Expecting Too Much: A Recipe for Disappointment and Failure

Much of the gaming expansion legislation passed in the last eighty years was driven by a need for tax revenues, employment and economic stimulation.  For example, when Massachusetts approved gaming, the state was in the midst of a recession and desperately needed jobs, capital investment and new sources of tax revenues.  The pro-casino forces carried the day with predictions for $300-$500 million in tax revenue, thousands of jobs and hundreds of millions of dollars in economic development.  And in November of 2011 the governor signed the Expanded Gaming Act. The act provided for three casinos and one slot parlor.  Five years later the slot parlor is the only property operating and in its first year it generated just $81 million in taxes; that is a long way from the expectations of the act.

Nothing has been as simple as the erstwhile politicians imagined as the process has been wrought with problems and delays that were unanticipated.   The licensing alone took four years to award two casino licenses and one for the authorized slot parlor.  There were numerous local level regulations, committees, boards and special interests each with special requirements that had to be met adding to the delay between the passing of the act and the eventual opening of the MGM casino in Springfield and the Wynn casino just outside of Boston.   A series of lawsuits by unhappy communities and disgruntled, rejected suitors were also not part of the plan.  All of these factors made the original revenue projections impossible to achieve.

Adding to the complications, the competitive landscape has changed dramatically since the lawmakers in Massachusetts were debating the merits of casino gambling.  That altered environment will have a significant impact on gaming revenues in Massachusetts.  There are simply more casinos in 2016 than there were in 2011 and there will be more in 2019 or 2020 when the MGM and Wynn finally open.   But, Massachusetts is not the only state where lawmakers failed to take into account the expansion of the industry regionally when predicting casino tax revenues.

New York is going to experience the same shortfalls when the newly authorized casinos in that state finally open.  Like Massachusetts, New York is going to have much more competition than the legislation anticipated. Those other casinos will take part of the money that Governor Cuomo and the lawmakers hoped New York would collect.   But even without additional competition, the delay between the enabling legislation’s approval and the casino openings will set the governor’s plans and tax revenue predictions back two or three years.

The only casino unlikely to be affected by the competition or the bureaucratic delays was not part of the governor’s plan, Genting Resorts in Queens.  Genting is getting set to spend $400 million to expand its property with a hotel, spa, restaurants and 140,000 square feet of convention space. It also plans to add 1000 slot machine, bringing its total to 6500.  Genting Resort in Queens is about the only casino in the country unthreatened by new competition.  Genting is the hometown casino for over eight million New Yorkers.  Even a casino in the Meadowlands of New Jersey won’t cut significantly into its business.  However, a casino at the Meadowlands racetrack would affect the other casinos to be built in New York.

New Jersey is poised to expand its gaming; in November a casino referendum will be on the ballot. Voters will be asked if they want more casinos in New Jersey.   The forecasts for revenues from additional casinos in New Jersey will be as tenuous as those in New York and Massachusetts.  Enthusiasm, private agendas and a lack of objective information are distorting the impact and benefits of any expansion in New Jersey.  One of the issues that advocates in New Jersey are ignoring is the possibility of expansion in Pennsylvania.

In Pennsylvania, the legislature and the governor have been locked in a very tense and combative two-year budget debate. The lawmakers finally passed a $1.3 billion revenue package, the budget calls for $31.5 billion in spending.  Besides new taxes on tobacco and a loan from the general fund, the budget anticipates an estimated $100 million from legalizing casino-run internet gambling, slot machines at airports and off-track betting parlors.   In much the same way that Massachusetts did, the lawmakers in Pennsylvania reverse engineered the gaming expansion.  They started with the amount money required and the in a rather arbitrary way assigned numbers to each of the categories.

Pennsylvania lawmakers approved a budget that will require $100 million from an online gambling bill that won’t be voted on until the fall.  In addition to a gambling measure that lawmakers hope will generate at least $100 million, the $31.6 billion budget also relies on a $200 million loan from the Pennsylvania Professional Liability Joint Underwriting Association, a government-chartered medical malpractice insurance fund.  Evan Grossman, Watchdog, 7-15-16

What are the chances the legislators are right about the revenue potential of online gambling or any other expansion?  No much in my opinion.  It is very hard to find an example of a state where the numbers that drove the campaign for expansion were realized.  Ohio might be cited as a state where lawmakers got it right, except that the governor found a way to authorize slot machines at racetracks which more than doubled the number of slot machines in the state.  And that is the core of the problem; the economy and the gaming industry are dynamic and ever changing.  Long term planning that does not contemplate the problems or anticipate major changes in the landscape are destined to fail.

I started to think about the issue of legislatures and politicians expecting too much after reading an article in the Pittsburgh Tribune-Review by Mark Gruetze.  Gruetze quoted Mathew Katz, the founder of a software company, warning anyone who would listen about the challenges in legalizing internet gambling in Pennsylvania.

No matter when online gaming begins in Pennsylvania or any other state, don’t expect an immediate flood of tax money or casino profit, a voice of experience says. “The reality is, it takes time,” says Matthew Katz, founder and CEO of CAMS LLC, a California company that provides software for online gambling operators in Nevada and New Jersey. “It’s not all of sudden you go live and everybody comes and plays. It takes time to educate the marketplace.”  Katz also is founder and CEO of Verifi Inc…“We want to come into Pennsylvania, but if the costs are going to be similar to that of New Jersey, we would probably have to make the decision not to.”  Mark Gruetze, Tribune-Review, 7-5-16

Katz’s warning contains two important concepts; it takes time to build a new market; and if the fees and taxes are too high prudent companies will pass on the opportunity.  Those are not the only issues facing any expansion of gaming in today’s world, but they point out just how complicated predicting the potential of future casinos can be.  The gaming industry has reached a point where no jurisdiction stands alone and each new gaming outlet impacts all others within its reach.  That makes it very important to be realistic in planning gaming expansions; however lawmakers and politicians are rarely realistic.  They expect too much and therefore are certain to be disappointed.  But of course, if lawmakers faced the facts honestly, they would have to deal with the crucial fact that government spending is limited by government revenues.  And we all know that expecting politicians to honestly face facts is expecting too much, don’t we?


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