It's good that SNL mentioned how budget cuts would harm Natives. That's a genuine but little-known concern. Kudos to the show for continuing to remember Indians.
But...the real issue, of course, is the appearance of the "Indian chief."
It goes without saying that Indians in 2013 don't look like 19th-century Plains chiefs. But how many of the millions of viewers realize that? Not many, I'd guess.
Since SNL was satirizing the Village People, one could argue that this wasn't a slight against Indians. But the Village People stereotyped Indians, so repeating the stereotypes is problematical. To many people, this faux "Indian" is a real Indian.
Unless you're showing the original Village People in an original performance, I'd say there's no reason to put them or their doppelgangers on screen. The bit didn't get enough laughs to justify the stereotyping.
As I've said before, about the only way to do this brand of humor is to challenge or criticize the stereotypes you present. SNL didn't do that, so I'd have to call this a fail.
For more on Saturday Night Live, see Victoria's Secret in Saturday Night Live and "Eskimo Susie" in Saturday Night Live.