Looking at the Viability of Delaware's Gaming Industry - WBOC-TV 16, Delmarvas News Leader, FOX 21 -

Looking at the Viability of Delaware's Gaming Industry

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DOVER, Del. (WBOC) - The question of the viability of the casino industry in Delaware spinning around the roulette wheel. Nobody is quite sure where it will land. It's an answer that starts and ends with money.

More than $600 million is how much the slots at Delaware's casinos were bringing in at their peak of performance in the mid-2000's. Since that the numbers have slipped to say the least.

Between 2007 and 2012, they fell to about $475 million. 2013 numbers are even lower.
Adding table games, and sports betting has been a bit of a buffer, but slots are still more than 85 percent of the casinos' business.

Most every dollar of proceeds is split four ways. The state, the horsemen and machine vendors each take a cut - 43.5 percent for the state, 10 percent for the horsemen, 9 percent for the vendors and the casinos get what's left.

According to the American Gaming Association, that puts the percentage Delaware's casinos end up with in the middle of the pack compared to the percentage in states with similar systems.

The state's cut is currently Delaware's sixth largest revenue source. It's projected at $193 million this fiscal year.

While some states funnel casino money to specific spots, like schools or roads, Delaware's money goes to the general fund. It supports every aspect of state government. And it makes Delaware's budget one of the most gambling-reliant in the nation.

That worries a number of lawmakers.

"That's a non-guaranteed source of revenue for the state," said Sen. Brian Pettyjohn, R-Georgetown. "We have to be more reliant on fixed sources of revenue."

"We've become too dependent on gaming as the only source that bails us out of these problems," Rep. Dave Wilson, R-Bridgeville, said. "I don't think gaming when we started it was set up to bail us out of problems with revenue."

That's exactly what the state did in 2009. Delaware faced an historic $800-million budget shortfall. So, the state increased its portion of the revenue share from 37 percent to 43.5 percent. Beyond the casinos, Delaware implemented various tax hikes and pay cuts. Sen. Brian Bushweller, D-Dover, said the state has since fully or partially restored those changes.

"But we never went back," he said. "And addressed the fact that we increased the casino gaming revenue share from 37 to 43.5 percent. That's why I think it's fair we do that."

It's a move Gov. Jack Markell's administration hasn't shown much appetite for.

"The economy hasn't rebounded as fast as everyone had hoped for, has seen in previous history," Finance Sec. Tom Cook said. "So there was really only so much that we could do at this point."

But Ed Sutor, CEO of Dover Downs, said with profits where they are the current split is unsustainable for the casinos.

"What we're asking for is take it down to a level where you can still get a big chunk but still allow us to stay in business."

Lawmakers are starting to tackle that issue in earnest through a group created this summer by the state legislature - the Lottery and Gaming Study Commission. It was created as part of a vote on $8 million set aside right at the end of the 2013 legislative session for the state's gaming industry.

Many people labeled the $8 million a bailout.

"I voted against it," said Rep. Dennis Williams, D-Talleyville. "I thought it was a horrible idea."
Others strongly opposed the "bailout" characterization.

"[A] very unfortunate choice of words," said Rep. Darryl Scott, D-Dover.

"The word bailout is incorrect," Sec. Cook said.

Deciding if it was a bailout starts with understanding where the $8 million came from and what it was for. In mid-June as lawmakers were finishing the budget process, they found they had more than $50 million extra to work with. The casinos had been pushing for help for a while.

House Majority Leader Rep. Val Longhurst, D-Bear, said the legislature wasn't ready to make a huge change.

"What we realized is we needed to help them in the short run until we get back in January," she said. "So, the $8 million was paid to the vendors to help offset the rising costs that they have with the new vendor contract."

That's the key for those who say it was not a bailout. Remember four groups split casino revenue - the state, the horsemen, the casinos and the slot machine vendors. Under a contract starting this summer, the vendor's share from slots went from 6 percent to 9 percent. That added expense comes out of the casinos' portion. Sec. Cook sees the money as lessening the casinos' burden.

"The eight million dollars set aside really just leveled the playing field or kept it at the same place where it was prior to the new contract," he said.

"That money will never come into our hands, never into our bank accounts," said Sutor. "It will be used to offset some additional costs coming from the vendors."

Explanation aside, the whole thing left a lot of people unsatisfied for various reasons. For some that was because it didn't address the overall issue.

"I supported it," Sen. Bushweller said. "But I was one of the first to say I don't really think this the solution to the problem."

"This relief is not going to answer the problem long term," said Rep. Wilson "It looks good now, but I'm concerned it's not the fix we'll be looking for down the road."

Some didn't buy the argument the money was for the vendors.

"Yes. The $8 million is going to pay the vendors for the slot machines," Rep Williams said.

"However, that means the casinos have $8 million more they don't have to spend."

And there's the court of public opinion.

"If you ask the everyday citizen should we be bailing out the casinos, the answer would be absolutely not," said Rep. Charles Potter, D-Wilmington North.

Sec. Cook points out the relationship between the state and the casinos is unique to begin with.

It's that unique relationship the study commission is charged with looking at and potentially altering.

That means the panel, which started meeting this summer, has an extremely difficult job ahead of it.

Nine people - Democrats, Republicans, state cabinet secretaries, a Delaware Chamber of Commerce representative - form the group.

"This is a great opportunity to evaluate that partnership," said Sec. Cook. "And to see who is baring the costs and who is baring the revenue and the benefits from it."

The commission is currently in a fact-finding mode. Perhaps the most important facts center around the casinos' financial situations. Info on Dover Downs, a publicly-traded company, is readily available. But Harrington and Delaware Park are private.

At a commission meeting October 8, all three casinos discussed their financial pictures and pointed to significant revenue drops in recent years.

"It gives us information to look at," Rep. Tim Dukes, R-Laurel, said. "We'll come back again next month and hear more information that will hopefully help the committee make the right decision here."

This part of the overall discussion is continuing next month because some information was deemed "proprietary." The commission was willing to let the casinos share that in a closed, executive session.

"We have to have the complete picture," Sen. Pettyjohn said. "If we try to make a decision just based on 40-percent of the available data, it's not going to be a good decision."
Some members weren't happy about that discussion not happening in a public setting.

"That is a concern," said Rep. Potter. "I understand proprietary information. But you're asking for state dollars, so people want to know why do you need this money."

When the commission finishes its fact-finding, Sutor expects members will see the current setup doesn't work for the casinos.

"You're going to see what we've been saying all along, what we predicted all along. We said this was going to happen, and unfortunately it did."

But there's no guarantee that will be the result.

"I think this may backfire on them to show that they should have been doing more," said Rep. Williams. "They should have been running their businesses a little bit differently."

Even if commission members do agree there's a problem, they still have to agree on a solution to propose. That could be tricky. There are lots of options. Some think the best one is to return the revenue-sharing model to go back to its 2008 level.

"If we can remove ourselves as part of the problem," said Sen. Bushweller. "Then it's up to the tracks to make their businesses go."

"I don't think we can go into this assuming we already know what to do," Rep. Dukes said.

No matter what the commission comes back with, it's only a recommendation. Final say still rests with the full general assembly and then the governor. It's unclear right now how willing all those people would be to go along with a recommended change if there even is one.

The commission meets next in early November. It needs to wrap up its work and have a report for the legislature by the end of January.

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