Regulatory Updates

Update on the Proposed Class II Gaming Regulations

D. Michael McBride, III,
D. Michael McBride, III,

D. Michael McBride, III, Attorney at Law
Dunlevy, P.C.

We can all envision the tremendous harm the National Indian Gaming Commission's proposed rules to restrict Class II gaming will cause tribal economies. Dr. Alan Meister's recent report from the Analysis Group, commissioned by the NIGC, quantifies a portion of that hurt, conservatively estimating a $1.2 billion impact on tribal revenues, with that figure rising to $2.6 billion if tribes have no viable alternative to the games newly outlawed by the NIGC.

The untold story is the broader impact these ill-advised rules will have. A University of Oklahoma, Price College of Business study has estimated that the proposed rules will inflict over $3 billion of indirect damage on jobs, services, and businesses that rely on Class II gaming. Damaged industries run the gamut from construction ($30 million) to finance and insurance ($171 million) to manufacturing ($391 million). It is not just tribes and private industry-states and local governments will hurt badly as well.

A recent federal hearing has highlighted these dangers. On February 20, U.S. Reps. Dan Boren and Tom Cole held congressional oversight hearings in Miami, Okla., to investigate the economic impact of the proposed rules. The testimony was dramatic. Tribal and local government leaders testified to the tremendous economic advantages Indian gaming has brought to Oklahoma-highlighting how far state-tribal relationships have come in recent years.

Class II gaming has long been present in Oklahoma and across the country. Innovative tribes and manufacturers took to heart Congress' intent that they have "maximum flexibility" in applying technology to Class II games and that those games not remain stuck in time. Indeed, the success of Class II electronically aided bingo in Oklahoma paved the way for that state's 2004 voter-approved tribal-state compact, allowing additional Class III gaming devices.

The compact has worked well, and Oklahoma has received more than $80 million for use in education and increased teacher pay. But, Class III shared revenues are only a small part of the story.
Dr. Meister's NIGC-commissioned report shows that Indian gaming generates over $26 billion annually for tribal governments, as of 2006. In Oklahoma, 33 tribes have Class III compacts , about 94 casino locations, and approximately 30,000 Class II gaming devices. Again as of 2006, Oklahoma, California, and Florida tribes own 84% of all the Class II gaming devices in nationwide, with Oklahoma tribes making up the majority at 59%.

In 2007 alone, Oklahoma Indian gaming generated nearly $2.5 billion of tribal government revenue and grew by 25%. Non-Indians and local businesses have also benefited. Around 75% of all tribal gaming employees are non-Indian and many are female. Chief Glenna Wallace of the Eastern Shawnee Tribe has written that women hold 65% of jobs within gaming operations and many are single parents. She also wrote that her local community had an unemployment rate of nearly 25% before Indian gaming. Now it is less than 5% - statistically, anybody that wants to work has a job. As the oversight committee heard, for every $100 the tribe generates, an additional $2,500 is pumped into the local community purchases.

Moreover, for every 10 casino jobs created by Indian gaming in Oklahoma, 25 are created in the non-Indian community. Local leaders testified to these benefits. For example, Ottawa County, Oklahoma, is the country's largest environmental disaster Superfund site and lost 2,000 jobs when the B.F. Goodrich plant closed in 1986. Things got so bad that a sign on Main Street once read, “the last one to leave Miami, turn out the lights.” If it were not for area tribes and their entrepreneurial spirit, leaders testified, Miami might not have survived.

No doubt, gaming stirs passion, both for and against. The debate has always involved questions of morality and societal preferences. But, Indian gaming is not “commercial” and is already regulated in ways intended to address societal concerns. Indian tribes, by law, can use gaming revenue only for public purposes. Tribal casinos are not “for-profit”; they use gaming to fund tribal government where taxation is not allowed.

When passing the Indian Gaming Regulatory Act in 1988, Congress encouraged Indian gaming as a means of promoting tribal self-sufficiency and reversing the deplorable socioeconomic conditions of many tribes.

Why then does the federal government want to limit the most effective economic development engine ever promoted by the United States Congress for tribes and their surrounding communities? The NIGC believes that technology has blurred the lines between Class II and Class III games and wants more stringent rules to limit technologic aids in playing bingo, pulltabs, and other Class II games. Most tribes, on the other hand, believe that the commission is making rules that conflict with the plain language of the Indian Gaming Regulatory Act's definitions and contravene what Congress intended. The tribes are right. The NIGC has stepped way beyond its regulatory powers.

Representative Cole described the commission's rule making as “destructive, highly unjust and deeply troubling” and found that the proposed rules will “cripple economic development in Indian country.” As Cole noted, the Commission's efforts are "a solution in search of a problem."

This dire prediction is supported by the numbers. Dr. Meister's report analyzed the impact of the proposed rules on Class II gaming revenues. Although Meister estimates that a state like Oklahoma might increase its annual Class III “revenue share” from about $54 million to $122 million, tribes within the state could lose more than $2.8 billion and 3,336 jobs will vanish. Once the indirect economic impact of the proposed rules are considered, as they were in the University of Oklahoma study, the losses climb to over $5 billion. This loss affects all who live within a state. Oklahoma, with 65% of its gaming devices invested in Class II games, will be particularly devastated by the proposed rules. Tribes residing in Alabama, Montana, Florida, and California will also be greatly affected by the commission's abrupt attempt to legislate Indian gaming.

Under the proposed rules, almost all of the 22,000 Class II bingo devices in Oklahoma - nearly half of all tribal games - would have to be modified or discontinued. Large tribes may weather the storm; many have already migrated to Class III devices at their larger casinos. But, it would be devastating for small tribes and rural economies in the short term, with their razor-thin margins. In the long term, large tribes will also suffer when Class III compacts expire.

Even though the Constitution says “Indians are not taxed” and the IGRA declares that Indian gaming revenue "shall not be taxed," over the past decade and a half, states have increasingly required that tribes “share” revenue with the state as part of the Class III compact. Tribes need Class II gaming to protect their ability to negotiate the fairest possible Class III compacts. Tribes need Class II as a "fall back" in case states choose not to negotiate in good faith. If there is no meaningful Class II game alternatives, tribes will be in a tremendously weakened bargaining position for future compacts. It is likely that states will have an even greater appetite for tribes to “share” revenue in future compacts.

The proposed rules could wreck an otherwise flourishing tourism and recreation industry in Oklahoma and in other parts of the country. If Indian gaming sneezes, Oklahoma and many other states and local governments will catch a cold.

D. Michael McBride III is Chair of Indian Law & Gaming Practice Group for Crowe & Dunlevy, P.C. He can be reached by calling (918) 592-9824 or email mike.mcbride@crowedunlevy.com.