Online state lottery games spark feud with tribal casino operators

A dispute between an American Indian tribe and the state over online lottery games has put a 21st-Century twist on a decades-old debate over how much casino revenue tribes should share with the state.

How it’s resolved will have financial consequences for Michigan, which has depended on tribal dollars to fund almost $60 million of statewide economic development efforts annually.

What’s murky in making financial projections is whether the state can preserve revenue-sharing agreements with tribes in the long term; some tribes believe the expansion of Internet lotteries negates their obligation to share their gaming proceeds.

And one Michigan tribe has already discontinued payments in protest.

Budget uncertainty

Attorneys who specialize in tribal law say there’s no precedent to determine whether states or tribes are right in their interpretation of how online lotteries influence a key provision of gaming compacts that offers tribes exclusivity.

In practice, that means allowing tribes to be the sole casino operator in a specified geographic area. That exclusivity is provided in exchange for paying a portion of electronic gaming revenue to the state.

At stake is $7 million up to $60 million in funding toward state economic development efforts, depending on whether other tribes follow suit to the protest initiated by the Gun Lake Tribe. Gun Lake stopped making revenue-sharing payments two months ago.

The state could face unexpected budget deficits if tribes decide to withhold payments, as the Michigan Economic Development Corp. disclosed last week. And, since states are barred from taxing tribes or otherwise forcing them to fork over cash under federal law, there’s no easy remedy.

State proceeds from online lottery operations are not linked to economic development; that funding goes toward the state’s School Aid Fund. Net proceeds from online lottery sales — the total amount played minus the amount paid to winners and other administrative costs — total $15.9 million so far in 2015, according to the state. Still, the Match-e-be-nash-she-wish Band of Pottawatomi Indians — the full formal name of the Gun Lake Tribe — believes the state broke the noncompete provision of its compact when the Michigan Lottery started to sell online games last summer. The tribe says this possibility was discussed when its compact was negotiated in 2007.

The state disagrees that it violated the compact by expanding the lottery, both via games on its website and new electronic ticket-dispensing machines.

Regardless, the Gun Lake Tribe yanked its payments in June.

Lean times possible

The loss of that single payment blew a $7 million hole in the MEDC’s year-end budget, ending Sept. 30, according to the agency. Its CEO, Steve Arwood, warned of lean times ahead as the agency reorganizes to compensate for fewer dollars. Layoffs are possible.

The MEDC has not yet said what programs or services could be cut or changed, nor how many employees could lose their jobs. The agency declined to make Arwood or other administrators available for an interview last week.

But in a statement, Arwood said the financial effects could double in the 2016 fiscal year that starts Oct. 1 if a resolution on the tribal casino revenue sharing isn’t reached and the Gun Lake tribe forgoes its biannual payments this fall and next spring.

The MEDC says it also faces a roughly $15 million year-over-year budget cut to its business attraction and community revitalization funding as of Oct. 1. The Legislature also recently eliminated the state’s film incentives program.

The MEDC was reorganized earlier this year under the state’s Department of Talent and Economic Development, which has a $1.2 billion budget for fiscal year 2016.

In May, the MEDC alone was working with a proposed $403 million budget, but lawmaker scrutiny and pressure to cut costs has its operating budget in flux. State officials couldn’t provide a current year or FY 2016 agency budget on Friday.

“It goes without saying that the scale and scope of our program must be reduced,” Arwood’s statement said.

Where funding goes

The MEDC this spring was the target of lawmakers who proposed yanking the roughly $60 million in annual tribal gaming revenue as part of a road-funding solution — a proposal that hasn’t gone anywhere.

An important caveat to the state funding puzzle: Tribal revenue-sharing funds are not subject to any kind of state appropriations process that works through the Legislature. They are direct payments.

The Gun Lake Tribe, which operates a namesake casino in Allegan County, paid $13.3 million to the state from Oct. 1, 2013, through March 31, 2014, according to figures from the Michigan Gaming Control Board.

That was nearly a quarter of the MEDC’s total tribal revenues of $56.9 million that year, data show.

The money contributed by five tribes — Gun Lake, Little River Band of Ottawa Indians, Little Traverse Bay Bands of Odawa Indians, Pokagon Band of Potawatomi Indians and the Keweenaw Bay Indian Community — have funded MEDC community development, business attraction and tribal business programs, agency spokeswoman Kathy Achtenberg said. Tribal funds also are used to pay for programs such as Pure Michigan Business Connect, which matches companies with in-state vendors and suppliers.

Revenue sharing from the Nottawaseppi Huron Band of Potawatomi Indians, meanwhile, funds the Michigan Strategic Fund and does not directly support MEDC operations, Achtenberg said.

Changing markets

Tribes may not like Internet lotteries — an attorney for the Sault tribe said most, if not all, of the state’s 12 tribes that operate casinos are “deeply concerned” about expansion — but they’re here to stay.

Nationally, the expansion of state lotteries routinely is cited in tribal disputes over revenue sharing, said Eric Dahlstrom, a tribal law attorney with The Rothstein Law Firm in Tempe, Ariz., who is not connected to the Gun Lake case.

As for the Gun Lake Tribe’s compact, which authorizes the Gun Lake Casino, the terms of the arrangement call for a graduated revenue-sharing system. The revenue sharing ranges from 8 percent of net winnings up to $150 million to 12 percent of net winnings of at least $300 million.

A tribe statement said both parties knew the beginning of online state gaming would change the relationship.

“At that time, it was clear that Internet lottery sales would result in elimination of (the) tribe’s state revenue-sharing payments,” the tribe said in a statement, declining to elaborate. “Both parties agreed that if the state introduced Internet lottery sales or expanded other forms of electronic gaming to social clubs within the tribe’s market area, that the tribe would not have to make state revenue-sharing payments.”

Dave Nyberg, Snyder’s associate legal counsel and tribal liaison, who is based in Marquette, said despite the disagreement over the issue, the relationship between state officials and Gun Lake tribal officials is amicable, and both sides still believe a resolution can be reached.

Gun Lake’s tribal council said in a statement it made a payment in December 2014, despite its belief the tribe was not required to do so.

Nyberg said meetings are ongoing, but would not disclose what is being discussed.

Future of gaming

A 2011 U.S. Department of Justice ruling paved the way for online lotteries by lifting a ban on Internet gambling with the exception of sports betting.

Today, the Michigan Lottery counts 160,000 registered online players and growing, spokesman Jeff Holyfield said. Overall, it’s still small business — Holyfield said net proceeds from digital games are just 2.3 percent of the entire lottery’s net winnings.

But by 2022, the state is projecting online lottery sales will have netted an additional $480 million in revenue, Holyfield said. That’s because of increased options to reach customers on smartphones, tablets and laptops.

“This is part of our overall digital strategy,” he said.

But because the questions on how tribal casinos and online gaming can operate in tandem remain unsettled, Dahlstrom said he believes there will be more cases that review the terms of state compacts.

“The fact that it’s run by the state versus a private entity isn’t really relevant,” Dahlstrom said. “The technology is changing within the lottery world, so that as lotteries start to figure out how to use the Internet … it changes the competitive field. And I think we’re going to see more of that.”