Casino Gaming in Massachusetts

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In October 2007, Governor Deval Patrick proposed legislation that would legalize commercial casino gaming in the Commonwealth of Massachusetts. The draft legislation proposed by the Governor would allow for the development of up to three large destination-style casinos in different regions of the state. The Governor's proposal also specified the process by which casino developers would be selected and the minimum amount of licensing fees to be paid to the state by the developers.

Following the announcement of the proposal, the Greater Boston Chamber of Commerce engaged UHY Advisors FLVS, Inc ("UHY") to conduct an independent analysis of the potential casino developments. Specifically, UHY was asked to examine the potential gross gaming revenues, new jobs created and the socioeconomic impacts associated with the legalization of casino gambling.

Findings

Gambling in Massachusetts

Commercial casinos, racinos and tribal casinos currently operate in thirty seven states. While casino gaming is not available in the Commonwealth, Massachusetts residents have access to gaming in-state through the lottery, four racetracks, and charitable gaming events. Gaming revenues from these three in-state sources averaged $290 per adult resident in 2006. Massachusetts ranks 26th among the 50 states in gaming revenues per adult and 1st among states without casino gaming. A significant portion of the gaming revenues at the Connecticut and Rhode Island casinos are from Massachusetts residents.

This report assumes that all new casino development takes place within the framework established by the draft legislation and that only three casinos are developed in Massachusetts. Tribal authorities have additional options for casino development that may be open to them. There are two federally recognized Indian tribes in Massachusetts. In Massachusetts there are issues concerning the ability of tribes to pursue developments that are not located on tribal lands. Depending on the outcome of the legislation and the licensing process, it may be the case that one or both of the recognized tribes pursue the development of a casino outside of the framework in the draft legislation. Given the complex nature of the tribal gaming question, this report is confined to developments pursuant to the Governor's draft legislation.

Economic Impact of the Governor's Proposal

Casino Revenues

Revenues reported by the casino industry are typically reported in terms of gross gaming revenues ("GGR"). This is equal to the amount wagered at the casino less total winnings paid out. This study estimates that the current demand for casino gaming in Massachusetts is between 2.0 and 2.3 billion dollars of GGR. The study also conservatively estimates that $500 to $550 million of this total will be derived from out-of-state patrons. A significant portion of the Massachusetts casino revenues will be from the recapture of expenditures that residents currently make at casinos outside of the state. According to a national survey by Harrah's, 31 percent of Massachusetts residents report having engaged in casino gambling in the past year. This is similar to the levels reported in states that have already legalized the operation of commercial casinos. Massachusetts residents spend an estimated $800 million on casino gaming in Connecticut and Rhode Island. Since casino patrons generally prefer to visit casinos that are closer, a large proportion of these revenues would be recaptured by the Massachusetts casino developments. Additionally, casino facilities are often designed to draw patrons from outside of the region. This is known as the destination effect. The destination effect is generally greater for large, upscale casino developments and lower for riverboat casinos, slot parlors and card rooms. The destination effect is also stronger if a region possesses complementary man-made or natural resources to attract patrons from outside the region. Because of the larger draw of patrons from outside of the region, destination casinos tend to have the smallest negative impacts on local non-casino business per dollar of GGR generated.

Job Creation

This study estimates that permanent employment at the three proposed casinos will be between 17,000 and 21,000 based on a mid-point estimate of $2.15 billion in gaming revenues. The estimate of employment at the three Massachusetts casinos is based on employment and GGR at other large casino developments. Because of the large concentration of casino resorts in Nevada and Atlantic City, developments in these two locations may not be comparable to the potential Massachusetts developments. Therefore, this study estimates the number of jobs at the potential developments using two sets of benchmark facilities. One set of benchmarks includes Nevada and Atlantic City casinos while the other does not.

Estimates of construction labor requirements were derived from the cost of large, recent casino development projects. Construction labor inputs may be measured in terms of the total amount of labor necessary to complete a project or in terms of the average number of people employed during the project lifecycle. The former is expressed in worker-years while the latter is in terms of jobs. The projected total labor requirement for the initial construction is between 30,100 and 34,400 worker-years of labor. The lower and upper ends of the range are derived from different assumptions concerning the amount of labor used relative to the cost of construction. Dividing labor requirements measured in worker-years by a three year construction period results in an estimate of 10,000 to 11,500 construction jobs during development. The estimates are based on construction costs of approximately $4.3 billion and do not include additional jobs that would be created in the transportation sector or in the building material industry.

Earnings and Wage Levels

Employee earnings at casinos vary with the level of responsibility and degree of interaction with customers. Overall, casino workers in Massachusetts could be expected to earn an average of $36,000 to $44,000 per year, with considerable variation between job categories. Few positions in the gaming industry require advanced training beyond a high school diploma or GED. Casino workers generally receive benefits, including health insurance.

Regional Economic Impacts

This study surveys the academic research on the regional economic impact of casino
developments. The research supports the proposition that casino development has positive economic effects, although there are varying estimates of the size of the impact. The most significant impacts concern employment. Local employment levels increase and unemployment falls following the development of a new casino. Research on the regional impact of casino development also documents a decrease in welfare participation and transfer payments in the area hosting a new casino development.

Impact on State Revenues

The experience of other states indicates that the minimum $200 million up-front license payment in the Governor's proposal should not be a barrier to bidders. Illinois recently auctioned a license for a casino in the Chicago area. The highest of the seven bids was over $500 million. Experience with the competitive award of licenses in Pennsylvania also indicates a willingness of developers to pay in excess of the amounts specified in the Governor's proposal. A competitive award process may raise other issues for consideration by policymakers. The experience of other jurisdictions reveals that the award of licenses based on financial and non-financial criteria may give rise to litigation and delays in the award of licenses. Disputes may arise if the party that submits the bid with the highest payments is not awarded the license.

Gaming tax payments (referred to as "operating license payments" in the Governor's proposal) provide an annual source of state revenues from casino developments. The Governor's proposed minimum gaming tax rate of 27 percent of gross gaming revenues will result in a net increase in state gaming revenues after accounting for shrinkage in lottery proceeds. The gaming tax model developed herein accounts for the effect of economic growth, population growth, inflation and lottery mitigation on casino GGR and gaming tax revenues. Assuming that the casinos enter service in 2012, by that time the size of the market for casino gaming will have grown to an estimated $2.7 billion in GGR. The model allows for one-time, permanent declines in lottery revenues of 5 and 10 percent from the casino developments. With a 5 percent decrease in lottery revenues, the casino developments will generate $429 million in general purpose funds ($375 million in 2007 dollars). The Governor's proposal allocates half of these funds to transportation infrastructure and half to tax relief. With a 10 percent decrease in lottery revenues, the casino developments will result in $376 million of general purpose funds ($330 million in 2007 dollars). These figures are net of the amount allocated under the Governor's proposal to lottery, public health, and local impact mitigation.

The level of the gaming tax is another area of consideration for policymakers. The proposed gaming tax of 27 percent of GGR is high relative to the rates in states that have large destination casino developments. This higher gaming tax means that fewer funds will be available to the casino operator to support capital investment, marketing, and the requirements that the proposed legislation mandates. While a high gaming tax can enhance state revenues, it may conflict with other objectives of the proposal such as job creation and the sustainable economic health of the operators.

Summary of Economic and Fiscal Impacts

• GGR of $2.15 billion based on current conditions
• Projected GGR of $2.7 billion in 2012
• Projected additional general purpose funds of $376 to $429 million in 2012
• 17,000 to 21,000 permanent jobs at casino developments
• 10,000 to 11,500 construction jobs over a three-year period

Social Impact

The two leading surveys of problem and pathological gaming estimate that approximately 1.3 percent of the population in a given year experience behaviors consistent with problem or pathological gambling. Most estimates of the percentage of the population that have had gambling problems at any point in their lifetime range are between 2 and 5 percent. Researchers hypothesize that there is a link between an increase in gaming availability and the prevalence of problem gaming, crime and personal bankruptcy rates. Estimates of the size of the effect vary among studies with some finding little or no impact and others finding a significant impact.

However, in no instance did a study find a reduction in problem gambling, crime or personal bankruptcy rates following the introduction of casino gaming.

The Governor's proposal provides for the transfer of 2.5 percent of gross gaming revenues to mitigate the public health impact of the developments. At the mid-point estimate of $2.15 billion in GGR, the casinos would contribute an additional $54 million a year to problem gambling abatement. Under the Governor's proposal, the 2,5 percent of GGG will also go to mitigate the increased cost of public services (i.e., public safety, schools, etc.) in communities near the site of the casino developments.

While generally highlighting the negative impacts of casino gaming, the research also mentions certain positive public health aspects of casino development in the immediate area. The enhancement of employment opportunities from casino development may lead to improvements in public health outcomes as individuals that have steady jobs have improved physical and mental health outcomes and a higher probability of access to healthcare than unemployed or intermittently employed individuals.

Additional Issues

Should legislation allowing the development of commercial casinos in Massachusetts be enacted, there are a number of important issues that need to be studied and evaluated on a case by case basis. Many questions can only be addressed once the location, scale and type of facility have been determined. Some of the issues for additional and ongoing study include: the impacts of the casinos on local businesses and labor markets, the impacts on the value of housing and requirements for education spending, the oversight of the casino businesses, and community-level impacts.

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Methodology

The analysis in this study took place on three levels. First, UHY developed economic models of the demand for casino gaming and state tax revenues from ongoing casino operations. The model of gaming demand was based on casino patronage and expenditure patterns in other New England states. Given the potential revenues from the casino developments, UHY then developed projections of annual gaming tax revenues that would accrue to the Commonwealth. Second, UHY reviewed research by academics and government concerning the socioeconomic impact of the introduction of casino gaming. Third, UHY performed field research by interviewing policymakers and stakeholders to gather additional information and perspectives on issues concerning the legalization of casino gaming.