Michigan draws thin in new, high-stakes Indian casino tax negotiations

After 20 years of legalized Indian casino gambling in Michigan, the state is trying to claw back a piece of the action from six tribes as high-stakes talks to extend gaming compacts proceed.

At stake: A share of a multi-billion-dollar industry and upwards of $40 million in potential annual revenue for the state.

The tribes now pay 2 percent of slot machine and video gaming profits to local governmental units, a requirement spelled out in a federal consent decree that governs 20-year compacts finalized in 1993.

They paid 8 percent to the state until after 1996, when voters approved construction of three non-Indian casinos in Detroit. That and approval of more Indian casinos broke decree terms that promised tribes exclusive rights for casino gaming in exchange for payouts to the state.

Multiple sources say the state wants that share back – or more.

Initial reactions from tribes have been less than positive.

“It's garbage,” said James Williams Jr., tribal chairman for the Upper Peninsula's Lac Vieux Desert Band of Lake Superior Chippewa.

“To be honest, I was offended by it.”

Williams said the state’s offer – conveyed in writing to his tribe several months ago – proposes sliding scale payments to the state of 8 percent to 12 percent. That's on top of 2 percent payouts to local government.

Williams said the state also proposed a ban on smoking in casinos and more stringent oversight of the 2 percent payouts, in addition to regulatory oversight for overall operations. Williams said the state wants to wrap up negotiations by the end of November. That would mark the anniversary date of compact approval on Nov. 30, 1993, by the U.S. Department of Interior.

“I don't think that's going to happen,” he said.

Aaron Payment, tribal chairman of the Sault Ste. Marie Tribe of Chippewa Indians, called the state offer “a big fat zero. It's a non-starter. Negotiations have to include something for something.

“They are offering us nothing.”

One analyst foresees tough bargaining ahead, as the state strives to improve its bottom line and tribes guard their revenue stream.

“It's all about the money,” said Richard McLellan, a Lansing lawyer who sat in on the 1993 negotiations on behalf of the Sault Ste. Marie Tribe and the Bay Mills Indian Community.

Indeed, state government could certainly use another $45 million in annual revenue, the approximate amount it would reap if an 8 percent payout were restored under new compacts.

But just how the state could wring such a concession from tribes is unclear. States are banned under the federal 1988 Indian Gaming Regulatory Act from imposing a tax on casinos. In past decisions, the U.S. Department of Interior has required states to confer substantial economic benefit to tribes as a prerequisite for revenue sharing.

John Wernet, general counsel for the Sault Ste. Marie tribe, said that will be critical to negotiations. He is former deputy legal counsel and adviser for tribal-state affairs for Gov. Jennifer Granholm.

“The issue now is pretty clear, that the state would very much like to find a way to generate new revenue at the state level. In order to do that, the state must offer something of substantial value.

“That really is the nub of it,” Wernet said.

Another gaming analyst believes time is on the side of the tribes, since language in the compacts states they will remain in effect “pending exhaustion” of administrative and judicial remedies, a provision that suggests a process of years, rather than months.

“(The state's) direct leverage is limited. The tribes have lots of power here,” said Jake Miklojcik, president of Michigan Consultants, a Lansing-based gaming consulting firm.

“You're not going to put a couple thousand people out of work in Mt. Pleasant,” he said, referring to the Soaring Eagle Casino & Resort. “You're not going to start laying off 500 people at a time.”

Dave Murray, deputy press secretary for Gov. Rick Snyder, declined to comment on details of the state's initial offer.

“We're not talking about the specifics,” Murray said.

In the meantime, gambling has become an addictive source of cash to both state and local coffers in the two decades since the original compacts were approved. Indian gaming has mushroomed to 12 tribes and 23 casinos, with more than 23,000 slot machines and $1.5 billion in slot machine and video game profits in 2012. Payouts that year to state government and local units topped $90 million.

Five additional tribes approved for casino gaming since 1993 pay the same 2 percent local share, in addition to payouts to the state ranging from 4 percent to 12 percent.  The Keewenaw Bay Indian Community, one of the original seven tribes approved in 1993, agreed in 2000 to pay 8 percent to the state under an agreement to allow it to move casino operations to the old Marquette County airport.

Detroit's three commercial casinos churned out another $1.4 billion in revenue in 2012, with annual gaming taxes totaling nearly $115 million. Bankruptcy filings in July confirm just how dependent the city has grown on the monthly $11 million it clears from the casino tax, an amount that would pay for the entire city fire department.

All that is on top of $2.4 billion in lottery sales in fiscal 2012, disbursing nearly $780 million to the state school fund.

With the original guarantee of exclusivity gone, the state in 1998 negotiated revenue sharing agreements with four tribes that promised no more commercial casinos would be developed. Its 2007 agreement with Allegan County's Gun Lake tribe granted it exclusive rights to a regional market in exchange for revenue payments to the state of 8 percent to 12 percent.

The gambling landscape grew even more crowded in 2003, when the state established Club Keno, a pick-a-number game entrenched in thousands of bars across the state. It racked up $526 million in fiscal 2012, more than a fifth of lottery total revenues.

That prompted two tribes – the Little River Band of Ottawa Indians in Manistee and Little Traverse Bay Band of Ottawa Indians in Petoskey – to halt their 8 percent payments to the state that were part of their 1998 gaming compacts. The tribes argued that Club Keno was the equivalent of a commercial casino game.

The state sued the tribes in 2005, contending Club Keno was an extension of the lottery's Keno game in effect when the compacts were signed. The suit was settled in 2008, with the state agreeing to cut its revenue share from 8 percent to 6 percent. The tribes were awarded $26 million of $52 million in gaming revenue that had been put in escrow since the dispute began.

In recent years, charity poker rooms known as “millionaire parties” have sprouted around the state, with dozens of permanent poker rooms that often offer food and alcoholic beverages, with games like blackjack and Texas Hold 'Em. In fiscal 2012, they raked in $15.6 million in profit, as some tribes grumbled about unfair competition.

Earlier this year, the state dabbled with taking the lottery online.

In January, lottery officials announced they were looking to take instant lottery games and tickets online, to computers, tablets and mobile phones. Those plans were put on hold in June when the Legislature failed to fund the idea, as some lawmakers fretted about its effect on stores that sell lottery tickets.

And gambling competition from Ohio added one more element to a market that may be approaching saturation. New casinos opened in 2012 in Cleveland and Toledo threaten to drain players from Detroit's casinos and the FireKeepers Casino in Battle Creek. Revenue from Detroit's casinos declined 0.5 percent from 2011 to 2012.

In an article for the Michigan Bar Journal, Zeke Fletcher, a former attorney for the Grand Traverse Band, wondered what the state has left to offer the 1993 tribes.

“It is possible that, given the destruction of the exclusive market, effectively the state has nothing to offer the tribes in exchange for the re-institution of 8 percent payments or an increase in 2 percent payments,” he wrote.

Deputy Press Secretary Murray said that remains to be seen.

“That will be part of the topics that are being discussed,” he said.

Ted Roelofs worked for the Grand Rapids Press for 30 years, where he covered everything from politics to social services to military affairs. He has earned numerous awards, including for work in Albania during the 1999 Kosovo refugee crisis.