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State’s growing portion puts casinos in bind

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Dover Downs offers more than 2,500 slot machines, plus numerous slots tournaments and promotions. // Photo by  Luigi Ciuffetelli

Dover Downs offers more than 2,500 slot machines, plus numerous slots tournaments and promotions. // Photo by Luigi Ciuffetelli

By Kathy Canavan

Delaware has a golden goose problem. The state collected $162.6 million from its three casinos in the fiscal year just ended, but the casinos say they can no longer attract gamblers if the state keeps taking more than 55 percent of their revenue off the top.

Secretary of Finance Thomas J. Cook said the Markell administration will continue discussions to make sure the industry stays competitive, and the issue will be one of the ones at the forefront in the next legislative session.

With flashy new casinos in neighboring states cannibalizing their market, Delaware casinos are slashing their staffs, reupholstering their furniture and touching up items that would have been replaced 10 years ago.

“¢ At Dover Downs: In the casino industry, hotels rooms are routinely “re-ragged” every five years ““ a total do-over where everything is reconditioned or replaced. Dover Downs Hotel, which AAA ranks with the storied Hotel DuPont, hasn’t had a re-rag in eight years. Instead, housekeeping and maintenance workers shine and repair. The company pension plan was frozen five years ago, and no one has had a pay increase since 2010. The casino is in debt. In 2006, its stock sold for almost $20. It’s 98 cents now and hasn’t grazed $1 since June 23. The NYSE exchange has threatened to drop it. “We’ve made every prudent cut we possibly can, and the only things left are payroll and marketing. You cut either of those and your revenues are going to go,” said CEO Ed Sutor.

“¢ At Harrington Raceway & Casino: The casino is in debt.  Managers axed an entire pit of gaming tables they couldn’t afford to staff. They are reupholstering furniture they would have replaced in better times, and they’ve begun using internal staff to install drywall to save money.

Ed Sutor, CEO of Dover Downs, said the company anticipated competition and built a destination attraction.

Ed Sutor, CEO of Dover Downs, said the company anticipated competition and built a destination attraction.

“¢ At Delaware Park: Between 2003 and 2009, casino management pumped $19.6 million a year in capital improvement back into the business. Since the state upped its take in 2009, they reinvested $6 million in the last fiscal year and less than $3 million most years. Even with no debt, they’ve been “limping along,” according to Bill Fasy, the president. “You can’t be competitive unless you refresh the businesses annually,” he said.

Delaware’s gaming revenues are on a downward slide, according to Fitch Ratings. That’s a national trend, too. Of the 47 states with gambling revenue, 27 reported declines over the past year, according to the Nelson A. Rockefeller Institute of Government.

Casino operators say one thing makes Delaware different – the deal they struck with the state and horse track operators in the mid-’90s has been tweaked seven times.

The changes were mostly in the state’s favor, they say.

At this point, the casinos are required to pay slightly more than 55 percent of their revenues to the state. The state redistributes part of that money to horsemen and vendors fees.

“We had a good deal in 1995, but there have been seven different tax increases since then, and the last one went too far, said Fasy of Delaware Park. “We’re partners with the state? Partners are usually treated with a seat at the table during the decision-making.”

Frank Fantini, CEO of Fantini Research which provides research for the gaming industry and publishes Fantini’s Gaming Report, looks at it this way: “If you talked to the owner of a retail business and asked, “˜If the government took $6 out of every $10 you earned, could you survive?’ the answer would probably be no,” said “People look at the gaming tax and they think that’s the only tax casinos pay, but it’s not. That’s just the first tax that they pay. They pay property tax, their share of employee taxes, and, if they make a profit, they’re going to pay Delaware corporate income tax.”

Dover Downs Casino. // Photo by Luigi Ciuffetelli

Dover Downs Casino. // Photo by Luigi Ciuffetelli

Paying tax or sharing revenue?

Casino advocates and state officials use different words to describe the amount the state gets from the casinos’ gross revenues.

“The casinos like to use the word “˜tax,'” said Vernon Kirk, director of the Delaware State Lottery. “This is revenue-sharing. We have a partnership with the tracks. We take our share. They get their share.”

State officials call it revenue-sharing because the casinos and the state formed a partnership that allows the three casinos to operate as a monopoly.

Some casino advocates consider the state’s share a tax, and, because the casino’s ante is based on its total revenue after the payout to bettors, they say it is similar to a gross receipts tax but much higher than the top gross receipts rate of 0.75 percent.

“There is no doubt that, if you were going to try to say this is the equivalent of a gross receipts tax on an industry, it would be orders of magnitude over any other gross receipts tax paid in the state,” State Treasurer Ken Simpler said. “There’s a fundamental difference when it comes to the casinos, though, because they’ve been provided a license that basically gives them a monopoly right. It’s been 20 years, and no additional licenses have been granted, so you’ve provided those three companies with a monopoly power to operate.”

Simpler said the casinos have a valid argument that the initial arrangement has been changed to their detriment. “Typically, in terms of sharing, it has only gone in one direction,” he said.

Patti Key, CEO of Harrington Raceway & Casino:

Patti Key, CEO of Harrington Raceway & Casino: “We are down to the bare bones.”

However, he said the state has also granted the casinos expanded rights such as increasing hours and additional products. “Many accommodations have been given to the casinos to try to expand the pie for everybody,” Simpler said.

“No state or taxpayer money has even been invested in or used for the operation of any of the three casinos,” said Patti Key, CEO of Harrington Raceway & Casino. “It’s all our capital. We assumed all the risk. The state’s revenue share increased over the years to fill budget gaps before the [gambling] market became saturated. Now, we’re asking for some of those proceeds back.”

Ripple effect

Gambling contributes only about 5 percent of the state budget, but its ripple effect is large:

“¢ Gambling equals tourism. It is the fourth-ranked activity visitors to Delaware enjoy, just after shopping, dining and the beaches, according to the Delaware Economic Development Office. About 15 percent of visitors say gamble when they visit the state.

“¢ Casinos directly employed 3,216 people in the first quarter of this year, according to the Office of Occupational and Market Information.

“¢ Every casino executive is expected to take a leadership role in nonprofits in their communities, and casinos and employees make financial contributions as well.

“¢ Dover Downs alone paid $1.2 million in real estate taxes last year, plus a $2.1 million electric bill.  As Mayor Robin R. Christiansen put it, “If Dover Downs wasn’t a presence in our city, not only would the city be cash poor, but we would be lacking a major entertainment and tourism destination.”

“¢ Charlotte Mathes, who owns Delmarva Cleaning and Maintenance in Dover, said 80 percent of her business comes from the casino. “I have 116 employees. If the casino would have to close, my people would be in trouble,” Mathes said. “It helps a lot of people around here.”

“¢ In Harrington, Beverly Bonneville, manager of the Holiday Inn Express across the street from the raceway, said 35 percent to 40 percent of her business is casino-related.

The Poker Room at Delaware Park is open 24 hours a day, seven days a week. // Photo by Fred Bourdon

The Poker Room at Delaware Park is open 24 hours a day, seven days a week. // Photo by Fred Bourdon

Stopping the decline

State Sen. Brian Bushweller, a Democrat whose district includes Dover Downs, tried to push a bill that would have allowed the casinos to keep a large share of revenues this year.  His argument the casinos borrowed money to build under the assumption that the state’s share would not be jacked. “They made substantial commitments, especially Dover Downs. They built a true destination point for gamers with the casino and the hotel. It’s a magnificent facility and it worked. They were right in what they did. People came in droves,” Bushweller said.

Bushweller is irked when people refer to his bill as a “bailout” for the casinos. He considers the amount the casinos pay a “tax.”

“The combination of both the new out-of-state competition and the fact that the General Assembly has raised the state’s tax several times now threatens the existence of our casinos,” he said. “If we don’t do something about it now, then the decline of the casinos is going to accelerate. We can stabilize it and we can stabilize the thousands of people they employee and stabilize their contributions to the state treasury.”

The state has allowed the casinos to open i-gaming and table games and sports betting to draw new players, and last year it gave the casinos a discount off the vendor’s fees they pay. The discount allowed the tracks to retain about 45 percent of their receipts in 2015, compared with about 43 percent in 2014.

Bill Fasy, president of Delaware Park, said the company reinvested $6 million in the property in the last fiscal year.

Bill Fasy, president of Delaware Park, said the company reinvested $6 million in the property in the last fiscal year.

Poor management?

State Rep. Charles Potter Jr., D-Wilmington North, who wants to legislators to allow a new casino in his district in Wilmington, opposes casino relief. “It’s easy to feel the emotion of somebody saying they’re losing money and it’s easy to feel sorry for them, but, yet, when they were having great years they should have reserved funds rather than paying it out in dividends. I would have paid down debt. What they did is called poor management,” he said.

“We should have never created a monopoly and just allowed three casinos to come in,” Potter said. “I’d like to see all our casinos succeed, but they have to have the right business and marketing plan, and a lot of them didn’t do that. The excess profit that they made back then, if they had put some in the layaway, I don’t think we’d be speaking about their problems right now. I attribute it to their management styles and to not wanting to expand – [like] what happened to IBM when they didn’t expand and Apple came in and ran right past them.”

Ed Sutor of Dover Downs said his company did anticipate the competition and it did expand its facility. “The reason why Dover Downs is in its current difficult position is it did anticipate the competition and expand its facilities by $300 million. We did that with our own money and $120 million of borrowed money. What we did not anticipate was the last increase in the share taken by the state in 2009. We’ve put more money into this facility than we ever made. We borrowed it.”

“Dover Downs had $185.4 million dollars in total revenue last year, and, from that, they made a profit of $80 million. That’s darn good management in the face of this massive competition from Maryland and Pennsylvania,” Bushweller said. “The problem was casinos built their business plans around the amount the state was taking in the 1990s. That’s been changed seven times in the ensuing years, so that the state’s take was doubled. Then, the best-laid business plans begin to fall apart.”

“The casinos are going down and will continue to go down unless we readjust our relationship,” Bushweller said. “When people say, “˜Well, how are we going to balance our budget if we take less money from the casinos?’ the answer is if we don’t take less money then the decline is going to continue. It’s going to get worse and worse and worse.”

Take the case of Harrington Raceway & Casino, where management borrowed money to launch a $55 million expansion. “A week after the construction was complete, the market crashed. You know, historic lows,” CEO Patti Key said. “We haven’t – and really no one has – recouped from that yet.  So, we didn’t get a return on investment, and, then, six months after that the state imposed a revenue-sharing increase. It’s like you buy a house and you have a job and you plan on paying it off, and then you lose your job.”

Key said every dollar the casino made has been reinvested in the casino or the Delaware State Fairgrounds, but there is still equipment that needs to be replaced. She said the company doesn’t believe in layoffs, but they’ve lost 150 jobs through attrition since 2009. “We have cut every area we can cut.  We eliminated an entire table game pit. We are down to bare bones,” she said.

casino-share-graph

“The marketing dollars and the money for capital reinvestment simply are not there,” she said. “In this industry, you have to reinvest in your properties. You have to keep it fresh to bring people in. I think most legislators understand our dilemma, and I think the general public is beginning to understand as well

Thomas J. Cook, Gov. Markell’s finance secretary, said the state has allowed new games to help the casinos compete in the new, more competitive environment. He said he expects more discussion in the next legislative session to assure the casinos stay competitive.

“There’s no simple solution,” Cook said. “The key is that we have a business environment that allows for the casinos to succeed while, at the same time, allowing the taxpayers to get a fair share of those benefits generated by this industry.”

To gambling analysts like Fantini, the state’s reluctance to cut a better deal with casinos is like killing the goose that laid the golden egg: “If the casinos go out of business, you’re losing the jobs, you’re putting income taxes and property taxes at risk,” he said. “The state could set something that is very high but allows the operations not just to survive but to thrive – 50 percent. Really, what right does any state government have to tax a business to the point where it can’t be profitable?”

Fantini said Delaware casinos were very prosperous even after the state raised the portion of revenue it took, but now Marylanders and Pennsylvanians can stay home to gamble.

“The Delaware industry will never be what it was before the neighboring states went into business, but that doesn’t mean Delaware can’t have a viable business. There is a sufficient population in the region. Delaware Park sits there on [Interstate] 95, and it’s very convenient. Gamblers are kind of like golfers. They all have their own home course but they all want to play elsewhere as well.”

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