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Don’t count on slots to save Md.

Originally published in the Daily Record

Economic & Fiscal Policy

by John J. Walters

OP-EDS

Maryland is placing a lot of faith in revenue generated by slot machines positioned in a few strategic locations around the state to plug large holes in the budgets of such services as education and law enforcement.

Yet, despite the state government already committing more than $80 million to the purchase of nearly 2,000 machines, significant progress has been made toward opening only two of the state-sponsored gambling parlors. Hollywood Perryville Casino is scheduled at open at the end of this month, and Ocean Downs is expected to open in December.

Elsewhere, the only applicant to run the proposed Baltimore casino, Canadian developer Michael Moldenhauer, was recently deemed unfit for the job by the state slots commission. City residents will have to wait a little longer for their tax burdens to even resemble those of their neighbors in surrounding counties, since officials planned to use revenue from the casino to lower the astronomical property taxes in Baltimore.

The state is also looking for a new bidder for the slots parlor proposed for Rocky Gap Lodge & Golf Resort in Allegany County. The first round drew only one bid, which was thrown out when the group didn't submit the multimillion dollar licensing fee.

Developers say ‘no way'
The "No Slots at the Mall" group has filed for a referendum to the decision to put nearly 5,000 slot machines at Arundel Mills, and it is already airing commercials advising people to cast their vote to keep slots where they belong - in places where gambling already exists, such as racetracks.

Private developer Mark Vogel still wants to buy Rosecroft Raceway, which closed recently and filed for bankruptcy. But Vogel let his option to buy the property expire last week and instead will take his chances at the bankruptcy auction.

If Vogel is confident enough that he can turn a profit even after buying the track and paying off its debts, why is the government having so much trouble finding qualified people to run its casinos?
Simply put: greed and red tape.

The state wants to take more than 60 percent of all gambling proceeds from each of the five proposed sites. It also would give little wiggle room for casino owners, as only slot machine gambling is considered fair play. When asked to operate on margins so thin, it's no wonder that those developers with any sense at all are saying, "no way."

Gov. Martin O'Malley initially projected that slots would bring in about $800 million a year for the state. Since then the figure has been revised a few times, and it now hovers at a still-optimistic $600 million annually.

It is unclear whether the government actually anticipates this much income or if it is simply painting a rosy picture to make next year's projected billion dollar deficit seem a little more palatable.

Case study in Pittsburgh
To get a more accurate picture of what we can expect from our casinos in Maryland - that is, one not based on the O'Malley administration's most optimistic guess - a good case study might be the one conducted by the Allegheny Institute of the Rivers Casino in Pittsburgh, which just finished its first year of operation.

Things didn't go exactly as planned, although next year's inclusion of table gaming (an option not available in Maryland) is expected to help.

Gross terminal revenue (the money earned before paying tax obligations) at Rivers Casino lagged management projections by 50 percent and fell short of the Gaming Control Board estimates by 33 percent.

Since those projections were based on anticipated gambling demand, it is very important to get an accurate read on the market before making any statements. So how careful were the studies conducted by the O'Malley cohort?

The Rivers Casino was actually underperforming so badly this summer that bond rating agencies like Standard & Poor's repeatedly downgraded its rating for fear that the casino may have trouble meeting all its obligations, the most onerous of which is undoubtedly the 55 percent state tax on gambling revenue. This makes Maryland's proposed tax rate of 60 percent seem more than a little unwise.

Places like Las Vegas have clearly made gambling into a profitable industry, and investors like Vogel suggest that there is confidence that a similar formula can work in Maryland, even where it has failed before. Yet the state government continues to cripple whatever entrepreneurial spirit may exist with its meddlesome policies and outrageous taxes.

It is understandable that O'Malley would come out with such substantial and healthy estimates for casino-generated tax revenue, given the state's dire need for cash and its residents' desire for good news.

But it is certainly looking like time to switch to "Plan B" to solve our financial woes. Does the state even have one? Or are we just hoping for more federal money to bail us out again?

And what's the federal plan to close the budget gap? Bigger slot machines?

John J. Walters is a research associate at the Maryland Public Policy Institute. He can be reached at jwalters@mdpolicy.org