Let the games begin: New Class II regulations could hurt bottom lines - ‘Significant negative impact’ projected

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Economic impact. Those two words combine to form a loaded phrase that has, since the Indian Gaming Regulatory Act’s passage in 1988, been constantly bandied about in connection with tribally owned casinos.

In most cases, the “economic impact” on people’s minds is that created by a proposed or existing casino, usually in the areas of job creation and revenue-sharing. This time, however, the economic impact in question will affect Indian casinos rather than be the result of their operations.

A newly published report estimates that tribally owned Class II gaming facilities could take a collective $9.6 million loss if proposed regulations kick in as currently written.

In May, the National Indian Gaming Commission proposed new regulations governing criteria by which to classify gaming devices as either Class II or Class III. Technology had caused the line between the classes to become blurred, causing confusion for tribal governments and gaming device manufacturers.

In a Nov. 6 press release, NIGC explained the situation. “As drafted, the proposed regulations would, in many cases, require more time for players to play the games,” the regulator said, “thereby reducing the number of games which could be played in given amounts of time, and thereby reducing income tribes currently generate from some of the games as they are now played.”

NIGC commissioned gaming analyst Alan Meister of the Analysis Group to “conduct an independent study of the potential impact of the proposed Class II regulations on the Indian gaming industry,” the regulator said in the press release. “Specifically, the question was asked to identify the potential economic impacts and, to the extent possible, quantify them on an aggregate nationwide basis.”

In his Nov. 3 report, Meister painted a rather grim picture of the impact of the proposed new regulations, characterizing their effect as “significant” and “negative.”

“The magnitude of the negative impact would vary widely from state to state and tribe to tribe,” Meister wrote, “depending upon the legal landscape, political environment, existing market conditions, and the availability of viable alternatives to Class II machines.”

Among the negative impacts, Meister concluded that the new regulations would affect Class II gaming facilities through decreases in gaming revenue, non-gaming revenue, and the “variety and quality” of Class II gaming devices. Temporary facility closures, as machines are changed or upgraded, are “possible,” as are increases in capital costs as well as regulatory, training, revenue-sharing and financing costs. Tribal governments could see a drop in revenue from their Class II operations, while the number of tribal members employed at such operations would decline by an estimated 458 jobs.

Meister notes that not all of the potential effects of the proposed regulations are in fact quantifiable, but he does produce estimates when possible.

Gaming tribes that also operate Class III machines are not likely to experience revenue losses. But tribes that only have Class II devices would likely have to introduce new, compliant machines which, because they play more slowly, will generate less revenue. Meister estimates that the average revenue per compliant machine would be 57 percent less than for Class II machines currently in play, which works out to a total decrease of $142.7 million.

Based upon this total decrease, the analyst estimates the total loss of non-gaming to be $9.6 million; combined, these losses will produce an estimated loss of $17.4 million in revenue for tribal governments.

Assuming the proposed regulations are adopted as-is, how tribal governments respond could significantly affect revenue sharing with state governments. In Oklahoma, which permits both Class II and Class III gaming, Meister postulates that revenue paid to Oklahoma City would increase between $49.6 million and $74.5 million if all tribal Class II machines are replaced with Class III devices.

Of course, such a windfall would only be possible in states that allow Class III gaming. But its possibility presents an interesting dilemma from tribal decision-makers. Which is better – to remain Class II and keep lesser profits in tribal hands, or to upgrade to Class III and pay the state for the “privilege”?

The public comment period on the proposed Class II definitions, classification standards and technical regulations closed on Nov. 15. The regulator will continue to accept comments from the public on the economic analysis until Dec. 15.

NIGC not a regulator?

On Oct. 20, the U.S. Circuit Court of Appeals in Washington, D.C., ruled that NIGC does not have sufficient statutory authority to perform its regulatory mission. The case stemmed from the 2001 refusal of the Colorado River Indian Tribes to provide requested casino financial records for to NIGC.

In their decision, justices A. Raymond Randolph, Harry Edwards and David Tatel affirmed a district court ruling that while IGRA granted NIGC audit authority, the agency does not have regulatory powers over Indian casinos.

The Las Vegas Review-Journal reported on Oct. 21 that Sen. John McCain, R-Ariz., chairman of the Senate Indian Affairs Committee, said that the underlying district court ruling needs to be “corrected.” Earlier this year, McCain proposed legislation to give NIGC broader regulatory authority; it passed the committee by voice vote but stalled on the Senate floor.

The Review-Journal also said that while the National Indian Gaming Association praised the ruling, NIGC Chairman Philip Hogen, Oglala Sioux, wants Congress to “give his agency regulatory authority because tribal casinos are not cooperating with commission auditors.”

“Let the Games Begin” has frequently praised the three-tiered regulatory structure – tribal, state and federal – that oversees Indian gaming. But a proper regulatory regime can only work if it has the teeth and the muscle to actually be effective. It does not serve the Indian gaming industry well to have a federal regulator with no clout. This situation requires prompt remedy.