Making the News

Boston Globe

Originally Published:Thursday, March 5, 2009
http://www.boston.com/news/education/higher/articles/2009/03/05/cahill_slot_estimates_criticized/?page=1

Cahill slot estimates criticized

By Matt Viser
Boston Globe

State Treasurer Timothy P. Cahill's estimate that three slot machine parlors he has proposed for Massachusetts would produce $2 billion to $3.3 billion in licensing fees was criticized yesterday by gambling specialists as significantly inflated and apparently based on outdated data that did not take into account current economic realities.
Cahill also encountered problems on a second major proposal, a plan to privatize the state lottery that he unveiled yesterday morning. It is a move that has been contemplated by other states, but which the US Department of Justice has said would violate federal law.

Cahill's numbers for slot machines were based on an underlying flaw, an assumption that each slot machine would produce profit of $275 per day, which is probably too optimistic, specialists said. Cahill used that number in a financial analysis to conclude that prospective bidders would agree to pay between $665 million and $1.1 billion each in upfront fees for a license.

"Nobody's ever paid that much for a casino license," said Clyde Barrow, a casino specialist at the University of Massachusetts at Dartmouth. "I can't see anybody putting up that kind of money to license a slot parlor. This is really an eye-popper for me."

The real-world experience for states has been far less lucrative. Pennsylvania has sold licenses to operate slot machines for $50 million each, which is only 7 percent of Cahill's lower estimate.

Cahill is running into problems similar to those Governor Deval Patrick encountered last year in coming up with estimates for what expanded gambling could bring to Massachusetts. It is an inexact science, particularly in estimating how much prospective slot operators would bid on a license.

In an interview yesterday, Cahill called his numbers preliminary. "They're absolutely an estimate," he said. "But I would rather err on the side of overestimating what they're worth and get more than underestimate them and be kicking ourselves later."

"Even if the revenue is less than we thought, it's still more than we've got right now," he added.

In a breakfast speech to the Greater Boston Chamber of Commerce yesterday, Cahill proposed that the state consider privatizing the lottery, which he said would net $1 billion immediately and $900 million a year in ongoing revenues.

But an opinion issued last year by the US Department of Justice said selling or leasing a lottery to private enterprise would be illegal. The opinion, issued in October in response to a number of states considering leasing their lotteries to private companies, said federal law requires that states maintain control over all significant business decisions made by a lottery and keep the vast majority of the money.

Cahill did not mention the potential legal impediment during yesterday's breakfast speech, which captured widespread attention, but he said in an interview later that he and his staff knew about the legal problems with the plan. He said he hoped the Justice Department's position would be reversed by the administration of President Obama.

"We recognize this is a roadblock," he said. "I feel very strongly that if the president of the United States wants states to solve our problems, they should allow us to do something like this. The reason I'm doing this is so we don't have to go to the feds hat in hand."

 

Cahill has been using his estimate of up to $3.3 billion in slot licensing revenues to sell top lawmakers on his plan. His proposal could include a two-stage licensing system for each facility, one license for the rights to build a slots parlor and a second "concession" license to install and run machines.

Cahill's staff used a variety of assumptions and financial models to arrive at the figures, including estimating how much each slot machine would yield, how many slot machines would be installed, and what the operating expenses would be, according to a summary of the plan.

Casinos and slot parlors in other states have attracted bids that are much lower than Cahill estimates.

In December, Illinois put its 10th full casino license out to bid, and the highest bid was $435 million. The state gave the license to Midwest Gaming and Entertainment, which paid a $125 million up front and $300 million over the next 30 years to build a casino in a Chicago suburb.

Illinois has among the highest tax rates for slots in the country, at up to 50 percent. Cahill argues that developers in Massachusetts would be willing to pay more upfront costs in return for a relatively low state tax of 27 percent.

One of the flaws in Cahill's analysis, several gambling specialists said, is that he appears to be overestimating the amount of money the slots would make.

"They're taking numbers that are prerecession and applying them to a time period when we're in a deep recession," said Michael Pollock, managing director of Spectrum Gaming Group, a New Jersey-based consulting firm that last August completed a gambling study for the Patrick administration. "Clearly those numbers are out of date."

Cahill estimated profit by extrapolating from casinos in Connecticut and Rhode Island. But according to statistics compiled by Spectrum Gaming, the annual numbers for those casinos in January 2009 were lower than the ones Cahill used.

In his address yesterday, Cahill said he would divide the money that comes from licensing slot machines into thirds: A third would replenish the state's reserve account, which has been used to bolster state finances; a third would create a public higher education endowment; and a third would boost state retiree healthcare funds.

Matt Viser can be reached at [email protected].

 

 

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