scott Meacham had never been in a casino before. So it was a bit surprising when in 2003 Oklahoma Senate leaders asked Meacham, who was then state treasurer, to sit down and help negotiate a deal that would eventually bring casino-style gaming to Oklahoma.

At the time, the horse racing industry in Oklahoma was in trouble. Remington Park in Oklahoma City had found itself in deep financial trouble, as was the now-shuttered Blue Ribbon Downs in Sallisaw. To help boost the race tracks’ finances and purses, horse racing groups were looking at adding slot machines to track offerings.

“It presented itself as really more of a horse industry problem at that point,” Meacham said.

But before the Legislature would be able to give race tracks slot machines, a deal would have to be hammered out with the state’s tribes, some of which were already operating “Class II” electronic bingo games at fledgling casino sites around the state. Federally recognized American Indian tribes are permitted to operate Class II games if bingo or similar games are legal in the state they are located in, though they cannot be regulated or taxed by the state. But for a tribe to operate Class III games — which are Las Vegas-style slot machines — it must first have an agreement, or compact, with the state.

Often, those Class III gaming compacts require the tribe to pay “exclusivity fees” to the state — the tribes get Class III gaming and a guarantee that the state will not allow other entities to operate similar games while the state gets a cut of the casino winnings.

“On the other side of the ledger, you had this growing tribal gaming in Oklahoma,” Meacham said. “It was growing by leaps and bounds. New facilities were popping up all over the place. The state wasn’t getting any revenues from it and had no sort of regulatory oversight at all because of the argument by the tribes that what they were doing was Class II gaming.”

Legislative leadership had been trying to strike a deal in early 2003 between horse racing groups and the tribes — both of which are composed of different groups that are often in competition with one another — and the state, but handed negotiations off to Meacham after the end of the legislative session that year.

“It was sort of this multi-variable equation that had to be simultaneously solved,” Meacham said of the negotiation process.

As if the negotiations were not already complicated enough, there was a fourth party to consider — Oklahoma voters.

The compromise the state, the tribes and the horsemen would eventually come up with would have to be approved by voters on the November 2004 ballot as State Question 712, which directed that the lion’s share of money paid to the state by casinos go toward education.

Getting a deal that would be passed by the voters meant no roulette or craps games at casinos, Meacham said — a sticking point that caused at least two of the tribes in the negotiations to oppose the final product.

“From the very start, our thesis was it could not be full casino gaming, for political reasons,” Meacham said. “Politically back then to sell it, because we were going to a vote of the people, we felt that it was important that it be something less than full casino gaming. That was really more of a political decision than anything else.”

But leaving games like roulette and craps out of what would be considered “covered games” under the compact also provided the state with something else — leverage to renegotiate the compacts when they expired, Meacham said.

“I knew I wouldn’t be in office, so I was trying to do everything I could to put the state in as good a position as possible when these were renegotiated,” Meacham said. “I always felt since we hadn’t given them a lot of games and held some in our pocket gave us the ability when we came back to renew the compact to get another deal.”

Then there was the issue of exclusivity fees the tribes would pay.

Even if the state, tribes and horsemen came to an agreement, and that agreement was passed by voters, the U.S. Bureau of Indian Affairs would have to sign off on the compact. And if the BIA doesn’t feel that a tribe is getting a fair shake in the compact for whatever reason, it will often reject it.

To come up with the exclusivity fee rates that would be accepted by the tribes, the BIA and the state, Meacham said negotiators looked at the rates in place at the time around the country. Some compacts that had been given BIA approval in other states had exclusivity rates as high as 25 percent, meaning the state gets a quarter of the winnings.

But, Meacham said, a 25 percent rate in Oklahoma’s case likely would not have gotten past the BIA.

“This was not that, because we were giving multiple tribes the right to game, we weren’t giving them full Class III and we were giving non-tribal entities the right to play some of the same games,” Meacham said. “So we felt like there was no way we could get anything that high approved.”

Another concern, Meacham said, was if the rate was too high on the Class III games, the tribes would not shift away from their Class II games, from which the state got nothing.

Eventually, negotiators would come to an agreement on the rate for the electronic games — 4 percent on the first $10 million (minus prize payouts), 5 percent on the next $10 million, and 6 percent on everything else. For card games, the rate would be 10 percent of the monthly net win.

“It seems like a number that has been fair to both sides,” Meacham said. “It hasn’t unduly restricted the tribes’ growth. It’s provided significant revenues to the state. Anything that’s sort of a fee or tax or anything, you want it to not be so onerous as to restrict the activity. You want to be just below that so the activity goes on because that maximizes your total revenues. It seems to me it’s kind of been in the sweet spot.

David Stewart, former CEO of Cherokee Nation Businesses, was also at the negotiating table during 2003 and 2004. At the time, he said, the full size and scope of the gaming market in Oklahoma was uncharted territory. Because of that, and the sizable investments that would be required for tribes to build up a gaming infrastructure in the state, tribal leaders wanted a compact that would have a relatively low exclusivity fee rate and a longer term to help provide stability and certainty.

“That was one of the key factors in the original negotiation — we need a stable business environment for us to invest hundreds of millions of dollars in the business. That was critical,” Stewart said.

Finally, in 2004, the parties were able to finalize an agreement.

It was decided that the compacts would last for 15 years, expiring on Jan. 1, 2020, with provisions allowing for 15-year renewals afterward. The finished product would also provide a window to renegotiate the exclusivity fee rates — 180 days prior to the expiration of the compact, either party could request to open negotiations.

The tribes would get Class III electronic games, non-house banked card games (such as poker and blackjack) and a limited agreement of exclusive rights to gaming operations. The race tracks would also get a limited number of Class III electronic games, except for Tulsa’s Fair Meadows, which would not have slot machines, but would be paid a percentage of the Class III winnings from tribes with casinos in a 20-mile radius around the track. The state would get exclusivity fees from the tribes of 4 to 6 percent of the net win from the Class III machines and 10 percent from the card games.

That November, voters passed State Question 712, and the following year the BIA began approving the tribes’ compacts with the state.

Since 2006, the tribes have raked in tens of billions of dollars in gaming revenue from the new games, and the state has received nearly $1.4 billion from the exclusivity fees, the vast bulk of which comes from the Class III electronic games, according to the state’s Office of Management and Enterprise Services. The covered card games, while subject to a much higher exclusivity fee rate, make up only a sliver of the revenues.

Ironically, in the years following the approval of the compacts the tribes began buying up the state’s horse racing tracks.

The Cherokees purchased Will Rogers Downs in Claremore a few months before the compact was approved by voters. Blue Ribbon Downs in Sallisaw was soon purchased by the Choctaw Nation, though the track sat within the historical boundaries of the Cherokee Nation and was subsequently put out of business after the Cherokees opened a casino down the road from the track. Remington Park in Oklahoma City was purchased by the business arm of the Chickasaw Nation.

Today, the only horse racing track in the state not owned by an American Indian tribe is Fair Meadows in Tulsa, which is owned by the Tulsa County Fair Board. It is also the only track, under the provisions of the law passed by voters, to not have electronic gaming machines.

However, even though those tracks and the gaming machines inside are owned by tribal entities, they are not on tribal trust land and thus not considered “tribal gaming.” In short, unlike tribal casinos, the state can regulate any gaming that occurs at the tracks.

“Remington, even though it’s owned by a tribe, it’s not considered tribal gaming because it’s not occurring on tribal jurisdiction,” Meacham said.

The financial boost to the tribes as a result of the compacts allowed tribal governments to diversify and spread their economic reach into areas besides gaming, Stewart said, something that would have never happened without gaming.

“All of the tribes built organizations as a result of that compact,” Stewart said. “Then they became more sophisticated. It’s a springboard for diversification.”

Meacham said, overall, the compacts have been a good deal for both the tribes and the state, and the exclusivity fee rate on electronic games of 4 to 6 percent was a fair one.

“Part of the thought on the term of the compact was if you gave the tribes these protected revenue streams for a period of time, they would make large capital investments, and you’ve seen that,” Meacham said. “It has really promoted capital formation and job growth in the state beyond the jobs its created in the revenue stream to the state. It’s been pretty amazingly successful.”

Rolling the dice with ‘ball and dice’

In early March 2017, a springtime storm was beginning to take shape in Oklahoma.

But it was not one with rain, lighting or hail. Instead, it was a political storm.

Thousands of educators were beginning to coalesce around the idea of a statewide teacher walkout to protest years of cuts to education and per-pupil spending. The failure of a revenue-raising plan backed by state business leaders, referred to as the “Step Up Plan,” in February had only added fuel to the fire, as further cuts to state government and education were anticipated.

Part of the Step Up plan was a measure to add so-called “ball and dice” games — roulette and craps — to the list of “covered games” that tribal casinos could offer, with the state getting 10 percent of the net win. But after the plan failed to get the needed votes in the Legislature, the ball and dice proposal came to the floor of the House as a standalone bill, House Bill 3375.

The measure was introduced by Rep. Kevin Wallace, R-Wellston, who the previous year had introduced a similar bill that would have allowed tribes to offer craps and roulette if they agreed to forgo state rebates from the state for tribal license plates. Wallace said the bill was expected to add about $22 million a year to the state’s coffers, most of which would go toward education and mental health.

Initially, House Bill 3375 also would have allowed tribes to offer sports betting at their facilities, but that was contingent upon a U.S. Supreme Court case that had yet to be decided by the time the bill came to the House floor on March 8, and the sports betting provision of the bill was dropped. It would be May before the high court struck down the federal law that prohibited states, with the exception of Nevada, from allowing sports betting.

Some representatives were concerned that by passing the bill, the state would be giving up one of its tools to bargain for higher exclusivity fees on electronic games when window opened to negotiate the tribal gaming compacts in July 2019.

“Representative, why are we doing this before the compact is up for renegotiation?” asked Rep. Tommy Hardin, R-Madill.

“This bill does not affect the compacts one bit,” Wallace responded. “The compacts will be up in 2020 for gaming and it is the responsibility of the executive branch to handle those negotiations.”

Hardin, who is also a member of the Legislature’s Joint Committee on State-Tribal Relations, continued. “So why are we as a legislative body giving away something that our next governor could use to renegotiate compacts for a better percentage for the state?”

“We’re not changing the compact at all, the terms of the agreement of the compact, those will still come up and be able to be negotiated on,” Wallace replied. “I believe if you want to talk about leverage or a negotiation point, the sports book will probably be that lever. And we did take it out of the bill.”

But if the state has put its chips on sports betting as the way to leverage higher electronic gaming fees, it might have made a sucker bet.

“It (sports betting) is not the key to reopen a discussion about the terms of the compact for other games or the terms of the division of regulatory responsibility under the compact that expressly recognizes tribes as the primary regulators and casts the state in the role of monitor,” attorney Dean Luthey Jr., general counsel for the Oklahoma Indian Gaming Commission, said during OIGA’s annual conference last week. “You cannot in your discussions let sports betting become the wedge to deprive us of the benefits that we have under the compact, either by intentional misstatement by people across the table, or likely, from lack of knowledge.”

Stephen Greetham, senior counsel for the Chickasaw Nation, said if the state were to increase the rates on Class III games, it would likely cause tribes to shift more toward Class II games, from which the state gets nothing.

“To the extent that occurred, any Class III rate increase would have only illusory value, as more and more gaming migrated to Class II and any netted state revenue share declined,” Greetham said. “Tribes are not going to offer a game if it does not make economic sense, and the current rate calibrates well with prevailing margins, which means it works well for both the compacting tribes and the state.”

Unlike other states with higher exclusivity rates, Greetham said, Oklahoma has more than 30 tribes offering gaming, in addition to the horse racing tracks and the state lottery, and the population base in those states allow them to have the higher rates.

“In simple market analysis and economic terms,” Greetham said, “any argument that suggests the Oklahoma gaming market potential is somehow equivalent to the Connecticut and New York region is fantastical.”

House Bill 3375 passed the House 68-22. Hardin, who voted against the bill, said the state would be getting “pennies on the dollar” if the bill were to become law.

“It seems like that’s what we settle for here a lot of times,” Hardin said, debating against the bill. “We wonder why we’re 48th or 49th. It’s because we settle for pennies on the dollar. The current compact is up for renewal in 2020, so why don’t we just wait and let the next governor have that as a negotiating tool.

“It seems this state is pretty short-sighted when it comes to negotiations.”

By the time the bill came to the Senate in April, the teacher walkout was in full swing, as thousands of educators packed the Capitol and each chamber’s gallery. It passed the Senate by a vote of 29-16 and was signed into law by Gov. Mary Fallin a few days later.

“The teachers were huge advocates for ball and dice because they knew that revenue went to education,” said Sarah Jane Smallwood-Cocke, director of Public Policy for the Choctaw Nation. “I think the teachers’ strike helped us to get it to a vote. It really did put pressure on leadership in both chambers to have that vote happen. It was great to have tribes and education leaders partner on that to understand the contributions we make to education as tribes here in Oklahoma.”

Thus far, the addition of games like craps and roulette to tribal casinos’ list of offerings has not yet been signed off on by the BIA, but the initial reception by tribes has been somewhat lukewarm. Only 12 of the 32 tribes in Oklahoma with gaming compacts have prepared compact amendments to include those types of games to submit to the BIA, said Oklahoma attorney William Norman, whose firm Hobbs, Straus, Dean & Walker represents tribes throughout the nation on gaming issues.

Luthey advised tribes considering adding roulette or craps games to first do a thorough cost-benefit analysis, since the cost of running those types of games is much higher than the electronic games.

“These games are going to be more expensive to operate than the machines,” Luthey said. “Intensely labor driven, aren’t they? You need people there (to run the games).”

For the most part, Oklahoma tribal gaming officials view roulette and craps, as well as running a sports book, as ancillary to the electronic games, in that it helps attract a younger crowd who may be willing to travel out of state for those types of games.

Around 69 percent of Nevada’s gaming revenue comes from electronic games, while only 1.7 percent of revenue comes from sports betting, said Matthew Morgan, director of gaming affairs for the Chickasaw Nation and vice chairman of the OIGA. In addition, the revenue from sports betting is volatile from month to month, he said.

Yet, it’s likely Oklahoma officials will try to use the prospect of allowing tribes to conduct sports betting as a jumping off point into negotiations for higher exclusivity fees on electronic games.

“There’s a greatly over-inflated expectation by most state legislators across the United States that there are great rewards for them financially if they permit sports wagering,” Norman said. “In fact, what we see is the numbers are very small when it comes to the (profit) margins. They’re 1 to 5 percent. The percentage of sports betting in terms of revenues in Nevada are very small compared to electronic gaming. So it’s more of an amenity rather than a new cash cow.”

Moving toward negotiations

The political storm that struck the Legislature last spring showed no signs of abating as spring turned into summer.

Though many legislators were term-limited, some chose not to run again in the face of the political backlash incurred, while others lost their primary elections.

So when the Legislature convenes for its next regular session in February 2019, there will be a lot of new faces.

At least 70 percent of the House will have less than two years’ experience under their belt, said Chad Alexander, a longtime Republican political consultant, lobbyist and radio host. And that’s if no other incumbents lose their seat in the November general elections.

“It takes a legislator about three sessions before they really understand all of the process,” Alexander said during a panel at the 2018 OIGA conference. “That’s a huge opportunity, because you are not fighting long-term people who have been there and are set in their opinions.”

Even with experience, many legislators don’t understand the contributions the tribes have made to Oklahoma or the issues surrounding them. Gaming is usually the first topic lawmakers bring up when a person representing a tribe walks into their office, said Smallwood-Cocke.

“Most of the time, they don’t understand it (tribal gaming) at all,” she said. “They don’t understand how gaming compacts work, they think the Legislature can have a role in the compacting process. We’ve had several legislators file bills to make sure they do have a role in that legislative process, which we’ve worked collaboratively with other tribal nations to help defeat.”

Under the terms of the compact, it is the governor’s office who would represent the state in negotiations over changing exclusivity fee payments, but when it comes to changing other parts of the compact, such as what games are allowed, things get a bit murkier.

“You’ll see in the compact amendment legislation (for ball and dice games) that it becomes effective without the signature of the Governor as far as this new compact amendment, just like the initial compact,” Luthey said. “So we’ve got the latest view of one branch of government who has compacting authority.”

In addition, those representing the tribes contend the compact has an “evergreen provision,” which states that if horse racing tracks are still authorized to conduct electronic gaming when the tribal compacts hit their expiration date, then the compacts automatically renew for another 15 years.

“Do you really think the racinos are going to be shut down for compact purposes by the state? I don’t think so,” Luthey said.

The issue of whether the compact automatically renews was brought up in the floor debate on House Bill 3375. Asked whether the compact automatically renews if neither party wants to negotiate changes to the deal, Wallace said he did not know.

Meacham said it would not, and would require active steps by both parties for the compacts to renew.

“My understanding, unless there is something has occurred I’m not aware of, which is entirely possible, is these compacts would terminate by their own terms unless somebody does something proactively to extend them,” Meacham said. “I don’t see anything that has triggered that automatic renewal provision.”

Chris Benge, Gov. Mary Fallin’s liaison for Native American Affairs, it would be up to the next administration to open up talks with the tribes about the compacts.

The Frontier asked the three remaining gubernatorial candidates from the two major parties whether they planned to negotiate exclusivity fees with the tribes once the window for negotiations opened in July 2019. Two — Republican candidate Kevin Stitt and Democrat candidate Drew Edmondson — said they would open negotiations. The third, Republican candidate Mick Cornett, declined to respond.

But talks do not guarantee action.

“Guess what the compact doesn’t say,” Luthey said. “It doesn’t say what happens if in the renegotiations the parties are unable to come to an agreement. And it certainly doesn’t say that if an agreement is not reached after the renegotiation provision is invoked, there’s not agreement, that the compact terminates. It doesn’t say that.”

“So there’s a provision to talk.”

The question of whether the state’s cut of electronic gaming winnings is a complicated one, with good arguments on both sides, David Stewart, formerly of Cherokee Nation Businesses said. The market conditions are much better known now than they were in 2004, and the low rates helped to build the gaming infrastructure put in place after the compacts were first negotiated, he said.

But the tribes have been used the money from gaming to expand their operations beyond gaming and create jobs and services. They have increased their financial stability, economic power as well as their political power, he said.

Luthey said it is important to remember when the discussions begin in earnest next year to remind the state of the risks taken by the tribes that ended up generating more than a billion dollars in revenue directly to the state.

“These casinos did not come down fully blown from the hand of Zeus. They were built with borrowed money. Usually, at rates substantially more than you could get from the Federal Reserve Bank in Kansas City. The tribes took that risk. The tribe put its credit on the line. Tribal elected officials put their offices on the line. Could you imagine if this had not succeeded?” Luthey said.

“We took a lot of risk. For somebody to say we now need to pay more in exclusivity fees — really? Remember that risk when somebody wants to engage you and say you’re not paying your fair share.”