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The Future of Casino Gambling in Iowa

posted on April 18, 2014

Picking winners and losers.  Economic development spurring Iowa communities applying for casino licenses.  But not every community wins.  A conversation about Iowa's casino industry and the path ahead on this edition of Iowa Press.

Borg: This week's rejection of a Linn County investor group's application for a downtown Cedar Rapids casino is raising questions about Iowa's casino industry. A governor-appointed Racing and Gaming Commission tightly regulates the industry.  The commission's own market study consultants say the state has all the casinos its population base can support right now.  Those existing casinos are reporting flat or even declining revenue.  But the question is whether they should be protected against competition or operate in a free market.  In rejecting Cedar Rapids' application this week, four Racing and Gaming Commissioners opted for protecting.  One vote favored open competition.  Commission Chair Jeff Lamberti said, licensing a Cedar Rapids casino risks, as he used this word, destabilizing Iowa's gambling industry.  We're also questioning Commission Administrator Brian Ohorilko and Creighton University Economist Ernie Goss.  And Mr. Goss has co-authored a book entitled "Governing Fortune: Casino Gambling in America".  Gentlemen, welcome to Iowa Press.

Thank you.

Good to be here.

Borg: And across the table, Des Moines Register Political Writer Kathie Obradovich and Radio Iowa News Director Kay Henderson.

Henderson: Mr. Chairman, let's first start with the decision made on Thursday.  Why did you vote no on the Cedar Rapids application?

Lamberti: Well, I think as was indicated that I thought it would be destabilizing to the industry.

Henderson: What does that mean, destabilizing?

Lamberti: Well, Iowa has never had an open competition in casinos.  I think maybe a lot of people don't understand that. But from the beginning of the establishment of casino gaming in Iowa, it has been a regulated industry.  We have encouraged significant investment in those facilities upwards of hundreds of millions of dollars in some of them and in return we have been very cautious about allowing competitors to come in too close.  And we did commission two studies and it indicated that it was going to have a significant impact on at least two of our existing facilities.  And I thought that was going to be a significant change from the past and the potential to destabilize the market in terms of the impact on those facilities, loss of jobs, and we have not had that.  We have had a very stable and predictable gaming environment and I think that's important and that has been pretty consistent throughout the history of the Racing and Gaming Commission.

Henderson: Mr. Goss, for the benefit of viewers as an economist, you had submitted a bid to do one of those studies.  You were not chosen.  When you read those studies did they appear to you to prove the point that a casino in Cedar Rapids would destabilize the neighboring casinos?

Goss: It depends on what you mean by destabilize.  It is certainly true and it is one issue that really faces the Iowa casinos and it's an important one, there's competition in casinos and any casino that opens in Iowa, I don't care where you open it, is going to cannibalize some activity from another casino or other entertainment venues.  So the idea that I think is popular among some in the population is that well it's a monopoly, it's a pot of money.  Well, it's not a pot of money.  There is some cannibalization.  If you look at the newest casino that opened in northwest Iowa you see the reduction in the revenues of a casino close by.  You see some cannibalization even there.

Borg: That is the Larchwood way up in northwest Iowa, the Larchwood Casino?

Goss: Correct, in Sioux Falls, the metropolitan area of Sioux Falls.  And it did reduce the casino revenues in their nearest competitor and they are competitors.  It's important to recognize that. Casino-goers are very, I won't say fickle, but they like the latest and greatest. So you open a new casino, it draws from the older casinos and then individuals move on, gamblers do.

Obradovich: Well, Mr. Ohorilko, how much discretion does the commission have in deciding how much competition is too much competition? Is the law very prescriptive there? Or is there a significant amount of the commission's own judgment that goes in here?

Ohorilko: And that's a good question.  In the current statutory framework, the commission is tasked with determining the number and location of licenses across the state of Iowa.  And past commissions have set administrative rules to help them through that process.  And my experience I've had the opportunity to serve under three commissions that have went through an application process similar to this.  It's not an easy task for the commission members.  And through my experience when there is a question on any one of the criteria whether it is background, financing or in this case the economic impact or impact of existing operators it really makes that question and that evaluation process much more difficult.

Obradovich: But what does the law say about how the commission is to consider the economic impact on other licenses?

Ohorilko: The law is very broad in that it says that the commission shall determine the number and location of licenses. And so to comply with that they have established criteria within the administrative rules over the past to help them with that process.

Borg: You look like you wanted to say something --

Goss: I think, Kathie, I think another important point is this is an interior location.  Very important.  Most casinos across the U.S., I shouldn't say most but a high proportion, are located near the border.  Now, there's a reason why.  It's because you can pull from residents in another state.  Here you're talking about, in the Cedar Rapids case, in the middle of the state.  So you're obviously, how much are you going to draw from other states is going to be limited in that location.  Now, again, if you look at in Iowa's casinos I would argue the most successful ones are in Pottawattamie County.  That is one of the top casino destinations in the U.S., top 25.

Obradovich: Mr. Lamberti, I think of all the reasons you could have given for turning down this license.  The people of Cedar Rapids probably found it hardest to hear that you were doing it because of existing casinos and wanting to avoid taking too much away from them.  I mean, are you saying that even a great license has no chance if there are too many casinos close by?

Lamberti: Yeah, that's probably the case, quite frankly, because that is the system that we have in place, that is the system we have fostered.  I don't think Iowa wants a bunch of small what I would call slot parlors where they're very small, there's not major investment.  The fact of the matter is we have not only encouraged but required that these facilities be top notch so they have lots of amenities.  They have spas and golf courses.  And so when you're encouraging that kind of investment the issue of competition does come into play. And that is historic throughout the various times that new licenses have been added.  And I also commented if the legislature and the Governor want to see a different model they're certainly entitled to make a change.  But I think that brings issues of tax rates and all of that.  We simply have chosen in Iowa not to have an open competition model but to encourage significant investment and thereby somewhat protect.  And these studies that we had, the impacts were more than just double digit.  I mean, Riverside it was proposed there could be as high as 30-40% impact on them and I don't think the commission has ever gone much above single digits in approving a new facility.

Obradovich: Isn't it though also part of the commission's role to help maximize the revenue for the state?  And would two casinos, even if one took money away from the other one, wouldn't two casinos bring in more money for the state ultimately?

Lamberti: Potentially.

Obradovich: And if one of those casinos, one of the existing casinos went out of business, wouldn't the Cedar Rapids casino still bring in more money?

Lamberti: Well, in the Cedar Rapids case it was projected that about 80% would be existing gaming revenue, only about 20% of those numbers would be new.  It's not just about maximizing state tax revenue, it's also about the impact on local communities, jobs and so we factor in all of those.  If it was just about maximizing state revenues we would have a lot more casinos.

Borg: Mr. Goss, I'm interested in your opinion on that.  You've heard the rationale.  You've heard Mr. Lamberti say our hands are tied even though Mr. Ohorilko says they have some flexibility.  What I heard Mr. Lamberti say yesterday in saying if the Governor or the legislature wants to change this, they should give us additional guidance --

Lamberti: But we actually have broad discretion.  This is the model that the commission had adopted.

Borg: Mr. Goss?

Goss: Yeah, it's sort of -- without being glib, and I've said it on this program before, every community wants their own nuclear weapon.  It's somewhat retaliatory, in other words, trying to keep some of the revenue at home because obviously Cedar Rapids, the residents of Cedar Rapids are now going somewhere else, at least to some extent, to gamble.  So that's part of the motivation for Cedar Rapids.  I certainly understand it.  But you are, to a large degree -- as Kathie said -- when you add another casino you do increase the overall revenues for the state of Iowa but not to the extent you think.  In other words, you are cannibalizing some others.  And I think importantly, we need to understand that this is entertainment but it's a high tax entertainment and you are pulling for other restaurants in the area.  So if you open that in Cedar Rapids you are going to pull some activity from local restaurants.

Borg: Mr. Lamberti, you used the word destabilizing the industry and you meant financially destabilizing.  But in a way the current model destabilizes, and I don't know that there's a better remedy, destabilizes the societal fabric of an area.  You've got communities, particularly in this case in the eastern Iowa area, really competing almost like a political campaign against each other.  The Washington County group against the Linn County group.  What is there to stop Cedar Rapids now, highly unionized and union interest in bringing jobs with a new casino, what is to stop Linn County from saying, we'll boycott, from now on, the Riverside Casino?  That's a major population group that Riverside depends on.

Lamberti: Well, they certainly could do that but when it comes to the commission we talk about creating this stable environment and quite frankly we have been successful in doing it.  Our casinos are profitable.  We have not had major disruptions where we see facilities closing.  I can't solve all the world's problems.  I can decide what kind of industry we're going to have.  I know people in Cedar Rapids are disappointed with the decision but I think it was clearly the right decision because of that impact and the effect that we could see on the loss of jobs, the loss of revenue, the non-profit, that facility simply was going to have too big of an impact.  It was the right decision.  It was a tough decision but there has to be some limits.  Or the legislature needs to tell us that we do want a lot more casinos and I don't think that's what the people of Iowa -- so unfortunately it does fall on the commission to make some pretty difficult decisions.  But I think -- I've only been on three years so I'm not going to take credit for past success but I think they've done a really good job of fostering and building this industry in Iowa.

Henderson: You mentioned this guidance from the legislature in regards to the number of licenses.  You have also brought up the topic of taxes.  Do you think the tax rates should be changed?

Lamberti: No, I don't think the tax rates need to be changed with the current model. But if we're going to go to a model that is much more open competition I think it's something the legislature would need to consider because of if we're going to start opening casinos everywhere that wants one we are going to have a negative effect on the existing facilities and one way to address that is a tax rate.  For example, in Las Vegas I believe their tax rate is 9%.  Our effective rate is 22%, 24%. So they're an open competition model, their tax rate reflects that.  Our reflects a more regulated industry, not just on the regulation in terms of making sure the casinos are operated honestly and above board, but we're regulated in terms of where they are and what they look like.

Obradovich: Mr. Ohorilko, Mr. Lamberti just said that the casinos are stable, the financial market is stable.  But you just saw the financial reports, the new financial reports for all the casinos and from what I understand revenues are down.  So what is going on there?

Ohorilko: Yeah, it has been a tough environment for the facilities and the chairman is correct in that the environment is stable when you compare that to other jurisdictions.  In Iowa the facilities are doing well in comparison.

Obradovich: What do you mean by doing well?

Ohorilko: Well, doing well in that there are a number of jurisdictions that are still seeing a decrease in numbers, facilities closing.  We have not experienced that here in Iowa.  We have experienced a decline in revenue.  That has been consistent the past few years with the exception of the year when the Grand Falls facility had opened.  But if you were to factor that out the numbers would have been down for that.

Obradovich: What is the reason for that?  Why are we seeing this decline? Is it all just economic -- the wide economy being slow?  Or are there other reasons?

Ohorilko: I think part of it is due to the economy.  I think the past two studies that the commission has requested to be conducted, the one in 2008 had mentioned that the industry in Iowa was approaching a saturation point.  The one in 2013, again, had mentioned that. And so I think with the economy the way it is and the markets having more casinos, more gaming positions, it is difficult for those facilities.

Obradovich: Mr. Goss, I just wanted to -- I'll let you make your comment but chew on this also.  Are communities just kidding themselves if they think that a casino is going to really kick start economic development in a community?

Goss: They are kidding themselves. It's entertainment.  It's entertainment.  But back to the point of growth, the Iowa casino revenues have grown more slowly than national but not too much. Now, why?  Well, look at Kansas, Governor Sebelius, I'm sure none of you remember her, but under her administration they okayed four new casinos, commercial casinos in Kansas, they have only opened three.  I did the analysis in the one in Kansas City, Kansas and I did the analysis on a full destination casino.  It was somewhere between $500 million and $1 billion, say $700 million, not enough.  Not enough of a population base because you're competing with Kansas City, Missouri, not just Kansas.  And the company I was working with decided to pull out.  There was just not enough.  So what did they open? Something less than what I would call a destination casino.  If all the casinos could be destination casinos, meaning people coming in from out of the region, out of the state, they would be great generators of economic development.  They're not.  Most of them are convenient, what I call convenience casinos, meaning they're drawing from their own population, cannibalizing other entertainment venues.

Henderson: Mr. Lamberti, if I were a resident of Jefferson, Iowa and trying to read the tea leaves here on your decision on Cedar Rapids, would I be encouraged or discouraged?

Lamberti: I think I would say neutral at this point.  I'm not sure that we're necessarily looking at an apples to apples comparison.  We haven't spent a lot of time on Greene County and that is why we like the separation because we want to put our time into each of them.  But even the initial read of the market studies shows some differences in terms of the cannibalization and where it comes from and it is much more diverse and spread out whereas in Cedar Rapids it was honed in directly on a couple of existing facilities at very high amounts. So I'm not sure how the individual commissioners are going to look at that.  But I would not take much away from the Cedar Rapids decision as an indicator. Now, I would say both of those market studies also said there's not a lot of market share left in this state.  But, you know, each commissioner gets to decide what weight to put on those studies.

Henderson: But Mr. Goss made the point that this is an interior casino.  Is that a huge negative factor?

Lamberti: It potentially could but as you look on a map of where Jefferson is located it may be something of a donut hole and it would be a much smaller facility. That matters as well whereas we were looking at $160-$180 million facility in Cedar Rapids, we're probably talking about a $30-$40 million facility.  That matters as well.

Henderson: Mr. Ohorilko, your commission also regulates the greyhound industry. As some Iowans may know there has been legislative activity in regards to ending greyhound racing, which is operating at tracks in Council Bluffs and Dubuque associated with those casinos.  Can you tell us if they have a negotiated settlement that will bring about an end to greyhound racing?

Ohorilko: At this point they are still in discussion and from what I understand they are making much more progress than they have ever in the past with these discussions.  And so I think it's a healthy exercise for the industry, both the greyhounds and the facilities, to sit down and try to determine what is in the best interest of both.  The relationship between the parties, it's economic and maybe hasn't been the best the past few years.  And so my understanding, it's far from a done deal at this point, but is that they have progressed to a point that is beyond where they had discussions in the past.

Henderson: Mr. Goss, it seems as if this deal will involve the casinos paying greyhound breeders and owners a lot of money not to race anymore.  Iowa would be the only state in the country to have these sort of reparations.  As an economist what do you think about that?

Goss: Well, first off, we're talking about betting so let me put a bet on this.  My bet is the racing, greyhound racing is going to go away and we're seeing it going away across the nation because gamblers just can't, they're in some cases so addicted they can't wait for the dogs to go around the track.  They need to lose it instantly.

Henderson: So why should the state, if there's a lack of interest in this form of gambling, why should there be these huge payments to the greyhound industry?

Goss: That's a great question.  But the problem that I see is casino gambling comes in, first off, we're going to require that the boat have cruises.  That's the first thing.  Then we'll remove that requirement, they only have cruise once.  We'll remove that requirement, they'll simulate a cruise.  Then finally now we're moving interior, moving is hardened.  And so the problem is that what the casinos do, in my judgment, is they're in some cases so addicted to some that it drives out some of these entertainment venues that I think the population enjoys, some of the population.

Borg: Mr. Ohorilko, I need to go to another subject here and that is up in the Sioux City area.  Bring us up to date on the Argosy Casino.

Ohorilko: Yeah --

Borg: That is going out of business.  Why?

Ohorilko: It is. We had a situation where -- Iowa law contemplates for two license holders for any particular location. You have a for-profit operator and you have a non-profit operator.  It is unique to the state of Iowa, it has been very successful in distributing dollars to local communities.

Borg: But they got into a fight.

Ohorilko: They got into a fight.  The agreement expired, first time ever in the state of Iowa where an operating agreement between a non-profit and a for-profit entity expired.  The commission, Chairman Lamberti and members of the commission had encouraged the parties to sit down, negotiate, work it out, reach an agreement.  Those discussions, those encouragements took place and they never got a deal done.

Obradovich: Mr. Lamberti, if you're licensee and your operator can't get along in Sioux City, why not just bring another operator into Sioux City?  Why can't another community now have an opportunity to bid for that license?

Lamberti: Well, the commission hasn't had a history of removing licenses from a community that have had one.  That was probably number one.  And in that particular case the desire of the commission for many years was to move that boat from a boat to a land-based facility. And so those interests were already in the works and so when the agreement lapsed we took advantage not only of the fact that they no longer had an agreement but we were going to use that to move to land-based because we have been a commission focused on adding amenities and driving more revenue when we can and we'll get more revenue out of that facility when we move to a land-based facility.

Obradovich: But this is the first time this has ever happened in the state of Iowa.  Are these truly unique conditions? Or might there be other licenses that might be in jeopardy around the state?

Lamberti: Well, you can't say never but most of our agreements are much more long-term and they have options that will take them out many years. So we see it as a fairly unique set of circumstances unlikely to be repeated, can't say it wouldn't be but I think it's highly unlikely.  And quite frankly they let this thing go up to within months of it ending before they started negotiating.  That is probably a failure on somebody's part to have that kind of an investment and allow that to happen.  But I just don't see it repeating itself.

Obradovich: This is going to end up in court though, right?

Lamberti: It is already in court.

Goss: This just points out this fantasy, for example, some of these casinos, not necessarily in Iowa, are require to be on the water.  They're in puddles for goodness sakes. They're called that.  In other words, these fictions and what we're seeing, back to your question Kathie, is we're seeing it in Mississippi moving to land-based.  In other words, there was a requirement that you be on the water and because of Katrina now they're moving into land-based.  Why they're moving to land based? Again, removing the fiction that this is somehow this nostalgic riverboat gambling. Well, it's not, let's remove that nostalgia, let's remove the fantasy, this is gambling.

Henderson: Mr. Ohorilko, you keep track of gambling trends.  There has been a lot of discussion about legalizing Internet gambling and having states manage that.  Where, in your opinion, is this headed?

Ohorilko: Well, I think, for Iowa, we are in a wait and see approach.  Certainly in other jurisdictions that is not the case.  In Nevada and New Jersey, Delaware have all legalized various forms of Internet gambling.  Some limited strictly to poker, some all forms of online gambling.  And so it's something that as a commission we are closely monitoring and will be prepared if the legislature were to ever authorize it.

Obradovich: I just want to have a last, very quick, answer here.  What do you think would happen in the state of Iowa if gambling just went away?  What would happen to the budget? What would happen economically, Mr. Lamberti?

Lamberti: Well, I don't think it would hurt the state budget to a point that they couldn't survive because, as you know, they only allow I think it's $60 million of gaming revenue to flow into the general fund.  It would hurt on infrastructure projects because that has funded a lot of infrastructure projects in Iowa.  It would be a major loss of jobs.  I agree, gambling is entertainment, but this has developed into a very significant industry employing thousands of people.  That would hurt.

Obradovich: Mr. Goss, would Iowa be better off or worse off?

Goss: I think in terms of the nation we would be better off without the casinos in the sense that it is 1% of Iowa's GDP, that is what we'll call AGR, the adjusted gross rate --

Borg: I have to leave it there.  Thank you, thank you very much for being with us today. Next week on Iowa Press we're tapping political party insiders for insight and analysis.  Iowa Public Television, as you know, will be producing an Iowa Press Debate involving the five republican candidates seeking the Senate seat that retiring democrat Tom Harkin is vacating early next year.  Now, that Republican Senate Candidate Debate is Thursday night at 7:00.  And on our Iowa Press program the following day we'll be questioning republican activists Doug Gross, Craig Robinson and party chair Danny Carroll.  Same times, 7:30 Friday night, noon on Sunday.  I'm Dean Borg and thanks for joining us today.


Tags: Brian Ohorilko casinos Ernie Goss gambling Iowa Jeff Lamberti news politics