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Class II regulations still hot

LAS VEGAS – National Indian Gaming Commission Chairman Phil Hogen is still questing after a “bright line” between Class II and Class III gaming, and may find it by enforcing compliance with an opinion he issued rather than the normal way through regulations.

But Jess Green, a Chickasaw attorney in Oklahoma who is an expert in Indian gaming law, said he’s ready to litigate if Hogen takes that route.

At a presentation called NIGC Roundtable: The Commission View, Hogen spoke at length about his perception of the need for changes that would “clarify” the difference between Class II and Class III gaming machines.

Class II machines, which are used for bingo, lotto, pull tabs and other such games, don’t require a tribal-state compact or sharing the tribe’s gaming revenues with the state. Class II gaming is particularly useful to tribes in states that refuse to negotiate gaming compacts.

Class III slot machines do require a compact with the state, which usually takes a share of the tribe’s profit.

Hogen recalled the early years of Indian high stakes bingo when a bingo blower randomly selected the numbers and players could see the balls being selected and who they were playing against. Players were confident that the game wasn’t rigged because everything was transparent, Hogen said.

“It’s not easy with all this complicated environment, all this high speed electronic equipment. You’ve got to convince the player that this is fair and a square kind of deal.

Independent study challenges NIGC’s Class II figures
The Oklahoma Indian Gaming Association has released an independent study that shows the National Indian Gaming Commission underestimated the cost of implementing Class II regulations by $137.2 million. The NIGC issued a cost-benefit study prepared by Policy Navigation Group on Sept. 24 prior to its adoption of new Class II regulations establishing technical standards and Minimum Internal Controls (MICs). The study’s purpose was “to provide a comprehensive estimate of the social benefits and costs” of proposed Class II gaming regulations. The study was meant “to update and to supplement” an earlier independent study by economist Dr. Alan Meister on the potential impact of the same Class II regulations, which the NIGC had commissioned earlier this year. OIGA hired Meister in turn to review the Policy Navigation Groups’ work. Meister has extensive experience analyzing economic issues related to the gaming industry, especially Indian gaming and online gaming. His work has included economic and fiscal impact analyses, industry and market analyses, assessments of regulatory policies, analyses of Tribal-State gaming compacts and revenue sharing, feasibility studies, surveys, and expert testimony in litigation and regulatory matters. He has also conducted independent, academic research on Indian gaming and is the author of the annual Indian Gaming Industry Report. “When the NIGC published its cost-benefit Study on Sept. 24, 2008, we were surprised at the very low level of negative impacts found by the study – so low that we decided that an independent analysis was needed,” David Qualls, OIGA chairman, said in a press release. The NIGC’s cost-benefit study found that the Class II MICS and Technical Standards would only impose negative costs of $7.8 million over 10 years. Meister’s study found that the negative economic impacts could be as high as $145 million in hardware costs alone. “Our member tribes had expressed concerns for over a year that these regulations were seriously flawed and would impose significant, unnecessary costs on our tribal gaming operations. This independent assessment shows our concerns were justified and that the NIGC has purposely ignored those concerns,” Qualls said. Oklahoma has around 60 percent of all the Class II gaming machines in the country and will be hard hit by the costs of compliance with the new regulations, which will include upgrading current machines or buying new ones. In his executive summary, Meister said he was asked to review and comment on the methodologies and conclusions of the Policy Navigation Groups’ cost-benefit study especially as it related to his earlier study. He found a number of shortcomings, including a lack of transparency; questionable assumptions; unsupported/speculative assumptions; assumptions contradicted by available information; biased assumptions; omission or minimization of negative impacts on tribes; mischaracterizations of results from his earlier report; and lack of an adequate basis for determining whether the proposed regulations are a “major rule” within the meaning of the Small Business Regulatory Enforcement Fairness Act. The NIGC used the cost-benefit study as a justification for declaring the regulations to not be a “major rule,” and for not conducting additional consultation with tribes or allowing for congressional oversight hearings, according to the press release. “These shortcomings raise significant doubts about the reliability of the Cost-Benefit Study’s quantitative results and qualitative conclusions. Therefore, policymakers should be cognizant of these shortcomings when considering the impact of the proposed Class II gaming regulations,” Meister said. The Class II MICS and Technical Standards regulations were made final and published by the NIGC in the Federal Register on Oct. 10; they became effective on Nov. 10.

“I think a very useful and worthwhile purpose is served by somebody like NIGC putting together a set of tools that can be sued and applied by the gaming tribes. I think it would be useful for the industry to have a totally broadly accepted place where that (bright) line is drawn so you don’t have to fight that battle in each and every jurisdiction with respect to each and every compact.”

Hogen’s efforts to put together those “tools” in the form of four new regulations generated a firestorm of controversy last year when tribal leaders and gaming experts almost universally denounced the proposed definition and classifications portions of the rules, saying they would have re-categorized all electronic versions of Class II games – bingo, lotto, pull tabs and others – as Class III machines and put them out of business.

The controversy seemed to cool off somewhat last summer when Hogen withdrew the classifications and definitions. The other two new rules – technical standards and MICs (Minimum Internal Controls) – were issued and became effective on Nov. 10. Tribes can grandfather their existing machines for five years, and either upgrade the existing machines or purchase new ones that are compliant with the new technical standards.

Hogen said he was “delighted” with the tribes’ “buy in” to the new technical standards and MICs.

“I think the industry will be stronger when we’re done, But we didn’t get there in terms of drawing that brighter line that I sought to draw when we started this process four-five years ago.”

He noted that he recently disapproved a gaming ordinance submitted by the Metlaketla Indian Community in Alaska that would have classified a one touch machine as a Class II machine.

“I thought maybe it would get into the court room and we’d get some guidance with regard to whether that was a proper reading of IGRA,” but that didn’t happen, Hogen said.

Green reminded Hogen of his testimony before Congress regarding the Class II regulations that once the technical standards and MICs were in place, he, Hogen, would not do more so as not to have a greater economic impact in Indian country.

“And we find ourselves, as you noted in an earlier meeting, having some debate about what states are going to call Class II gaming. My question to you is, in the remainder of your term are you going to take other action to define Class II gaming?” Green asked.

“Well, those decisions haven’t already or yet been made and I’m not the only one that will be in the party making them, but we’re proceeding down the track here, what lies before us is we have issued a commission view, a view of the chair, that is unchallenged so far, that a one touch game is not compliant. Now it may be that we will try to better enunciate, better clarify what we mean by that and announce that the chair’s position that non-compliance games, games that are one touch, for example, will be discouraged and if necessary, if not complied with, there will be enforcement to follow. That, as I say, has not been decided. That’s a possible route that we will take that will be consistent with what was developed before,” Hogen said.

Green’s response as quick and edgy.

“Mr. Chairman, do you understand that if you take that approach those of us that encourage compliance will start encouraging litigation?”

“Yeah, well, I wouldn’t be surprised if litigation was to fellow and litigation might lead to greater clarity and that’s been my long sought goal,” Hogen said.

Reading from his Blackberry, Green recited Hogen’s testimony to Congress.

“‘But we put in a five-year grandfather clause to soften the blow because we know it’s going to be a tough economic impact. The useful life of the equipment is probably about five years so use them until they’re used up and then comply.’ Your statements today don’t agree with that, Mr. Chairman, your statement that you’re going to do more than just your five-year moratorium has a much greater economic impact. Do you grasp that?”

“Yes, well, one environment we were talking about was one in which we had classification standards that would bring the clarity by means of regulations and be accommodated by a grandfather clause, a grandfather opportunity, and what we ended up with was not getting to go there so we’ve got to get there by other means that might be available to us and that might be by compliance and enforcement,” Hogen said.

In an interview following the presentation, Green said action would be taken if Hogen tries to impose regulations beyond the technical standards and MICs that have been issued.

“Chairman Hogen made a representation that he would issue further bulletins about Class II to try to limit its scope – that’s disingenuous with his congressional testimony in which he said once he issued the regulations he’d be done because of the financial impact to Indian country. He’s going to issue some bulletins and try to push the issue further and try to get it into court, which has a financial impact on Indian country. There’s no sound logic to it and there is an appearance of impropriety to it; it’s inappropriate to say one thing to Congress and then represent to this body something else,” Green said.

While Green said he is ready to litigate, he would prefer not to.

“Fighting with NIGC is not good for the industry, it’s not good for our sovereignty and even if you win the first stage you’ve got three to five years of a really bad situation and even if you win, they always appeal all the way to the Supreme Court and you spend $5-10 million that could be used on a senior citizen site, feeding seniors Christmas dinners,” he said.

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