As Massachusetts faces a decision about casino gambling in an upcoming election, Frank Fahrenkopf, the former president and CEO of the American Gaming Association and current IOP fellow, offers insight on the state of the gambling industry, including a look at Question 3 on the Massachusetts’ ballot.

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Nation & World

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Gambling industry revenues fall, even as Massachusetts voters weigh opening casinos

For an industry that grew annually by double digits starting in the 1970s, betting on the continued vitality of the U.S. gaming business seemed a sure thing. Gambling’s popularity prompted the spread of commercial casinos, slot-machine outlets, and off-track betting parlors from Las Vegas to nearly every state. But that longtime growth cut gaming’s profits ever thinner, and industry revenue actually started declining in 2008.

Atlantic City, N.J., once a thriving destination for gamblers on the East Coast, has seen four of its 12 casinos close their doors since January, with a fifth slated to shut down next month. Revenues there have plunged more than 45 percent since 2006. Moody’s Investors Services downgraded the industry’s outlook from “stable” to “negative” in July, blaming flat or declining revenues everywhere except in Las Vegas, which is still performing “relatively well.” Revenues reported by state gaming authorities are expected to drop 3 to 5 percent over the next 12 to 18 months, Moody’s said.

Locally, casino gambling is a contentious issue in the upcoming statewide election. Massachusetts Gov. Deval Patrick signed legislation in 2011 that would permit three resort-style casinos to open here for the first time.

Upset at the controversial, back-room politics that appeared to drive much of the process, Repeal the Casino Deal, a grassroots group opposed to casinos, won a lawsuit before the state’s highest court in June to get the issue put before voters in next month’s statewide election. A yes vote on Question 3 will annul the law, prohibiting casinos, slot-machine parlors, and betting on simulcast greyhound racing in the state, and invalidate licenses already awarded to developers Wynn Resorts and Penn National, or ones promised to others, such as MGM Resorts. The law would be left intact with a no vote.

As president and CEO of the American Gaming Association (AGA) from 1995 to 2013, Frank Fahrenkopf helped reshape public perception of the commercial casino business and advocated for the industry in Washington on a host of regulatory, political, and educational issues. Currently a fall 2014 fellow at the Institute of Politics at Harvard Kennedy School (HKS), Fahrenkopf first came to national attention during the Reagan administration as chairman of the Republican National Committee from 1983 to 1989. The Gazette spoke with him about the state of the gambling industry and the Massachusetts ballot question.

GAZETTE: What accounts for the Atlantic City closures, and how healthy is the industry today?

FAHRENKOPF: I can only think of two places in the United States where competition has really driven people out of business. The first is Atlantic City. When I was with the AGA, for 15 straight years I would always go down to speak at the gambling conference there, and I constantly told them, “You’re going to have to clean this place up.” I don’t know when the last time you were in Atlantic City [was], but it wasn’t very nice. And they didn’t do it for a long, long time. Unfortunately for them, they were unlucky because just about the time that they started to turn things around, we had the economic crash in 2008, and so that really put them back. They really depended on the Philadelphia market, and when Pennsylvania brought in casino gaming, people in Philly didn’t have to drive an hour, hour and 15 minutes down to Atlantic City. They could gamble closer to home. It just devastated them. So that’s one jurisdiction.

The other is my old home, the Reno/Lake Tahoe area of Nevada. Indian casinos opened on the western side of the Sierra Nevada Mountains. I don’t know if you’ve ever been to Reno, but you’ve got to drive over the Sierra Nevadas to get to Reno from California or up to Lake Tahoe or to Carson City. The Indians started putting casinos on the western side with big signs saying, “You don’t have to put tire chains on to play our slots.” I was always asked “When is too much too much? When is there saturation?” The market will tell you. You’re talking about discretionary income. The amazing thing is Las Vegas is breaking all records on people visiting. The McCarran [International] Airport, they’ve just expanded it. People are going, but they’re on tight budgets. Things are still tough.

GAZETTE: How has the industry changed in the last decade, and where are the areas of market growth in the next five to 10 years?

FAHRENKOPF: The big growth in the world now is in Asia. It is absolutely incredible. In 2000, the Chinese had me come over to Hong Kong for meetings in Macau. And it was the most terrible place you could have imagined. The ceilings in these casinos were lower than these [in his office], and the casinos were full of smoke — it was terrible. They wanted to attract foreign investment, not only U.S. companies, but Australian companies and others. I met with them and I said, “What you’re going to have to put in place is a transparent system of regulation and control with your banks, and so forth. So I suggest you go to New Jersey, and you go to Nevada. They’re the two jurisdictions in the United States that have a long history, they work with the FBI, they work with law enforcement, and they have a very good reputation.” Of course, Steve Wynn, Sheldon Adelson, MGM, companies from Australia all went in. It’s amazing now to go; you can never believe what it was like before.

In the States, there’s no question that things are flat right now. I mean, 2008 was really devastating for the industry in a number of ways. Not only did people lose discretionary income and their jobs, but there was no place to go for credit. MGM was in the middle of building a $5 billion project. There were three or four on the boards in Atlantic City that didn’t go anywhere, a big one in Vegas that stopped. Banks wouldn’t loan money. There was no credit. You couldn’t sell any stock or issue bonds, so it hurt. Now, it’s just about to where it was prior to the collapse of 2008.

The big change that’s taken place in the world is what’s called an integrated resort. An integrated resort is not just a casino like you might see in Atlantic City. It’s first-class hotel rooms, first-class restaurants [with] name chefs, shows, retail shopping, and so forth. That was the changing dynamic that really built Vegas. The last time I did a poll, 50 percent of the people who go to Las Vegas don’t gamble. They go for the other amenities. That’s now the model that I think most of the companies [follow].

GAZETTE: With so many gambling options available, has convenience become the primary driver of customers over these luxury restaurants, nightclubs, and resort amenities?

FAHRENKOPF: No, I don’t think so. Particularly when money’s tight, people want to go to someplace nice. The pari-mutuel industry has been in a tough position for years and years. People who go to the track got older and older, and they were dying out. Young people don’t want to go to the racetrack, watch a race that takes about two or three minutes, and then sit there for an hour until the next race comes up. Off-track betting, where you could sit in a betting parlor in New York and bet in California or here in Massachusetts, revived that a little bit, but the difficulty came about that many, many of the tracks were run down, were old, they weren’t attractive. That’s why the concept of “racinos” came up. They’ve been very, very popular over the last 10 years — where, at a place where there’s an existing racetrack, a casino was built. When you have a casino there, a track owner can offer bigger purses, and bigger purses bring better horses and jockeys. So it’s been a real revival in places like Florida, Delaware, Pennsylvania, West Virginia. I don’t know the details with Suffolk Downs, [but they were probably] hoping that they would be able to have a racino.

GAZETTE: How much more can the industry grow? Aren’t there a finite number of gamblers?

FAHRENKOPF: When I was practicing law in Reno, New Jersey passed a statewide referendum to have casino gaming. And we were terrified that we’d lose half the nation. Guess what happened? More people went to New Jersey, got exposed to what New Jersey had to offer and wanted to go to Vegas, which is the most incredible place on earth if you feel like gambling. The same thing was true when Macau opened — that people in the Far East would no longer come to Las Vegas; they’d visit Macau. They still come. Two years ago, I was in Macau, and they were concerned that Singapore was going to hurt their market. Singapore only has two casinos — those two casinos do just about as much as the whole state of Nevada does. Macau is five times the gaming revenue of Nevada. It’s something else. And what’s happened is people who live closer to Singapore have gone to Singapore, experience it, and now they’re going to Macau. So far, I find very few places where, if you’ve got a quality place, [the competition hurts]. You compete for it.

“I can only think of two places in the United States where competition has really driven people out of business. The first is Atlantic City,” said Frank Fahrenkopf, who from 1995 to 2013 was the president and CEO of the American Gaming Association. Photo by Martha Stewart

GAZETTE: Next month, Massachusetts voters will decide whether to repeal the 2011 law that permits three casinos to be built across the state. How does the gaming industry view this debate? Is it watching?

FAHRENKOPF: My guess is that the companies interested in doing business here — I’m sure Steve Wynn, having just been awarded [a casino license in Everett], is very interested in it. Massachusetts is different, in my perception. Massachusetts has a higher percentage of people who gamble than any other state in the union. Most of it has been with the lottery over the years — it’s the richest lottery, I think, in the world — and they drive down to Mohegan Sun, or they drive down to Foxwoods, or they drive down to Rhode Island. So you have a population here that likes to gamble. The question is: Do you build casinos here? If you don’t build them, you’re going to have people still going down to Connecticut and down to Rhode Island to gamble, [but] you lose that tax revenue. You won’t have the capital investment, the economic development, the jobs. The industry produces a tremendous number of jobs, and particularly for those that are the hardest to place, from what we’ve seen historically around the country. The companies train them, the salaries are fantastic, the benefits are fantastic compared to most jobs. So it’s been a positive.

This is a unique industry. It’s not like any other industry in that you don’t have a right to have a gambling license. It’s a privilege granted by the state. And because of that, you can tax this business higher than most, a privilege tax, and then ordinary taxes on top of it. This is an industry that is unlike other industry in that it wants and desires and demands tough regulatory control with the appropriate law-enforcement oversight. And so it is tough regulation and law enforcement that provides the integrity of the business. … This industry wants tough regulation. I know there’s been some criticism of the Massachusetts board, whether it went too slowly. At the very first meeting of the Massachusetts Gaming Commission, 3½ years ago, they invited me to come, and I was their keynote speaker. I think they’re being very, very careful and don’t want to make any mistakes, and so they’re not going to be rushed into anything.

GAZETTE: While Springfield, Mass., is still struggling, the state overall has an unemployment rate consistently below the national average, and a high cost of living. Besides the temporary construction jobs and the tipped and hourly service jobs, what long-term benefits do casinos offer the local economy?

FAHRENKOPF: Last week in Las Vegas, they had what is called Global Gaming Expo (G2E), which I started 10 years ago. It’s the world’s largest gaming trade show. The head of the American Gaming Association introduced a report, and it talks about not only the tax revenue that’s generated, but also about that revenue turning over in the community — what the industry means to a state, what it means to the country. When you look, for example, at Pennsylvania, they’ve only been in the business now for four or five years. They’re now the No. 2 state in tax revenue. The tax revenue is just incredible. They’ve cut back on property taxes, so people get the savings. It not only generates taxes, but allows them to cut taxes on people. Plus, the jobs are very good jobs in these casinos. I don’t know Massachusetts well enough that I could really give you any distinct argument on those things. And that’s why I say, “Trust, but verify.”

GAZETTE: One of the primary criticisms against casino gambling is that the tax revenues generated often get eaten up by collateral costs like a spike in crime, the hiring of additional prosecutors, road and transportation burdens, mental health/addiction treatment, a rise in personal bankruptcies, and the shuttering of local, small businesses. Is that a fair picture of the true impact of casinos?

FAHRENKOPF: Whether it’s a lottery, whether it’s casinos, whether it’s racetracks, anywhere in the country in the 20 years that I worked for the industry, there are always these people who say these things are going to happen, that “the sky is gonna fall.” Having worked for this guy [points to picture of Ronald Reagan] I always liked what he said about working with the Russians: “Trust, but verify.” And you don’t have to trust the opponents or the advocates. You can go to states like Iowa, you can go to Illinois, you can go to Missouri, you can go and talk to mayors, chiefs of police, city managers, social welfare people, and see what they say about all of this. Go talk to those people, and what you’re going to find is that the sky doesn’t fall. These complaints that the anti-gaming folks have focused on just aren’t true.

We’ve been polling for years. About 80 to 85 percent of the American people consistently say they have no problem with gambling for themselves or others. There’s a hardcore 15 percent that oppose all forms of gambling. About 10 percent of that is people who are opposed on religious grounds, on moral grounds. They learned a long time ago — the opponents — that if you argue morality, the American people resent someone trying to push their morality on someone else. So they came up with an argument that somehow the social costs of gambling will exceed the economic benefit. There’s no question that 1 percent of the population — not only here, but in Europe and in Asia — meet the requirements of the National Psychiatric Association for pathological gambling. And that 1 percent, they’ll lose all their money, the families break up, they commit crimes, and so they’re sick people. But clearly, the economic benefits far exceed any of the social costs.

Get the facts right. Don’t just listen to someone on either side of the issue. When Disneyland and Disney World opened, guess what? Crime went up a little bit. Pickpockets go where money is and where people are; you get more traffic accidents. That comes not with gambling, that comes with any large event or place where you’re going to have large numbers of people. That’s just a factor of it. So you’ve got to factor that in. That’s a legitimate thing you’ve got to be concerned about.