Issue 170
December 15 - 21, 2003
Volume 3
page 3

What Can Schwarzenegger Really Do?
By I. Nelson Rose

Voters want Arnold Schwarzenegger to redo every deal Gov. Gray Davis made, including tribal casino compacts.

It is easy to understand why - Davis was incompetent and corrupt.

Even when Davis did not personally ask for money and negotiate sweetheart contracts, he surrounded himself with people who did so on his behalf.

The Barry Keene scandal is typical. Keene, a former politician, oversaw negotiations and signed a contract requiring the state to overpay Oracle as much as $41 million for software that was not needed and never used.

Two weeks later, Oracle gave the Davis campaign a check for $25,000.

When Keene got caught and was forced to resign, his excuse was problems with his second wife. As the Press-Democrat put it, he claimed "...he simply messed up by signing the Oracle contract on a bad-marriage day."

Whomever Gov. Schwarzenegger appoints as the state's negotiators, they cannot be as bad as Barry Keene.

But Arnold may not be able to undo the damage.

The FBI and State Attorney General are not thinking about criminal investigations of Davis's tribal casino deals, as they did with Barry Keene. But Schwarzenegger has been given a political mandate to reexamine the compacts to try to get more money from California's tribes.

In March 2000, Davis signed unbreakable 20-year compacts with 61 tribes giving them a monopoly casino industry. It is already half the size of Nevada's. In FY2002, Nevada's 347 casinos won a total of $9.56 billion. California's approximately 40 tribal casinos will take in at least $4.5 billion this year. And because tribes are governments, they pay no federal or state taxes.

California tribes do pay small fees, this year totaling less than $150 million. By contrast, Connecticut's two tribal casinos last year gave that state $369 million.

There is no doubt California could have gotten a lot more. The tribes themselves in the early 1990s had offered to give half a billion dollars a year for the same slot machines Davis gave them almost for free.

Schwarzenegger - in fact, anybody, except Davis or Keene - can negotiate a better deal for the state with the 35 tribes that have not yet signed compacts. The problem is federal law requires the state to give the same terms to all tribes.

Of course, law in theory often differs from law in practice. When the state's budget crisis hit, Davis refused to sign any compact unless the state got 25% of tribal gaming revenue. Despite the law, he was able to stall for almost four years, by raising issues like environmental impacts.

When the recall hit and Davis was desperately trying to save his job, he lowered his demand from 25% to 5%, which some tribes immediately snatched up.

Schwarzenegger has announced that he will block any of Davis's last-minute, fire-sale 5% compacts that he can. But some were approved by the Democratic-controlled State Senate, led by Sen. John Burton (D.-San Francisco), a friend of big labor and big money contributors.

Schwarzenegger wants tribal gaming to expand, if the state can get more, say 10% or 15% of gaming revenue. But, it is unclear whether these compacts would be approved by the U.S. Department of the Interior. Interior only approves a higher rate of revenue sharing when a tribe gets a unique economic benefit, like a monopoly. It did approve 25% in Connecticut. But what justification is there for California to get nothing from the first 61 tribes, 5% from a few tribes that signed during the recall, and 10%-15% from the remaining 30 tribes?

If all tribes paid, say 10%, all compacts would be approved. But tribes with 17 years to go on their compacts have little incentive to renegotiate.

Davis gave each tribe the right to have up to 2,000 slot machines and no limit on the number of table games. This means they can open some of the largest casinos in the world, larger than 90% of the approximately 550 privately owned casinos in America.

Recent court cases and rulings of the National Indian Gaming Commission also allow tribes to operate what are called Class II machines without limit. These video gaming devices are technically bingo, but play a lot like slot machines, with traditional symbols like cherries and bells rather than bingo cards.

Even before Schwarzenegger took office, the Morongo tribe set up 25 Class II machines in a convenience store less than a mile from its massive casino. These Class II devices let the tribe go beyond the 2,000 cap on conventional slot machines. They also send a powerful message to the new governor on behalf of the tribe, "If you do not give us a good deal on additional slot machines, we will simply set up Class II machines."

Class II games are not as lucrative as true slots. And Schwarzenegger does have one legal argument. There is supposed to be a state-wide limit on slots, although no one knows what it is. The compacts have an undecipherable formula; Davis thinks the number is 50,000, the tribes say 150,000. Whatever the cap is, it so far has not been an issue. But, it might give the new governor a little threat over existing tribal casinos wishing to expand.

Can Schwarzenegger counter with the ultimate threat, "Give the state a decent share of tribal casino revenue or we will set up privately owned casinos in the middle of cities"? Probably not, at least not directly.

The California Supreme Court, quoting extensively from my 1986 book, Gambling and the Law, declared that the state's constitutional ban on "casinos" covers house-banking games and slot machines. The only way racetracks, card clubs and others could get true slot machines would be to amend the State Constitution. But the tribes would be willing to spend hundreds of millions of dollars in any campaign to protect their monopoly.

Of course, not every gaming device is a slot machine. Besides Class II games there are true video lottery terminals. And the ban on house-banked blackjack does not apply to player-banked blackjack.

In the end, Schwarzenegger's strongest argument may be political as well as legal. He can argue that the situation has changed: Not only has California gotten rid of Davis and Keene, it now faces the largest state budget deficit in history.

Schwarzenegger's status as governor, and as a celebrity, can put public pressure on tribes to contribute what he calls "a fair share."

He might even be able to get the Secretary of Interior to agree.

About the Author

Professor I. Nelson Rose is an internationally known scholar, public speaker and writer and is recognized as one of the world's leading authorities on gambling law. A 1979 graduate of Harvard Law School, he is a tenured full Professor at Whittier Law School in Costa Mesa, California, where he teaches one of the first law school classes on gaming law.


Of Related Interest

I. Nelson Rose has written a number of books, which includes "Blackjack and the Law."
This book explains that all casino games, except blackjack, have a built-in house edge, a mathematically calculable advantage to the gaming establishment. The CEO's hate that blackjack can be legally beaten by a small percentage of skillful players who have studied and practiced card counting, but are the casinos going too far in their attempts to stop it? In order to protect their civil rights, casino players today must have a legal arsenal at their disposal. Blackjack and the Law is the foundation of that arsenal, bringing together 14 years of syndicated columns of Attorney I. Nelson Rose with the commentary of Attorney Robert A. Loeb.

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