A RESEARCH NOTE ON INDIAN GAMING IN ARIZONA:
EVIDENCE OF RECESSION AND RECOVERY

Aliese M. McArthur, New Mexico State University
Thaddieus W. Conner, University of Oklahoma and
William A. Taggart, New Mexico State University

Abstract

This research note further investigates the effect of the economic recession on Indian gaming revenues throughout the country, with a focus on the Indian gaming industry in Arizona.  An analysis of quarterly contributions to the Arizona Benefits Fund, which are based on tribal net win revenues, reveals that not only has Indian gaming experienced declines coinciding with the recent economic recession, as previous notes have reported, but more importantly that the industry is showing signs of recovery.  As detected elsewhere, the strategic response of the gaming tribes in Arizona to the recession was to introduce more slot machines, though they did not reach the statewide cap and now appear to be decreasing their numbers.

Gaming in a Down Economy, Evidence of Recovery

The recession that swept the nation in late 2007 has provided evidence that casino gaming may not be the Òrecession-resistant" industry it was once considered to be.  The American Gaming Association (AGA) reported that 2008, the year following the onset of the recession, was tough on commercial gaming, with some states experiencing upwards of 20% declines in gaming revenues (AGA 2008).  A poll conducted by the AGA discovered that this overall negative position was due largely to a decrease in consumer spending, similar to the decrease in many other industries.  The AGA points out, however, that not all states experienced the same decline, with some states such as Pennsylvania, a relatively new gaming entrant, experiencing their largest increases in the same year.  The following year the news was no better, as the AGA (2010) continued to report that the commercial gaming sector remained in a downward spiral as the recession persisted.

There is some recent evidence to suggest that the economic tide may be turning.  In September 2010, the National Bureau of Economic Research announced that the recession had ended in June 2009, amid debate as to whether or not the country had seen the worst of it (NBER 2010).  If the economy has indeed shown signs of recovery and the gaming industry is susceptible to shifts in the economic climate, as prior research suggests, then we should expect to see a possible recovery in gaming revenues. In fact, a more recent AGA report shows that gaming revenues may indeed be rebounding (AGA 2011).  In 2010 commercial casinos saw a 0.9% increase in gross gaming revenues, in comparison to a 5.5% decrease in 2009 (AGA 2010).  While it is not clear whether this increase is due to the end of the recession or the expansion of gaming, 14 of 21 states with commercial gaming saw an increase in revenues in 2010.  Except for New Jersey, which likely saw large revenue decreases due to increased regional competition, revenue losses in 2010, for those states which experienced them, were small in comparison to previous years.

A similar story has been unfolding in the Indian gaming industry (Meister 2010).  As previous research notes have indicated, Indian tribes with casinos in states such as New Mexico, Connecticut and California have experienced decreases in gaming revenue similar to those in the commercial industry, with tribes in Connecticut experiencing declines as early as late 2007 (Conner and Taggart 2009a, 2009b, 2010b).  By 2009, approximately one-third of the Indian gaming tribes across the nation were experiencing revenue losses of more than 9% (Palermo 2009).  Also similar to the commercial industry, not all states with Indian gaming have witnessed significant declines.  Oklahoma, for example, experienced continued growth through the end of 2009 (Conner and Taggart 2010a).  This growth, likely fueled by the expanding nature of Indian gaming in the state as well as little regional competition, also mirrors the experience of states with newer gaming activities, such as in Pennsylvania.  If Indian gaming indeed follows the same patterns as commercial gaming, then we can expect to see indications of recovery in these revenues as well.

To continue our investigation into the effects of the economic recession on Indian gaming, we focus this research note on the gaming nations in Arizona.  As a state that was hit particularly hard by the economic downfall, ArizonaÕs recession persisted into 2010, with some signs of recovery beginning in 2011 (Beard 2010; del Puerto 2011).  As early as 2008, the Executive Director of the Arizona Indian Gaming Association, Sheila Morago, briefly noted that, Òlike almost every business and industry, gaming [in Arizona] was adversely affected by the overwhelming economic crisis that impacted our nation this year" (AIGA 2008).  In 2009, PalermoÕs article on the national recession pointed out that in Arizona, tribes experienced a 16.1% decrease in gaming revenue in the fourth quarter of 2008 and another 9.4% in the first quarter of 2009 (Palermo 2009).  Little recent research exists that explores the impact of the recession on Indian gaming in the state, however.  This research note will continue the study into the impact of the recession on Indian gaming in Arizona, with a focus on potential recovery.

Indian Gaming in Arizona

In 1994, Indian gaming became a part of the Arizona landscape with the signing of 16 Tribal-State Gaming Compacts (Arizona Department of Gaming [ADG] 2011).  Today, all but one of the 22 federally recognized nations in Arizona have a valid compact in place, permitting the operation of Class III games under the Indian Gaming Regulatory Act of 1988.1 Fifteen of the tribes with compacts operate 23 casinos, while the other six have slot machine rights, which they lease to the others with gaming facilities.  The most recent round of compact agreements, signed in 2003, last a decade and permit renewal for an additional 13 years.  Among other regulatory items, the compacts limit the number of slot machines in the state to 18,158, approximately 15,000 of which are in use.  Other provisions require tribes to report their net win revenue on a monthly and quarterly basis to ADG and to make quarterly contributions to both the Arizona Benefits Fund (ABF) and to Arizona cities, towns and counties.

The amount a tribe contributes to the state is based on its Class III net win revenue (ADG 2011)2 The percent of net win revenue that a tribe pays ranges from 1 to 8 % according to a sliding scale (see Table 1).  Of the total amount, 12% goes to Arizona towns, cities and counties of a tribeÕs designation, while the other 88% goes to the ABF.  Money paid into the ABF is distributed, based on set percentages, between education, healthcare, tourism, wildlife conservation and other programs throughout the state. 

Table 1: Arizona Sliding Scale for Determining Tribal Contribution

Net Win Revenue

Contribution

First 25 Million

1%

Next 50 Million

3%

Next 25 Million

6%

Above 100 Million

8%

Pursuant to privacy clauses in the Arizona gaming compacts, information on tribal net win revenues are not available to the public.  However, the ADG does provide yearly data on tribal contributions.  This data begins with fiscal year 2004, which runs from July 1st, 2003 to June 30th, 2004, the first year operating under the most recent compacts (ADG 2011).  Through e-mails and telephone calls with officials at ADG, we were able to secure quarterly contributions to the ABF from the beginning of FY 2004 through the third quarter of FY 2011.  This provides 31 time points on which to base our analysis, decidedly enough to detect trends in the data.  Although the progressive nature of the sliding scale magnifies the fluctuations to some degree, ABF payments are a direct function of gaming revenues over time.  As part of our analysis, we also examine the number of slot machines in operation in Arizona from 2004 to 2011 to explore whether these tribes, like those in California and Connecticut, have been increasing the numbers as a strategic response to the effects of the economic recession (Conner and Taggart 2009b, 2010b).

Gaming Contributions and Slot Machines in Arizona

Figure 1 displays the total contributions to the Arizona Benefits Fund between FY 2004 and FY 2011.  Most notable in this graph is the annual cyclical pattern.  In five of seven years for which we have data spanning all four quarters, contributions were highest in the fourth quarter (April through June).  The two exceptions to this, where contributions were actually lower in the fourth quarter than the first (July through September), are in 2008 and 2009, the first two full years of the recession.  In all seven years, contributions were lowest in the second quarter (October through December) Ð a trend which has also been observed in other states. 

Figure 1: Total Tribal Contributions to ABF between the First Quarter of FY 2004 and the Third Quarter of FY2011, in Millions

In addition to the annual cyclical pattern is the general upward trend of contributions through the end of 2007 followed by a general decline apparent through 2010. Also through 2007, the first quarter of the fiscal year is higher than the fourth quarter of the previous year, but beginning with the first quarter of FY 2008 and continuing through FY 2011, we see that first quarter contributions fall below the fourth quarter of the previous year.  This curvilinear pattern suggests that, like in other states, Arizona gaming revenues have been susceptible to the downward fluctuations in the economy.  Since this research includes post-recession time points Ð four quarters after the Arizona recession was declared over Ð this is the first time we observe some recovery, with a slight upward trend in the first three quarters of FY 20112

We calculated the percent change in tribal payments between successive quarters and the percent change between corresponding quarters in successive years (percent change every four quarters) and have summarized this information in Figure 2.4 Although no additional patterns are readily apparent in the quarterly changes, the percent change every four quarters paints a much clearer picture of the trends in contributions.  The high level of percent change seen in the first few years is likely due to the new compacts signed in 2003, at which time the Indian gaming industry in the state was continuing to grow.  Though the percent change decreases every four quarters in all years leading up to the recession Ð with the exception of 2006 Ð the state did not experience an actual loss in revenue sharing payments compared to the previous year until the third quarter of 2008, corresponding with the depth of the recession.  At this point, there were nine consecutive quarters in which there was a loss in comparison to the quarter the year before.

Figure 2: Quarterly Percent Change in ABF Contributions and Percent Change Every Four Quarters between FY 2004 and FY 2011

Besides evidence of the deterioration of revenues associated with the recession, there are also signs of potential recovery. Other than briefly in the second quarter of 2006 and again in the third quarter of 2009, we do not see substantial improvement in percent change every four quarters until the second quarter of 2010, or a positive percent change again until the first quarter of 2011.  This would appear to suggest that Indian gaming in Arizona is now experiencing some degree of recovery.

Another trend more recently discovered in the relationship between the economy and Indian gaming is the response of some Indian gaming nations to the effects of the recession.  While cuts in employment have been a widespread response from both commercial and Indian casinos alike (AGA 2008, Palermo 2009), research shows that some Indian tribes are pursuing other strategies as well (Conner and Taggart 2009b, 2010b).  In early 2008, for instance, the gaming tribes in California began increasing the number of slot machines in play, which simultaneously decreases the number of employees on the floor and potentially increases revenues.5 The two gaming nations in Connecticut adopted a similar approach in response to declining revenues.  Although the strategy of combining cutting employment with increasing slot machines does not eliminate the effects of the recession on gaming revenues, it does potentially soften the impact. 

Figure 3 displays the number of slot machines in use in Arizona by quarter from the beginning of FY2004 through the third quarter of FY2011.  Although there is a steady increase in the number of slot machines from FY 2004 through FY2010, there is a noticeable steepening of the slope in FY 2007, during the beginning of the recession, and a leveling off in FY 2009, near the end.  In FY 2010, as we observe increases in percent change every four quarters in contributions for the first time since the recession (Figure 2), we also witness a slight decrease in the number of slot machines in use. 

Figure 3: Number of Slot Machines in Use in AZ, FY 2004 through FY2011, in Thousands

Figure 4 displays the relationship between the percent change every four quarters in the number of slot machines and the percent change every four quarters in contributions to the ABF.  The correspondence between changes in the number of slot machines and contributions is strong.  Most evident is the specific years in which contributions were down and slot machine numbers were up Ð early 2008 through mid 2010 Ð which overlap precisely with the timeline that economists have given for ArizonaÕs recession.  Furthermore, the end of ArizonaÕs recession in 2010 is not only the first time that percent change in contributions every four quarters is once again positive, but it is also the first time in the entire series in which the percent change in slot machines is negative.  This indicates that not only did the gaming tribes in Arizona increase the number of slot machines on the casino floor during the recession, but are also now consciously decreasing the number as the economy appears to be improving.

Figure 4: Percent Change Every Four Quarters in ABF Contributions and Slot Machines

Summary and Conclusion

As previous research has indicated, casino gaming is not as recession-resistant as it was once considered to be, as further evidenced by the experience of the Indian gaming tribes in Arizona.  When the economy was down from early 2008 through late 2010, so were revenue contributions from Indian gaming to the Arizona ABF. Furthermore, Arizona tribes appear to be adopting a similar business strategy as tribes in California and Connecticut; during tough economic times, they increase the number of slot machines, which are more cost effective than table games. 

Perhaps the most important lesson learned from this research is that the Indian gaming industry in Arizona appears to be making a recovery.  While previous research has shown the link between the economy and both commercial gaming and Indian gaming as well as the potential recovery of commercial gaming, this research seems to suggest that Indian gaming may be on the path to recovery as well.  Although Arizona is just one state where Indian gaming is showing signs of recovery, it is an economy that was hit particularly hard by the recession.  In light of this, the experiences of the tribes in Arizona the past few quarters may suggest good news for Indian gaming nations throughout the country as they look to the future.

Footnotes

1 Class III gaming under the IGRA includes such things as slot machines and table games where players compete against the house, as in blackjack and roulette.

2 "Net win revenue" is defined by ADG as Òthe difference between gaming wins and losses before deducting casino operating costs," which is not the net profit of an operation.

3 The last four quarters of data are from ADG news releases, which are subject to revisions by the tribes before posting by the state the following quarter.

4 Calculating percent change and percent change every four quarters results in the loss of one and four time points, respectively.

5 The AGAÕs 2011 ÒState of the States" reports that all states with table games and slot machines get at least 63% of their gaming revenue from slot machines, while for some states the percentage is much higher.

Refbacks

  • There are currently no refbacks.