Kansas: The Novelty Fades

KS casino cash slotted for pension fund fix, not tax relief
March 26, 2012
By Gene Meyer Kansas Reporter

TOPEKA — The house always wins.

The phrase is trite yet poignant, because it’s mostly true. Las Vegas, as they say, wasn't built because of winners.

Some Kansas lawmakers, including Republican Gov. Sam Brownback, want to take that idea and give it a legislative twist.

Kansas would take some $47 million — conservatively speaking — in casino revenue to fix the state's pension fund, which is riding a seemingly terminal losing streak. The pension fund — and its stakeholders — get some chips to play with.

But taxpayers, for the most part, would get the equivalent of a complimentary breakfast.

Kansas House Minority Leader Paul Davis, D-Lawrence, last week proposed, and the Kansas House approved, a plan that would invest three-quarters of the state's share of the casino take — which, primarily, emanates from two new state-owned casinos in Kansas City and near Wichita — toward paying down the $8.3 billion unfunded liability.

The $47 million, annually, is an estimate from Davis, who predicted as much as $200 million as the three state casinos — including Dodge City — become better established. The Kansas Legislative Research Department has yet to disclose an official prognostication. Hollywood Casino in Kansas City and Kansas Star Casino in Wichita have been open less than a year, and Boot Hill Casino in Dodge City less than two years.

Keith Kocher is gaming activities director at the Kansas Lottery, which regulates gambling in Kansas. He made some quick calculations and predicted the initial revenue stream could be closer to $60 million, based on the latest revenue reports. Revenue from the lottery was not considered as part of the House bill.

Kansas Public Employees Retirement System, or KPERS, is the state’s largest pension fund, and it’s in big trouble. According to a state estimate, a gap of some $8.3 billion exists between the benefits pledged to 260,000 KPERS recipients by 2033 and the actual money to pay them.

Some say the shortfall is larger — much larger.

Economists Joshua Rauh, of Northwestern University, and Robert Novy-Marx, at University of Chicago, for example, calculated in a 2010 study that all state pensions funds, including Kansas’, understated funding shortfalls. The reported $8.3 billion in Kansas, the study concluded, was closer to $22 billion.

People receiving KPERs benefits — as well as those who expect to later — represent a small percentage of Kansas’ nearly 1.5 million-member workforce, according to the 2010 U.S. Census. The KPERS system has about 280,000 members

The Kansas Expanded Lottery Act of 2007, which led to the casinos, gives casino operators 73 percent of house revenue to run their respective business and, of course, to turn a profit. Another 5 percent goes to administer programs targeting problem gamblers and to local governments in areas where the casinos operate.

The remaining 22 percent, under the Expanded Lottery Act Revenues, or ELAR, must be used to retire state debt, help reduce state and local property taxes, or improve state infrastructure.

Those, according to the law, are the choices. Pick a card.

The state, theoretically, could restore money for college and university building improvements shelved in 2008 because of the Great Recession. But, Davis said, the idea failed to inspire lawmakers, or at least those he talked with about the idea.

Kansas could build roads.

The state is two years into a 10-year, $8.2 billion program to build roads, bridges and other transportation infrastructure statewide. As an aside, legislators have pulled $1.5 billion from Kansas Department of Transportation construction budgets since 2000 to cover periodic shortfalls in the state’s budget.

Kansas also could offer home and business owners relief on property taxes.

Those taxes are 19th highest in the nation if one counts collections per capita, or 15th highest if one counts the amount paid on a median-priced home, according to the Tax Foundation. The foundation is a nonpartisan tax policy research organization in Washington, D.C., that advocates lower taxes.

Bills to lower taxes are pending in both houses of the Legislature, but it remains unclear whether lawmakers will act on them before taking an expected month-long break in April.

Kansas also could use the money to pay down state debt.

And that's a winner, or so say Brownback and Davis.

"KPERS unfunded liability is a debt in the eyes of agencies that issue ratings on the bonds we issue," Brownback has said.

"This is a reasonable choice," the governor said. "It's a good way to get the debt down."

Rebecca Floyd is general counsel of the Kansas Development Finance Authority, the state agency that raises money on Wall Street for long-term state investing. She agreed with Brownback and Davis.

"It's a valid choice,” she said. "Investors want stability, which includes certainty about how much money they get back and when they get it. You can't just pay willy-nilly with whatever revenues come in."

Exactly.

Restoring KPERS' full financial health may take decades, and counting on casino money to patch long-term money problems doesn’t make for a good bet, said Lucy Dadayan, a senior policy analyst and government fiscal specialist at the University of Albany's Nelson A. Rockefeller Institute of Government in New York.

States during the past two decades have tapped into casino revenue to help meet revenue demands, and gaming markets are reaching saturation, she said. New casinos often collect lots of revenue at first, but fade quickly when the novelty wears off.

"Their growth is not sustainable and is short-lived," Dadayan said. "Trying to produce $8 billion for a pension fund, based on gambling, is not the best policy."

Eugene Martin Christiansen disagrees. He’s chief executive of Christiansen Capitol Advisors LLC, a New York-based gaming industry consultant.

"One of the main reasons states change their statutes to allow gambling is to generate revenues for government," said Christiansen, whose firm counts the Kansas Lottery among its clients.

Some — such as Pennsylvania and Nevada — are quite successful, he said. Pennsylvania received more than $1 billion in gambling revenue in 2009, to lead the nation, pushing it ahead of Nevada, according to the American Gaming Association, a trade association in Washington, D.C.

"I can't think of any state right now that isn't happy with the amount of revenue that gambling has brought in,” said Christiansen.

Count Kansas among them.

Lawmakers have floated several ideas to fix the troubled pension plan, and the House last week passed a measure that would require teachers and public workers hired in 2013 to choose between two options, neither of which is a traditional pension plan. In any case, state contributions probably will shrink.

"We have problems with anything that drains the fund," said Terry Forsyth, a Topeka lobbyist for the Kansas National Education Association, the state's largest teachers union.

"That's why we're happy to see the (casino) money in there, too," Forsyth said.

Kansas instituted a lottery in the late 1980s, but after a while intentions became unclear, and suggestions of legislation to use the money for this or for that served to muddle the process and confuse taxpayers.

“People to this day believe that gambling money was supposed to be used for education,” Kocher said. "That's the case in Missouri and other states which were working on similar legislation about the same time, but in Kansas, it's been for economic development from the beginning."