Analysts: IGT, Station to benefit from deal

Tuesday, June 22, 2004 | 10:37 a.m.

BLOOMBERG NEWS

SACRAMENTO -- California Gov. Arnold Schwarzenegger signed new casino agreements with five Indian tribes Monday to provide $1 billion to the state next year, keeping a campaign promise to tap gambling money to fill budget deficits.

The new compacts may be models for other tribes allowed to operate casinos as Schwarzenegger renegotiates arrangements cut with his predecessor, Gray Davis, that didn't provide money to the state. The agreements will pave the way for an expansion of gambling in the most-populous U.S. state by eliminating a 2,000 slot-machine limit at casinos in exchange for the payments.

"This is a fair deal for the tribes and for the state," Schwarzenegger said before a crowd of 300 gathered at an auditorium near the Capitol for a signing ceremony. "I'm hopeful more tribes will join us."

California's finances will be given a boost as lawmakers work to meet Schwarzenegger's request to pass a budget by July 1, the start of the new fiscal year, for the first time in four years. Expanding the $5 billion-a-year industry in California will also benefit companies such as slot-machine maker International Game Technology of Reno and casino operator Station Casinos Inc. of Las Vegas, analysts say.

"It's good for slot machine manufacturers like IGT," said Joseph Greff, a gambling industry analyst for Fulcrum Global Partners, which doesn't have any financial ties to those companies. "For the few publicly traded managers of these tribes, like Stations, it will be strategically, financially positive for them as well."

The agreements with the Pauma, Pala, Viejas, Rumsey and United Auburn tribes will provide $1 billion to the state during the new fiscal year, financed by a bond that will be repaid by the tribes over 18 years. The tribes will pay fees on new slot machines on a sliding scale, ranging from $12,000 per machine for any over 2,000 to $25,000 for any added over 4,500, according to copies of the agreements posted on the governor's Web site. The agreements expire in 2030.

"This agreement is a great victory for everyone involved," said Anthony Pico, chairman of the Viejas tribe, one of the five tribes, at the Sacramento ceremony. "This agreement provides necessary revenue to the state of California to help with its budget situation."

Schwarzenegger's budget for the fiscal year that will begin next week, which hasn't been approved by the Legislature, assumes $500 million from Indian tribes to help close a $14 billion budget deficit. The governor estimated the state will reap another $150 million to $200 million a year from fees on new slot machines.

The bond proceeds will finance transportation projects, the governor said. Details about the bond, such as which California agency would be charged with selling it, have yet to be determined.

The agreements are a political victory for Schwarzenegger, who vowed during his run for office last year to force the tribes to pay their "fair share." Indian tribes contributed more than $2.6 million to Lt. Gov. Cruz Bustamante's bid for the governor's office, including $1.5 million from the Viejas, campaign finance records show.

Since taking office seven months ago, the Republican governor has also met pledges to roll back an increase in vehicle taxes, repeal a law that granted driver's licenses to illegal immigrants and reform the workers compensation system.

Schwarzenegger, whose approval rating in a recent poll was 65 percent, said he would oppose two rival initiatives on the ballot in November, both of which would expand the number of slot machines in California by allowing Indians to add more or by giving racetrack and card room owners the right to own slot machines should casinos not agree to surrender some of their winnings.

Unless one of the initiatives passes, the tribes will maintain a monopoly on Nevada-style gambling in California contained in a 2000 initiative that authorized gambling on reservations.

"I will also protect this partnership, and the will of the people, by working to defeat the gaming initiatives set for the November ballot," Schwarzenegger said. "I urge voters to join me and preserve the exclusive rights they voted to give the tribes back in 2000."

Sixty-four tribes entered into casino-operating agreements under Schwarzenegger's Democratic predecessor, said Susan Jensen, a spokeswoman for the California Nations Indian Gaming Association. There are 53 casinos open, according to the California Gambling Control Commission. The tribes don't make payments into California's general fund. Instead, they contribute to a fund that pays for services on reservations that don't operate casinos.

By removing the 2,000-slot limit, new compacts would expand gambling in California. Fulcrum Partners analyst Greff said another 25,000 to 40,000 slots could be added to casinos. International Game is the largest seller of slot machines in the United States. Jensen said 10 to 12 tribes currently operate at the limit.

Station Casinos operates a casino near Sacramento for United Auburn. Caesars Entertainment Inc. has a tentative agreement to develop one near San Diego on behalf of the Pauma and sees the California market more as a source of expansion than a threat to Las Vegas, the nation's gambling capital that is booming despite challenges by Atlantic City, Detroit, riverboat gambling and Indian casinos nationwide.

"We think the California Native American gaming market is a significant opportunity for us," Robert Stewart, a spokesman for Caesars, said. "What differentiates Las Vegas is not the gambling. It's the entertainment, the retail, the dining. All those sorts of things."