The noose tightens

One of California Gov. Arnold Schwarzenegger’s tools for pulling the Golden State out of its economic black hole is becoming clearer—eliciting a piece of the action from tribal casinos. Schwarzenegger has approved expansion of five tribal casinos, two of them close to Reno’s prime markets.

And the likelihood is that this is just the start. Most of the $1 billion that will accrue to California state government in the five new compacts is in one-time revenues, so Schwarzenegger has an incentive to keep negotiating new compacts to keep the billions flowing into the state treasury to pay down the state’s debt. That substantially escalates the already serious risk to Nevada from tribal gambling, and one economist expressed the hope it would force the state to accelerate economic diversification.

The compacts provide for payments to the state of $250 million a year over 18 years and $1 billion up front. To make the billion-dollar payment to the state, the tribes will sell bonds. In exchange, the tribal casinos will be permitted to lift the 2,000-slot-machine limit, making them larger and more profitable operations—and more threatening to Nevada casinos.

It represents another incremental step in the decline of gambling in the Reno urban area, which depends on Sacramento and San Francisco for most of its customer base. The Cache Creek Casino northeast of San Francisco and the Thunder Valley Casino northeast of Sacramento both signed new compacts.

Whether that decline is good or bad news is a judgment call. Casinos in Nevada naturally see it as a problem, but others say there is an upside, though it requires not thinking of Reno’s casino economy and Reno’s economy as one and the same.

“The overall [Reno] economy is not going to suffer,” says University of Nevada economist Thomas Cargill, arguing that the non-gambling sector of the local economy has become strong enough to withstand a faltering casino sector. “It’s not as dependent as it used to be on gaming. I do not see, even though the gaming industry itself is adversely affected, the overall community being hurt. In fact, in the long run it’s going to benefit because the weaker the gaming industry is, the weaker its political influence will be, and the greater the chance for other segments of the community to exert their influence.”

The tribal casinos, while initially a threat to Nevada, were a substantially smaller one than they have since become. The first California casinos were fairly spartan affairs—large barny buildings filled with slot machines and card games and perhaps some basic food service. California gamblers looking for more of an experience—gambling, eating at elaborate restaurants and seeing world-class entertainers—kept coming to Reno.

But that has changed, and the tribal casinos have become more sophisticated. Cargill says the first generation of facilities got the California casinos up and running and bringing in money. But once they did that job, the tribes looked around for help and found it in many cases in the boardrooms of Nevada casino corporations such as Harrah’s.

“The first Indian casinos were not really competitive, but they learned very quickly. They learned you bring in management and expertise that is already competent at this, and they manage it for six or seven years until the tribes are up to speed and then hand it back to the tribes.”

Cargill says California’s deficit is a big threat to Nevada.

“They are going to be looking for revenue everywhere they can. Given the willingness of the state to support Indian casinos as long as it gets a cut, you’re going to see a lot more of this coming. And Northern Nevada is going to be susceptible to this threat for obvious reasons. This is the most serious threat Northern Nevada has received in its history.”

But that’s good news, Cargill says, because it will force Nevada to change its ways. “In the longer run, it will provide more reasons to offer incentives to diversify.” Cargill goes so far as to say, “I’m more optimistic about Northern Nevada than Southern Nevada over the long run,” because the south is so tied to a single industry.

The seriousness of the peril facing Reno-area casinos, if not the Reno area, can be seen when Cargill looks for a comparison. The only bigger economic threat the Reno metro-area casinos could face, Cargill says, is—terrorism.