Maryland is fervently hoping that its residents will, sometime very soon, start sinking loads of money into slot machines. Apparently the state is so eager for this that it's started modeling the behavior itself.
On Wednesday, the Board of Public Works approved an eye-popping $49,427,672 contract to buy or lease 1,062 slot machines for the casino that's set to open this fall in Cecil County. That amounts to an average of $46,542 per machine, including five years of maintenance. That's more than four times what state analysts predicted they would cost when Maryland's slots program was enacted three years ago. Most troubling, the item was a last-minute addition to the board's agenda, showing up with little supporting documentation less than 24 hours before the meeting. Comptroller Peter Franchot objected and voted against the measure, but Gov. Martin O'Malley, no doubt eager to see slots up and running in Perryville before the fall election, supported it, along with the board's third member, Treasurer Nancy K. Kopp.
Curiously, the state has chosen a very different approach to procuring the slot machines for its casinos than officials in neighboring Delaware have. It's theoretically possible that Maryland's way will work out better in the long run, but that requires a lot of assumptions about the skill with which the state will run its program. Given our lack of experience, that feels like a big gamble.
Delaware law, like that in Maryland, requires the state, not the slots licensees, to own or lease the machines, known in the trade as video lottery terminals. In this initial contract, at least, Maryland has chosen to purchase the bulk of the machines — 795 of them — rather than leasing. Delaware is an all-lease operation.
Rather than paying anything out of pocket, Delaware's lottery agency contracts with slots manufacturers to provide machines for its casinos in exchange for a cut of the proceeds. The default is 4 percent. Every week, the state calculates the average take from its slot machines, and if a vendor's machine does better than the average, it gets slightly more than 4 percent. If it does worse, it gets slightly less. That way, the vendors have an incentive to replace machines that aren't attracting many gamblers with ones that are, maximizing their profits and the state's tax revenues. Delaware doesn't have to figure out what customers will want, and it isn't stuck with older machines that nobody wants to play.
But does it make sense in the long run to buy rather than lease? In 2009, Delaware paid $41,334,874 in gaming vendor costs and fees, which averages out to about $5,900 per machine. So, in order for Maryland's decision to buy to beat Delaware's decision to lease, we would need to keep our machines for a little more than eight years.
We also need to assume that our decision now about which machines to buy would be at least as wise as the decisions slot machine manufacturers make about which machines will be popular in Delaware, and that wisdom would need to hold true for several years. The purchased machines don't completely lock Maryland in to a particular set of games, because the software can be replaced on the terminals. By the terms of our contracts, we get one free software switch in the first year if a particular kind of machine is performing poorly, but after that it will cost about $3,800 apiece. The industry standard is to swap out the games every six months to two years.
Lottery officials emphasize that Wednesday's procurement includes five years of maintenance, and in many cases that's nearly as expensive as the machines themselves because of the demanding terms of the contracts. Officials also say they considered leasing rather than buying, but given the lease terms they were offered — much more expensive than the ones Delaware secured several years ago — buying would pay for itself before the end of the five-year contract.
We certainly hope they're right, but the fact remains that the machines are turning out to be significantly more expensive than state analysts expected when Maryland designed its program — and based future budget projections on it. The way Maryland is setting up its program maximizes the state's control and its potential for long-term profit. But it also increases the risks. Will that pay off? We wouldn't bet on it.