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Republicans discussing 'auction' to get most out of slots

By LIAM FARRELL Staff Writer, The Capital
Published on Monday, July 30, 2007
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With one of Maryland's most powerful Democrats predicting slot machines will be used to ease the state's budget deficit, some Republicans are focusing on an "auction" system they believe will give government the most money.
Members of the minority party believe any legislation to legalize slots to help close the state's $1.5 billion deficit should be coupled with a competitive bidding process.

Businesses should have to bid on either the operating licenses or the amount of slots earnings that would be set aside for the state, they say.

"Certainly in the (Republican side of) the House of Delegates there is a lot of interest in the auction," said Del. Steve Schuh, R-Gibson Island. "It helps forgo the need for tax increases."

Slots have been at the center of a perennial debate in the General Assembly.

Senate President Thomas V. Mike Miller Jr., D-Calvert, has predicted slots will be a part of any final budget solution, and Gov. Martin O'Malley would support a slots measure geared toward preserving the racing industry.

But using a slots auction along with greater budget reductions is gaining traction in the minority party.

"This is an excellent solution," said Del. Nic Kipke, R-Pasadena. "It is time we do what we have to do to avoid raising taxes."

House Republican Leader Anthony O'Donnell, R-Calvert, would not comment on whether the auction concept would be part of an alternative budget plan currently being drafted by the House Republican Caucus.

But Mr. O'Donnell acknowledged that if slots are going to be part of the solution, an auction system would be advantageous for taxpayers.

"It seems to me to make sense ... if we are going to go there," he said. "Let's craft it to help solve our problem and give the best return."

Although any Republican proposal has a steep challenge ahead in the Democratic legislature, Mr. O'Donnell said all voices should be considered under the weight of the government's financial woes.

"Nobody has a monopoly on good ideas," he said. "We have some to offer as well."

Much of the interim budget discussion in Annapolis before next January's session has been on what taxes and fees will be raised, such as hiking the sales tax, income tax, corporate tax, and lifting the freeze on in-state tuition.

The Board of Public Works approved Gov. Martin O'Malley's $280 million of cuts on July 11, but only $128 million - less than one percent of spending - was taken from state agencies. About $101 million of those cuts will carry forward into future budgets , according to the Department of Legislative Services.

But the state is projected to have at least a $1.4 billion deficit annually into 2012.

Recently, House Speaker Michael E. Busch, D-Annapolis, said the legislature will look at cutting up to 1,000 of the estimated 1,965 state job vacancies currently funded. The House Republican Caucus is drafting an alternative budget plan that will include more reductions.

"That is our fundamental position," said House Minority Whip Christopher Shank, R-Washington, who declined to give specifics on the plan but said it is being finalized. "What we fundamentally believe in is that there needs to be fiscal discipline."

Upfront money

Last session, Mr. Miller predicted tax raises, budget cuts and slots would all be used to close the deficit.

Legislative leaders declined to close the gap at the behest of Mr. O'Malley, but Mr. Miller introduced a slots bill to get the discussion rolling.

Despite the presence of many slots enemies - including Mr. Busch, Comptroller Peter Franchot, and grassroots organizations such as the Annapolis-based StopSlotsMaryland - the senate president was unequivocal in his statements on expanding gambling from Keno, horse racing and the lottery.

"This is going to be part of any final solution," he said in February. "The votes are not here in the Senate if this is not part of a final solution. It is going to happen, it has to happen, it will happen.

Mr. Miller's bill would have raised more than $800 million annually for public school education by authorizing up to 15,500 video lottery machines at a maximum of seven locations. An estimated 52 percent of the revenue would have gone directly to the state for education.

The licenses would have been doled out through a competitive bidding process conducted by a nine-member commission, with four permits reserved for racetracks and as many as three for non-racetrack destinations, which could also bid on the licenses. The state would have received a total of $93 million in license fees.

Slots should be put at racetracks because they offer the "most politically palatable solution," Mr. Miller said in an interview this month. The tracks are ideal locations because they have historically been places where gambling is accepted, he said.

"Slots are not the best answer," Mr. Miller said. "(But) if you are a pragmatist, you can't be against them."

But some experts question whether reserving licenses for racetracks or establishing a percentage take outright are ways to ensure the best profit.

A study published in 2003 by the Maryland Public Policy Institute, a nonpartisan research and education organization, outlined several different slot market designs and their fiscal benefits.

Written by Jeffrey C. Hooke and Thomas A. Firey - the former is the chairman of the Maryland Tax Education Foundation, the latter works as the managing editor of the Cato Institute's Regulation magazine - the paper states Maryland could receive a torrent of cash if slots are started the right way.

A "reverse auction" process, which Mr. Hooke and Mr. Firey deemed the most beneficial way to kick-start gambling, would allow slots in commercial areas and give out licenses to the bidders who promised to keep the smallest percentage of revenue. Although there would be no up-front profit, Maryland would receive more than $1.6 billion annually before inflation, according to the study.

Under a "cash auction" system, slot licenses would be awarded to whatever bidders were willing to pay the most. If the state allows slots operators to keep 39 percent of the revenue, Maryland could see an up front windfall of $1.5 billion and annual earnings of about $1.3 billion, the report says.

"If your sole objective was to allow the free market to identify for us the ideal locations ... you go about it with an open, free market auction," said Mr. Schuh, a member of the House Appropriations Committee who added that he would not support every type of slots measure. "It is the best way of making sure the Maryland taxpayer gets a fair deal."

Although Mr. O'Malley supports "limited" slots to help preserve horse racing jobs and open space, the governor had no comment on an auction.

"It is too early to comment on a slots proposal," said Rick Abbruzzese, a spokesman.

Published July 29, 2007, The Capital, Annapolis, Md.
Copyright © 2007 The Capital, Annapolis, Md.