Testimony Before the Maryland House Ways & Means Committee

Madam Chairman and members of the committee, I appreciate the opportunity to address you today. My name is Frank Fahrenkopf, and I am president and CEO of the American Gaming Association, the national trade organization representing the commercial casino segment of the gaming industry, which consists primarily of publicly held casino companies listed on the New York and NASDAQ stock exchanges, including most of the names consumers are most familiar with in our industry: Harrah’s Entertainment, MGM MIRAGE, Park Place Entertainment and many others.

I want to begin by stating clearly that I am not here to advocate for additional gaming in Maryland—that is for the people of this state to decide. But during the brief time I have today, I would like to share some general information about our industry—information about economic and social impacts, our industrywide commitment on issues of public concern, particularly our responsible gaming initiatives, and the appropriate role of government in the gaming business. And I expect I’ll be debunking a few myths along the way as well.

Overview of the Gaming-Entertainment Industry

Economic development is a top of mind concern for policy-makers today, so I’d like to begin by providing you with an overview of the gaming industry today, specifically the contributions made by the commercial casino industry in providing quality jobs, economic development and capital investment in the communities where we operate.

The gaming industry in this country has grown dramatically during the past few decades. There are now state-run lotteries in 38 states plus the District of Columbia; some form of pari-mutuel betting in 40 states; commercial casinos in 11 states; Native American Class III casinos in 23 states; racinos in six states; and charitable gaming in 46 states and the District of Columbia. The entire industry employs, directly and indirectly, more than 1 million people, and in 2002 had gross revenue of more than $68.7 billion.

Creating Jobs and Strengthening the Economy

The commercial casino segment of the industry directly employs approximately 350,000 people, who earned nearly $11 billion in 2002, including benefits and tips. Those figures do not include the more than 450,000 construction-related and indirect jobs generated by casinos from local purchases of goods and services.

Commercial casinos generated $26.5 billion in total revenues in 2002. Racinos generated an additional $2 billion. Although we don’t have more recent figures, a 1997 study commissioned by the AGA found that from 1993 to 1995, our industry spent almost $13 billion for construction and purchases of property, furniture and equipment, including improvements and refurbishments. The investment-to-profit ratio for the major casino companies is often as high as 3-to-1. In Atlantic City alone, casino gaming has generated investment of more than $6 billion since its inception in 1978. In Mississippi, more than $7 billion has been invested in construction of casinos, hotels, restaurants, showrooms, retail outlets, golf courses and other amenities. As you can see, this industry has a significant impact across the entire economic spectrum.

Research conducted for the National Gambling Impact Study Commission, a federal panel mandated by Congress to study the impacts of gaming, also documented the economic benefits of casino gaming. A report by the National Research Council of the National Academy of Sciences commissioned by this panel concluded, “Gambling appears to have net economic benefits for economically depressed communities.” Adam Rose, a Penn State University professor who also conducted research for the commission, found, “… 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.”

Generating 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. Last year, commercial casino companies paid more than $4 billion in direct gaming taxes to federal, state and local tax governments. From 1998 through 2002, the commercial casino industry paid $16.6 billion in direct gaming taxes alone to state and local governments. These figures don’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.

States have used these large sums of tax revenue generated by casinos to fund new school and library construction; urban renewal; transportation and infrastructure improvements; benefits for the disabled, elderly and veterans; and historic preservation, among many other projects. For good reason, we are proud of how the taxes from our industry have helped benefit communities across the country where we do business.

Providing Social Benefits and Second Chances

Beyond creating jobs and contributing tax revenue, our industry helps 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 provide 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 National Gambling Impact Study Commission confirmed in its 1999 final report what we in the commercial casino gaming industry already knew: Casinos have been especially effective in economically depressed communities.  

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, “Unemployment 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.

A 1997 PricewaterhouseCoopers survey of employees in the commercial casino industry also found a number of important indicators related to social impact. Among those findings are the following:

• More than 8.5 percent of employees responding to the survey reported that they have left welfare as a result of their employment.
•  Approximately 63 percent of employees surveyed indicated their jobs in the casino gaming industry provided improved access to health care benefits. Virtually all of the companies surveyed offered health care to their employees.
•  Approximately 43 percent have better access to day care for their children.
•  About 78 percent indicated that their employer provided them with training to perform their job.

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 in their efforts.

An Engine of Economic Growth

The bottom line shows that the commercial casino gaming sector is a dynamic, growing contributor to economic growth in this country, and it provides solid, meaningful employment to hundreds of thousands of Americans. I’m not providing you with information that has been developed by an economic model. This is not a theoretical discussion concocted in an ivory tower. I’m presenting you with hard, solid, irrefutable evidence available from the many studies I’ve mentioned.

Weighing Benefits and Costs

Now that I have provided you with an overview of the benefits we provide to our communities, let me next address the exaggerated claims of social costs associated with our industry. Again, I will cite the National Gambling Impact Study Commission.

The federal commission’s research did not find that casino gaming created enormous social costs. In fact, it found quite the opposite. The National Opinion Research Center at the University of Chicago (NORC) determined, “Those communities closest to casinos experienced a 12% to 17% drop in welfare payments, unemployment rates and unemployment insurance.” Its community database analysis found that spending on social services was no different in places closest to casinos than in places further from casinos. 

As Professor Peter Reuter of the University of Maryland found in a 1997 study of the impact of casinos on crime and other social problems, social costs on the Gulf Coast area of Mississippi and in St. Louis have seen little change due to the advent of gaming. Interviews with social service agencies indicated modest increases in the demands for their services. In fact, the principal agency providing mental health services in the Gulf Coast area reported, “No more than 1 percent of its caseload involved gambling problems; nor did the officials believe many cases had even an indirect relationship to gaming activities.” In St. Louis, the local family service agencies did not experience an increase in caseloads, as they had expected, and “expressed their surprise at how little indication they had of any effect from casinos.”

When you examine the research and look at real examples instead of the theory and economic models concocted by gambling opponents, you will see that this industry, like any other industry, makes important economic and social contributions to its communities.

Alleged Social Costs

Opponents of our industry claim that gaming creates a host of social impacts. What they fail to mention is that their rhetoric has been contradicted by one independent government study after another.

Crime

Our opponents are fond of claiming that the presence of gambling increases the incidence of crime. That is just flat wrong. There is nothing inherent in the nature of casino gaming—or in the collective character and behavior of millions of Americans who enjoy this form of recreation—that causes crime.

When 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. Look at Orlando, Fla., after the opening of Disney World for a graphic example. Crime went up, and it certainly wasn’t due to an increase in gaming. Same story with Branson, Mo., when the attractions in that city opened.

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.

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 confirms this finding. A recent study 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.”

Bankruptcy

With a concurrent growth in legalized gambling and bankruptcy filings during the 1990s, opponents of our industry have added bankruptcy to their list of social ills caused by gambling, despite the fact that the evidence proves them wrong.

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.”

These findings support research conducted for the federal commission. The NORC study 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. 

State studies conducted in Indiana and Louisiana, both completed in 1999, also failed to find a link between gambling and bankruptcy. In 2002, economists at the University of Louisville and the University of Kentucky investigated the relationship between the introduction and proliferation of pari-mutuel wagering and casino gaming opportunities to personal bankruptcies in Illinois, Iowa and Missouri, using county-level data and also failed to find a link between access to pari-mutuel or casino gaming facilities and a higher rate of personal bankruptcy. This study 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.

The preponderance of the published studies refutes the causal link between gambling and bankruptcy.

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 fall below the national average in terms of bankruptcy filing growth rates during the 1990s.

The conclusions drawn by opponents of our industry have no basis in fact, as the overwhelming evidence from these recent studies and data have indicated.

Addressing Problem Gambling

Finally, I’d like to address a very legitimate concern, and that is about disordered gambling. First and foremost, it’s important to remember that the vast majority of people—99 percent—gamble for entertainment and set a budget. As the National Gambling Impact Study Commission stated in its 1999 final report, “[T]he 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.”

That said, we recognize that a small percentage of the population does not gamble responsibly. Despite opponents’ exaggerated claims that have been as high as 11 percent, we now have the facts before us. The prevalence of pathological gambling is estimated to be between 0.6 percent, according to the federal commission’s research, and 1.14 percent, according to a study by Harvard Medical School’s Division on Addictions published in the September 1999 issue of the American Journal of Public Health. With the National Research Council of the National Academy of Sciences estimating the prevalence at 0.9 percent, the consensus is that about 1 percent of the U.S. population has a clinically diagnosable mental health disorder known as pathological gambling. Let me be blunt: None of our companies wants customers with gambling disorders. Since our organization was founded nearly eight years ago, we have had a commitment to addressing disordered gambling. This has been a commitment in words and deeds, as I will outline later in my remarks.

Adding to the complexity of this disorder is that, 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 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.

Against that backdrop, I’d like to discuss some of the allegations that have been made about casino gambling and the extent of disordered gambling.

There is often an assumption that increased availability of casino gambling will lead to an increase in pathological gambling. Despite all the accusations by gambling opponents and reports by the media, the scientific evidence does not support that position.

While the commission research highlighted a link between availability and prevalence rates, that’s only part of the story. In fact, that conclusion was reached only after combining phone survey and patron survey data. If the phone survey data alone is examined—a measure equally if not more valid than the combined data—you would see that the exact opposite conclusion can be reached (and was, in an earlier draft of the report).

Other scientific evidence raises similar doubts. For example, a government study that compared prevalence rates in Connecticut in 1991 versus 1996 reached the following conclusion: “… probable pathological gambling rates may actually have fallen in Connecticut, and have certainly not risen, during a period in which one of the largest casinos in the world was opened in the state.” Similar results were found in follow-up studies conducted in South Dakota, Louisiana, Michigan, Minnesota, Oregon, Texas, Washington, British Columbia, New Zealand and South Africa. Nationally, the 1976 federal gambling commission found that the number of “probable compulsive gamblers” was 0.77 percent of the U.S. adult population, virtually identical to the findings of the latest federal commission, despite the significant growth of gambling opportunities during that time.

If pathological gambling prevalence rates increased along with gambling availability, it would seem logical to see an increased demand for social services in communities with casinos. However, as I indicated earlier, the federal commission’s community database analysis found that spending on social services was no different in places closest to casinos than in places further from casinos.

Another erroneous assumption about our industry is that the more people gamble, the more likely they are to become pathological gamblers. In fact, the NORC research found that while many more people have gambled at least once in their lifetimes (68 percent in 1975, compared to 86 percent in 1999), the number of people who have gambled in the past year has remained relatively unchanged (61 percent in 1975, versus 63 percent in 1999). As the Public Sector Gaming Study Commission pointed out in its final report issued in 2000, “[T]hese findings mean that Americans have become much more likely to have experimented with gambling, but this experimentation has not turned them into people who gamble regularly or routinely.” The Public Sector Gaming Study Commission was a national panel of state and local government leaders set up to study the social and economic impact of gaming and the role of the state and local governments and their citizens in making public policy regarding gaming. The study was commissioned by the National Council of Legislators from Gaming States (NCLGS), a nonpartisan organization of state legislators who chair or are active members of the committees responsible for gaming in their respective state houses across the country.

Gambling opponents also claim that a high percentage of our revenue comes from pathological gamblers. While some of these unfounded claims have gone as high as 50 percent, I again point you to the commission report’s research findings. NORC estimated that 5 percent to 15 percent of the industry’s gross revenues were from pathological gamblers, with the higher number attributed to pari-mutuel facilities, not casinos. Our companies have said it time and time again. We don’t want customers who bet over their heads, and we have put in place extensive programs to educate our customers and employees.

Industry Initiatives

As I indicated earlier, the commercial casino industry is committed to working for the development and implementation of education, prevention and treatment programs to address disordered gambling. Our actions have been taken in consultation with scientific experts, who have told us that our role should be one of education and funding research to learn more about gambling disorders in order to improve prevention and treatment. Our dedication is demonstrated by our actions, which I’d like to describe for you now.

One of the first initiatives undertaken by the AGA when it was founded in 1995 was to create an independent organization that would fund peer-reviewed research to help expand our knowledge and understanding of gambling disorders. The National Center for Responsible Gaming (NCRG) was established in 1996 and since then has awarded $6.1 million in research grants to more than 20 prestigious academic institutions and research organizations. In 2000, the NCRG awarded a $2.4 million contract to Harvard Medical School’s Division on Addictions to establish the Institute for Research on Pathological Gambling and Related Disorders to carry out the research initiatives first established by the NCRG. Thanks to the NCRG, we now have promising drug and behavioral treatment options; a new understanding of the brain’s reward system and of how dysfunction in this area can contribute to pathological gambling; further evidence of the genetic factor in pathological gambling; and a clearer picture of how and why some adolescents develop gambling disorders.

The National Gambling Impact Study Commission acknowledged in its final report that, “… the largest source of funding for research on problem and pathological gambling is the casino industry.” Casinos, vendors and suppliers, a foundation and a union have committed close to $10 million to the National Center since its inception just seven years ago.

Beyond funding research, the AGA also has developed public and employee education programs to raise awareness of disordered gambling and promote responsible gaming. Let me interject here that these activities are nothing new for the commercial casino industry. Our member companies have a long history of encouraging and instituting responsible gaming practices. Harrah’s Entertainment, Inc., pioneered responsible gaming programs in the 1980s with its two now widely used programs, Operation Bet Smart and Project 21.

Since the AGA was formed in 1995, we have built on those programs, spearheading a Responsible Gaming National Education Campaign to promote responsible gaming practices industrywide. Key components of this campaign have included comprehensive industrywide guidelines, publications, collateral materials, employee training, a lecture series bringing expert speakers to gaming jurisdictions nationwide, and an annual event to underscore what we do year-round.

I might add that our responsible gaming activities have spurred some states to adopt creative new ways to address this problem. In Missouri, for example, the casino industry has forged a diverse coalition involved in the gaming industry in that state to raise public awareness of responsible gaming. The Missouri Alliance to Curb Compulsive Gambling, whose members include the Missouri Riverboat Gaming Association, Missouri Lottery, state department of mental health, Missouri Gaming Commission and Missouri Council on Problem Gambling Concerns, should be a model for other states to follow.

I would encourage you to follow the lead of other states—and a recommendation of the federal commission—in dedicating a portion of tax revenue toward disordered gambling research, education and treatment programs. In doing so, I would also encourage you to treat gambling disorders as you would any other public health issue, and conduct a needs assessment to determine the necessary allocation.

The Role of Government

The economic and social benefits derived from gaming will be in large part a function of specific decisions made by you as public officials. Should the citizens of Maryland decide to legalize additional forms of gaming in this state, it’s important for you to recognize that the decisions you make regarding the form of gaming, tax rate, regulatory structure and ownership all will have a long term, direct and significant impact on your final product.

I’d like to take a few moments to illustrate my point.

Let’s start with the form of gaming. It’s important for you to know that the extent of benefits realized by this state will vary depending on the type of facility you allow. The federal commission I referred to earlier 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,” which doesn’t provide a comparable number of good-quality jobs or economic development.

In terms of tax rate, although it’s tempting for me to say our taxes should be as low as those paid by every other industry, we recognize that ours is a privileged industry, and states do have the right to tax our business at a higher rate than others. However, a careful balance needs to be achieved. Setting a tax rate based on a specific budget deficit number would be short sighted. The tax rate you set will determine the very nature of the industry in your state for the long term. High tax rates suppress capital investment and other expenditures, limiting jobs as well as revenue, thus reducing the potential tax revenue for the state. In short, your tax policy will determine whether your state has “destination type resorts” or “convenience gambling.” 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. A good example of that is in New York, where a proposed effective racino tax rate of about 87.5 percent has generated little or no interest from casino operators. A better example is Illinois, where raising the tax burden is credited with contraction of the industry, and is now leading to reductions in operating hours, employment, and capital investment.

Economic experts and others who follow this industry support this view. For example, the 2002 annual report of the Missouri Gaming Commission cautioned against tax increases, saying they would discourage investment. A 1998 report by the Council of State Governments urged state officials to consider lower tax rates to encourage investment. Wall Street analysts have written extensively on this subject, saying that higher taxes deflate return on investment, making our companies’ shareholders less likely to support either new or improved operations. Marc Falcone of Deutsche Bank and Harry Curtis of JP Morgan went so far as to suggest that the value of the final license in Illinois—which just over a year ago was still valued at $600 million—is worth absolutely nothing today because of the tax increases imposed there.

Decisions regarding regulatory policy will also shape the industry. As you are no doubt aware, 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. We believe adequate regulatory controls are important to ensure public confidence in the integrity of this industry.

Regulatory oversight of commercial ventures creates an important system of checks and balances. This system ceases to exist when government and owner become one and the same. Without those checks and balances, you create inherent conflicts of interest in many areas. While the government’s primary responsibility is to protect the public interest through creation and enforcement of the law, the primary ownership goal for any casino model is maximizing profits for shareholders. Governmental ownership would threaten the effective casino regulatory model that ensures public confidence in the integrity of gaming through strict regulation of the casino owners or managers.

Governmental ownership also is totally at odds with the efforts of most legislatures to remove politics and political decision making from the highly regulated business of casino gaming. The few ethical and legal problems that have arisen in the casino industry’s history underscore the merits of an independent gaming board, free from influence of state politics, and the demerits of governmental ownership that would inevitably inject politics into the business of gaming. These conflicting objectives would exist even if a private company managed the operations.

There are other more practical business obstacles as well. It would be difficult for the government to effectively compete with commercial casinos in the highly competitive field of casino marketing. How would the public react to millions of public funds being used to draw people to casinos? Governmental ownership also would lead to significant fiscal and political conflicts related to many of the commonly used marketing tools. For example, what would be the public reaction to spending public funds to induce people to gamble through the use of free goods and services (“comps”) paid for by taxpayers?

Beyond the issues identified above, governmental ownership of a casino is a bad idea for the same reasons governmental ownership of any private enterprise is a bad idea. The business of government is and should be government and the creation and enforcement of the law, not running a casino business. Otherwise, why stop with casinos? Why shouldn’t governments own sports teams? Amusement parks? Airlines? Automobile manufacturers? History rejected this whole state-owned enterprise notion.

It is for these reasons that no U.S. state has ever seriously entertained government ownership of casinos.

Improving 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.

But you don’t need to trust me. All you need to do is ask those who already know about our industry first-hand. According to a nationwide poll of casino county residents conducted in 2001 by pollsters Peter Hart and Frank Luntz, 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.

If poll results don’t provide adequate evidence for you, you have the most compelling case of all in Iowa, where citizens on Election Day 2002 had the opportunity to throw out all the casinos and racinos after eight years. Instead, all 11 counties voted overwhelming in favor of keeping them, with margins of victory ranging from 63 percent to 81 percent. Why? Despite the dire pronouncements of gambling opponents about the long-term impact of casino gambling, Iowans recognized that none of those predictions had materialized. What they’ve seen is that casinos and racinos have created jobs, increased tourism, provided entertainment and generated more funding for charitable causes than any other organization in the state.

When I first testified before the National Gambling Impact Study Commission, I asked the panel to follow the lead of my old boss Ronald Reagan, who often said in reference to his dealings with the Soviet Union during the Cold War, “Trust, but verify.” In most cases, the federal commission did just that. Despite the fact that the majority of commissioners, including the chairman, were personally opposed to gambling, they still concluded that the commercial casino industry provides quality jobs, promotes capital investment and generates economic development.

We applaud you for taking the time to carefully evaluate the pros and cons of expanded gaming to determine whether or not it’s right for Maryland. Every form of economic development—whether it’s a new industrial plant, a theme park, shopping mall, casino or racino—will bring with it benefits and costs, and it’s important to weigh all the information. In doing so, however, I hope you will rely on the considerable amount of independent, government-funded research that is available today. Perhaps the late Daniel Patrick Moynihan, the U.S. senator from New York, said it best: “Everyone is entitled to their own opinion, but not to their own set of facts.” As you move forward in your deliberations on this issue and others, I hope that you will make your decisions based on facts, not anecdotes, science, not theories.

Thank you for inviting me to present information about our industry before this committee.