Budget & Tax

State has ‘significant work’ ahead on gaming compacts

July 24, 2020

Ray Carter

The Oklahoma Supreme Court has struck down casino gaming compacts negotiated by Gov. Kevin Stitt with two tribes, ruling the governor exceeded his authority by including sports betting in the compact agreements.

The new compacts were primarily opposed by other tribal casino operators, including those who have received an outsized share of Oklahoma’s gaming revenue under prior compacts. Stitt and the participating tribes argue the new compacts increase economic benefit to smaller tribes that are at a substantial disadvantage under the old system. The new compacts also laid the groundwork to increase the fees paid by other tribes operating Oklahoma’s largest casinos, raising those fees to levels paid in many other states.

The lawsuit challenging Stitt’s agreements was filed by House Speaker Charles McCall, R-Atoka, and Senate President Pro Tempore Greg Treat, R-Oklahoma City. While that lawsuit was technically based on “separation of powers” arguments regarding the executive and legislative branches, some of the politicians and attorneys making that argument have notable ties to the state’s largest casino operators who oppose the efforts of Stitt and smaller tribes to reach new agreements.

The Oklahoma Supreme Court’s Ruling

In its ruling, the Oklahoma Supreme Court found that tribal gaming compacts Stitt entered into with the Comanche Nation and Otoe-Missouria Tribe are “invalid under Oklahoma law.”

The court wrote that Class III gaming is legal only so long as it complies with provisions of the State-Tribal Gaming Act, which is “game-specific.” That law currently prohibits event wagering, better known as sports betting, the court ruled.

“The Legislature has yet to amend the State-Tribal Gaming Act to include house-banked card and table games and event wagering as covered games,” the ruling stated. “As a result, the tribal gaming compacts at issue authorize types of Class III gaming expressly prohibited by the State-Tribal Gaming Act. In turn, any revenue to the State, the Comanche Nation Tribe or the Otoe-Missouria Tribe that would result from the tribal gaming compacts is prohibited. The Court must, therefore, conclude Governor Stitt exceeded his authority in entering into the tribal gaming compacts with the Comanche Nation and Otoe-Missouria Tribes that included Class III gaming prohibited by the State-Tribal Gaming Act.”

McCall said the ruling means Oklahoma “and its tribal nations can move forward from this together as partners, as we have done for decades with great success.” 

Attorney General Mike Hunter, who also opposed the governor’s efforts, said, “We hope this settles and advances the resolution of gaming compact negotiations.”

Conflicts of Interest?

Hunter and McCall have previously been identified as major recipients of campaign donations from tribal entities. The state’s largest casino operators, who oppose renegotiation of compacts, are among prominent donors to political campaigns in the state. In December 2019, CNHI reported that Hunter received $54,400 in tribal donations in 2017 and 2018, far more than any other candidate in the state during that period, based on data compiled by Followthemoney.org. McCall ranked fifth on the list, according to CNHI.

And one attorney representing legislative leaders in the lawsuit—onetime Senate leader Glenn Coffee—also has ties to the state’s largest casino operators who oppose Stitt’s efforts.

Coffee was among officials involved in a 2016 settlement on water issues that tribal officials declared ensured “the Chickasaw and Choctaw Nations will have a role in significant management decisions relating to the water resources of the nations’ historic treaty area.”

Coffee also signed his name to a brief submitted to the U.S. Supreme Court by the Chickasaw and Choctaw Nations in regards to the potential re-establishment of reservations in Oklahoma as the result of Jimcy McGirt’s request to have his sentence vacated. McGirt was convicted of molesting, raping, and forcibly sodomizing a four-year-old girl, but argued he could not be tried in state court because he is Seminole and because the Muscogee (Creek) Nation’s reservation boundaries remain in place. When the court sided with McGirt, it effectively re-established the Creek reservation in Oklahoma. The ruling is expected to do the same for the former reservations of other tribes, including the Chickasaw and Choctaw Nations, giving certain tribes dramatic regulatory control throughout much of eastern Oklahoma, including Tulsa.

In the aftermath of that ruling, Choctaw Nation Chief Gary Batton issued a statement declaring tribal officials were “looking at ways to expand our sovereignty with the McGirt decision.”

Coffee also has close ties to Hunter. Hunter gave Coffee a lucrative contract to represent the State of Oklahoma in an opioid lawsuit. That contract became controversial when it was revealed by Oklahoma Watch in 2019 that Coffee was expected to receive $5.6 million “despite having no obvious role documented in court filings.” Oklahoma Watch’s “review of the publicly available court file shows little involvement by Coffee in the day-to-day work of the case.”

Roughly two months after that public disclosure, Coffee quietly withdrew from the case.

Small Tribes Pitted against Largest Operators

Under gaming compacts, tribal governments pay the state of Oklahoma a fee for the monopoly right to operate casinos. Under compacts signed 15 years ago, no tribe pays a state fee greater than 6 percent on slot machine revenue at tribal casinos. That is well below the norm in many other states today, and several Oklahoma tribes are now entering or seeking to enter other markets with far higher fees or tax rates on gambling. For example, the Choctaw Nation has sought to open a casino in Matteson, Illinois, where the top casino tax rate is 50 percent, while the Quapaw Tribe now runs a casino in Arkansas, where the tax rate is 13 percent.

While Oklahoma is home to dozens of federally recognized tribes, most of whom have casinos, the financial benefit of prior gaming compacts has accrued to only a small fraction of those tribal governments.

Data on exclusivity fees contained in the Oklahoma Gaming Compliance Unit’s Annual Report for fiscal year 2019, the most recent available, indicates the lion’s share of existing gaming revenue is controlled by only a handful of the 32 tribes listed as having operated casinos with Class III gaming in recent years.

Based on exclusivity fee payments to the Oklahoma state government, 66 percent of Class III gaming revenue is generated in casinos owned by only three of the 30-odd gaming tribes—the Cherokee Nation, Chickasaw Nation, and Choctaw Nation.

That same data indicates 81 percent of casino gambling in the 2019 budget year occurred in casinos owned by less than one in five gaming tribes.

One reason that 80 percent of Oklahoma’s gaming tribes accrue just 19 percent of Class III gaming revenue is because the existing compacts limit those tribes to remote locations removed from population centers.

Proposed Compacts Reduce Tribal Disparities

Stitt has publicly said new compacts should address that disparity.

In a public letter released early this year, Stitt indicated fees should be lower for smaller tribes operating casinos far from population centers, which would increase the economic benefit to citizens of those tribal nations. In contrast, he said tribes with major facilities near urban areas should face higher fees based on market conditions.

“I believe that a new compact should more equitably allocate fees among tribes,” Stitt wrote. “It should include protections to require vendors not to exceed national market rates. And it should address changing market conditions.

“The past 15 years have proven the exclusivity promised by the State to be more valuable than anyone anticipated,” Stitt continued. “But that value has not been enjoyed equally by all tribes or shared appropriately with the State. Increasing fees at the highest market revenue levels to better support our public schools and mental health services while reducing fees to benefit the tribes operating smaller gaming operations ought to be a topic for discussion.”

The compacts Stitt has since negotiated fulfill that promise.

The compact for the Otoe-Missouria Tribe provided for an exclusivity fee of 4.5 percent to 6 percent of the adjusted net win on slot machines at the tribe’s existing facilities. However, higher fees of 8 percent were agreed to for proposed new facilities in Noble and Payne counties and a 12-percent rate would have been levied on slot machines at a proposed new casino in Logan County.

The compact with the Comanche Nation also authorized higher rates for proposed new casinos. The Comanche Nation agreed to pay an exclusivity fee of 13 percent of adjusted net win for a proposed Love County casino, 12 percent for a proposed Cleveland County casino, and 8 percent for a planned Grady County casino.

The U.S. Department of the Interior, which must review state-tribal compacts, raised no objections to the agreements and allowed both to take effect.

The United Keetoowah Band of Cherokee Indians and the Kialegee Tribal Town have signed similar new compacts in recent weeks. Those compacts include exclusivity fees of up to 15 percent on proposed new casinos near metro areas, and do not include sports betting. Neither tribe currently operates any casinos.

Officials from both the Otoe-Missouria Tribe and Comanche Nation have said the new agreements reduce the fee they pay for their existing casino sites, which are in remote locations, boosting the economic benefit to the tribes.

While lowering the fee on small tribal casinos far from population centers, Stitt’s compacts also effectively established a top rate of up to 15 percent on some of the state’s largest existing casinos, which are mostly operated by the Cherokee Nation, Chickasaw Nation, and Choctaw Nation. Those three tribes have strongly resisted Stitt’s efforts to renegotiate compacts, and have sued in court.

Because state-tribal gaming compacts state that the agreements “shall have a term which will expire on January 1, 2020,” Stitt has argued new compacts are now required and has called for raising the fee for monopoly rights at the state’s most lucrative casino sites.

Tribal officials—including those representing the Cherokee Nation, Chickasaw Nation, and Choctaw Nation—have argued the expiration date in old compacts is negated by another provision they claim causes the compacts to auto-renew, locking in place the current low fees for decades to come.

In addition to agreeing to higher fees for more lucrative casino locations, the Comanche Nation and Otoe-Missouria Tribe also agreed that Class III games would represent a specific share of casino revenue at each site. Currently, some tribes have claimed to have increased Class II machines in their casinos, which are not subject to state fees.

It has been estimated that if all Class II machines in Oklahoma were replaced with Class III machines, and exclusivity fees were kept at the 6-percent fee rate, it would result in $80 million to $90 million more in annual fee payments to the Oklahoma government.

What Comes Next?

Stitt indicated the dispute may now shift to federal court.

“The Supreme Court decision highlights an apparent conflict between the federal law and our state laws,” Stitt said. “Oklahoma must address the entire gaming framework to ensure that all federally recognized Tribes can legally game and enjoy all the privileges conferred by IGRA (the Indian Gaming Regulatory Act). Together with the McGirt decision, it’s clear that the State has significant work to do—in partnership with the Tribes—to resolve these matters. I look forward to doing the hard work for the benefit of all Oklahomans, and to ensure a sustainable future for our State.”

Stitt has argued federal law grants governors substantial authority when negotiating gaming compacts with tribal governments.

In a statement, Otoe-Missouria Tribe Chairman John R. Shotton indicated his tribe will continue to operate under the provisions of the new compacts, aside from the sports-betting language. The compacts included a severability clause that allows them to remain intact even if specific provisions are struck down.

“The Oklahoma Supreme Court doesn’t have jurisdiction to invalidate our compact when state and federal law dictates that our compact is legal,” Shotton said. “We have said all along we do not plan to offer house-banked card and table games and event wagering until they are authorized by state law. Indeed, this condition was part of the compact, and it was unfortunately overlooked by the Court. We will continue to operate under the remaining terms of our compact pursuant to the severability clause of the compact, and we will refrain from operating any game that is not authorized under state law.”

The issue of legalized sports betting may now be in the hands of the Legislature. Lawmakers have approved comparable gaming expansions in recent years but have done so in exchange for relatively minimal payment from tribal entities.

While lawmakers approved a wide range of tax increases on working families from 2015 to 2018, including taxes on basic necessities such as transportation and fuel, they have balked at asking casinos to pay a significantly higher share. Many lawmakers are financial recipients of tribal campaign donations, including from the Cherokee Nation, Chickasaw Nation, and Choctaw Nation and officials with tribal ties.

Legislative leaders previously pushed through an expansion of gaming in 2018 at the request of the state’s tribal casino operators. Legalization of dice and roulette games at tribal casinos was authorized in return for payment of only $24 million from tribal casino operators that year.

Lawmakers who served at the time and opposed the measure have called it a giveaway, saying the state “could have gotten a better deal” and declaring the legislation “a home run for the tribes.”

Treat, who was not the Senate leader at that time, was among those who opposed the dice and roulette legislation, saying that it was giving up “our leverage as a state to negotiate a better deal—a better deal for our taxpayer, a better deal for our educators, a better, more stable arrangement between two sovereigns.” 

Lawmakers have since considered additional legislation to exempt gambling losses from a $17,000 cap on tax deductions, while preserving the cap for all other Oklahomans. That legislation, viewed by critics as an indirect subsidy for state casinos, would have reduced state tax collections by $17.8 million in year one and $8.9 million annually thereafter, wiping out much of the gain generated by the prior legalization of dice and roulette games.