The Casinos Are In Trouble… Is Anybody Out There Listening?

Politicians and regulators are starting to listen to casino operators. In nearly every state, operators are struggling with a depressed economy and increased competition from neighboring states. Regulation and taxation that have always been burdensome for the industry have become nearly unbearable in the current conditions and casinos are asking for relief. A trend toward a reduction of regulation started in Atlantic City when Governor Chris Christie burst onto the scene and into midst of the Atlantic City casino industry. Christie said Atlantic City needed guidance, that regulations should be rethought and made less onerous and that the casinos themselves could use some help and some new thinking. The newly elected governor was just the man for the job. Now, four years later, it would appear his ideas have failed to alter the course of history. Still, he did address some of the systemic problems that had frozen the casinos in Atlantic City in a 1970s casino model.

In the summer of 2010, New Jersey Governor Chris Christie travelled by helicopter to Atlantic City for what the local media described as a historic press conference. The news out of the city had been growing steadily worse, and by the time of Christie’s appearance it was clear that, nearly four decades after it had legalized gambling in an attempt to avoid economic ruin, Atlantic City was back where it had started. Standing in front of Boardwalk Hall, next to the mayor and members of the city council, Christie declared, “Atlantic City is dying.” The city, once known as the World’s Playground, had become unclean and unsafe. The number of visitors had fallen, and casino revenues were plummeting. Christie then announced a plan to return Atlantic City to its rightful place as the East Coast’s premier entertainment destination. There would be a sparkling new tourist district, with more conventions, restaurants, retail outlets, and non-gambling attractions. Also in development were bold new marketing plans and nonstop air routes to deliver fresh gamblers. Atlantic City, the Governor promised, would become “Las Vegas East.” John Wolfson, New Yorker, 11-18-14

It probably would not have mattered what Christie tried – the die was cast. By 2010, casinos in Pennsylvania had already taken a significant bite out of Atlantic City’s revenue. And that is only part of the problem. New York, Maryland, Ohio, Maine, Rhode Island, Delaware and Connecticut are also eating some of the Boardwalk City’s lunch. When Governor Christie was standing on the boardwalk promising a new future, the pattern of market saturation in the eastern gaming market was not as clear as it is today, but it was a fact, nevertheless.

Market saturation was hardly even discussed four years ago, but that has changed. Ohio probably gets credit for changing the way everyone thinks about casino markets. The casinos – and the racinos – in Ohio did not meet dream-like expectations of the lawmakers or developers. But they did meet the worst-case, nightmarish predictions of casinos in surrounding states. Casinos in Michigan, West Virginia, Pennsylvania, Illinois and Indiana have felt the presence of Ohio casinos and it has been painful.

The casinos in Indiana are the worst hit. They are down between 30 and 50 percent, depending on their location and the size of the market being served by the casinos in Ohio as well as in Indiana. The casinos in Indiana have been lobbying for legislative relief. The casinos are asking to have the tax burden reduced and they want to eliminate the need to maintain a crew and the pretense of a boat that sails. The riverboat casinos would like permission to come ashore. The governor is not very supportive. He says it would be an expansion of gaming and he is against any expansion. Still, there is growing support in the state legislature for the idea and for lowering the tax rate.

Indiana’s riverboat casinos would be allowed to move to on-land sites and the state’s horse track casinos could have live dealers run table games under recommendations from a legislative committee. The public policy study committee voted unanimously Thursday to support those changes, along with proposals to offer tax incentives for casinos to build new facilities or renovate their current sites and seek ways to replace the current $3-per-person admission tax the riverboats now pay. Casino officials have pushed for such changes for several years in the face of increased competition from neighboring states, but have been largely opposed by Republican Gov. Mike Pence and many GOP legislative leaders who worry about an expansion of gambling. Associated Press, 10-31-14

The casinos in Delaware are also seeking tax relief. Thus far, like the efforts in Indiana, it has been an uphill battle. Part of the problem is the general attitude about casino profitability. Whenever a casino asks for lower taxes or a reduction of regulatory burdens, they are accused of being greedy. The closing of casinos in Atlantic City notwithstanding, it is commonly believed by lawmakers and the voting public that all casinos mint money and all casino owners are rich beyond their wildest imagination. That does not mean that casinos will never get a break on taxes or regulation, just that it will never be easy.

An industry group representing Delaware’s three casinos is asking state lawmakers to revise revenue sharing models so that the casinos can remain profitable amid increasingly intense competition from casinos in other states. The top priority for the Video Lottery Advisory Council is returning to a tiered rate structure for slots revenue, with the state’s share fluctuating based on the amount of revenue taken in. Casino representatives on the council also voted Thursday to ask that the tax rate on table games be revised, either through a lower rate or subtracting half the revenue to help cover casino payrolls before distributing the money among the state, the casinos and the horse racing industry. Randall Chase, Associated Press, 10-31-14

In time, every state with casinos will be asked by its resident casino industry to lighten its regulatory burden so that it can compete with casinos in other jurisdictions. Pennsylvania will be the next state to debate the issue. It is clear that Pennsylvania is losing revenue to surrounding states. To survive and compete the casinos will need a reduction of the impossibly high tax rate of 55 percent.

A lobbying group for the gaming industry, in Philadelphia for a conference, says casinos in Pennsylvania must develop a next-generation gaming policy to remain competitive. While Pennsylvania is now the second-largest gambling market in the nation (after Nevada), Geoff Freeman, the president and CEO of the American Gaming Association, says they want to take casino gaming to the next level: “How do we take 34,000 jobs and turn it into 50,000 jobs? How do we take $2.4-billion in tax payments and turn it into $3-billion?” Freeman says the industry wants state policymakers to re-think tax policies set when casinos first opened in 2006: Steve Tawa, KYW-TV

There is another reason that it is an uphill battle for casinos in the legislature and with regulators -everyone thinks they understand what is best for the industry and its customers. This, too, is a trend that started in Atlantic City. The regulators were charged with protecting the public from organized crime and sleazy operators. They did their job by dictating every detail of any operation they could. They dictated table limits, the number of employees needed for every job, hours of operation, levels of supervision and even how many slot machines a casino could buy from one slot manufacturer. New Jersey, primarily under pressure from Governor Christie, has eased up a little. But other states are still trying to control everything.

West Virginia is arguably the state in the worst position, although casinos in Delaware and Indiana might disagree. West Virginia has competition coming at it from everywhere. The casinos have been working for several years to get some regulatory changes to make it easier to compete. They are making progress, but it is not easy. The regulators are trying to think like supervisors and business managers, not regulators.

Lottery Commissioners Tuesday discussed giving a break to the state’s hard-hit casinos by relaxing personnel requirements for one popular table game. Under state Lottery regulations, each craps table must be staffed with four casino employees: Two dealers, a stickman, and a “box,” and casino operators are asking that they be able to run craps tables without a box during non-peak hours. “He’s just an extra set of eyes on the game,” said David Bradley, Lottery deputy director for table games. “There are jurisdictions that do give this relief, that do not require a box person on the game.” Bob Lagg, general manager of the Mardi Gras casino in Nitro, said casinos would like to have the flexibility to be able to reassign casino employees to other games during slow periods…Commissioner David McCormick asked how the casinos could know if a particular table was busy, since a table with a couple of players each making multiple bets per roll could be considered busy. Phil Kabler, Charleston Gazette, 11-18-14

How many people does it take to operate a craps table? That depends on the conditions. On the Las Vegas Strip in the midst of a high-rolling game, there could easily be four dealers and as many as three superiors – two in the box and another watching from a distance. Besides that small mob, there are a couple of people watching in surveillance and a casino manager or two in an office somewhere. On the other hand, late at night, in the dead of winter and far, far away from the famous Strip there might be one lonely employee – one dealer. There are other considerations in managing an operation as complex as a casino table game pit and it is highly unlikely that any regulator understands them well enough to design a regulation to cover them all.

Operating a business like a casino is not a simple black and white affair and it does not lend itself to black and white restrictive regulation. It is really quite simple; tell the casinos not to allow cheating by the employees or the customers and then fine them if they do. Don’t tell them how to do it, just tell them what outcome is required. The next few years are going to be very challenging for the casino industry. To succeed in the face of the challenges, casinos will need to be able to make sound business decisions and pay reasonable taxes. The days when the industry could and would bear everything thrown at them are gone. The regulators are going to have to listen to the concerns of the industry and take them seriously.


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