Benefits and Challenges of Gaming Expansion

I appreciate the opportunity to participate in this forum with you today. My name is Frank Fahrenkopf, and I am president and chief executive officer of the American Gaming Association, a trade organization representing the commercial casino segment of the gaming industry in the United States. Our members consist primarily of publicly held casino companies listed on the New York and NASDAQ stock exchanges, and several of them, including Caesars Entertainment, Harrah’s Entertainment, Isle of Capri, Kerzner International and MGM MIRAGE, already have formed partnerships with companies in the U.K. to pursue development opportunities here.

The AGA’s primary mission is to represent the interests of our member companies before the U.S. Congress and the executive branch of our government. More relevant to our discussion here today is our secondary mission: to serve as an information resource, addressing myths that are perpetuated by gaming opponents as well as documenting the benefits of casino gaming.

While most trade organizations have been around for decades, our association is relatively new: We were formed nearly nine years ago, in 1995, following a significant expansion of casino gaming in the United States during the early 1990s. I tell you this because I think that here in the U.K. you are in a position similar to where we were a decade ago.

Gambling expansion in the United States gave rise to an antigambling movement. This movement was led primarily by religious leaders, who preached against gambling for moral reasons. But as they soon learned, their views were out of step with the majority of Americans. As early as 1992, 90 percent of Americans said casino entertainment was acceptable for themselves or others.

Faced with this dilemma, gambling opponents rethought their strategy and refined their message. Their arguments soon began to focus on social costs, alleging that they outweighed any benefits from casinos. This message originally resonated with the public and created serious challenges for our industry—similar to the challenges you are now facing here in the U.K. Having been through this experience, I’d like to share with you what we’ve learned in the United States in hopes that it will help you address some of the same issues.

The debate in the United States centered around this basic question: Will the economic benefits of casino gaming exceed any social costs? The answer to this question is an emphatic yes.

One of the main reasons gambling opponents were able to gain some momentum was because there was a lack of credible evidence to dispute their claims. But that is no longer the case. A federal commission, with members appointed by the president of the United States, the speaker of the house and others congressional leaders, was created in 1996 by the U.S. Congress to study the impact of the gaming industry in the United States. While gambling opponents predicted the National Gambling Impact Study Commission would uncover a whole arsenal of smoking guns, the commission’s final report, which came out in 1999, as well as other independent studies, actually provided us with the ammunition to counter their false claims.

Alleged Social Costs

Crime

Gambling opponents are fond of claiming that the presence of casinos increases the incidence of crime. The study prepared for the federal commission measured index crimes that reflect the public safety and security, such as murder/manslaughter, forcible rape, robbery, aggravated assault, burglary, larceny/theft, motor vehicle theft and arson—Part I crimes reported to the Federal Bureau of Investigation—and reported, “[T]he casino effect is not statistically significant for any of the…crime outcome measures…” meaning the level of crime in cities closest to casinos is no greater than the level of crime in places further removed from casinos.

Other federally funded research confirmed this finding. A recent study funded by the National Institute of Justice found “few statistically significant changes [in crime levels comparing] pre and post casino periods. The expectation that crime rates would rise as a result of the advent of casino gambling in the communities under study was not borne out.”

There is nothing inherent in the nature of casino gaming—or in the collective character and behavior of millions of people worldwide who enjoy this form of recreation—that causes crime.

If crime does go up in new gaming jurisdictions, the explanation is more often than not that any city that hosts thousands of new tourists daily is likely to experience an increase in petty and street crime. The fact of the matter is that in the majority of new gaming jurisdictions, crime has decreased over time and dropped well below the rate it was prior to the arrival of gaming.

Bankruptcy

With a concurrent growth in legalized gambling and bankruptcy filings during the 1990s, opponents of our industry added bankruptcy to their list of social ills caused by gambling.

Again, the federal commission findings contradicted their claims. Commission research found that “… the casino effect is not statistically significant for any of the bankruptcy … measures,” meaning the level of bankruptcies in cities closest to casinos is no greater than the level of bankruptcy in places further removed from casinos.

The most compelling evidence to date refuting an alleged link between gambling and bankruptcy is a study issued in 1999 by the U.S. Treasury Department, which concluded: “There is no connection between state bankruptcy rates and either the extent of or introduction of casino gambling.”

The preponderance of published studies have refuted the causal link between gambling and bankruptcy. Instead, many studies concluded that personal bankruptcies are related to population, personal income, age, race, divorce rates, unemployment rate, and the ratio of debt to disposable personal income.

If the academic studies aren’t persuasive enough, keep in mind the following facts:

The states that led the country in per capita bankruptcy filings in 2002—Utah and Tennessee—are two of the three states that had no legalized gaming at all.
Of the top 10 states with the highest personal bankruptcy rates, a majority has no casino gaming.
Colorado is the only state in the country during the 1990s that actually recorded a negative growth rate in bankruptcy filings, but it has had commercial casinos since 1991.
Of the top 15 states with the highest rate of increase in bankruptcy filings, only one (New Jersey) has commercial casinos.
Seven of the 11 commercial casino states fell below the national average in terms of bankruptcy filing growth rates during the 1990s.
Disordered Gambling

The commission research also found that the magnitude of disordered gambling was not close to what had been alleged and continues to be alleged today by gambling opponents. According to the commission’s final report, “The vast majority of Americans either gamble recreationally and experience no measurable side effects related to their gambling, or they choose not to gamble at all. Regrettably, some of them gamble in ways that harm themselves, their families, and their communities.”

Approximately 1 percent of American adults can be considered “pathological gamblers,” according to the National Academy of Sciences, a private, nonprofit society of distinguished scholars mandated by Congress since 1863 to advise the federal government on scientific and technical matters, as well as Harvard Medical School—two of the most respected institutions in the country. The estimate from the commission research was even lower, at 0.6 percent. According to the National Academy of Sciences and other top scientific experts, a majority of those people who are pathological gamblers also experience other problems, such as mood disorders, substance abuse problems and behavioral disorders. As a result, it’s very difficult to gauge the extent of this problem, or even to know whether it’s a distinct disorder.

Because this topic is a speech in and of itself, I will leave the rest of the discussion to the social costs panel you will hear from later today.

As you can see from these recent studies and data, the conclusions drawn by opponents of our industry have no basis in fact. This is information that needs to be repeated to counter their claims that continue despite overwhelming evidence to the contrary.

Economic Benefits

The economic and social benefits derived from gaming will be in large part a function of specific decisions made by public officials. I know that gaming companies here in the U.K. have already submitted testimony emphasizing that decisions made in your final gambling bill regarding the form of gaming, tax rate and regulatory structure all will have a long term, direct and significant impact on your final product.

I would concur with them and would like to take a few moments to explain why these are such important decisions.

Let’s start with the form of gaming. Our federal commission was clear and unequivocal in stating that “destination type resorts,” which include hotels, restaurants, shopping, entertainment and other amenities, offer major economic advantages and benefits compared to “convenience-type gaming.” As testimony submitted to your Joint Committee on the Draft Gambling Bill emphasized, resort casino hotels are necessary to serve as a catalyst for massive regeneration, thousands of jobs, and significant investment in skills, leading to greater prosperity and improved quality of life for local residents and businesses.

Destination type resorts—and the benefits they bring—will only be realized under certain economic conditions. While ours is a privileged industry, and jurisdictions do have the right to tax our business at a higher rate than others, a careful balance needs to be achieved. High tax rates suppress capital investment and other expenditures, limiting jobs as well as revenue, thus reducing the potential tax revenue. While the industry can and will pay more under certain market conditions, such as limited licenses or proximity to large population areas, rates set too high will serve as a barrier to market entry.

In terms of regulatory policy, every jurisdiction in the United States with legalized casino gaming has in place an extensive regulatory regime to ensure fairness of the games, prevent criminal activities and determine the scope of the industry. We believe adequate regulatory controls are necessary to ensure public confidence in the integrity of this industry.

Job Creation

If these recommendations are reflected in new U.K. gaming laws, you can expect to experience similar economic benefits to those we have seen in the 11 states where commercial casinos are legal in the United States.

The federal commission found plenty of evidence of these benefits, stating this in its final report:

As it has grown, [gambling] has become more than simply an entertainment pastime: the gambling industry has emerged as an economic mainstay in many communities and plays an increasingly prominent role in state and even regional economies.

The commission reached this conclusion based on a number of factors, beginning with jobs. The commercial casino segment of the industry in the United States directly employs approximately 350,000 people, who earned nearly $10 billion in 2002, including benefits and tips. Those figures do not include benefits from the nearly half a million construction-related and indirect jobs generated by casinos from local purchases of goods and services.

The commercial casino industry contributed $26.5 billion in total revenues to the economy in 2002. These figures don’t include the billions of dollars spent each year on construction and purchases of property, furniture and equipment, including improvements and expansions. The investment-to-profit ratio for the major casino companies is often as high as 3-to-1. As you can see, this industry has a significant impact across the entire economic spectrum.

Tax Revenue for Community Improvements

Along with creating jobs and generating capital investment in our communities, the commercial casino industry pays its fair share of taxes in the United States, which help fund education, urban renewal, infrastructure improvements, benefits for the disabled and the elderly, historical renovation and other programs.

In 2002, commercial casino companies paid more than $4 billion in gambling privilege taxes to federal, state and local governments, which doesn’t include the income, real estate and other normal taxes paid by all businesses, nor does it include the billions of dollars in taxes paid by our employees or the local development agreements that bring additional revenue to host communities.

As the federal commission report indicated:

The National Gambling Impact Study Commission heard from a number of local officials in jurisdictions where casinos are located. …Without exception, these elected officials expressed support for gambling and recited instances of increased revenues for their cities. They also discussed community improvements made possible since the advent of gambling in their communities and reviewed the general betterment of life for the citizenry in their cities and towns.

Many of the economic benefits I’ve discussed here today are documented in the AGA’s annual survey of casino entertainment. We’ve brought along copies of our most recent survey for you, and I hope it will serve as a valuable resource in responding to questions about the economic impact of casinos.

Social Benefits and Second Chances

Casinos have served as a catalyst for economic growth in areas with considerable need and little or no alternatives, a goal I know you are trying to achieve here. Beyond creating jobs and contributing tax revenue, our industry has helped improve quality of life for hundreds of thousands of employees and their families by elevating job skill levels, most of which are transferable to other types of employment. In addition, we have provided special education and training, along with benefits such as top-notch health care and day care programs.

Because of historically high rates of unemployment and underemployment in many of the communities where we operate, we also have been able to give many of the people there a second chance.

The final report of the federal commission confirmed what we in the commercial casino gaming industry already knew: Casinos have been especially effective in economically depressed communities. The commission stated in its recommendations that:

…[When considering the legalization of gambling or the repeal of gambling that is already legal, state, local, and tribal governments] … should recognize that especially in economically depressed communities, casino gambling has demonstrated the ability to generate economic development through the creation of quality jobs.

One of the best indicators of success in this area is the number of people on public assistance. As the research initiated by the commission found, “[U]nemployment rates, welfare outlays, and unemployment insurance decline[d] by about one-seventh” in gaming communities. And although income in those communities stayed the same, more came from paychecks and less from government checks than before.

Other studies commissioned by the industry in new jurisdictions found similar social benefits following the introduction of casino gaming. In addition to decreases in public assistance following the introduction of casino gaming, communities have benefited from the newfound purchasing power of gaming employees, which has stimulated local economies, and they have benefited from having a new source of donations and volunteers working for charitable organizations.  

As an industry, we are unparalleled in our ability and our determination to hire large numbers of unemployed individuals and to provide those new employees with job and life skills training to ensure that they succeed.

The bottom line is that the commercial casino gaming sector is a dynamic, growing contributor to economic growth in the United States, providing solid, meaningful employment to hundreds of thousands of Americans. The same benefits can be realized in communities here in the U.K.

Quality of Life

In closing, I recognize that there is a belief among some observers that casinos may detract from the quality of life in a community. My response to that is simple: Nothing will improve quality of life better than a job with a steady paycheck and health benefits, access to day care, or the ability to further your education. Beyond the employee impact, the purchasing power of a significant new work force can have a dramatic, positive impact on an entire community, particularly an economically depressed community, because income allows people to buy homes, cars and major appliances, as well as dine out in restaurants and contribute to local charities.

According to a nationwide poll of casino county residents conducted in 2001, Americans who live in counties with casinos not only have a favorable impression of casinos but also can point to specific ways the casinos have improved their quality of life—spurring tourism; creating job opportunities; funding improvements to roads, schools, hospitals and other projects; and improving the overall economy.

Those of you who have seen me speak before know that I commonly close my remarks with a quotation from a man I admire greatly, Winston Churchill. It seems particularly appropriate in this forum to again draw upon his wit and wisdom. Churchill said this about economic growth: “Prosperity, that errant of our daughter who went astray …is on our threshold. She has raised her hand to the knocker on the door. What shall we do? Shall we let her in or shall we drive her away?”

With the proposed liberalization of gaming laws here in the U.K., you’ve heard the knock at the door. You hold the key to shaping the U.K. gaming industry to become a positive force of economic and social change. No, casino gaming is not a panacea. But if it is part of a carefully crafted plan, it can serve as a critical building block in a broader effort to create quality jobs, promote capital investment and generate economic development throughout your communities.