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State fiscal turmoil leaves gaming industry caught in crossfire

By Aaron Stanley, CDC Gaming Reports

Live by the state. Die by the state. Perhaps no phrase so succinctly describes the very existence of the casino business.

This adage becomes truer than ever in mid-summer, at the end of the fiscal year, when states are forced to air all of their dirty financial laundry. And this year there was more than enough to go around: 2016-17 saw the highest number of states lowering their revenue estimates since the 2009 recession, with several teetering on the brink of self-inflicted financial crises and budget showdowns.

Such turmoil is a positive development for the gaming industry in the sense that it forces states to consider new means of revenues – like gambling – that they may have previously eschewed. But it also means that casinos and the gaming industry becomes caught in the crossfire of state budget politics and misguided taxation philosophies

Let us consider some of this year’s highlights:
A huge budget stalemate in Illinois nearly saw the major credit rating agencies downgrading the state’s debt to junk status. The crisis prompted a temporary shutdown of the state’s lottery, which cost the state $4 million in revenue from lost Powerball and Mega Millions ticket sales, according to the Jayme Odom, the lottery’s chief of staff.

A partial government shutdown was ordered in Maine on July 1 that also halted the sale of multistate lottery games – which generate roughly $200,000 in weekly profit for the state – because the lottery would be unable to meet its contractual obligations with other partner states. The shutdown ended on July 4 when Gov. Paul LePage signed a new budget into law.
New Jersey had a three day government shutdown of its own at the onset of July. This generated nationwide publicity in the form of Chris Christie’s bizarre “Beachgate” scandal, but it also threatened to shutter Atlantic City’s casinos, pursuant to a rule requiring their closure if such an impasse lasts more than seven days.

While no such shutdowns have occurred in Pennsylvania, ongoing fiscal calamity and credit downgrade warnings have sparked fierce intra-industry squabbling over the proper balance of gambling.

Pennsylvania has allowed a $32 billion 2017-18 budget to become law without passing a means of funding that spending. This has occurred amid a $1 billion shortfall from the 2016-17 fiscal year.

Already the third largest gaming market in the country, the state’s budget woes have prompted calls for a massive proposed expansion of gambling that has included internet gambling, 40,000 video gambling terminals in bars and gas stations, the issuance of “satellite” casino licenses, airport gambling, etc. All of this is occurring in a market that many regard as on the brink of saturation, as evidenced by a 2 percent decline in slot play last fiscal year.

State over-reliance on casino cash cows is also problematic because it frequently equates to little sympathy on taxation issues, such as with Pennsylvania’s push to tax online casinos at 54 percent.

Tiny Delaware’s $400 million deficit means that there is no wiggle room to loosen the suffocating tax rates it imposes on revenues from table games and slots, even though the local industry continues to be battered by competition from Maryland and Pennsylvania.

It’s no secret that casinos are by their very nature a political industry. One cannot simply go and build a casino next door without first obtaining a license from the government. A quid pro quo then occurs where, in exchange for that license to operate a controversial activity, the operator is obligated to pay back a portion of its revenues to the state. State legislators are then able to appropriate those funds to key constituent groups without incurring the scarlet letter of raising taxes.

This is understood and accepted by all parties. But the key question remains whether or not it’s possible that an industry that has opportunistically expanded because of government dysfunction can become a victim of that same very dysfunction?

These state fiscal issues aren’t going away anytime soon. Illinois still faces an estimated $200 billion in pension liabilities – most of which is unfunded.

Unfortunately, it doesn’t appear that there is much by way of serious long-term solutions being enacted at the state-level across many of these jurisdictions – meaning that this year’s shenanigans will only be exacerbated in the future. It’s probably a fact worth recognizing and paying attention to.

Aaron Stanley
mobile: 612-220-7492