Ohio's gambling jackpot lower than predicted
Alexander Coolidge, The Cincinnati Enquirer 2:40 p.m. EDT June 5, 2013
It's early, but casinos are seeing less betting, racinos plan fewer slot machines and governments get less revenue.
CINCINNATI — One year after it started, expanded gambling in Ohio is off to a slower start than expected, leading to potentially smaller payouts for the state's cities, counties and schools.
The state could fall $260 million to $360 million short on annual gambling revenue, an Enquirer analysis of results from all 11 Ohio gambling venues shows.
Why the shortfall? In large part it's because racinos, racetracks with associated casinos, were projected to install more video slot machines — and that overestimated demand for gambling in the Columbus market.
It's too soon to say whether the Horseshoe Cincinnati Casino, the last of four to open in the state, will add to or stem the statewide shortfall. The Enquirer analysis shows the casino to be outperforming original expectations here if its initial performance is projected through a full year. But revenues have dropped from the venue's inaugural month in March.
Together, the four casinos in Cincinnati, Cleveland, Columbus and Toledo are on pace to generate $950 million in gambling revenue a year, the analysis shows. That's compared with $1.1 billion forecast in a study commissioned by Ohio Gov. John Kasich's office in 2011.
If the pace continues, the casinos will deliver $315 million in taxes rather than the $375 million originally projected.
Meanwhile, racinos are setting Ohio up for further disappointment: The governor's study projected the state's seven racetracks would generate $1.2 billion in annual gambling revenue — with the state keeping $391 million — from play at 2,500 video slot machines each.
But most of the tracks are opening with 1,000 to 1,600 video lottery terminals. Gambling experts say fewer slots likely will mean less gambling revenue, which would produce less money for Ohio schools, the sole beneficiary of racino gambling because the Ohio Lottery administers it. Analysts see those plans as a sign that developers expect fewer slot players.
"Racinos are either playing it safe or they don't think Ohio's as large a market as initially thought," said Mark Nichols, an economist at the University of Nevada, Reno. "That means fewer tax dollars."
Under those calculations, Ohio would receive $450 million to $550 million total from gambling based on effective tax rates of 33% to 33.5%, which are about in the middle among states with gambling.
Last year neighboring Pennsylvania, which has about 1.2 million more residents than Ohio, received almost $1.5 billion from gambling on $3.2 billion in revenue, according to the American Gaming Association's annual report, State of the States. Pennsylvania opened its first casinos in 2007 and now has 11 total freestanding and racetrack casinos. It taxes slot machines at 55%, among the highest rates across the USA, and 16% for table games.
Ohio, with four land-based and racetrack casinos at the end of 2012, received $138.2 million on $429.8 million in gross gambling revenue, the report said.
In part because of the effects of Hurricane Sandy on New Jersey tourism, Pennsylvania casinos became the second highest grossing behind Nevada, according to the report. Pennsylvania's gambling operations also generated the most revenue for the state, besting even Nevada because of its higher tax rates.
Ohio now has four freestanding casinos, two racinos and two on the way this year. Three more racinos are expected to open in 2014.
Columbus casino underperforms
Three casinos are doing less business than projected in 2011 with Hollywood Casino Columbus as the biggest underperformer. In 2011, Spectrum Gaming Group of Atlantic City, N.J., forecast for the governor that the Columbus casino would be the largest in the state, generating $381.7 million in gambling revenue a year.
Since opening in October, Hollywood Casino Columbus has generated $132 million and is on track to bring in $236.6 million after one year. Officials with Penn National Gaming, which owns all Hollywood casinos, said they're satisfied with both of their casinos in Columbus and Toledo.
Toledo was forecast for $235 million in revenue; it likely will pull in $197 million.
"We're very happy with the performance of both our properties," spokesman Bob Tenenbaum said.
He declined to discuss Spectrum's study.
Horseshoe Casino Cleveland also looks as if it will fall short of first-year gambling revenue projections of $279.6 million.
Officials with Caesars Entertainment, which runs both Horseshoes, said they are not alarmed. Instead, they are focused on longer-range goals of growing the casinos into destinations that each will generate $300 million in revenue a year.
"City casinos take longer to ramp up than suburban casinos," said John Payne, president of Caesars' central U.S. markets that includes 20 casinos.
Racetrack casinos put in fewer slots
Meanwhile, racino developers are pulling their punches on installing one-armed bandits, installing a third fewer video lottery terminals than envisioned in the state's forecast.
All were authorized and forecast to install 2,500 machines each, but none has indicated it will do so.
ThistleDown in suburban Cleveland opened in April with fewer than 1,100 slot machines. Scioto Downs in Columbus, which opened in June 2012, has 2,100. Most racino developers are saying they want to open with 1,600 or fewer slots.
The Spectrum study envisioned 29,120 gaming positions — chairs in front of slot machines or at gambling tables at casinos and racinos — but operators are on track to create 20,000.
Steve Gallaway, principal of Denver-based Gaming Market Advisors, said racino developers are hedging their bets. They don't think the market can absorb all the slot machines allowed, so they're putting fewer in.
"For Ohio, that means less tax revenue until the economy improves," he said. "The market is still just as viable, just not today. Once the economy strengthens, making the demand there, Ohio will see those machines" after a three- or four-year delay.
Governments cautious on revenue
The effect of gambling tax revenue will be felt throughout Ohio, especially once the casinos have had a few years experience and all seven racinos are up and running.
Municipal, county and school officials say they have been cautious about projections.
Cincinnati now is counting on about $10 million in casino tax revenues annually, compared to estimates that anticipated $20 million a year.
The city's casino money is not assigned to cover any specific expense although the city manager's office has identified it as a potential source of up to $3 million in annual money for a streetcar project starting in fiscal year 2015-16.
For the next fiscal year, the city is counting on $9.1 million to flow into the general fund, including $1.6 million the city is carrying over from this year that it hasn't spent.
"The city's been conservative about casino projections," city spokeswoman Meg Olberding said. "We need to give it a full year before we know precisely how much revenue we can count on."
Hamilton County Commissioner Greg Hartmann said the county wants to use $6 million to $8 million in anticipated casino tax revenues to help it shore up its $38.6 million stadium fund. Those numbers are based on low-ball estimates.
Cincinnati-area school officials say they're not sure what implications less gambling money might have. The Ohio Lottery Commission keeps 33.5% of all gambling revenue from racetrack video lottery terminals, and the money goes to the Ohio Department of Education.
Jenni Logan, treasurer for the Lakota School District, said lottery money is part of the state financing that makes up 40% of her $150 million budget.
"It's part of the money the state gives to school districts," she said.
Competing ideas, then flood of options
Ohio's flood of gambling options started four years ago with different groups that never envisioned competing with one another.
After nearly two decades of courtship by gambling companies, Ohio voters legalized casino gambling in 2009 through a constitutional amendment. Developers Rock Gaming and Penn National Gaming won the vote with promises to create thousands of jobs and generate $650 millionin tax money for 88 counties, more than 600 school districts and four host cities.
The numbers behind the casino plan were based on generating $2 billion in gambling revenue and did not anticipate racino gambling.
But Ohio lawmakers' own bid to generate gambling tax dollars from the state's seven racetracks were threatening casino developers' promises even before the ballot initiative passed.
The same year as the amendment plan, legislators hatched a plan to raise $933 million in taxes and fees over two years by legalizing what they predicted would be a $1 billion-a-year business of installing video slots at racetracks. Like the casino plan, racino legislation didn't envision competition from casinos.
Matt Schuller, now executive director of the Ohio Casino Control Commission, said conventional wisdom in the legislature in summer 2009 was the casino amendment would fail. At the time, Schuller was chief of staff to Ohio Senate President Tom Niehaus.
"The conventional wisdom was that people in Ohio hated gambling," he said.
Then-Gov. Ted Strickland signed the budget plan that authorized slots at racetracks. The plan immediately became mired in litigation, and opponents won the right to put a repeal initiative on the Ohio ballot.
The racino plan laid unresolved but dormant as Strickland campaigned against Kasich and the court battles dragged on.
Meanwhile, Rock Gaming that tapped operating partner Caesars Entertainment Corp. and quietly tweaked its gambling revenue projections, forecasting each would generate $300 million in gambling revenue. Penn National Gaming later also updated the revenue forecast for Toledo: $195 million.
Then in mid 2011, Kasich announced his plan to authorize video slots at racetracks. His study envisioned a $1.2 billion racino industry controlled by seven racetracks operating 2,500 slots apiece that would co-exist with a scaled-down $1.1 billion casino industry.
http://www.usatoday.com/story/money/business/2013/06/05/ohio-gambling-revenues/2392697/
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