Tribal Gaming: State is losing a casino jackpot

While battling a tough economy, Michigan has lost out on more than USD 300 million in revenue from Native American casinos since the state’s deal with seven tribes allowed them to halt payments, a Free Press analysis has found.

The lost revenue could easily double by the time the tribal pact with the state expires in seven years. The tribes were obliged to pay the state a share of profits only as long as they held a slot machine monopoly in Michigan. That monopoly ended when the state opened gambling to other tribes in 1998.

The Free Press also found that the state’s 17 tribal casinos — now a billion-dollar industry — attract almost no scrutiny from state or federal authorities.

State officials rarely set foot in the casinos. They almost never check to make sure tribes aren’t hiring key casino employees with criminal backgrounds. And they only occasionally examine the books to ensure that tribes pay what was promised to neighboring Michigan communities when tribal gaming was approved in 1993.

Federal officials have never once audited a tribal casino in Michigan.

When gaming officials do take a close look, they sometimes uncover problems that mean thousands, even millions, of dollars to Michigan taxpayers.

Dan Gustafson, executive director of the Michigan Gaming Control Board, acknowledged the agency’s history of weak oversight. He blamed it on inadequate staff and funding, and the need to be sensitive to the tribes. Federal officials also blamed a lack of staff and money.

„Given the authority that we have and the resources that we have, we’re doing the best job we’ve done since the casinos opened,“ Gustafson said.

The tribes counter that they scrupulously regulate themselves, so no outside oversight is necessary.

„Take a look at Indian gaming across the country — you rarely hear a story about fraud or corruption or mob influence,“ said Steven Morello, former general counsel to the Sault Ste. Marie Tribe of Chippewa Indians and now a candidate for the tribe’s board, which oversees the tribe’s five casinos. „I’ve got to conclude the Indian people have done a fairly good job of regulating themselves.“

Kathryn Tierney, a lawyer for the Bay Mills Indian Community, which runs two Upper Peninsula casinos, said „there is every incentive“ for tribes to run clean operations, treat customers well and meet obligations to the state.

„The revenue generated by gaming is the tribe’s revenue,“ she said. „You are protecting a tribal asset.“

But some legislators say they don’t feel assured.

„The whole idea of regulation is it keeps everybody honest,“ said state Rep. Fulton Sheen, R-Plainwell, a member of the House Government Operations Committee, which oversees the workings of state government. We regulate our Detroit casinos, why are they“ — the tribal casinos — „treated any differently?

„To me, it’s a travesty.“

Rochelle Busbee, a Detroiter who organizes bus trips to northern Michigan casinos two or three times a year, said she cannot understand the state’s hands-off approach.

„You have people traveling from everywhere, spending their money,“ she said of gamblers. „They should be treated fairly, and the gaming commission needs to oversee it. That’s my opinion.“

Michigan’s loose oversight of the tribes contrasts sharply with its regulation of Detroit’s three casinos. The state gaming board receives USD 27 million a year to keep tabs on Detroit casinos, including background checks and slot machine inspections, but just USD 275,000 annually to oversee the 17 tribal casinos.

Other states have stricter oversight and collect more from tribes. Connecticut regulators, for example, routinely scrutinize the tribes‘ finances and gambling equipment. They also collect 25% of slot machine profits, far more than Michigan.

A dicey 13-year history

In 1993, Gov. John Engler negotiated a deal that legalized casinos for seven tribes in Michigan. The state, under a federal law passed five years earlier, wrote a compact with tribes that wanted to run casinos.

As part of the deal, the seven tribes pledged to give 2% of slot machine profits to communities near their casinos and another 8% to the state. But the tribes had an out: If they ever lost their slot machine monopoly in Michigan, they could cut off the 8% payments.

Without the agreement, the state had no claim on the tribes‘ casino revenue. Michigan can’t collect taxes from tribes because they are sovereign nations.

The tribes also agreed to open their books to state inspectors, comply with federal gambling laws and state liquor laws and, for certain key jobs, avoid hiring anyone convicted of a gambling offense, fraud or similar crime.

All but one of the original seven tribes stopped their 8% payments by 1999 because the state had agreed a year earlier to let another four tribes open casinos. Those four tribes also promised to pay 8% of profits to the state, though only two — the Little River Band of Ottawa Indians and the Little Traverse Bay Bands of Odawa Indians — later opened casinos.

But they too stopped paying, in 2004, claiming the state lottery’s new Club Keno game infringed on their deal. The state has sued to force the tribes to turn over the money. The case is pending.

In all, Michigan collected $ 216 million in 8% payments before the tribes stopped sharing their profits.

If the first seven tribes had continued to make their payments, the state would have collected another $ 337 million through 2005, according to a Free Press analysis of gambling revenue reported to the state. That’s enough money to restore state funding of the public university system to 2001 levels. The revenue would have kept rolling in until 2013, when the tribes‘ 20-year agreement with the state is to expire.

The gaming board has the right to inspect gambling records, but has completed just 12 audits of tribal casinos since 1993. During a five-year stretch from 1999 through 2004, the agency never completed a single audit, records show.

On the rare occasions the state has probed tribal casinos, it has found problems.

In 2004, auditors discovered the Hannahville Indian Community had shortchanged state and local taxpayers for years, an amount they estimated at USD 3 million or more. The state sued the tribe and won. The tribe has appealed.

Auditors also discovered some tribes spent a share of their profits — money that was earmarked for communities near casinos — on themselves or pet causes. One tribe used USD 700,000 to pay its members‘ property taxes, rather than giving it to a community as they’d agreed.

And in 2003, a state gaming employee noted that Fred Dakota, a member of the Keweenaw Bay Indian Community tribe who had served prison time for accepting bribes from a slot-machine vendor, had won a seat on the tribal council, which oversees the tribe’s casinos. He remains on the council.

Some records also showed some tribes had failed to ensure their slot machines were making the proper payouts. Other tribes refused to provide records, but the agency did nothing.

Gustafson, the gaming board chief, and Eric Bush, who oversees tribal gaming enforcement for the state, said the gaming board has become more aggressive in recent years, having completed six audits since 2004, including the one in Hannahville.

Gustafson said the agency faces roadblocks in scrutinizing tribal records. One key concern, he said, is that the state is trying to respect the tribes‘ sovereignty while protecting its own interests. He and Bush, in interviews, repeatedly stressed the need to be sensitive in dealing with the tribes.

„In fact, they won’t even let us call them audits,“ Gustafson said. „They want us to call them inspections. They’re very sensitive about the word ‚audit.‘ „

Bush said, „You have to have infinite patience with the tribes.You can’t tell the tribes to do anything.“

Tierney, the Bay Mills attorney, counters that state officials can be „overzealous.“

„When we think that does occur,“ she said, „we say you’re acting beyond the scope of your authority.“

Other states keep eyes open

William Thompson, a Nevada professor who writes about the gaming industry, said casinos — tribal or not — need strict oversight because the cash involved creates endless opportunities for skimming, money laundering or other corruption.

„It demands a lot of security. This means multiple eyes watching, people with different interests watching to make sure it’s safe,“ said Thompson, a professor of public administration at the University of Nevada, Las Vegas.

Several states contacted by the Free Press reported having more employees who inspect and audit casinos than Michigan does.

In Arizona, more than 100 employees oversee 22 tribal casinos. Michigan has just three. New York has 54 workers assigned full-time to roam four tribal casinos, looking for violations. Michigan has no one in that role.

Bush and Gustafson contend that their agency is doing the best it can with the meager budget set aside for tribal oversight. Under deals negotiated with the state in 1993 and 1998, tribes pay either USD 25,000 or USD 50,000 a year to fund state oversight of their casinos.

The state, until recently, did so little it refunded part of this modest budget to the tribes each year.

By contrast, the state assigned 102 employees to Detroit’s casinos after Michigan voters approved them in 1996. Under state law, the three Detroit casinos paid a combined USD 27 million last year to the gaming board — or 98 times the USD 275,000 the tribes paid the state to monitor their casinos. The state spent USD 16 million of the USD 27 million on regulation of Detroit casinos. Put more starkly, that’s USD 5.3 million a year to oversee a Detroit casino — compared with a little more than USD 16,000 annually for a tribal casino.

Bush and Gustafson said the National Indian Gaming Commission, which monitors casinos on the federal level, needs to take a tougher stance in monitoring casinos to help reinforce the state’s efforts.

Federal officials have never conducted their own audit of any Michigan tribal casinos. The commission’s annual budget is capped at just USD 12 million and it has a staff of 95 — and must oversee about 400 casinos and other gaming operations nationwide.

„Tribal gaming is too big,“ Bush said. „The feds have to tighten up, show some leadership in working with state regulators and the tribes.“

But Shawn Pensoneau, a spokesman for the commission, said federal officials aren’t the primary casino regulators, either. „The tribes are the primary regulator,“ he said.

Speaking of Michigan, he said, „There isn’t anything that I’m aware of, at this time, that resembles a crisis.“

Not everyone is so satisfied.

John Wernet, deputy legal counsel to Gov. Jennifer Granholm and her liaison to the tribes, said the state gaming board has been more assertive but frustrations remain:

„Am I satisfied with the progress we’ve made? No. It’s been a lot slower and more difficult than I would have preferred.“