Rhode Island's Taxpayer Subsidies

9/25/2006: Safety net for current slot halls: Taxpayers

By SCOTT MAYEROWITZ
Journal Staff Writer
Posted May. 1, 2015 at 11:44 AM

If business at Lincoln Park and Newport Grand declines because of the proposed West Warwick casino, Rhode Island taxpayers will have to cover their losses -- potentially millions of dollars -- because of a deal crafted by state lawmakers last year.

At that time, the company that owned Lincoln Park faced federal corruption charges and questions swirled throughout the State House about the impact of a guilty verdict.

If the owners were convicted - which they later were -- then the track would lose its license and be forced to close, costing the state $525,000 a day.

So when prospective buyer BLB Investors showed up, the state's leaders did everything possible to make a sale possible, including promising to protect Lincoln Park from any losses caused by a casino.

"Obviously, the specter of a casino was a big concern of theirs," House Majority Leader Gordon D. Fox said last week. "It was important for both the administration and the legislature to get the BLB deal done because . . . at the time we were dealing with a potential felon running a central money-making institution for the state."

Now, as Rhode Islanders debate whether they want to amend the state Constitution to allow a casino, that promise -- called a slippage clause -- has returned to the spotlight.

The casino proposed by Harrah's Entertainment and the Narragansett Indian Tribe promises to bring millions of new tax dollars to the state. But the casino would also probably hurt business at Lincoln Park and Newport Grand.

Gambling is the state's third-largest source of revenue. Slot machines last year accounted for $255.7 million of the state's budget.

Nobody is sure exactly how much damage the casino would cause to Lincoln Park and Newport Grand. Harrah's says it would be minimal; Lincoln Park and Newport Grand say it would be catastrophic. And the slippage clause -- which was also extended to Newport Grand -- complicates the matter further.

For taxpayers, the key to the debate is: will the new revenue from Harrah's be enough to offset the state's losses from the two existing facilities?

THE SLIPPAGE CLAUSE was the product of months of private negotiations between BLB, Governor Carcieri and top lawmakers.

In order to close the deal, both sides wanted something. An agreement had to be reached before BLB would commit to purchase the track.

The state sought a commitment from BLB to make at least $125 million in much-needed improvements at the aging track. BLB asked for 1,750 additional slot machines and to have its tax rate locked in for 15 years.

BLB also wanted something else: protection from a potential casino.

Carcieri and Senate President Joseph A. Montalbano, a North Providence Democrat whose district includes Lincoln, added a clause into the deal.

The state gets a bit more than 60 percent of the slot revenues at Lincoln Park and Newport Grand. Harrah's was proposing in 2004 to pay just above 25 percent. If the ballot question passes, lawmakers would then negotiate a tax structure for the casino.

The version the Senate passed said that if a casino was approved, it would have to have the same tax rate. Either Harrah's would pay 60 percent or Lincoln Park's rate would drop to 25 percent.

That didn't sit well with House Speaker William J. Murphy, a Democrat who had long been pushing for a casino in his hometown of West Warwick.

While the Senate quickly passed the deal, Murphy stalled and ended the House's session for the year.

But then a last-minute deal was struck and Murphy called back his members for a special session.

The tax-parity clause was dropped, and in its place the House inserted the slippage protection. Newport Grand was also given authorization for additional slot machines, a locked-in tax rate and its own slippage clause in exchange for a $20-million capital investment.

Harrah's could still pay a lower tax rate, and BLB was assured that its business would not lose money because the state would have to make up its losses.

Carcieri said he didn't like adding more slots at Newport and never spoke favorably about the slippage clause, which he points out came from lawmakers.

But he said he still signed onto the deal because it cleared the way for a change in ownership at Lincoln Park.

"We needed to get somebody else in there," he said last week.

Murphy and Montalbano did not respond to numerous requests for interviews.

THERE IS NO clear picture about what a Harrah's casino would do to Lincoln Park and Newport Grand.

Both facilities predict a 40-percent drop in revenue. A 2004 report by gambling analyst Sebastian Sinclair, prepared for the Town of West Warwick, forecast a 12.5-percent decline at Lincoln Park and a 33.6-percent decline at Newport Grand. Harrah's also says there will be a drop, but that it won't be nearly that steep.

The deal the state struck with Lincoln Park protects it through 2020; Newport Grand is protected through 2015.

The slippage clause takes the average revenue at each facility in the two years prior to a casino opening and assumes that income there should grow each year by inflation. If revenues drop below that figure, the state has to make up the loss.

Lincoln Park estimates that by 2010 its slot machines will generate $547 million. The state would get $335.3 million. Lincoln Park would take $152 million. The rest of the money is split among other parties, including the Town of Lincoln, the slot manufacturers and GTECH, which manages the system.

If a casino caused a 10-percent drop in revenue, the state would be short $33.5 million. However, because of the slippage clause, the state would also have to pay out an additional $15.2 million to Lincoln Park, creating a $48.7-million shortfall, according to Journal calculations.

Harrah's estimates that its casino would provide the state with $113 million in new tax revenue that year, which would more than make up the hypothetical 10-percent loss at Lincoln Park.

But if revenues at Lincoln Park dropped by 30 percent, the state would lose $146.1 million. Even with Harrah's $113 million, there would still be a budget shortfall.

The state also has to consider potential revenue losses at Newport Grand.

House Majority Leader Fox noted that lawmakers have yet to agree with Harrah's on the terms of the casino's operation. That would happen after the Nov. 7 referendum.

"If this vote should pass, nothing prevents a discussion with the casino, with Harrah's, that if there is slippage . . . that they make it up," Fox said last week.

However, Harrah's doesn't appear so willing to make such payments.

Jan L. Jones, Harrah's senior vice president for communications and government relations, said last week that her company would be willing to cover any state losses in the first two years. But that offer does not extend to the slippage payments.

"I can't imagine any private company," Jones said, "that's going to make up another company's inability to operate."