Muddy holes and rusting steel: the compact’s legacy

On Wednesday, August 27, representatives of the Seneca Gaming Corporation announced that they were halting their $130 million casino hotel expansion project in Salamanca and their $333 million casino/hotel/entertainment construction project in downtown Buffalo.

Their press release blamed “various factors, including challenging economic and capital market conditions, greater demands on the company’s available cash, and increased competition and construction costs.”

According to a Buffalo News story filed the same day by Mike Beebe, “Philip J. Pantano, a Seneca Gaming spokesman…said the decision had been in the works for several weeks, since the company’s last SEC filing indicated the gambling industry was hitting a stagnant period.”

It is doubtful that the SGC’s reading of its own August 14 SEC filing was what moved them to stop construction on the two gambling sites 13 days later. If the information in that report had been the sole basis of the decision, the decision would have been made before the SEC document was even filed.

The August 27 press release did not mention the successful citizens’ lawsuit opposing the casino in US District Court or the comments in the Moody Investors’ Service June 30 credit report about the financial dangers of an unfavorable result for the Seneca gambling operation in that lawsuit. Neither did their August 14 press release on their Third Quarter 2008 Financial Results, which pointed instead to their 11 percent increase in net revenues.

Their failure to mention the lawsuit is like a coroner saying that a man with artery disease and a bullet between his eyes died from a coronary. It is distantly possible that the arteries shut him down before the slug did, but not likely. All those financial conditions listed by the SGC in their August 27 press release surely informed their decision, but it is unlikely that they alone accounted for or precipitated the shutdown of the two construction projects.

The process leading up to this decision may well have been in the works for several weeks, as Philip J. Pantano said, but that doesn’t mean the lawsuit wasn’t part of it. It means only that (1) Pantano wasn’t talking about it, and (2) they couldn’t know what choice they would have to make until the lawsuit was decided and, as soon as it was, the last step took less than a day.

What the judge said

Judge William M. Skretny had ruled on August 26 on the motion from casino opponents asking him to order the National Indian Gaming Commission (NIGC) to close the Buffalo operation down in accordance with his July 8 ruling in a case known as CAGEC II. That ruling held that the NIGC ordinance that gambling could take place on that site was improper, hence the Senecas’ current slot machine operation in the blue metal shed and gambling in the big casino under construction were both illegal.

The judge also ruled on countermotions from the US Department of Justice (which by law defends government agencies and officials in lawsuits) arguing (1) that the judge should drop the whole matter because NIGC operated outside control of the judiciary, and (2) that because the Bureau of Indian Affairs had changed its internal rules about what makes land gambling-eligible before his July 8 ruling (the defendants had known about this but kept it secret from the judge), the judge should send the whole matter back to NIGC, thereby giving the Senecas what he termed a “fourth bite of the apple.”

Judge Skretny would have none of the Justice Department’s sophistry. He rejected all their motions in all regards and he told NIGC that it had to start following its own rules about illegal casinos. There seems to be no way gambling can presently take place legally on the Senecas’ Buffalo property.

The Seneca response

Seneca spokesmen first said that the case would be submitted for expedited appeal. That means, presumably, the Justice Department will ask the Second Circuit Court of Appeals in New York City to throw out Judge Skretny’s July 8 ruling that the casino is illegal.

I haven’t found any legal scholars and experts with knowledge of that court in general and Judge Skretny’s July 8 ruling in particular who think the Second Circuit will overrule him on this. It’s possible, they say, but not likely.

Nonetheless, the Senecas’ August 27 shutdown announcement came as a surprise. Even people (like me) who thought they wouldn’t prevail in court even if they went all the way expected them to tough it out to the end. One attorney who has been involved with them in other litigation for years said, “These guys don’t back off. They’d rather take a big loss at the end than back off.”

They haven’t really backed off yet; they’ve just stopped going forward. The blue steel slot machine shed is still going 8 a.m. to 4 a.m., seven days a week. Construction is on hold, they say, not abandoned, and, they say, it could be restarted at any moment if the financial situation brightens sufficiently.

But will it? Their most recent financial reports claim an increase in gambling revenues, putting them ahead of much of the casino industry, which has lately seen major drops in much of the country. Perhaps they project a future decline that would make it difficult for them to keep up the payments on the loans they need to complete those two projects. And perhaps they can no longer get or afford the interest on the huge loans they need to carry those projects out.

Moody’s mood

Just like credit card companies, the investors who sink millions into projects like this rent their money at various rates, in large part determined by their sense of the amount of risk in renting that money to any specific borrower. Sure things get easy loans and low rates; risky things have to look hard for loans and pay high rates; very risky things may not get loans at all, no matter how much they’re willing to pay.

The most recent evaluation of the SGC’s credit worthiness from Moody’s Investors Service, which is dated June 30, 2008, is gloomy but not disastrous. The report gives SGC a rating of Ba2, which in their hierarchy is an investment that has speculative elements which are subject to substantial credit risk.

The report notes several problems. The Senecas’ Allegeny operation is threatened by a new Pennsylvania “racino,” which is expected to siphon off some of its non-local clientele. Moody wonders if the Senecas are subject to the US bankruptcy code, which means creditors might not have anyone to sue or anything to take possession of in case of default. Collateral doesn’t mean much if you can’t grab it in case of default. Moody is also concerned about (but didn’t, for some reason factor into its rating), the “negative implications linked to SGC’s high management turnover.” Does the departure of so many senior executives suggest serious problems in the corporate structure that haven’t yet gone public but which potential investors should worry about?

One of the Seneca casinos’ positive points from Moody’s point of view is that unlike all the New York and Pennsylvania racetrack slot operations and the Ontario casinos, the Seneca casinos permit smoking. It’s another sector entirely that bears the cost of lung, mouth and throat cancer.

SGC has, on occasion, had a Moody’s Ba2 rating before and it has managed to borrow money. What is different this time—perhaps fatally different—are three factors not included in the June 30 evaluation that Moody’s says could drive that rating down to places rational investors do not like to go.

One is the possibility of “a material decline in operating results linked to competition or the weak economy.” That is a factor the SGC acknowledged in its press release. Another, which they also acknowledged, is “the weakening of liquidity,” which could be affected by a wide variety of things, ranging from rising construction costs to reduced numbers of out-of-town gamblers because of the increasing cost of transportation.

The third unincluded factor Moody says could drive the Ba2 down, and perhaps the most significant, is one the press release did not acknowledge: “a litigation outcome with adverse credit implications,” which is a pretty good characterization of the August 26 Skretny decision. The SGC is now in the position of fighting not for an outcome in district court but a reversal in the Second Circuit, a much more difficult hurdle given the quality of Skretny’s legal research and the reluctance of appellate courts to overturn district courts in matters like this. If they are not successful, the “adverse credit implications” will be fatal for the Buffalo operation and catastrophic for any corporate financial plan that has the Buffalo operation as a key part.

That section of the Moody’s report might as well have been printed in Day-Glo. Little wonder that the SGC decided to pull the plug on current construction a day after their lawyers told them what the judge had said.

Paladino’s irony

There’s a curious irony to all of this that centers around the maneuverings of Buffalo developer Carl Paladino.

Last November, Paladino told me that well before Governor George Pataki’s 2002 gambling compact with the Senecas, he met with Buffalo Mayor Anthony Masiello, Buffalo Corporation Counsel Michael Risman, and Seneca Nation of Indians President Cyrus Schindler to discuss a Buffalo casino run by the Senecas. At that meeting, Paladino said, “We had firm, solid commitments from them that a casino would be a stand-alone, without any competition to our hospitality industry. Those were solid commitments.” Paladino said he and Masiello discussed the Buffalo casino agreement with Pataki before the compact was finalized, but the stand-alone, noncompetitive language never made it into the compact. Schindler’s successors as head of the Seneca gambling operation, said Paladino, “abrogated and denied the representations and promises that had been made by Schindler.”

The Senecas had obviously decided there was no reason to share the profits or control with a developer like Paladino, or with anyone else, so they came up with a comprehensive project of their own that would include everything a gambler might need or want: casino, hotel, restaurants, shops, bars, whatever. They’ve got a full-service operation like that in Niagara Falls and they were planning on building one in Buffalo. There would be no need for a gambler to exit the property or use any services provided by anyone else. It would be entirely Seneca, and entirely off the state and city tax rolls, which means they could run those business at a terrific cost advantage over any nearby non-Seneca competitor.

Paladino counted on City Hall to protect his interests. He says he told the Senecas, “You’re just gonna have to do it, fellas, or we’re gonna put a toll booth up, we’re not going to hook you up to our sewer, we’re not going to hook you up to our water.”

The Senecas had a response to that, too: They decided to locate their casino not in downtown Buffalo, but rather in Cheektowaga, near the airport and near a Thruway entrance. That, they probably figured, would bring in more non-local business anyway.

“We sued to bring them back to Buffalo where they belonged,” Paladino told me, “where the promises were made. And we expected then that [the Brown] administration was going to negotiate a compact along the lines of what we had agreed to. And they didn’t do it.”

(The full conversation, “Dancing with Paladino,” appears in the November 9, 2006 issue of Artvoice. It is online at http://artvoice.com/issues/v5n45/dancing_with_paladino)

Paladino’s Cheektowaga lawsuit was successful. The Senecas had to set up their operation in Buffalo after all. And when they set about doing it, Mayor Byron Brown, as Paladino says, did nothing to protect Paladino or anybody else.

It was the forced move of the casino back to Buffalo that led to the involvement of the Margaret L. Wendt Foundation. Some plaintiffs in the lawsuit objected to gambling anywhere in Erie County, and some objected to gambling anywhere at all. But others—and the Wendt trustees—were involved in the lawsuit only because they were certain that a casino in downtown Buffalo would do massive, irreversible harm to the city. The involvement of those plaintiffs and the Margaret L. Wendt Foundation has always been specific to this downtown casino project.

Many individuals and some organizations contributed to the legal bills, but most of the money, by far, came from Wendt. In April 2006, billionaire Tom Golisano gave a press conference announcing his objection to a casino, and he later took out ads in the Buffalo News opposing it. The ads were feckless and were never coordinated with any of the other anti-casino efforts. Golisano never contributed anything to the escalating costs of the lawsuit—now well over $1 million dollars, with the first appeal yet to be filed.

Without the funding from Wendt, it is highly unlikely that casino opponents could ever have raised enough money to see this litigation to the present point, let alone be able to say to the gambling interests, “If you want to appeal, go ahead and appeal. We’ll be there.” It was only because the trustees of the Margaret L. Wendt Foundation decided that their assignment—using Mrs. Wendt’s money for the benefit of Buffalo and its citizens—had a defensive as well as a constructive component that the citizens’ lawsuit wasn’t outspent into legal oblivion long ago. Had it not been for Carl Paladino’s lawsuit forcing the Senecas to give up their Cheektowaga plan and set up shop in downtown Buffalo instead, the Margaret L. Wendt Foundation would never have become involved.

So Carl Paladino, who says he was there before the beginning of casino gambling in Buffalo, and who erroneously believed he had a private sweetheart handshake deal that would send all the casino’s hotel, food, and liquor business where he thought it should go, may be the person more responsible than any other for the Buffalo casino’s demise. Had this series of events transpired in an old-time movie, this would be the place Barry Fitzgerald puts his hands together, rolls his eyes skyward, and intones in his fine, thick brogue, “The Lord works in strange ways.”

A lot of bad options

The Senecas could shut down the current operation, go home, and never visit it again. Abandoning nine acres of steel pilings, girders and mud on non-federal property is not a federal offense. It might be a state offense but neither the city nor the state can sue or prosecute the Senecas over property maintenance in state court. Neither can they seize the property and use it for the public good or sell it at auction, as they could an abandoned house not in Indian country that is a neighborhood eyesore or rat warren or firetrap. And they can’t force the Senecas to restore it to its pristine state.

The Senecas could use the site for nongambling commercial use. They could, for example, finish the shell and put out a call for bids saying they’ll tune the interior to fit the needs of a lessee. Developers do that all the time. But will business people enter a long-term lease with a capricious landlord whose priorities can change with each tribal election and who cannot be sued in state courts? Will they agree to have disputes settled in tribal court? Will they talk to Carl Paladino about the long-term dangers of handshake deals under such circumstances?

They could put up the fancy hotel and theater without a casino. But who’s going to lend them money for that? If they do put up such an establishment using profits from their other two casinos, could they make enough money to make the investment worth their while? That is, does it make sense for them to lend money to themselves for such a project? Their present hotel and food operations in Niagara Falls operate at a huge loss: They use them to attract customers who will gamble. Would they be satisfied with an operation that wasn’t underwritten by slot machines and crap tables?

Such an operation would present a new problem for the city more troublesome than the eyesore: What happens to Buffalo’s theaters and hotels when they try to compete with a operator who enjoys a 20 percent or more advantage because it doesn’t have to pay state and local taxes, can’t be sued in state court, and isn’t subject to state environmental and workplace laws?

Perhaps they could build a huge gas station and smoke shop. The land, Judge Skretny said, is Indian country, so presumably they can do anything on it they do on the rest of their property—except gamble. Buffalo may have one more reason for hoping that Albany doesn’t fold in its current tax war with the smoke shops the way it folded in all the others.

Other than some kind of cultural center, which isn’t likely to go up there, or SGC corporate headquarters, which SGC would be unlikely to need without the third casino, the only non-awful outcome for Buffalo might be if the Senecas sold the nine acres outright, so it came out of Indian country, putting the land back in the community and on the tax rolls. Maybe some smart developer could get an equally smart architect to repurpose the construction work done thus far.

But would the Senecas give up sovereignty after they’ve gone through all this legal maneuvering and expense to get it? It costs them almost nothing to let those steel girders and pilings rust, and who knows, the federal laws about casinos might suddenly loosen up or there will be a court decision somewhere that clears away all the impediments, and they’d be able to come back and scrape off the rust and chase away the rats and pick up where they left off. Not likely, but the August 26 shutdown wasn’t likely either. Gambling is about things that are likely and things that are not likely.

Masiello’s skeleton, Brown’s mudholes

Right now, there seem to be no good resolutions of this mess that began in Buffalo in a private deal cut in Tony Masiello’s office before the horrors of September 11, that took shape in Albany in the financial panic immediately following it, and was kept going long after the city should have stood up for its own interest because Tony Masiello’s successor, Byron Brown, would have signed on to anything that let him take credit for patronage jobs, in spite of their long-term cost to the city.

The mourners will shed tears for the lost jobs. Let them. But don’t fall for it: Those jobs are chimerical. The construction jobs are transitory, and once completed this project would give the city’s economy such a deep wound that other projects of greater cumulative magnitude would not happen. Likewise the promised 1,000 or 1,300 or 1,500 casino and hotel jobs (the number keeps changing, depending which SGC spokesman is bragging about bringing them to town or bemoaning their loss): Many of them are part-time, tip-based, and they come at the cost of twice as many better-paying and mostly full-time jobs in the taxpaying part of the economy.

Because of the citizens’ lawsuit, the city has been, for now, saved from its politicians’ worst instincts. The casino construction is on hold and the NIGC has been told to stop stonewalling and do its job. But this is no time to get complacent. The steel skeleton and the muddy holes remain. And so do the politicians.

This is the 49th in a series of articles about attempts to establish gambling operations in northwestern New York that Bruce Jackson has written for Artvoice and other publications since June 2001. From 2006 to July 2007 he was vice president of Citizens for Better Buffalo. He is SUNY Distinguished Professor and Samuel P. Capen Professor of American Culture at UB; he has been adjunct professor in UB’s Law School, Department of Sociology, and Department of Media Study. With Diane Christian, he directs the weekly Buffalo Film Seminars at the Market Arcade Theater.