DULUTH -- Twenty-six years ago, a city and a tribe took a gamble.

The Fond du Lac Band of the Lake Superior Chippewa bought a crumbling square block of property in the middle of downtown Duluth. With the city’s full support, they put the land in trust and used it to build the state’s first true casino -- the Fond-du-Luth. Both governments signed off on the deal and settled back to share the profits for 50 years.

Now, the two are about to face off in court in a dispute that could provide a cautionary tale as Minnesota contemplates expanding gambling on multiple fronts. Each possibility either relies on the cooperation of the state's Indian tribes or sets up competition that could set the two sides warring.

In the case of Duluth, the band decided in 2009 to stop making its annual payment of $6 million to the city, saying it needed and deserved to keep more of its revenue. To the surprise of city officials, the federal government weighed in on the side of the tribe. Now, both sides are dug in for a bruising court battle.

In St. Paul, legislators are weighing proposals that could, for the first time, expand gambling well beyond the province of casino-owning tribes, with electronic pulltabs at bars across the state, video slots at racetracks and even a state-run casino in a rundown stretch of downtown Minneapolis.

For the pulltab proposal, officials are relying on an unspoken understanding with the tribes not to object. Tribes don't like the proposal, but have raised no serious challenges, for now. The other proposals could put the state on a collision course with tribes, possibly long after it has come to rely on the extra gambling revenue.

For Duluth officials, the idea that a federal agency could step in and upend a signed contract was a startling revelation. "We have a very significant financial problem now," Mayor Don Ness said. "We have a huge hole in our budget."

Karen Diver, spokeswoman for the Fond du Lac Band of Lake Superior Chippewa, makes no apologies for halting the band's payments to the city. The fact that the National Indian Gaming Commission ruled in the band's favor, she said, shows leaders were right to question the deal with Duluth.

Without an expansion of gambling, the state has few options short of raising taxes to help pay for a new Vikings stadium or repay its sizable debt to schools.

That doesn't change the Minnesota Constitution, or the fact that casinos currently are the exclusive domain of Indian tribes in this state.

Fears of a power grab

But in the fraught atmosphere of the gambling debate, tribes fear that they once again have something the government wants.

"They wanted our land and they got that; now they want our casinos," said Jarvis Paro, 27, sitting in one of Fond du Lac's three community centers, down the hall from the pool, gym and community kitchen where the staff was getting ready to serve lunch to senior citizens at 50 cents a plate.

"If everyone had a chance to see how well the reservation handles the money. ... We've got everything a successful reservation could need," Paro said. "State [sponsored] gambling would take that away. It's going to dismantle our reservation."

Rep. Tom Hackbarth, who favors racinos, said the time has come for tribes to expect competition. "It's like having a Wal-Mart and a Target across the street from each other, or two gas stations kitty-corner from each other," he said. "Competition is good in the marketplace."

But John McCarthy, executive director of the Minnesota Indian Gaming Association, said the state's 18 tribal casinos have saturated the market.

"People think of gambling as an unlimited market, like you're printing money in the basement. It doesn't work like that," McCarthy said.

Casino proceeds are declining statewide, "partly because of the economy, partly because we've only got so many gamblers, with so much money they can spend," he said.

The state has tried to make inroads before into tribal gaming. In 2005 then-Gov. Tim Pawlenty tried to strike a deal with three of the state's most impoverished tribes for metro area casinos. That partnership would have created an ongoing revenue stream for state coffers, just like Duluth's. Republicans backed the proposal, but it withered under DFL opposition.

"Studies have shown that new casinos don't really create any new gamers, you just cannibalize your existing casinos," said Diver, who is chairwoman of the five-member Reservation Business Committee.

But such is the allure of gambling money that even Duluth, locked in a legal battle, is still considering a competing casino for its redeveloped city waterfront.

Gambling money at work

Indians say they have seen the difference casino revenues have made in the lives of their people and they are loathe to watch it shrink.

When Paro was growing up, the Fond du Lac reservation schoolhouse was a pair of leaky trailers. Today, his little girls attend school in a gorgeous building designed to evoke the image of a turtle, mirroring the Ojibwe creation myth. Paro works as a researcher at the reservation museum and -- like the other 4,200 tribal members -- collects $400 a month, which he uses to help pay the bills.

Casino revenues have helped the Fond du Lac tribe blossom.

Over the past 20 years, the tribe has pumped half a billion dollars back into the community, building new schools and new housing. Fond du Lac is now the second-biggest employer in the Arrowhead.

All of that, band members say, could be at stake if Minnesota opens the door to nontribal gaming.

Fond-du-Luth was the state's first casino, and it broke ground in coordinating efforts of tribal, city, state and congressional leaders.

Downsized after 20 years at Ford, Dan Huculak left Michigan and moved back to Fond du Lac, where his late mother grew up. He found a community completely transformed from the rural poverty he remembered from childhood visits.

"It was neat to see the casino for the first time, to see the neon glowing at night, and think, 'Wow, this is ours,'" said Huculak, now the operations manager at the reservation's new public radio station, WGZS (89.1 FM).

"Maybe," he said, "they should leave gambling to the people who understand it, instead of putting the stadium on the backs of the native casinos."

Jennifer Brooks • 651-925-5049