Sacramento – When two wealthy California Indian tribes took the unusual step of joining the fight to overturn lucrative new gambling deals for a group of rivals, they argued that the compacts encourage big gaming tribes to flood their markets with slot machines.

The unbridled competition could swamp smaller casinos in outlying areas, particularly in north San Diego County and the Coachella Valley, the tribes‘ representatives warned.

The argument is expected to become a major theme of an expensive ballot fight over the compacts. The administration of Gov. Arnold Schwarzenegger, which negotiated the deals, and others question the claim. And, so far, few of the more remote gaming tribes that critics say could be hurt are complaining.

The pending compacts authorize up to 7,500 slots for Pechanga of Temecula and the Morongo band of east Riverside County and up to 5,000 for Sycuan of El Cajon and Agua Caliente of Palm Springs. Those numbers would enable the four tribes to build some of the biggest casinos in the world.

In exchange, the tribes agreed to give the state a larger share of the profits from 2,000 slots each now operates. In addition, they agreed to pay 15 percent of the net gain on additional machines up to 5,000 and 25 percent on any in excess of that.

Three years ago, the first group of tribes to negotiate gambling agreements with Schwarzenegger agreed to much different financial terms – a tiered scale of set fees that increase with the number of slots at a casino. The fees top out at USD 25,000 a year for each machine in excess of 4,500.

Beyond a certain threshold, additional slots tend to earn less as their numbers rise in a casino. The fixed payment was designed to discourage large expansions beyond 3,000 or 3,500 slots in any casino, said Howard Dickstein, an attorney who negotiated the 2004 compacts for Pala of San Diego County and United Auburn of suburban Sacramento.

This month, Pala and United Auburn contributed $ 500,000 each to gather signatures to qualify ballot measures that could overturn the four pending compacts.

In contrast to the 2004 agreements signed by Pala, United Auburn and three other tribes, the state’s cut under the pending compacts declines along with the average net win as machines are added to a floor, Dickstein said.
“The ’04 compacts disincentivise very large expansions because the revenue share is ratcheted up,” he said. “These compacts, the ’06 compacts, do exactly the opposite.”

Terms that fan expansion at the big casinos could devastate smaller casinos that have long relied on spillover from the larger properties, Dickstein said.

“It’s a disconnect from a policy point of view. It sends opposite signals and it creates a very unpredictable economic climate,” he said. “I don’t know that anyone’s thought this through, whether the people who negotiated it on either side had the sophistication to see any of this, but it could create chaos in the marketplace.”

Unlike the pending compacts, the 2004 agreements allow unlimited slots for tribes willing to pay USD 25,000 a year per machine at the upper end. Nonetheless, expansion under the 2004 compacts and that projected by tribes under the pending deals largely appear to support Dickstein’s argument.

Of the five tribes that signed the 2004 compacts, only the Rumsey band of Yolo County has exceeded 3,000 slots. It has 3,100 in operation, a spokeswoman said.

United Auburn has 2,740 slots with an expansion planned. Viejas, near Alpine, has 2,500. Pala has 2,274 with plans to add 250. Viejas just announced plans to build a second casino with 2,500 slots at a hotel-resort expected to open in five years.

Of the tribes that negotiated the pending deals, Morongo has told state officials it expects to add 3,000 slots, pushing its total to 5,000, as soon as possible. Pechanga said it would immediately increase to 3,750 slots. Sycuan and Agua Caliente both indicated that they expect to reach 3,000 slots within the first year.

The Schwarzenegger administration suggested that the different numbers reflect the unique markets of each tribe, not strategic decisions driven by the financial terms of their compacts.

“One has unlimited slots where the other has a fixed amount of machines,” said Sabrina Lockhart, the governor’s chief deputy press secretary. “Both are fair contributions to the state, but the revenue sharing has no impact on what the market will bear.”

Jacob Mejia, a spokesman for a coalition that Pechanga, Sycuan and the other two tribes are forming to fight the ballot measures, said the criticism of their compacts is unfounded.

“The four tribes that have these agreements have a history of growing responsibly and methodically,” Mejia said. “I think you will see very gradual increases that respond to market conditions.”

A former gaming executive who played a key role in developing the numbers for the 2004 compacts said the tiered-fee structure was intended to discourage expansion.

The tribes involved, which included most if not all of those who later signed the pending compacts, also preferred the set fees because they did not require casinos to disclose their operating revenues, said Frank Riolo, a former chief executive officer for Viejas‘ casino.

Riolo said he did not believe the latest deals would spur excessive expansion.

“Flooding the market only drives down your net win across the floor and drives up your fixed costs of doing business,” Riolo said. “I actually think the economic terms are pretty much the same.”

Michael Lombardi, a tribal gaming consultant, has stakes in both camps. Lombardi serves as a spokesman and gaming commissioner for the Augustine band, which operates an 800-slot casino in the Coachella Valley, not far from Morongo and Agua Caliente. His wife and daughter are members of Morongo and share in that casino’s success.

Lombardi said Augustine has a number of concerns raised by the new compacts, particularly because they no longer require contributions to a fund that has delivered more than $ 45 million to local governments in Riverside County. But he said the tribe does not fear the added competition.

“There is going to be enough business for all of us here,” Lombardi said. “I think Morongo, Agua and Pechanga with their new deals will create new market share by offering larger properties, and we’re all going to feed off the crumbs that fall off their table.”

Augustine joined a vote by the 14-member Tribal Alliance of Sovereign Indian Nations to oppose the campaign against the pending compacts. The powerful organization includes Pechanga, Morongo and Agua Caliente.

Representatives of the Cabazon and Twentynine Palms tribes – two alliance members with struggling casinos that compete with Morongo and Agua Caliente – were absent when the vote was taken. Representatives of both tribes declined to comment.