Growing Up: The Challenges and Opportunities of Gaming Expansion

Thank you for that kind introduction, and thank you to Michael Pollack and Spectrum Gaming Group for inviting me to be here today. It’s a pleasure to have this opportunity to speak at the first Florida Gaming Congress. During the past decade, I have seen overwhelming growth in the gaming industry in the form of commercial casinos, Native American gaming and, most recently, the phenomenon of racetrack casinos, which voters in Broward County approved earlier this year. But the idea of expansion brings a mix of both opportunities and challenges, and it’s important for stakeholders in Florida as well as areas where gaming expansion is being debated to know what lies ahead.

While some of you already know my organization and what we do, I would like to start by sharing some background on the American Gaming Association for those of you who are unfamiliar with us. The AGA is the national trade association representing the interests of the commercial casino industry on federal legislative and regulatory issues. Most of our members are publicly held companies listed on the New York and NASDAQ stock exchanges, including operators I’m sure most of you have heard of, such as Harrah’s, MGM MIRAGE, Isle of Capri Casinos and Penn National Gaming.

Florida already has witnessed a great deal of success at the Native American casinos in this state.  And it will soon discover that commercial gaming brings immense benefits. The commercial casino industry, which operates 445 casinos in 11 states, generated nearly $29 billion in gross revenues in 2004. Of that amount, we paid nearly $4.7 billion in taxes to state and local governments. That tax revenue is used to improve the quality of life for residents in our gaming communities by funding education, infrastructure improvements, health care, tax relief, public safety and other projects. And the benefits go beyond taxes: We also provided nearly 350,000 direct jobs with salaries and benefits of over $12 billion. The gaming industry also creates employment opportunities in other sectors, including casino construction. With an estimated 650,000 indirect jobs, a total of about one million employees nationwide make at least part of their living from gaming. Other benefits include boosts in tourism, capital investment and added opportunities for economic development.  As an unfortunate example of just how important our industry is to the communities where we operate, the state of Mississippi is losing half a million dollars for each day the casinos destroyed by Katrina are not operating. 

Independent studies also have touted the advantages of gaming entertainment. Research prepared for the 1999 federal gambling study commission found that “…[A] new casino of even limited attractiveness, placed in a market that is not already saturated, will yield positive economic benefits on net to its host economy.”  In addition, studies conducted for the commission found that communities closest to casinos experienced a 12 percent to 17 percent drop in welfare payments, unemployment rates and unemployment insurance after the introduction of casino gaming. Also, an AGA study of three gaming jurisdictions – Joliet, Illinois; Bossier City/Shreveport, Louisiana; and Biloxi/Gulfport, Mississippi – found that in each jurisdiction, in addition to lowering public assistance programs, the introduction of casinos led to growth in retail sales, commercial and new housing construction, and restaurants.

Racino states are seeing the benefits of gaming as well. In 2004, racinos in seven states generated nearly $2.9 billion in gaming revenue and distributed more than $1.07 billion to state and local governments. Additional funds were directed to racetrack revitalization efforts, purses and track personnel, such as the jockeys and breeders. This extra money for racing allows new, modern racinos to compete with existing operators in other states, providing more options for customers and ultimately greater benefits for surrounding communities.

Increased competition can pose a real challenge for our industry. New operators in Florida will be faced with the challenge of developing and promoting facilities that can successfully compete against existing casinos in adjacent states and the Native American facilities already here.  Competition in the near term will not be as intense since the casinos in Mississippi and Louisiana are in the rebuilding phase, but those areas will recover, and when they do, they will be back bigger and better than ever.  Meanwhile, as racinos open their doors here in the next few years, gaming here and in neighboring states will be challenged to compete with your innovative casino designs and new amenities. As more and more areas expand into gaming, it leaves our businesses constantly asking the question: What new and unique entertainment choices can we offer our customers?

Gaming expansion leads to other challenges as well.  And the main challenge for us today is the overtaxing of our industry. While we’ve never tried to avoid paying our fair share, excessive taxation has had serious effects not just on our business but also on the communities where we operate.

In Illinois, where the state’s top gross gaming tax rate increased from 35 percent to 70 percent, the governor has discovered what is meant by the phrase “killing the golden goose.” Saddled by an unfair tax burden, the industry has been forced to cut back to stay profitable. Faced with declining cash flow, operators had to cut 700 jobs, with another 600 jobs going unfilled. Hundreds of millions of dollars in planned construction projects were either put on hold or canceled altogether. Revenues in fiscal year 2004 were down $88 million, with casinos in neighboring states reaping the benefits. Ultimately, the tax hike brought in less than half of what was projected — and payments to local governments actually went down by more than $8 million from 2002 to 2003.  Now the governor has been forced to scale back these tax rates, but the environment is anything but stable.

The experience in Illinois should serve as a cautionary tale for states looking to solve their economic woes with gaming tax revenue. With lower taxes and thus more capital available, casinos would have the opportunity to build better facilities and provide customers with added amenities, including shops, spas, restaurants, theaters and golf courses. With more opportunities available to customers, operators will see increases in tourism and, consequently, revenue. More revenue for the operator means more jobs and, ironically, more tax revenue for the state.

With a cap on the number of racino facilities allowed, Florida can still generate a significant amount of capital investment with moderate tax rates.  However, whatever tax rate is levied in Florida should allow operators to compete effectively with the existing operators in the market that are currently not taxed by the state. A high tax rate would put racinos in Broward at a competitive disadvantage with the neighboring Indian casinos.

New England provides the best comparison to the situation in Florida.  In Rhode Island, the effective tax rate on racetrack casinos is 60 percent, while the tax rate in neighboring Connecticut is just 25 percent. The lower tax rate has encouraged capital investment at the Indian casinos in Connecticut, creating vastly superior properties and more spending by Rhode Island and Massachusetts residents there than at the more convenient Rhode Island racinos. The spending is not insignificant: Rhode Island and Massachusetts residents spend more than $1 billion a year at Connecticut’s two Indian casinos, Mohegan Sun and Foxwoods.  I understand that this is a frequent challenge for governors and legislators who may feel pressure from taxpayers to address budget deficits without raising income, sales or property taxes.  But there should be a level playing field here in Florida, and the state would see a greater, long-term return with more reasonable tax rates.

I’m not proposing that governments should treat gaming like other industries. The fact is our businesses are very different from others. Unlike most industries, it is a privilege for us to operate, and strict regulatory oversight affects how we run our businesses, who runs them and where.

I anticipate regulators in Florida will hold the future racinos here to the same strict regulatory standards found in other states. Every jurisdiction 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. I also believe adequate regulatory controls are important to ensure public confidence in the integrity of this industry. And the success and growth of our industry relies substantially on the public’s acceptance of our business. So while government oversight can pose a challenge for some gaming companies – especially in emerging jurisdictions – the overall result is beneficial for the entire industry.

Despite this regulatory oversight and myriad benefits I mentioned earlier, there are still those who oppose our industry. With their constant stream of myths and misinformation about so-called social and economic costs of gaming, we often find ourselves responding to their unfounded claims. Fortunately, we are backed by peer-reviewed, independent research from such reputable sources such as the U.S. Treasury Department, the General Accounting Office, the National Research Council of the National Academy of Sciences and Harvard Medical School, which have provided evidence that the introduction of gaming won’t increase crime, corruption or bankruptcy, as well as other findings that run contrary to the claims of our opponents.

However, we understand that a small percentage of the population opposes gambling on moral grounds, and we don’t expect them to change their minds. The reality is that the vast majority of Americans approve of casino gambling. And overall acceptability of our industry has remained consistently high. According to polling conducted for the AGA, more than eight out of ten people view casino gambling as acceptable for themselves or others. Year after year, Americans overwhelmingly say that they recognize the benefits of gaming and feel strongly about preserving their right to gamble without interference from others, including the government.

Perhaps even more significantly, a recent survey of opinion leaders tells us that elected officials and civic leaders who live in gaming jurisdictions have an overwhelmingly favorable view of casinos and their impact on their communities. 

The survey was conducted earlier this year by Peter Hart, one of the leading pollsters in the country.  Peter talked to more than 200 mayors, county executives, state legislators, chiefs of police and other local leaders who live where casinos operate. 

According to the results, casinos have exceeded the expectations of community leaders in the locations where they operate and have significantly contributed to economic development in those areas. Fully 58 percent of all opinion leaders said they had a positive reaction to casinos when they were first proposed for their community.  And now, a full 89 percent say the introduction of casinos has met or exceeded their expectations. 

And, while gaming opponents often claim that casinos fail to generate new tax revenue because they simply siphon off money that people would have spent on other goods and services, the opinion leaders surveyed soundly rejected this so-called “substitution theory.” More than two-thirds said casinos have generated a net increase in tax revenue in the area, and nearly three-quarters of those surveyed said casino tax revenues have allowed their community to undertake projects that otherwise would not have been possible.

Fully 82 percent of survey respondents hailed casinos as responsible corporate citizens, and more than three-quarters said casinos have made an overall positive impact of in the community. Finally, in perhaps the most significant show of support in the entire survey, fully 75 percent of opinion leaders indicated they would vote again to allow casinos into their communities if they could go back and do it all over again.  These are the people who know our industry best, and these results are a strong indication of the contributions and positive impact of our industry.

While public acceptance of our industry has served us well, it’s important that we conduct our business in an honest manner and present ourselves as good corporate citizens to keep these approval ratings high. In order to be in good standing with the communities where we work and with our customers and employees, we need to emphasize responsible gaming at our casinos. Although the vast majority of our customers enjoy casino gaming without adverse effects, the National Research Council of the National Academy of Sciences and Harvard Medical School’s Division on Addictions have concluded that about one percent of Americans can’t gamble responsibly and meet the criteria of the American Psychiatric Association as pathological gamblers.

So as you add slot machines to your racetracks, you need to recognize that responsible gaming is an issue that will require your attention. One way for operators to show that they are serious about this issue is by adopting a set of business standards focusing on a comprehensive commitment to responsible gaming. The AGA has already developed such a program – the Code of Conduct for Responsible Gaming, which all of our member companies implemented last year. The code does what its name implies – it “codifies” a broad range of practices throughout our industry, from employee assistance and training to alcohol service, advertising and marketing. The code also covers our commitment to supporting research initiatives and public awareness surrounding responsible gaming and underage gambling. For some companies, it simply reinforces existing practices. Others will need to bring their practices up to the standards spelled out in the code.

By adhering to a universal set of guidelines, the industry as a whole benefits because it not only standardizes our practices but also sets the bar high. Just as this applies among commercial casinos, it also applies to every other segment of the gaming industry. If even one company fails to maintain high standards, it can have a negative impact on our entire industry. In the public mind there is not much of a distinction between a commercial casino, a racino, an Indian casino or sometimes even an online casino. I think the “Arthur Andersen” example is a good analogy — although other accounting firms were not implicated in the Enron scandal, all accounting firms got a black eye for their general practices as a result of that incident.

I’ve spoken a lot this morning about the general benefits and opportunities associated with gaming. As an emerging jurisdiction, Florida should also take advantage of another opportunity: To examine the history of our industry. As Winston Churchill said: “Learn all you can about the history of the past, for how else can one even guess what is going to happen in the future?” Taking a historical perspective and understanding the implications of our past actions will serve us well and will have a universal effect on our growing industry. This tactic will only become more valuable as we expand, allowing us to take advantage of our best practices and learn from our mistakes. The obstacles we overcome today present us with more opportunities for the future.