Lottery and Gaming Study Commission Minutes – 01/06/14 Meeting 1

Minutes of the Lottery and Gaming Study Commission

Legislative Hall – 01/06/14

Attendance:

Member / Present
T. Cook, Chair / Yes
A. Levin / Yes
B. Hall-Long / Yes
B. Bushweller / Yes
B. Pettyjohn / Yes
V. Longhurst / Yes
C. Potter / Yes
T. Dukes / Yes
G. Forbes / Yes

Others Present:D. Gregor, J. Johnstone, D. McGlynn, V. Kirk

  1. Call to Order

Mr. Cook called the meeting to order.

  1. Approval of Minutes

The minutes from the previous meeting of the Commission on 12/6/13 were approved.

  1. Follow-up Presentation on Horse Racing Industry

Ed Kee, the Secretary of Agriculture, presented a follow up on previous presentations connected to the horse racing industry entitled What is the Economic Impact of Horse Racing on Delaware’s Farm Economy.

Mr. Keesummarized the broad details of Delaware agriculture as an industry with $1.2 billion in annual sales at the farm level. Econometric estimates suggest agricultural output experiences a multiplier of 7; meaning Delaware enjoys $8 billion of annual economic activity as a result of agricultural output. Mr. Kee notesthat this estimate does not include equine activity.

Mr. Kee summarizes the existing stock of horses in Delaware stating there are 3,000 standardbred horses spread across 175 farms/training centers and 150 smaller farms. Additionally, 775 throughbred horses were housed annually in Delaware at various locations and farms for periods ranging from 6 months to a year. Mr. Kee states 10,000 Acres of Farmland is dedicated to horses and about three-quarters of that land is related to horse racing. This farmland and related infrastructure is valued at $177,000,000. The horse flesh at the farms and stables is valued at $73 million or roughly $20,000 per horse.

Mr. Kee states that the horses racing industry employs 1,540 licensed throughbred industry employees, 1,100 licensed standardbred industry employees, and 1,500 farm based employees for a total employment of 4,140 jobs. Mr.Kee notes both that some of the farm related jobs are not strictly in the horse business and that all of these jobs vary both in terms of skills level required and in term of time commitment.

Mr. Kee states the average cost of keeping a standardbred horse is roughly $20,000, while the average cost of keeping a throughbred is $25,000. Mr. Kee notes that when valuation are combined with the estimates of 3,000 standardbred horses and 775 throughbred horses economic activity is estimated at around $80 million. Mr. Kee uses a 2012 University of Kentucky study to note that the multiplier effect of the horse racing industry on the overall economy is 1: 0.5 as opposed to 1:7 seen in conventional agriculture.

Mr. Kee would like to pursue a more focused econometric study on the impacts of horseracing on the overall economy. MrKeerequests that the committee consider the potential negative impacts to the farm and general economy before any decisions are made.

Mr. Cook thanked Mr. Kee and opened the discussion for questions from commission members.

Mr. Dukes asked if studies of the economic activity generated by the horses racing industry had been done in prior years.

Mr. Kee stated that no similar analysis existed and that a 2004 study done by the University of Delaware collected a lot of data on the topic, but did not state results in a similar fashion.

Mr. Dukes asked Mr. Kee for his opinion on whether the horse racing industry had fluctuated over time.

Mr. Kee responded that his opinion was that there had been fluctuations grouped around historically significant events. Mr. Kee stated he could not quantify the levels of these fluctuations.

Mr. Potter asked for clarification on Mr. Kee’s statement that some horse racing operators may choose to leave the industry.

Mr. Kee stated that the good operators will survive and that the marginal operators will not. The farm owners and horse owners operating in Delaware will fluctuate depending on the size of the changes the committee makes.

Mr. Levin asks if large horse farm owners are likely to grown and small farm owners will lose the benefits of greater use.

Mr. Kee agrees in general, but notes there are exceptions.

Mr. Levin asks for clarifications of the multiplier affects connected to the horse racing industry and agriculture in general.

Mr. Cook asks for an explanation of the cost differences between standardbred and throughbred horses.

  1. Review of KPMG Report on the Economic and Financial Benchmarking of Delaware’s Casinos

Thomas Cook, Secretary of Finance, discusses the KPMG Report on Economic and Financial Benchmarking of Delaware’s Casinos. Mr. Cook notes that the report is near completion at this time and highlights some significant bullet points from the upcoming report.

KPMG analysis found most casino markets have experienced declines in revenues since 2008. The KPMG draft notes Pennsylvania’s casinos have fared better than those in Delaware because of attractive amenities. KPMG notes that studies conflict on whether iGaming will harm or help brick and mortar casinos. KPMG mentions the importance of access to a large player pool to the success of online poker specifically. KPMG notes that there is an inverse relationship between gaming tax and capital investment. KPMG notes that Delaware’s table game tax is the highest in the region and also higher than the national average. KPMG notes that Delaware casinos are battling recession, new competition and increased tax rates. KPMG notes that jobs may have to be cut to avoid additional losses unless tax relief is provided. KPMG notes that the opening of the casino in Anne Arundel will cause further declines in slot revenue. KPMG notes Delaware’s margins are lower than West Virginia and New Jersey and experienced a 3.8% decline in 2011. KPMG notes that the casinos need to free up cash to make capital improvements and/or maintain current amenities. If improvements or maintenance does not occur, customers may travel to neighboring state casinos. KPMG notes that other states have offered capital improvement incentives for their casinos, but that no such program exists in Delaware.

Mr. Cook mentions that the full report should be available in the near future and opened the discussion for questions from commission members.

Mr. Bushweller asked for an estimate of how soon until the full KPMG report was available.

Mr. Cook explained the report needs only a handful of statistics and hopes the report will be available this week. Mr. Cook states the commission’s agenda should focus on looking at options for now and consider how to digest the full KPMG report in the future.

  1. Review of Options for Consideration by the 147th General Assembly

Mr. Cook explains that the Summary of Options about to be discussed uses fiscal year 2015 projections and represents a list of suggestions offered by various committee members following the prior meeting. Mr. Cook asks whether public comment should occur now or after the discussion of options.

Ms. Longhurst states a preference for public comment at the end of this discussion.

Mr. Cook states that the options are grouped based on the particular revenue vehicles that would be affected. Mr. Cook opens discussion of an option to return video lottery distributions to 2009 levels, stating this change would cost the state $25.5m and increase the track share to $22.1m and the horsemen’s share to $3.4m.

Mr. Forbes notes that revenues to the tracks and the state have decreased since 2009, but that the tracks have born an excess burden of this decrease. Mr. Forbes notes the state should consider the relationship with the tracks a partnership. Mr. Forbes state that the tracks have had to scale back capital investment because of the 2009 change in revenue shares and that this could hurt revenue in the face of new competition. Mr. Forbes states that returning to 2009 revenue distributions is only the first step in establishing a partnership between the state and the horse tracks.

Mr. Bushweller states we cannot control competition or the economy, but the state can control the nature of the partnership between the state and the gaming industry. Mr. Bushweller notes the history increases in the state’s share of revenue from gaming. Mr. Bushweller notes that a variety of actions were made to increase revenue in 2009, but that all of those changes have been mitigated to some extent except the changes made to the gaming revenue distribution. Mr. Bushweller states that not mitigating the 2009 changes in one of the fundamental reasons the gaming industry is in fiscal crisis. Mr. Bushweller notes his comments are not critical of the general assembly’s actions in 2009 and that he voted for all of the changes at the time. Mr. Bushweller states that the state has failed to be a good partner to the gaming industry by not mitigating the changes to revenue shares.

Mr. Cook notes that some regionally comparative tax rates are available at the end of the options packet presented. Mr. Cook states that the options being discussed might not represent definitive recommendations, but rather should be considered as a package of options for the legislature and governor to consider.

Mr. Cook asks if the policy option to share vendor costs before distributing revenues is sufficient for addressing the belief that the current revenue distribution needs to change as opposed to the expense of revert to 2009 distribution rates.

Mr. Bushweller states that the failure to mitigate changes represents a moral failure and contributed to a poor business climate. Mr. Bushweller states that the only perspective where reverting to 2009 distributions is concerning is from a state budget perspective. Mr. Bushweller notes that the shared vendor cost option is supportable as it would spread some operating costs between the partners rather than solely burdening the casinos with operating costs. Mr. Bushweller notes the example of table games as a case where the burden of operating cost means that the state is able to make money while the casinos lose money.

Mr. Cook states a concern that reverting to 2009 rates does not alleviate the problem of increases in vendor costs burdening the viability of the casinos. Mr. Cook states that sharing vendor costs makes sense considering the lottery as a partnership and irrespective of what is decided about fair revenue distribution percentages.

Mr. Forbes states that both options have to be considered because overall revenue declines, but that the process should be phased in over a few years for budgetary reasons.

Ms. Longhurstnotes that the casinos have a monopoly within the state of Delaware. Ms. Longhurst notes that the general assembly has to consider all the options as a piece of the entire budget. Ms. Longhurst notes that the general assembly is already facing cuts in services. Ms. Longhurst states that a $25m budget shortfall is not viable given the context of the entire general assembly budget. Ms. Longhurst states a preference for the shared vendor cost option as establishing a partnership between the casino monopoly and the state. Ms. Longhurst asks that the casinos bring recommendations to the state to help facilitate a partnership. Ms. Longhurst states a concern that the debt of Dover Downs disproportionately driving this issue at hand.

Mr. Bushweller reiterates his support of the actions taken in 2009 and that the failure was in mitigating the rate increase in subsequent years.

Mr. Forbes states that all of the casinos are constrained by a lack of cash and that any solution chosen should be a two to three year plan.

Mr. Levin notes a common thread in the KPMG report is incentives for development and states that changing the distribution of revenue without providing incentives for growth will not be enough in the long term.

Ms. Hall-Long supports revenue assistance and asks for clarification on the direction of the commission’s actions given the potential for more available analysis in the near future.

Mr. Cook states that the commission should focus on a broad recommendation of potential paths forward. Mr. Cook states that the current focus is on whether the commission should recommend some change in distribution of slots revenue.

Mr. Dukes states the importance of finding a happy medium in the recommendation from the commission. Mr. Dukes asks how the horsemen’s share would be affected if all parties where to share vendor costs and only the horsemen’s share was returned to 2009 rates.

Mr. Cooks states the horsemen would be plus $400,000, the state would be down $10.3 million and the tracks would be $9.9 million.

Mr. Dukes states a concern that any cut to the horsemen might have negative long term effects with the industry declining. Mr. Dukes states a need for consideration of who can afford to take cuts in revenue the most when considering options.

Ms. Hall-Long states a desire to see more numbers and have a discussion about past crises faced by agencies in partnerships with the state in order to ascertain what has worked previously.

Mr. Potter notes that the city of Wilmington could use jobs and would like to see the level of attention being given to the casinos for the problems of the city of Wilmington. Mr. Potter states he cannot support returning to prior revenue rates. Mr. Potter states that while he would like the casinos to survive, the state should not continue to subsidize what is potentially a failed business model. Mr. Potter states a desire to see a casino opened in Wilmington to provide jobs for the city.

Mr. Cook asks if the commission would like to vote on each of the options offered.

Ms. Longhurst states that there may be no need to go over each topic or vote on the topics individually.

Mr. Cook states the logic behind sharing vendor costs among all the stakeholders and reiterates the possibility of working out a fair and equitable new revenue distribution beyond just sharing vendor costs.

Mr. Potter states a couple of observations concerning the weakness of the market for casinos and for the services of the horsemen.

Mr. Bushweller requests more discussion specifically noting West Virginia’s modernization fund, internet gaming, and a comp incentive program as topics of interest.

Mr. Pettyjohnstate that having the full KPMG report is imperative before any voting can be done.

Mr. Potter notes that the casinos should consider increasing advertising in the face of increased competition.

Mr. Cook suggests discussing each option today and then voting on suggestions in a future meeting. Mr. Cook moves discussion to changes in the treatment of table games, specifically mentioning reducing the state tax rate from 25% to 15% at a cost of $7.2m.

Mr. Bushweller reemphasizes that table games were implemented to offset the casinos loses, yet the state and horsemen are making money on table games while the casinos are losing money. Mr. Bushweller suggests sharing the expenses of table games the same way the commission is considering sharing the video lottery vendor fees.

Mr. Cook explains sharing video lottery expenses requires the sharing of machine costs and revenue accounting systems. Mr. Cook states table game cost sharing would include heavy personnel costs. Mr. Cook notes sharing personnel cost would raise questions about the states potential involvement in hiring and salary decisions.

Mr. Bushweller agrees such a change would be difficult. Mr. Bushweller states that the table game revenue sharing should be changed such that the casinos can make money off of table games.

Mr. Cook states that the existing table game revenue shares are modeled on West Virginia’s table game shares from 2009. Mr. Cook notes that West Virginia has lowered their table game rates since 2009. Mr. Cook notes the option of removing the annual table game fee at a cost of $3m to the state. Mr. Cook notes that the decision to allow table games was based on the casinos’ desire to produce revenue that could be reinvested in order to remain competitive. Mr. Cook suggests that changes to table game revenues could be tied to capital investments incentive. Mr. Cook suggests these might also be retroactive in order to compensate Dover Downs for their recent investments while incentivizing investments by the other casinos.

Mr. Levin asks if the annual fee for table games is a consistent policy across the country.

Mr. Cook explains that the annual fee began in response to Pennsylvania entry in the slot market and was originally a fee for both sports lottery and table games. Mr. Cook notes that the fee was removed for the sport lottery subsequently.

Mr. Levin asks if West Virginia and Maryland have annual fees.

Mr. Cook states that he will look into that and that Maryland does not have an annual fee. Mr. Cook turns to the iGaming suggestion. Mr. Cook notes thatthe legislature elected to keep the rates in the brick and mortars the same as rates in the casino for each type of game available over the internet, because internet gaming is relatively new and information on the topic is scarce. Mr. Cook notes that New Jersey has retained brick and mortar rates and that in Europe the average rate is roughly 20%. Mr. Cook notes that the casinos in Europe pay the infrastructure cost, while in Delaware that cost is shared. Mr. Cook states that as a result of shared costs the recommendation listed only drops the state tax rate to 25%.