Oklahoma, OK?

What’s behind the effort to force state tribes to renegotiate settled compacts?

Like the lyrics from the famous Rodgers & Hammerstein musical, tribal government gaming in Oklahoma is doing fine. The future of this vibrant industry has become more uncertain, however. The state’s tribal gaming compacts are up for renewal next January, and Governor Kevin Stitt recently called for complete renegotiation of the agreements.

On July 8, in an opinion piece in the Tulsa World, Stitt acknowledged the successful partnership between the state and tribal governments and the achievements of Indian gaming. But he made it clear that the partnership needs to work more broadly for the interests of all Oklahomans. The op-ed came as something of a shock to Indian gaming interests since it was delivered prior to the governor’s formal letter inviting the tribes to renegotiate.

Moreover, the editorial raised multiple points of contention for tribal governments. One issue was Stitt’s assertion that the existing compacts will expire on January 1, 2020. Another was his push for sharp increases in exclusivity fees for gaming operations. Tribal leaders quickly spoke out and presented a united front in opposition to the governor’s position. The stage has been set for a dramatic showdown.

Adding to the shock is the fact that Stitt is an enrolled member of the Cherokee Nation and chose to put this issue into the press prior to government-to-government negotiations. His office followed up with a warmer, more conciliatory letter to the tribes in August, but his administration’s position remains unchanged.

 

Okie Natives

Indian gaming started in Oklahoma more than 50 years ago with paper bingo cards and pull-tabs. After passage of the Indian Gaming Regulatory Act (IGRA) of 1988, several tribes began operating bingo halls featuring electronic Class II machines. In the early 1990s, the first compacts were signed with the state allowing tribal facilities to simulcast parimutuel horse racing, which has been legal in Oklahoma since 1983.

While it was interested in preserving the horse-racing industry, the state government opposed expanded gaming, and successive governors refused to negotiate compacts for Class III gaming. Tribal governments and gaming manufacturers meanwhile collaborated to develop the full potential in Class II technology, and as the appeal of those machines increased, tribal casino operations continued to expand.

Successful innovation of Class II technology by Oklahoma tribes eventually brought the state back to the bargaining table, and in 2004 a proposed compact was put to voters in a referendum as State Question 712. Voters approved the referendum, which passed with nearly 60 percent of the vote in November 2004, and the legislature was able to offer a new model Class III compact to Oklahoma’s federally recognized tribes. The referendum also permitted electronic games at three of Oklahoma’s racetracks.

Under the terms of the model compact, the state of Oklahoma would receive an annual share of gaming revenues generated by the compacting tribes from authorized Class III games. The state’s share of adjusted gross gaming revenues (GGR) from electronic games begins at 4 percent and rises to 6 percent once a tribe’s revenue exceeds $20 million. For table games and for ball and dice games that were authorized in a separate compact in 2018, the fee is 10 percent. The state directs the initial $250,000 of their fee to the Department of Mental Health and Substance Abuse Services for gambling education and treatment, after which the remaining revenues are allocated 88 percent to the 1017 Education Reform Fund, which can be appropriated only to the Department of Common Education, and 12 percent to the General Revenue Fund.

When these compacts were signed in 2005, they inaugurated an era of massive expansion, as Oklahoma became one of the fastest growing Indian gaming jurisdictions. More than 13 percent of the state’s population is Native American, second only to California in native population, and 38 federally recognized tribes call Oklahoma home. Of that total, 35 tribal nations now have compacted gaming operations catering to local and out-of-state customers.

Today, Oklahoma is home to 135 tribal casinos—including WinStar, the world’s largest casino by gaming machine count—and tribal gaming is listed as the state’s eighth largest industry.

 

Community Benefits

By any measure, tribal gaming has been a tremendous success in Oklahoma. According to the 2018 Indian Gaming Industry Report, produced by Alan Meister of Meister Economics, Oklahoma tribal government gaming generated a total of $4.3 billion in GGR during calendar 2016, a 5 percent increase over the previous year.

The most recent report places Oklahoma second in the nation—after California and ahead of Florida—producing 14 percent of the $31.5 billion generated by Indian gaming operations nationwide in 2016.

Casino gaming revenue has undoubtedly grown since then, as the National Indian Gaming Commission (NIGC) reported GGR of $32.4 billion in fiscal year 2017, an increase of 4 percent year over year. While the latest NIGC revenue figures are not broken out on a state-by-state basis as in the Meister report, for the Tulsa region, which includes the major casinos in eastern Oklahoma, Indian GGR increased by a slightly larger proportion (4.2 percent) in 2017.

Tribal governments had a total monetary impact of nearly $13 billion in 2017, according to an economic impact study conducted by Kyle D. Dean, Ph.D., Director of the Center for Native American and Urban Studies with the Meinders School of Business at Oklahoma City University. This study, which can be found at UnitedforOklahoma.com, reports that Oklahoma tribes generated the following in calendar 2017:

  • $12.9 billion in total economic impact
  • $1.5 billion in total exclusivity fees
  • $138.5 million in exclusivity fees in FY2018
  • 96,177 jobs for tribal and non-tribal employees
  • $4.6 billion in wages and benefits
  • $213 million in Medicaid expenditures (a savings of $88 million in state matching funds)
  • $1.3 billion in exclusivity fees for education paid since 2006
  • $198 million in in exclusivity and educational support in 2017
  • $61 million in community support via donations and sponsorships
  • $200 million invested in roads and bridges supporting 27,000 miles of roads

 

Defending the Fort

A successful industry like this one with a multitude of social and economic interconnections naturally has engendered strong defenders, chief among them the Oklahoma Indian Gaming Association (OIGA).

OIGA Director Matthew Morgan says the governor’s op-ed came as a complete surprise to the Indian gaming community. While the tribes had expected the state might bargain for more revenue in the compact renewals, they did not anticipate the governor coming out with a bid to renegotiate all the compacts.

Morgan says, “That put everyone in a precarious position that will make it difficult to negotiate with the state. Can you imagine any other industry where your partner wanted to tear up the existing agreement in public prior to negotiating the new contract?”

Tribal leaders were quick to respond to the op-ed. On July 23, OIGA published a joint letter from 29 tribal nations laying out three simple points: first, that the compacts will automatically renew; second, that current exclusivity fee rates should not change; and third, that the governor should send each tribe a formal proposal for consideration by tribal leadership bodies.

From the Oklahoma tribal gaming industry’s perspective, there were multiple inaccuracies and points of contention in the governor’s op-ed. For example, the governor claimed that “15 years ago, the tribal gaming industry in Oklahoma did not exist,” when in fact tribal Class II and bingo gaming operations have existed for more than twice that long.

The most obvious disagreement involves Stitt’s opinion that the existing compacts will expire on January 1, 2020. The tribes believe the compacts automatically renew, and there is support for their interpretation. According to the Oklahoma Policy Institute, a non-partisan think tank, “Compacts expire January 1, 2020 and will automatically renew for successive additional 15-year terms, provided that, within 180 days of the compact’s expiration either the tribe or the state may request to renegotiate specified portions of the compact’s terms.” Even Scott Meacham, the man who negotiated the original compacts 15 years ago when he was Oklahoma’s secretary of finance and revenue, admits that the compacts renew automatically. But he also points out that if lawmakers were to repeal other gaming laws such as horse racing, then the compacts could expire.

Then there’s the controversy over the rates for exclusivity fees which governor Stitt misleadingly described as “the lowest in the nation.” He called for mutual efforts to “bring these 15-year-old compacts to an agreement that reflects market conditions for the gaming industry seen around the nation today” and he opined that “most state-tribal compacts around the country provide for exclusivity fees to the state of 20 percent to 25 percent.”

The evidence for these assertions argues otherwise. An article appearing in KGOU on July 29 by Caroline Halter provided a Government Accounting Office analysis of 276 gaming compacts as of 2014 that graphically demonstrated the inaccuracy of the governor’s comments by documenting the vast majority of the 276 compacts analyzed (92 percent) are less than 15 percent and fully 39 percent of those compacts involve no exclusivity fees at all.

Moreover, the governor cited the expansion of gaming into neighboring Arkansas, where Oklahoma tribes are bidding for opportunities. The fees will “start at 13 percent and max out at 20 percent.” This statement ignores the fact that the Oklahoma tribes would be moving off their sovereign reservations to bid on commercial gaming opportunities taxed by the state gaming authorities.

OIGA contends that the success of tribal gaming in Oklahoma has far exceeded the expectations of the original compacts and over delivered exclusivity fee revenues during the past 15 years, paying out to the state at the highest rates over the period.

“We provided $148 million in exclusivity fees collectively in 2018,” says Morgan. “$71 million was the minimum expectation. We have exceeded the state’s expectations with competitive market-driven rates. I don’t think we see it as a dispute. The trigger has been met.”

Perhaps the most challenging question is what motivated the governor’s unilateral opinion. Of course, it’s normal to expect any state government to desire increased tax revenues from gaming, and it’s become more common for U.S. states, particularly those with large budget deficits, to turn to casino gaming as a stealth tax.

However, Oklahoma’s economy is performing relatively well and there is no apparent financial crisis to justify the governor’s aggressive stance on the compacts. Additionally, as is the case in almost every gaming market across the country, competition is increasing and future growth prospects are dimming as casino-style gaming becomes more widespread. Oklahoma Indian gaming faces brand new competition in Arkansas and increased casino competition in nearby states.

The governor’s office did not respond to a request for comment in time for this article. Donelle Harder, a spokeswoman for Stitt, said on July 29, “The governor is meeting with and reaching out to our tribal partners. Conversations are ongoing, and the governor is confident we can come to an agreement that enhances opportunity for the tribes, as sovereign nations and partners, and continues to move Oklahoma forward to the benefit of all 4 million residents.”

Another Stitt representative, Baylee Lakey, said on August 29 that the governor would refer detailed questions about the compacts to Attorney General Mike Hunter, who will represent the state in negotiations.

Whatever the motivation, and despite the governor’s efforts to kickstart negotiations, his op-ed has cast a pall over negotiations to renew the compacts.

“He has put a dark cloud over our industry,” says Morgan. “These are tribal governments. They have to have to have enough income to provide for their citizens… now that certainty has been removed.”

The op-ed has also caused tribal leaders to solidify their initially unyielding positions on compact renewal. The incoming principal chief of the Cherokee Nation, Chuck Hoskin, Jr., in comments to the Tulsa World board on August 7, cited the “solidarity among tribes” on the compact renewals as well as the state’s responsibility for its past financial decisions.

Hoskin summarized by saying, “So we don’t need to change the formula, I think the state just needs to change its philosophy in line with how the tribes view the role of our governments.”

Choctaw Nation of Oklahoma Chief Gary Batton says, “We’re going to stand firm” during his State of the Nation address at the Choctaw Nation Capitol in Tuskahoma on September 2.

Jonodev Chaudhuri, former NIGC chairman who is now in private legal practice, points out that IGRA was never intended to help fill state coffers but rather to foster economic development in Indian Country that would make tribes less dependent upon federal and state resources.

“Indian gaming should not be looked upon as a source of funding to balance state budgets,” he says. “IGRA established gaming as an attribute of tribal sovereignty empowering tribes to engage in economic development activities on their sovereign lands. States have no entitlement to gaming fees and IGRA actually prohibits state taxes on gaming revenues. Fees are only granted to the state government if something of equal value is granted to the tribal government.”

Kevin Washburn, former U.S. assistant secretary for Indian affairs and currently dean of the University of Iowa College of Law, says, “This is not a new trend. In the U.S., this dynamic has existed since time immemorial. Tribes have resources; others covet them. As for states, state governments have always sought to tax Indian resources and the federal case reporters are littered with court decisions addressing such matters, usually finding them illegal. The Indian Gaming Regulatory Act explicitly prohibits taxation, so revenue sharing justified as a quid pro quo has developed. But the amount that tribes pay must equate to the value that tribes receive.”

Washburn was even more direct in an article for Tulsa World that said, “Stitt’s 20 percent to 25 percent is outside the norm—and it is an unsustainable, job-killing tax that violates federal law.”

Until the administration puts forth a proposal, it appears that the tribes are standing their ground on the terms of the original compacts. OIGA wants the governor to acknowledge that the compacts automatically renew instead of expiring.

As Morgan explains, “the issue is about compact renewal. Acknowledge that the compacts do not expire, that they renew, and make a proposal on what the state would like to see then invite tribes to sit down in a government-to-government discussion.”

The governor appears to also be holding firm to his hard negotiating stance, and the immediate situation could be described as a stalemate. And unless the compact issue is resolved there is little chance that any new legislation on gambling expansion for sports betting or iGaming will be introduced.

Tribal government gaming has been so successful in Oklahoma that neither side wants to injure the industry, so eventually a mutually acceptable agreement will be worked out. Attorney General Hunter’s office released a statement saying he and the governor “look forward to a mutually constructive and beneficial dialogue with tribal leadership.”

In the final accounting, the tremendous success of tribal government gaming in Oklahoma, its widespread footprint and the close interweaving of social and economic relationships developed over time provide a crucial impetus for in any negotiation.

As Morgan insightfully points out, “We touch every individual in this state through investment, providing jobs, payroll taxes, infrastructure… all those things. And most of that is away from the major cities. We make a difference in rural Oklahoma because that’s where we reside.”