Bet on Casinos Means Rewards, Risks

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A bus ad for one of New York's racinos. It's one of several players in a complex and evolving gambling marketplace that also includes the lottery, gaming facilities in other states, Indian casinos and, if voters approve them, full-scale casinos in New York.

Photo by: Karla Ann Cote

A bus ad for one of New York's racinos. It's one of several players in a complex and evolving gambling marketplace that also includes the lottery, gaming facilities in other states, Indian casinos and, if voters approve them, full-scale casinos in New York.

The New York State Gaming Commission posted two interesting items on its website in recent months.

One was a glossy PowerPoint about the hundreds of millions of dollars and thousands of jobs that full-scale casino gambling could create in New York. The other was a request for proposals to study how to protect the state lottery from the competition full-scale casino gambling would present.

Such are the complexities of assessing the impact casinos will have on the state's economy and public coffers: It's not just a matter of figuring out how much the winners will make—although that is complicated enough—but also determining who might lose out on the deal.

And all those calculations must be made about a gambling market that is changing, with some neighboring states seeing gambling revenue shrink even as others expand their gaming offerings and Internet gambling begins to take off.

In some ways, New York voters who decided to approve full-scale casinos weren't just playing the cards in front them. The cards still to be dealt are the ones that really matter.

Competitive worries

New York already hosts plenty of gambling: Nine "racinos" offering horse-racing as well as VLTs and slot machines, eight gambling facilities on Indian land and a state lottery that has grown since 1967 from a single game to a menu of four jackpot games and four daily contests offering a combined 50 drawings weekly. Add to that at least 56 instant scratch-off games and QuickDraw, which generates a winning number ever four minutes—or 360 times every day.

On one hand, that dizzying array made the casino referendum less momentous: As the legislative memo that accompanied the state casino bill put it, "New York State is already in the gambling business," and "has more electronic gaming machines than any state in the Northeast or Mideast."

On the other hand, the number of existing gambling options raises the question of whether new casinos will draw new players to the market or merely pick off customers who are now placing their wagers at a racino, at an Indian gambling or via the lottery.

The New York Gaming Association, which represents the nine racinos, opposed early versions of the casino bill, saying it would "simply cannibalize as much as 85 percent of the state’s current gaming market, shifting revenue and jobs from one facility to another but resulting in no real increase in new jobs."

The final casino bill that Gov. Cuomo signed this summer assuaged some of the concerns about intra-state cannibalism. The law protects the territory of the Indian casinos by barring new gaming facilities from those areas and shelters all existing gaming facilities by prohibiting casinos from downstate for seven years. It also lowers the tax rate paid by racinos to equal what the new casinos will pay and protects horse-racing purses from the effects of more gambling competition.

But the law's wording didn't eliminate all the competitive pressures. An organization of upstate theater companies recently wondered if their audiences would be thinned by the arrival of casinos, which can neutralize an art scene by signing performers to exclusive contracts or just giving tourists a different place to spend money.

The Cuomo administration has said the casinos are supposed to work with, not against, cultural facilities that already exist. But the state lottery is wondering whether casinos will cut into its customer base. "The Lottery is faced with increased competition for discretionary income purchases as the possibility for casinos in New York State is put before the public in November," reads the Gaming Commission's RFP. "The Lottery anticipates the need to review different strategies to remain as a relevant gaming option and important source of funding for State aid to education."

Seeing a winner

Arts groups and the lottery may lose out if casinos come to New York. But the Cuomo administration argues that the entire state is already losing out, because its people cross the border to place their bets.

New Yorkers, the Gaming Commission's economic impact projection says, are a big part of the success of casinos in Connecticut and Pennsylvania and also travel to gaming facilities in New Jersey, Las Vegas and Quebec. If those buses heading east on I-95 to Foxwoods or west across the Hudson to Atlantic City can be detoured up the Thruway to a casino at, say, Saratoga, the state can tap into the riches other states have rolled in: $300 million in annual revenue in Connecticut, $1.5 billion in yearly tax intake in Pennsylvania and 30,000 direct casino jobs between the two states.

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"These jobs were made possible and revenue gained substantially from money spent by visiting New Yorkers," the Commission's PowerPoint claims.

The Cuomo administration's estimate is that casinos will generate nearly a billion dollars in construction spending, create 6,700 construction jobs and 2,900 permanent positions and produce $430 million in tax revenue—roughy half going to the regions where casinos exist, and the rest spread around statewide. Some of that money will come from new revenue-sharing arrangements with existing Indian casinos.

Unlike the lottery and racinos, whose funding of education often was offset by cuts in other sources of school support, any money generated by the casinos for schools will be over and above the school aid that the state currently distributes. The administration estimates that New York City, which received $8.5 billion in school aid from the state last year, will see $94 million in additional school aid if the casinos open.

The Division of Budget, which produced the estimate for the Gaming Commission, declined to produce supporting documentation for its projection, which might reveal what assumptions are behind the estimate. But a spokesperson for the division says none of the potential ripple effects from casinos—like the services that will spring up around the gaming facilities or the additional tourism casinos might bring—figures into the impact projection. So the full economic impact could be even greater.

By some counts, the state's $430 million tax revenue estimate from four casinos looks conservative. Last year, Connecticut generated $296 million from its two casinos and Pennsylvania derived $914 million from its 11 facilities.

Because it's not certain where New York's casinos would be—and because location could impact earnings—the Budget Division's projection is an average of the outcomes from different location scenarios, the spokesman said.

Where will they come from?

One thing we don't know about the state's projection is how much of the casinos' business is expected to come from tourists as opposed to state residents. That matters a lot.

When he signed the casino bill, Cuomo said the law would "bring the state one step closer to establishing world-class destination gaming resorts that will attract tourists to Upstate New York and support thousands of good paying jobs as well as new revenue for local businesses."

The notion that New York's casinos will be "destination facilities" is critical. According to a market analysis by the consultancy Spectrum Gaming prepared for the Massachusetts legislature, America's gaming market is divided into hubs and spokes. Spoke casinos cater predominantly to people within a two-hour drive who come often but don't stay the night. Those casinos don't do much for businesses and towns beyond the casino itself.

But destination casinos, or hubs, attract people who stay longer and spend more. These casinos complement existing attractions, and can help to lengthen the tourist year by giving visitors a cold-weather activity to try. That seems a good fit for upstate New York, which has a lot of attractions but gets pretty chilly by mid-autumn.

This was the theme of upstate Sen. John Bonacic's sales pitch for casinos on the Senate floor this summer.

"We have the best golf courses in the world right up here upstate, but we need a stimulus," the Racing and Wagering Committee chairman told his colleagues. "Everybody in the city or the island, within two hours, two-and-a-half hours, can come upstate and have a vacation without getting on a plane and spending a lot of money and never going into a casino and you can do that for four seasons upstate. That's what we have. That's the magic and the attraction of upstate. But we can't do it by ourselves."

One downside of destination casinos, according to Spectrum, is that the more a casino depends on tourists, the more vulnerable it is to the economic cycle. If spoke casinos have one thing going for them, it is a loyal customer base of folks who gamble in good times and bad. But only 27 percent of American adults go to a casino in a typical year, and the majority of those people only go once or twice.

"Gambling is the primary purpose behind few vacations," Spectrum noted in the report to legislators in Boston.

Will they come at all?

An increasing number of casinos have popped up to serve that gambling population. In 1978, Atlantic City became the first place outside of Las Vegas to offer serious gambling. Fifteen years later, Connecticut permitted its first casino, and soon there was another. In 2005 there were no casinos in Pennsylvania, and now there are 11.

"The expansion of casinos to more locations," the Spectrum study cautioned, "has reduced the allure of casinos as unique attractions." Spectrum concluded that, "It's clear that adding casinos will not significantly increase visits to Massachusetts from out of state visits."

However, Spectrum still thought casinos were a winner for the Bay State, because they would draw at least a few new tourists, lengthen the stay of many regular visitors and provide a way for Massachusetts residents to gamble without jumping on the Foxwoods bus. The consultants estimated that three casinos in the state could generate more than $300 million in tax revenue every year and thousands of jobs.

Massachusetts approved a plan to split the state into three regions and site a casino in each, as well as a slot-machine-only facility somewhere in the state. The first licenses will be out by next April.

For New York, this could mean more competition for gamblers on either side of the Massachusetts line. Spectrum's revenue projections for Region 3 in Massachusetts, the western slab of the state, assumed that a casino there would draw from Albany, Columbia and Rensselear counties in New York.

Even if Massachusetts' casinos offer weak competition, Foxwoods and other regional casinos who draw their customers from New York aren't going to sit on their hands when rivals in New York start to cut into their base. "Existing facilities, particularly in Connecticut, will not stand idly and accept a significant decline of business from one of their primary markets," Spectrum noted. They were referring to Massachusetts' new casinos, but the logic holds for other neighbors as well.

After all, many casinos up and down the East Coast are already feeling a squeeze. The total win at the two Connecticut casinos has fallen every year since 2006-2007, from $1.7 billion to about $1.2 billion—still a lot of money, but quite a bit less. The state of Delaware actually had to bail out its casinos earlier this year. In September, Atlantic City casinos posted a win that was 13 percent lower than the same month a year earlier. Those New Jersey casinos, which won $5.2 billion in 2006, won just over $3 billion last year, a decline of 42 percent.

"Atlantic City continues to be affected by the continuing competitive environment which has caused a significant decline in visitation to the region's properties as compared to 2012," the casino conglomerate Caesar's Entertainment said in its most recent report to investors.

Risks on the 'net

Like gambling itself, casinos are a risky business. MGM Grand, which owns casinos as well as other tourist facilities, reminded its investors recently that, "Our business is particularly sensitive to reductions in discretionary consumer spending and corporate spending on conventions and business development."

Even the mere perception of an economic slowdown can hurt its bottom line, the company said. So can rising fuel costs, an unstable job market, fear of terrorism—any of the things, in other words, that convince people to stay home rather than travel.

In fact, home is where the deepest threat to casinos might lie, in the form of Internet gambling. New Jersey recently became the third state to legalize online gambling, and the first to offer not just poker but blackjack and slots as well.

Destination casinos that package together restaurants, shopping, performances and other attractions besides gambling offer an experience that Internet gambling can't easily replace—at least for tourists. But for serious gamblers interested only in their poker hand or how the slots line up, Internet gambling could bite into the market for casinos, and reduce the tax revenue they generate.

So far, the companies getting licenses to run New Jersey's online games are Atlantic City casinos. Perhaps they're convinced that the 'net doesn't threaten their survival. Or maybe they see Internet gaming as a wager they have to make.

This article was updated November 6 to reflect the passage of Proposition 1, which approved full-scale casino gambling.

This is one of a series of articles on the past, present and future of gambling in New York State. Click here to read more. The Fund for Investigative Journalism's generous support made this series possible.