The economic effects of Harrah's Cherokee Casino and Hotel on the regional economy of Western North Carolina.

Ha, Inhyuck Steve ; Ullmer, James

ABSTRACT

The Eastern Band of Cherokee Indians opened their casino in 1995, and entered into a management agreement with Harrah's in 1997 to manage the casino operation. This paper explores the major components of spending and their impact on a seven county region in Western North Carolina. The payment streams include wages and salaries paid to Harrah's Cherokee Casino and Hotel employees, operational spending paid to businesses who supply the Harrah's Cherokee and Hotel with food, beverages, and services, revenue distribution for Tribal government services, revenue distribution to adult Tribal members from the per-capita account, and distributions from the minors-account to Tribal members who have recently come of age. We deviate from existing research in two ways: First, we use existing commuting patterns to define the relevant region. Second, we estimate the economic impact of payments to minors when they reach majority age. The transference of this wealth to current disposable income is significant. This "wealth effect," which has not been appropriately incorporated in any economic impact studies of the gaming industry, is included in our research.

INTRODUCTION

On October 17, 1988, Congress passed the Indian Gaming Regulatory Act (IGRA), 25 U.S.C. [section] 2710, for the purpose of establishing and regulating Indian gaming on Native American Reservations (See Federal Register, 2001). IGRA classifies gaming into three separate categories: Class I gaming is defined as traditional Indian gaming that is part and parcel of tribal ceremonies and celebrations. Class II gaming covers several types of gambling including lotto, pull-tabs, bingo and some types of card games. Class III gaming includes black jack, slot machines and all other types of gaming that are not included in either Class I or Class II. Since the passage of IGRA, twenty-three states have approved Class III gaming, five states have adopted Class II gaming and two states offer Class I gaming (Meister, 2002). Of the 562 federally recognized Indian Tribes in the U.S., 224 offer Class II or Class III gaming (National Indian Gaming Resource Library, 2004).

Several researchers have attempted to estimate the economic effects of Indian gaming, as well as private sector commercial casinos, on the regional economies in which they are located. For example, it has been estimated that estimated that Missouri casinos created more than 12,000 new jobs in that State (Leven & Phares, 1997). A comprehensive analysis of the economic impact of Indian gaming in Arizona was published (Cornell & Taylor, 2001). The economic impact on the surrounding community of a newly established commercial casino in Omaha, Nebraska has been estimated (Goss, 2002). A similar analysis was employed in calculating the economic impact of the tribal gaming of the Kalispel Tribe on the regional economy of Eastern Washington (Peterson & Taylor, 2002). Finally, it was found that Native American casinos in Colorado were responsible for the creation of more than 6,000 new jobs (Center for Business and Economic Forecasting, 2004).

These studies relied on an input-output approach within the context of a general equilibrium framework. The IMPLAN (Impact Planning) model developed by the Forest Service of the US Department of Agriculture and the Regional Economic Models (REMI) developed by Regional Economic Models, Inc. are the two most commonly used models of this type. Two researchers (Rickman & Schwer, 1993) have systematically compared the REMI and IMPLAN models and have found IMPLAN to produce reliable multiplier estimates. Moreover, while both models are dependable, it has been found that the estimated multiplier effects from IMPLAN are on the whole more reliable than those generated by REMI (Crihfield & Campbell, 1991). Consequently, the IMPLAN model was employed in this analysis.

The purpose of this paper is to estimate the economic impact of Harrah's Cherokee Casino and Hotel on the seven counties of Western North Carolina that were identified by commuting patterns as being influenced by Casino activity. This study begins with a brief description of Indian gaming, especially as it is encountered on the Cherokee Reservation. Then, empirical considerations are described and the methods employed in our study are subsequently presented. Finally, the results generated by the input-output model are offered along with some concluding observations and recommendations for further research.

GAMING ON THE CHEROKEE RESERVATION

In 1838, the Federal Government forcibly removed most Cherokees west to the Oklahoma Territory, a forced migration that is known historically as the infamous "trail of tears." Approximately 1,000 Cherokees--members of the Qualla Band--avoided this forced migration by hiding in the Southern Appalachian Mountains. The Eastern Band of Cherokee Indians (EBCI) traces their ancestry to these stoic Native Americans. Today, the EBCI Reservation encompasses 56,688 acres nestled next to the Great Smoky Mountain National Park. The present enrollment of the Tribe is 13,265 members with a Reservation population of 7,542 (NC Cherokee Reservation Genealogy, 2004).

Class III gaming (described above) involves comprehensive regulation that includes an agreement between the tribe and the state in which that particular tribe is located. In 1995, the National Indian Gaming Commission (NIGC)--the commission established by IGRA to regulate Indian gaming--published final regulations for all forms of gambling defined as Class III gaming. They are listed as follows: 1) The particular form of Class III gaming that the tribe wants must be permitted in the state in which that tribe is located; 2) The tribe and the state must have negotiated a compact that has been approved by the Secretary of the Interior, or the Secretary must have approved regulatory procedures; and 3) The tribe must have adopted a tribal gaming ordinance that has been approved by the Chairman of the Commission (Indian Gaming Regulatory Act Overview and National Indian Gaming Commission, 2003).

In 1994, the State of North Carolina and the Eastern Band of Cherokee Indians (EBCI) entered into such a compact for the purposes of allowing Class III Indian gaming on the Cherokee Reservation. In 1997, the Eastern Band of Cherokee Indians entered into a management contract with Harrah's to run the casino operation, an agreement which is still in force at the present time. The EBCI was obligated--as is the case with all such compacts--to abide by the restrictions stated in the compact between the State of North Carolina and the Tribe. According to the compact, the EBCI would be allowed to offer Class III video gaming partially because it required "skill and dexterity" to operate. In compliance with the agreement, the EBCI offered traditional video gambling, such as slot machines, video poker, video craps and video blackjack. In 2003, digital blackjack with dealers arrayed in the traditional Las Vegas style was provided.

The IGRA provides very detailed and specific purposes for the allocation of gaming revenue. This legislation, (25 U.S.C. [section] 2710 [Sec. 11]), specifies that revenues are not to be used for purposes other than 1) to fund tribal government operations or programs; 2) to provide for the general welfare of the Indian tribe and its members; 3) to promote tribal economic development; 4) to donate to charitable organizations; or 5) to help fund operations of local government agencies (National Indian Gaming Resource Library, 2004).

EMPIRICAL CONSIDERATIONS

In consideration of the IGRA provisions concerning the distribution of gambling revenue, the EBCI allocates its gaming revenue in the following manner. First, there is a fifty-fifty split between what is known as the "per-capita fund" and the "general fund." The per-capita payments are taxable payments from gaming revenue that are made to enrolled members of the EBCI. To be considered a Tribal member of the EBCI, one must possess at least one-sixteenth degree Eastern Cherokee blood and be a direct lineal descendant of someone on the Baker Roll--a census of the EBCI undertaken in 1924 (NC Cherokee Reservation Genealogy, 2004). Recently, a third requirement was added in response to the recent influx of tribal enrollment requests that occurred largely as a result of the per-capita payments. Now, new requests for tribal membership must be received within three years of the applicant's birth. Only about one-fourth of all Indian tribes in the United States (seventy-three) distribute per-capita payments to their tribal members 3/4 the EBCI has had a per-capita fund since 1998. A history of the per-capita payments to EBCI members from 1998 through 2003 is shown below.

The per-capita contributions to minors (enrolled Tribal members under eighteen years of age) are put into a trust. Contributions to the minors-account are made to qualified EBCI members until they reach the age of eighteen. Once minors turn eighteen and have received their high school diploma, they are eligible to withdraw partially or fully from their account. In the absence of a high school diploma, they can still withdraw from their account if they have passed the GED; otherwise, they have to wait until they reach the age of twenty-one to withdraw from their accrual.

The other half of gaming revenue is placed in the general fund and is used for various tribal programs as needed. This is the type of public sector spending that is incurred typically by all local government entities. The percentage of EBCI spending appropriated for various Tribal programs varies slightly from year to year as needs change. The allocations from the general fund for fiscal year 2003 are shown in Table 2 below.

The Cherokee Casino & Hotel complex generates five streams of spending that affect the regional economy of Western North Carolina. First, there are the wages and salaries paid to casino employees. Second, there is the operational spending paid to firms who furnish the casino complex with food, beverages and services. Third, there are payments made to the per-capita account for Tribal adults. Fourth, there are payments to the general fund for Tribal government services. Finally, there are contributions to the per-capita account for minors. The secondary data for these income flows was obtained from the 2003 annual report (Harrah's Cherokee Casino and Hotel 2003 Community Report, 2004). Regional data describing the inter-industry relationships in the seven county study area was obtained from the IMPLAN input-output software (Minnesota IMPLAN Group, 2000).

METHOD

The relevant region was defined using the commuter driving patterns of Harrah's employees. In order for a county to be considered part of the study area, at least one per cent of the employees of the Cherokee Casino & Hotel had to be from that particular county. There were seven contiguous counties in Western North Carolina that met this criterion. They were Buncombe, Cherokee, Graham, Haywood, Jackson, Macon and Swain counties--coincidentally, these are the same counties that the EBCI considers to be in their economic sphere of influence. Refer to table 3 for commuter information.

The multipliers used in this study separate the economic effects on the region from the economic activity generated by Harrah's Cherokee Casino and Hotel into three separate components: First, direct effects measure the changes in output and employment that result from direct final demand changes in the industry being studied--in this case the casino industry. Secondly, indirect effects measure the changes in inter-industry purchases that occur in the region as the directly affected industry expands. These acquisitions consist of raw materials, intermediate goods, transportation services, etc. Thirdly, induced effects reflect the changes in consumer spending as household income increases due to the direct and indirect effects of industry expansion in the region.

RESULTS

As mentioned above, the analysis employed in this study identified five spending streams generated by the economic activity at the casino and hotel complex in Cherokee. They include: (1) the wages and salaries of Harrah's Cherokee Casino and Hotel employees, (2) operational spending by the casino and hotel complex, (3) the revenue distribution to adult Tribal members (the per-capita account), (4) revenue distribution to the general account for Tribal services, and (5) the distribution of accumulated revenue to Tribal members who became eligible for payments from the minors' account in 2003--the "wealth effect" component of our study.

First, as previously noted, the amount of direct regional output attributable to Harrah's Cherokee Casino and Hotel Complex was obtained from Harrah's 2003 annual report. They are contained in column one of Table 4. Wages and salaries were $56, 944507. Operational spending firms who serviced Harrah's Cherokee Hotel and Casino complex with amenities such as food, beverages and cleaning services, etc. was $9,139,444. Revenue distribution to adult Tribal members from the per-capita account was $32,950,880. The revenue distribution for Tribal government services was $88,159,190.

A word is in order about the calculation of the wealth effect, the fifth spending stream identified in this study The portion of the per-capita account that is distributed to minors represents an increase in wealth for those individuals to whom the fund accrues. In this study, a unique attempt is made to capture the effect of the disbursal of these funds--what we've termed the "wealth effect"--to EBCI members when they become eligible. The per-capita distribution that accrued to Tribal members from 1998 through 2003 was $30,440 (Cherokee Casino & Hotel 2003 Community Report, 2004). The number of Cherokee minors receiving a high school diploma or GED was considered proprietary information by the Tribe and was therefore unavailable. Consequently, the authors assumed that graduation rates were fairly stable, so that the number of minors reaching the age of twenty-one, who had not graduated or received a GED, would approximately off-set the eighteen year olds who did not receive their high school diploma or GED in 2003. Accordingly, the number of minors reaching the age of 18 in 2003 was 139, and was multiplied by $30,440. Thus, the estimated amount of wealth released from the minors' account was $4,231,160 in 2003. This estimation of the "wealth effect" then represented an addition to current disposable income in 2003 for Tribal members who received these disbursements.

The indirect effects of inter-industry expansion that resulted from direct economic activity from Harrah's Hotel and Casino complex is estimated by the IMPLAN Program and presented in Table 4. Also, the induced effects from increases in household income, as estimated by the IMPLAN Program and is shown in Table 4. In the Table 4 summary, direct, indirect, induced and total effects are shown for all five identified spending flows, including the wealth effect. The change in regional domestic product that resulted from direct final demand changes at Harrah's in 2003 was $191,425,211. The indirect effects were $25,641,376 and the induced effects from household spending were $52,140,911 for an overall effect of $268,207,468.

The estimated employment generated by Harrah's Hotel and Casino complex is generated by The IMPLAN Program from the output data and is displayed in Table 5. Direct employment creation for the seven counties in the study area from the five spending streams at Harrah's Cherokee Casino and Hotel was 3,518 jobs in 2003. Indirect and induced job creation was 430 and 873 jobs, respectively. Thus, Harrah's was responsible for approximately 4,823 overall jobs in 2003 in the seven counties encompassed by this study

The inter-industry impacts from Harrah's Cherokee Casino and Hotel complex on the various industries in the region are captured above in Table 6. Not surprisingly, the service sector of the economy was most heavily impacted by the presence of Harrah's Casino and Hotel. More than 55% of the output growth and over two-thirds of the job growth occurred in that sector of the economy. The reasons for this are two-fold. First, the casino industry itself is dominated by service employment. Secondly, a significant component of the economy of Western North Carolina is tourism, which is dominated by employment in the service sector of the economy. Other sectors of the economy that experienced substantial increases in economic activity due to Harrah's were the government and construction sectors of the economy.

CONCLUSIONS AND RECOMMENDATIONS FOR FURTHER RESEARCH

While it is evident that Harrah's Cherokee Casino and Hotel complex has had a substantial economic impact on the seven county region that surrounds the Reservation, it is less clear as to whether or not this additional economic activity is resulting in an increase in the economic well-being of the region's poorest citizens. Two questions come to mind in this regard. First, are the poverty rates of the Eastern Band of Cherokee Indians declining as a result of Harrah's Cherokee and Hotel? Secondly, are overall poverty rates in the seven county region declining as a result of the economic activity generated by Harrah's? An inspection of the first inquiry seems affirmative according to a recent study (Costello, Compton, Keller & Angold, 2003). In an eight year longitudinal study beginning in 1993 that included our seven county region and four additional contiguous counties in North Carolina, the researchers found that the percentage of Native American families living in poverty, after increasing slightly in the early years of their study, decreased by 5 % between 1997 and 1998, 6 % between 1998 and 1999, and 18 % between 1990 and 2000. They attribute this reduction in EBCI poverty to the economic activity generated by Harrah's Cherokee Casino and Hotel complex--a conclusion shared by the authors of this article.

The answer to the second inquiry posed above also appears affirmative. Below, in Table 7, there is some evidence that the economic activity generated by Harrah's Cherokee Hotel and Casino is benefiting the populace by lowering the number of citizens living below the poverty line as measured by the Census Bureau (U. S. Bureau of the Census, 2006). While the percentage of those living below the poverty line in the United States was flat from 1998-2004, it increased almost one per-cent in North Carolina. However, in the seven county region of our study, five counties had the percentage of people living below the poverty line decline during the same period, and in some cases substantially.

In a comprehensive study of the socioeconomic impact of Native American Gaming, researchers have discovered that most Native American tribes that have opened Vegas-style casinos--i.e., those that have adopted Class III gaming--have seen the economic climate on their reservations improve dramatically (Evans & Topelski, 2002). In another comprehensive piece of research that synthesizes over 100 papers and reports, it was noted that a casino appears to yield positive economic results to a region where the market is not already saturated (Rose, 2001). The above findings appear to be the case with the Eastern Band of Cherokee Indians as well. This research indicates that Harrah's Cherokee Casino and Hotel complex has had such an impact on the seven county region of Western North Carolina identified in this research. The estimated gross regional product attributable to the Cherokee enterprise for 2003 was $268,207,468 with a concomitant employment impact on the region of 4,288 jobs--the estimated impact from the wealth effect was $5,427,637 of gross regional product and 52 jobs.

There are limitations to this study which deserve comment. First, this research measures the gross economic impacts of Harrah's Cherokee Casino and Hotel on the regional economy rather than the net impact. Here, the major concern is that resident patrons may substitute casino gambling for other retail spending on restaurants, bars, lodging, and other forms of entertainment. In cases where tourists are the dominant patrons, this substitution effect appears minimized. For example, there was found only a 30% substitution rate for Wisconsin gaming operations in small urban areas, regions similar to our study area of Cherokee, North Carolina (Thompson, Gazel & Rickman, 1995). Furthermore, other research indicated that in mostly rural areas, the casino effect of attracting visitors may even dominate the substitution effect (Taylor, Krepps & Wang, 2000). It has been discovered (Blois, Cunningham & Lott, 1995) that Native American gaming can undercut local hospitality enterprises if the casino subsidizes on-site restaurants, bars, and lodging. Consequently, despite the above indications that only a small substitution effect probably exists in the region, an exploration of this phenomenon may be warranted.

Travel and tourism are crucial to the economy of the seven county region of North Carolina defined in our study. Despite the limitations cited and the recommendations for further research, all indications are that Harrah's Casino and Hotel complex has complemented the tourism industry, and thus, has spurred growth in regional gross domestic product and regional employment. Moreover, there is cursory evidence that it may be helping somewhat to alleviate poverty, although that question needs more investigation.

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Inhyuck "Steve" Ha, Western Carolina University

James Ullmer, Western Carolina University TABLE 1 CHEROKEE CASINO & HOTEL PER CAPITA DISTRIBUTION from 1998-2003 Date Per Capita Distribution to Date 7/1/1998 $1,073 12/1/1998 $1,447 6/1/1999 $1,465 12/1/1999 $1,951 6/1/2000 $2,200 12/1/2000 $2,665 6/1/2001 $2,485 12/1/2001 $3,200 6/1/2002 $2,935 12/1/2002 $3,445 6/1/2003 $3,100 12/1/2003 $3,546 Source: Harrah's Cherokee Casino & Hotel 2003 Community Report TABLE 2 GAMING REVENUE DISTRIBUTION FY 2003 Programs and Services Share Tribal Finance 1% In-House Legal 3% Other 3% Education and Training 4% Tribal Council 5% Community Services 6% Economic and Community Dev 9% Health and Medical 9% Administrative Operations 12% Reserves 13% Social Services 15% Public Works 20% Source: Harrah's Cherokee Casino & Hotel 2003 Community Report TABLE 3 CHEROKEE CASINO EMPLOYEE COMMUTING County Employee Person Percent Buncombe County 26 1.47% Cherokee County 28 1.58% Graham County 46 2.60% Haywood County 287 16.20% Jackson County 739 41.70% Macon County 95 5.36% Swain County 518 29.23% Other Counties 33 1.86% Total 1,772 100.00% Source: Harrah's Cherokee Casino & Hotel 2003 Community Report TABLE 4 REGIONAL OUTPUT IMPACT OF CHEROKEE CASINO & HOTEL Output Impact Direct Indirect Wages and Salaries $56,944,507 $10,444,311 Operational Spending $9,139,444 $1,472,101 Revenue Distribution to Adult Tribal Members $32,950,880 $4,263,022 Revenue Distribution for Tribal Gov't Services $88,159,190 $8,914,535 Wealth Effect $4,231,160 $547,407 Grand Total $191,425,211 $25,641,376 Output Impact Induced Total Wages and Salaries $16,864,994 $84,253,812 Operational Spending $2,807,789 $13,419,334 Revenue Distribution to Adult Tribal Members $5,054,741 $42,268,643 Revenue Distribution for Tribal Gov't Services $25,764,317 $122,838,042 Wealth Effect $649,070 $5,427,637 Grand Total $$51,140,911 $268,207,468 Sources: Harrah's Cherokee Casino & Hotel 2003 Community Report and IMPLAN Version 2.0. TABLE 5 REGIONAL EMPLOYMENT IMPACT OF CHEROKEE CASINO & HOTEL Employment Impact Direct Indirect Induced Total Wages and Salaries 1,772.0 226.4 364.6 2,363.0 Operational Spending 214.4 21.3 40.9 276.6 Revenue Distribution to 271.9 53.1 82.4 407.4 Members Revenue Distribution for 1,225.5 122.3 375.4 1,723.2 Tribal Gov't Services Wealth Effect 34.9 6.8 10.6 52.3 Grand Total 3,518.7 429.9 873.9 4,822.7 Sources: Harrah's Cherokee Casino & Hotel 2003 Community Report and IMPLAN Version 2.0. TABLE 6 INTER-INDUSTRY IMPACT OF CHEROKEE CASINO & HOTEL Sector Output Impact Employment Impact Value Share Value Share Agriculture $657,527 0.25% 12.7 0.26% Mining $3,393,651 1.27% 18.2 0.38% Construction $16,750,328 6.25% 276.4 5.73% Manufacturing $8,020,553 2.99% 59.2 1.23% Trade $9,147,488 3.41% 203.8 4.23% TCPU $7,253,101 2.70% 60.0 1.24% FIRE $12,101,433 4.51% 157.3 3.26% Services $149,895,714 55.89% 3,314.7 68.71% Government $25,721,282 9.59% 721.4 14.96% Other $35,284,393 13.16% 0.0 0.00% Total $268,207,468 100.00% 4,822.7 100.00% Sources: Harrah's Cherokee Casino & Hotel 2003 Community Report and IMPLAN Version 2.0. Note: TCPU stands for Transportation, Communication, and Public Utilities. FIRE stands for Finance, Insurance, and Real Estate. Table 7: Percentage of People of All Ages below the Poverty Line Jurisdiction Year 1998 Year 2004 Buncombe County 12.9% 13.8% Cherokee County 16.6% 15.1% Graham County 17.9% 16.7% Hayward County 14.0% 13.8% Jackson County 15.5% 15.8% Macon County 13.7% 13.3% Swain County 21.8% 15.4% North Carolina 13.0% 13.8% United States 12.7% 12.7% Source: U.S. Bureau of the Census