The long term bet for Delaware casinos

In 2009, the addition of table games and sports gambling seemed to save the Delaware casinos and a state budget hole. Times have changed.

Here is Doug Rainey’s commentary:

The overused term “tipping point” is often used to describe the high homicide rate in Wilmington that finally seems to have everyone’s attention.

The term may also apply to the long-running effort to aid the state’s struggling  gaming industry. Revenues from slots and table games have dropped sharply in the past several years. The state’s three gaming-horse track  operations, sometimes known as racinos, are feeling the pressure.

The end of the gaming bonanza has been equally painful for the state, based on calculations from  the minimal amount of  information from the State Lottery.  Those figures show industry revenues are on track to drop by about half from 2006. That decline  goes a long ways in explaining the tight budgets Delaware has seen long after emerging from the depths of the recession.

The slide continues as Delaware venues are now pitted against more than two dozen casinos within easy driving distance.

Later, a sharp increase in the state’s piece of the gaming action  – in an effort to balance the budget during the recession of 2009  – left little room for a soft landing as revenues dipped.

It’s a jarring contrast from more than a decade ago when the industry was on roll.  The three casinos had little nearby competition and the state’s take of gaming revenues was among the lowest in the nation.

Unlike its neighbors, Delaware casinos, did not have to come up with tens of millions of dollars “up front” money, since the purpose of the slots bill was to prop up the state’s struggling horse racing industry. Indeed, the good times produced a brief boom as purses for winning horses briefly swelled.

The playing field changed 

Then Pennsylvania and later Maryland aggressively added casinos geared for the locals who had been making the trek to Delaware. In many cases, those casinos did not have the burden of horse tracks.

In response, Dover Downs spent heavily to build a destination resort, but took on debt. Delaware Park added a public country club and Harrington added a few amenities, but did not make any major upgrades.  

Last year, Dover Downs negotiated a new debt deal with banks, but remains under financial pressure with its stock price dropping to around $1 a share.  The company recently reported a  manageable  $700,000 loss for 2014  but keep in mind this figure would have been higher had legislators not come up with some extra money to aid the industry at the end of the last session.  

It’s harder to assess what is taking place at other venues, although lottery figures seem to indicate the revenue drop-off has been less severe at Delaware Park,  which sits in the middle of  a  market of half a million people.

Of late, the pressure to do something has intensified as Maryland prepares to add a destination, Vegas-style MGM casino in National Harbor, across the Potomac from Washington, D.C. That comes on top of two casinos in the Baltimore area.

 Stating their case

Dover Downs, taking the lead for the industry, rolled out a website prior to this year’s legislative session: jobsfordelaware.com.

According to the site, gaming accounts for 4,000 jobs in the state, many well above the minimum wage category and come with benefits such as pensions and health coverage.

For now, there seems to be little agreement on how to proceed.

The Lottery & Gaming Study Commission, formed by the General Assembly, has been wrestling with the issue for a couple of years. Last month, it narrowly approved a complex long-term plan with a nearly $46 million price tag and controversial provisions that include tax breaks for marketing and capital expenses.

The commission is headed by State Finance Secretary Tom Cook with the rest of the roster made up of legislators, Economic Development Office Director Alan Levin and a lone private sector representative appointed by the Delaware State Chamber of Commerce. 

The vote exposed an upstate-downstate split among legislators  that could  make any middle ground difficult to find. Markell administration officials on the commission also opposed the plan and the governor’s proposed budget seems to leave little room for relief. 

A number of legislators north of the canal have been skeptical of previous aid packages that were passed at the end of legislative sessions as a way to prop up the business.

Downstate legislators have strongly supported rescue efforts and a couple  have been vocal in expressing their frustration.

State Rep. Timothy Dukes, R-Laurel, chose to blame the media by attacking use of the term “bailout” in describing the plan. Another downstate legislator was quoted in a News Journal article saying that casinos were being “raped” by the state.

The harsh rhetoric, coupled with far less concern by those residing north of the canal, will do little in efforts to come up with a solution.

What can be done?

The problem is that any long-term fix will be painful for both the state and the industry as jobs are cut and the state looks for ways to make up for the lost gaming revenue. Simply restoring the old revenue sharing would leave the state with a $20 million a year revenue gap. That is the fairest solution, but thoughts of spending cuts to bail out or assist the industry may not fly.

One possibility could be the development of an independently operated private sector-based casino authority that would assess the long-term prospects of the industry, including the future of horse racing.

The commission would bring in casino industry experts to study debt loads, expenses and competitive positions, with an eye toward making tough choices that could include fewer state-owned slot machines and table games or simply letting  the weakest casinos go through the bankruptcy/restructuring process. The measures would  hurt, but might “right size” the industry and increase its chances of survival.

Meanwhile, the books of all casinos would be open to the public since taxpayer money will be directly or indirectly involved. New Jersey compiles detailed statistics and  taxpayers know the extent of the troubles of that industry.

So far, casinos have successfully fought to keep their finances private, leaving deep suspicions among bailout opponents.

Once a way forward is agreed upon, a revenue sharing arrangement that works to the benefit of all could be developed. The state would have to make room in the budget for less revenue. One thing legislators upstate need to realize is that letting the state’s take of the action remain at its current level will have consequences at election time if casinos move into survival mode and begin major layoffs.

For now, the best move would be to lift the veil of secrecy and let those outside the Dover orbit have a chance to look at the books and come up with a meaningful restructuring effort. 

——–

Doug Rainey is the editor of the Delaware Business Daily. Email: drainey@delawarebusinessdaily.com, or follow him on twitter: https://twitter.com/DougRaineyDe