Arnold Schwarzenegger has the hottest hand in California politics in many years. Even the L.A. Times has ceased its dogged pursuit of its great white whale. The ex–Mr. Universe’s carefully brokered deal on workers’-compensation reform is just the latest in a string of political victories for a man who one year ago was focused almost entirely on opening a movie about a killer cyborg from the future, the governorship a dream he was just beginning to talk about with a few people.

But the rookie politician’s skillful use of the perception and reality of his ability to use statewide initiatives to impose his will — which nonetheless always involves important compromises with Democrats — is about to run into a buzz saw on the November ballot in the form of what looks to be the biggest-spending initiative battle in California history.

In the process, California appears on the verge of a major expansion of gambling that was not advocated by Schwarzenegger in last year’s recall campaign, and Schwarzenegger may lose control of his prized negotiations for revenue from Indian casino tribes (which currently pay nothing into the state’s general fund) and end up squaring off against two of his top political advisers.

A Schwarzenegger-negotiated settlement with casino tribes made early progress but may be falling apart as tribes peel off to back an initiative pushed by the Agua Caliente tribe that would provide much less revenue to the state, at an 8.8 percent corporate-tax rate, which would likely end up being even less, as is the case with most corporations. Two top Schwarzenegger political consultants are pushing a rival initiative, financed by racetracks and card rooms, that would have California, like Connecticut, take
25 percent of Indian-casino revenues; if any of the tribes didn’t go along with the initiative, racetracks and card rooms would carry out their own expansion of gambling, ending the Indian casino monopoly. That expansion would consist of 30,000 new slot machines at five horse racetracks and 11 card rooms, including one in Gardena owned by Hustler publisher Larry Flynt.

This 50 percent expansion of slot machines would generate major new revenue for the state. In the end, Schwarzenegger may square off against both casino tribes and some of his own top advisers, a situation that may have been inevitable at some point given the multiple interests involved. All concerned, Schwarzenegger included, look like they are pushing an expansion of gambling few foresaw last year during the recall campaign.

Longtime Schwarzenegger senior adviser George Gorton and his chief media consultant, Don Sipple, are working with Democratic consultant David Townsend on the gambling initiative backed by the racetracks and card rooms. Longtime Gray Davis consigliere Garry South and former Pete Wilson spokesman Dan Schnur are working for the tribes.

Gorton calls his initiative “a big winner” for California, noting estimates that it would generate more revenue than the other proposals, even if the Indian casino monopoly continues. “Our polling shows this is a hard one to knock down,” he says. But such a major expansion of gambling is very controversial, even with L.A. County Sheriff Lee Baca co-chairing the campaign. The racetrack–card room forces have already begun airing $3.5 million of Sipple-produced ads whose rhetoric echoes that of Schwarzenegger during the recall in demanding a “fair share” of Indian-casino revenue for the state.

The action guv is pushing a negotiated settlement that, according to top Republican inside sources, looked set to reap $2 billion in near-instant revenue for the state, whose finances are still in deep trouble. Casino tribes would float a bond that would be funded by a big expansion of tribal gambling. The state would receive subsequent ongoing revenue from higher fees and fees on new machines. But that figure is now down to $1 billion in quick revenue to help solve the current budget crisis, as many casino tribes have peeled off to back the Agua Caliente initiative.

Schwarzenegger hopes to make the Agua Caliente initiative look like a loser, in part by playing the racetrack–card room initiative backed by part of his political brain trust as a winning alternative at the ballot box. But Schwarzenegger doesn’t actually want the latter initiative as anything more than leverage. Some high-ranking insiders expect Schwarzenegger to oppose that initiative as too great a potential expansion of gambling, as well as the rival Agua Caliente initiative, which he already opposes.


Unless the governor can soon get more tribes back to bargaining with his well-regarded chief negotiator, Daniel Kolkey, he may find himself in an uncontrollable situation, his once-promising emerging deal with the casino tribes in tatters, forced either to choose one of the initiatives to back or to oppose both and try again next year, forgoing needed revenue for the current budget crisis for at least a year.


We don’t really know how much business casino-tribe gambling is doing in this state. The commonly accepted figure is $5 billion a year, and growing. Kolkey — who also negotiated with the tribes on behalf of the Wilson administration, for which he was, rather ironically, recruited by Gorton — says they don’t know for sure, since the tribes, because of their sovereignty, are not required to report specific numbers even to the federal government. Some Wall Street analysts know, of course, since casino tribes disclose operating figures to obtain financing from and partnership with Nevada casino-management firms, but analysts I’ve contacted call that information strictly proprietary.

Another complication is that at least some of the casino-tribe forces ostensibly interested in what Schwarzenegger is proposing probably have another agenda. Anthony Pico, chairman of the Viejas Band of Kumeyaay Indians, says the Viejas are interested in the Schwarzenegger proposal and have not backed the Agua Caliente initiative. But the truth is that Pico first proposed the Agua Caliente position himself last year, when he and the Viejas put millions into Cruz Bustamante’s campaign. The Agua Caliente proposal is what Bustamante’s position became. So a victory for that initiative would be a victory for the Bustamante stance on Indian casinos, a bitter pill for Schwarzenegger, who buried Bustamante in last fall’s election.

Pico justifies at great length, and with a great sense of aggrievedness, all the actions of Indian casinos by referencing the tragic history of the American Indian. He claims the backlash against Indian casinos is not because they have become the biggest-spending interest in California politics — over $130 million since the late 1990s — but because of ongoing racism. Pressed on the question of whether or not another entity expanding gambling around the state and intervening massively in state politics would also engender major concern, he repeatedly declined to answer, finally dropping an object from his hand with a loud thump and saying, “My ancestors are telling me not to answer that.”

Overlaid on top of all this is the likely major expansion of gambling in California under all three scenarios, the two initiatives and the Schwarzenegger deal, the prospect of which went mostly undiscussed during the recall. Indeed, Schwarzenegger at first sounded like he opposed at least the geographic expansion of Indian casinos, a view he expressed when discussing the subject with me.

Candidate Arnold said that he favored some expansion of Indian gambling, but on existing sites. “They can expand gaming activity, but we don’t want it all over the place,” he said. Governor Arnold is holding his cards very close to the vest now as his negotiators do their work, but sources say that geographic expansion of Indian gambling is very much on the table as part of a sweetener for state revenue from the tribes.


Schwarzenegger’s decision last year to go to war with Indian gambling interests was fateful and controversial within his campaign. After a week of internal debate, Schwarzenegger made the call to go after the interests, which he had previously called “gaming tribes” and now called “casino tribes,” a much tougher phrase. They must pay “their fair share,” he intoned in commercials and speeches up and down the state. The strategy worked, helping delegitimize the heavy tribal spending against him and devastating the casino tribe–funded campaign of Bustamante, who had been locked in a close race with the action superstar. The success of the strategy created the widespread impression that gambling would be under control in California. Now it is on the verge of exploding.

Schwarzenegger was at first helped in negotiations with Indian casinos by his encouragement of initiative politics, as the existence of the racetrack–card room initiative recommended by his own advisers gave his negotiators important leverage. “The stick,” as the governor calls it. But the advent of the Agua Caliente initiative has altered the equation, with tribes seeing that a winning initiative campaign can save them money.

Raising money to defeat either initiative on what looks to be a cluttered November ballot would not be a simple matter for Schwarzenegger, whose own campaign last year ended up requiring him to spend twice as much of his own money — $10 million — as he had hoped. Businesses and wealthy individuals had a much greater stake in electing Schwarzenegger, and in stabilizing state finances and reforming workers’ compensation, than they did in defeating the expansion of another business.

Both sides are echoing Schwarzenegger’s “fair share” rhetoric. The racetrack–card room initiative campaign is called A Fair Share for California. The casino-tribes initiative campaign, first called the Truth on Cardrooms Committee and Californians for Tribal Rights, is now called Citizens for a Fair Share of Indian Gaming Revenues. Unless the governor’s negotiations with the tribes succeed, that rhetoric may be all that remains of his position of last fall in the campaign this fall.

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