Market pivotal in slots analysis

THE BALTIMORE SUN

Allowing corporations to compete for the right to build and operate gambling halls would generate vastly more money for state coffers than granting exclusive licenses to racetracks, according to a study released yesterday that examined how Maryland could maximize its take if slot machines were legalized.

By tapping market forces, such competition would drive down the percentage that operators of slots facilities would keep for themselves, and leave more of the remaining money for public schools and other needs, according to Jeffrey C. Hooke of the Maryland Tax Education Foundation and Thomas A. Firey of the Maryland Public Policy Institute.

Hooke and Firey concluded that the slots bill approved by the Maryland Senate this year -- limiting slots to racetracks and giving them 39 cents of every dollar collected at the machines -- offered the worst return to taxpayers of several options they examined.

Racetrack owners and related interests pumped hundreds of thousands of dollars into campaign accounts controlled by state leaders, and spent millions on lobbying in an unsuccessful effort to get a slots bill passed. The House of Delegates rejected the plan.

By allowing other corporations to bid on slot machine licenses -- or, as an alternative, having the state build and own the facilities and seek contractors to run them -- the share of gambling proceeds needed for expenses and profits would drop from the 39 percent in the Senate bill to as low as 21.5 percent, the study's authors concluded.

If Hooke and Firey's assumptions are correct, allowing 12,000 machines at five locations throughout the state would result in up to $500 million more in proceeds for the state than what they said the Senate plan would have produced through a racetrack-only deal.

"I think the racetrack owners have such influence that the state would never be able to negotiate a good deal," said Hooke, whose tax group has promoted the idea of auctions for slots licenses. His co-author, Firey, is affiliated with the libertarian Cato Institute.

Minor Carter, a lobbyist for a coalition of anti-slots groups, called the findings "an important paper."

"Every paper that comes out says the gambling industry is getting too much money," Carter said. "Everything we've seen shows there's a lot of money left on the table."

The report provides fresh information as the House Ways and Means Committee continues its off-season examination of the gambling issue, which is certain to dominate next year's General Assembly session. The committee meets again next week.

A slots bill had been the top priority of Gov. Robert L. Ehrlich Jr., and its defeat in March was widely considered a blow to his administration. Ehrlich has said he will no longer take the lead in the debate but will wait to see if the House of Delegates offers a concrete alternative.

"The governor still believes that the four-track proposal is the best deal for the state," said spokesman Henry Fawell. "But if some in the legislature disagree, he will give due consideration to any proposal they have."

Del. Jon S. Cardin, a Baltimore County Democrat and member of the Ways and Means Committee, said the report appeared to provide "new ideas [that] can only help us think outside the box, which is what we need to do."

Racing representatives criticized the assumptions in the study, however, and said the analysis also failed to account for their industry's value to the state economy.

The study assumed, for example, that slot machines in Baltimore and the Washington suburbs would yield an average $570 each per day, a figure that is double that of some other estimates.

"Those numbers appear to be completely out of touch with reality, and are certainly radically different than every other study done by our experts, and every other expert that has looked at this," said Joseph A. De Francis, a co-owner of the Laurel and Pimlico race courses, noting that he had not yet seen the report.

Hooke, an investment banker who has authored other gambling reports, defended his figures, saying they were based on audited statements of gambling returns in other states and cities.

The Baltimore-Washington market is the fifth-largest in the country, he said, offering a higher number of potential gamblers per machine than other metropolitan areas such as Chicago or Detroit, where slot machines already operate.

"I'm very confident that these numbers reflect a reality," Hooke said.

While the study offers an intriguing intellectual exercise in how to get the most money out of expanded gambling, it was unclear yesterday how those ideas could readily be translated into reality.

Hooke and Firey said they favored a "reverse auction" for slots licenses, where bidders compete against one another over the lowest percentage from slot machines they would take. But the authors conceded that such auctions are not commonly used in the United States.

The auction would allow the winner to build a facility for 3,000 slots machines. Two licenses would be offered for the Washington suburbs, and one for Baltimore, with smaller facilities in Western Maryland and the Eastern Shore, for a total of five containing 12,000 machines.

The corporations winning the licenses would then be responsible for finding the 30-acre site for the facility, and would be subject to zoning laws and building and traffic regulations in the counties in which they operated. Such regulations could hinder their business.

House Speaker Michael E. Busch, the leading critic of Ehrlich's slots plan, is more intrigued by another proposal. He is exploring the idea of the Maryland Stadium Authority borrowing money to construct slots facilities in locations with easy access to highways. The state would own the buildings, with gambling machines leased and maintained by the Maryland Lottery. A private vendor would run the buildings.

Yesterday's study concluded that such a scenario offers far greater returns than the rejected Senate slots bill, yielding between $1.5 billion and $1.7 billion yearly for the state depending on whether the buildings were located in prime commercial areas or not.

"The facts should be out there that if you do have expanded gaming, the state should have the greater amount of control, and the greatest amount of benefit," Busch said. "Studies like these are proving that last year's legislation wasn't the right way to go."

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