NOVEMBER 1996 · VOLUME 17 · NUMBER 11

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T H E    N E W    G R O W T H    I N D U S T R I E S

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CASINOS, they are not just for mobsters anymore.

That is the message the U.S. gambling industry is intent on conveying. "It is time that the organized crime issue is put to rest," says a brochure from the recently created American Gaming Association (AGA). "Today, gaming-entertainment is a legitimate industry made up of publicly-traded companies."

Much has certainly changed for the industry. While there may be some vestigal ties between organized crime and casinos, gambling is now big business. The dominant players in the industry include companies such as Hilton Hotels, which owns Bally Entertainment, ITT Corp., which owns Caesars Palace, and MGM+Grand.

Desperate to separate its image from its criminal origins, the industry is intent on portraying itself as a family-friendly spur to economic development. In Las Vegas, casinos now contain amusement parks. And the industry is even attempting to replace the term "gambling" with "gaming" or "gaming-entertainment" -- descriptions meant to equate gambling with other forms of entertainment and to portray gambling as an activity the whole family can be associated with, if not participate in.

With their image brightened up, the attractiveness of the casino companies' claim to be engines of economic growth has enabled them to expand at lightening speed over the past decade. Casinos directly and indirectly employ one million people, asserts Kelley Gannon, communications director for the AGA, and, she says, they "generate a lot of [tax] revenue at the state and local levels."

Over the past decade, dozens of downtrodden and deindustrialized states and communities in the United States have decided to place their bets on gambling-led economic development, legalizing forms of gambling ranging from video poker to full-fledged casinos. Ten states now permit casino gambling, and Native American reservations, which are not governed by state law, have opened casinos in more than 20 states. The amount of legally wagered money has skyrocketed, rising 2,800 percent from 1974 to 1994, to $482 billion.

But in recent years, the odds have worsened for continued gambling expansion, as opponents of the industry have organized broad-based populist coalitions. These conservative-liberal coalitions oppose gambling for a wide array of reasons, says Tom Grey, field coordinator for the Chicago-based National Coalition Against Legalized Gambling. Their message: gambling is "not good economics, not good politics and not good for the quality of life," he says.

Facing an energized and organized opposition, the industry's lucky streak has run out; the vast majority of referenda to legalize gambling at the state, county or municipal level have failed in recent years. Opponents of gambling have registered 21 wins against only two losses in recent elections. In the November 1996 U.S. elections, seven more states and six counties and cities will hold referenda to legalize or expand some form of gambling.

Gambling opponents also succeeded in 1996 in winning passage of a federal law creating a National Gambling Impact Study Commission to investigate the industry. The Commission will examine all aspects and effects of the industry -- ranging from its effects on economic development to its relationship to organized crime to its connection to compulsive gambling -- and issue a report within the next two years.

In the next few years, the epicenter of the national gambling debate is likely to shift from state and local battlegrounds to Washington, D.C. The Commission's conclusions and recommendations are likely to set the agenda for gambling regulation at both the federal and state levels.

Playing for the jackpot

The success of gambling opponents in turning back the tide on casino growth has led most of the big casino companies to focus their expansionistic designs in the now three major gambling hubs in the United States: Las Vegas, Atlantic City and the Mississippi Delta.

The big companies' turn away from gambling expansion has not dimmed the interest of local business people hoping to hit the jackpot and win the right to operate legal gambling venues, however. It is local business interests that have introduced most of the current gambling expansion proposals.

In Ohio, for example, the main backer of Issue One, a proposed constitutional amendment that would allow for the creation of eight "riverboat" casinos spread throughout the state, is Alan Spitzer, a developer. The Spitzer family owns one of Ohio's largest car dealership chains.

The "riverboats" would be boats in name only. Like "riverboat" casinos elsewhere in the country, the Ohio casinos would be permanently moored to a dock. Casino operators do not want the boats to leave the shore, because once a boat leaves the dock, new customers cannot come aboard.

Spitzer first floated the casino proposal in 1990. Ohio voters sunk the idea, soundly defeating a Spitzer-backed initiative by a 62-38 margin. The opposition in 1990 enjoyed the backing of horse racing interests in Cleveland and Cincinnati, which did not want to face casino competition for the gambling dollar.

Learning from the 1990 debacle, Spitzer reached an accommodation with the race track owners; both the Cleveland and Cincinnati racetrack owners are expected to seek approval from a new licensing commission to operate casinos if the initiative passes. Edward J. DeBartolo, Jr., the owner of the Thistledown race track in Cleveland (as well as of the San Francisco 49ers football team), has showcased an artist's rendition of a riverboat he hopes to operate; companies he controls had anted up $1.4 million to the pro-Issue One campaign by mid-October. And the River Downs track of Cincinnati had donated $500,000.

The handful of other interests expected to seek approval to operate casinos if the constitutional amendment passes have also made high-stakes contributions to the pro-Issue One campaign. As of mid-October, Spitzer had contributed $1.5 million; Forest City Enterprises, a development company owned by the Ratner family in Cleveland, had contributed $1.9 million; and three other potential casino operators had contributed amounts ranging from $125,000 to $500,000.

As of mid-October, casino opponents had raised a little more than $400,000, about one-fifteenth of the amount raised by the proponents. But the opponents have fashioned a broad coalition, with Republican Governor George Voinovich leading an establishment group, Citizens for a Stronger Ohio, against the amendment. The Ohio Manufacturers Association has voiced opposition to the amendment (but the state AFL-CIO has endorsed it, accepting the argument it would create jobs). The strongest opposition is coming from churches, which are posting thousands of signs throughout the state.

Cannibalistic casinos

Whether promoted by big Las Vegas companies or local business people, the contours of the debate over casinos remains the same.

Proponents contend they will generate tax dollars for state and local governments and will foster local economic development.

The Ohio initiative specifies that casino revenues, after pay out of winnings to gamblers, will be taxed 20 percent, with 80 percent of the collected monies going to fund schools. Kate Hubben, a spokesperson for Yes on One, the group campaigning for passage of the gambling initiative, says the tax is expected to raise $180 million to $200 million for Ohio schools. "While that certainly won't solve" all of the problems facing the schools, she says, it would buy 62,000 computers and 4.5 million text books.

Hubben also says the casinos would create 21,000 permanent jobs, with an average salary of $25,000, as well as 17,000 temporary construction jobs.

Opponents counter that casinos do not create new wealth and that smaller enterprises do not bring new money into the region. Tom Smith, director of public policy for the Ohio Council of Churches, explains that the patrons of smaller casinos such as those likely to be built in Ohio come overwhelmingly from the local area; money they spend on gambling is money they would have spent at local stores on televisions or other consumer goods. Furthermore, he adds, nearby establishments such as restaurants tend to fail rather than flourish, because they cannot compete with the casino restaurants, which often offer large discounts designed to keep patrons inside the casino. Tom Grey, who has been active in the Ohio fight, says casinos "cannibalize existing businesses, sucking money out of them."

Local gamblers "divert money from other consumer enterprises in the local economy -- it is a basic reorganization of what the economy already has," says Robert Goodland, a professor of environmental design and planning at Hampshire College and author of The Luck Business."From that perspective, gambling does not make any difference" to the overall local economy, though it will place "stress on existing business."

The problem, Goodland says, is that a certain percentage of gamblers get addicted. In Iowa, according to Goodland, the percentage of compulsive gamblers rose from 1.7 percent in 1989 to 5.4 percent in 1994, approximately four years after riverboat gambling was introduced. Generally, he says, "the more kinds of gambling you have, and the longer you have it, the higher the rate of problem gambling."

Problem gamblers impose large social costs, through running up debts, committing crimes -- including not just theft and embezzlement, but child and spousal abuse -- and taxing the criminal justice system. Goodland calculates the cost of each problem gambler for 1993 at $13,200. Projecting that number onto Ohio's population, he says that if the number of problem gamblers rose by 1 percent of the adult population, the state would incur approximately $300 million in additional costs per year -- much more than gambling advocates hope to contribute in new tax revenues.

"Gambling is a very deceptive form of economic development," he concludes. "You provide monopoly enterprises to a few businesses, and they will do exceedingly well. You will create jobs -- but you will lose jobs in other industries, and you will lose revenues and taxes elsewhere."

An additional, serious criticism of legalized gambling is that it transfers money from the poor to the rich, since poorer people gamble with proportionally higher stakes and only rich people own casinos. While the AGA cites figures that the average casino goer has a $39,000 annual income, Smith retorts that lower income people lose a much higher percentage of their income in slot machines and at the gambling tables.

Placing their bets

A s anti-gambling forces aggressively combat gambling expansion proposals in Ohio, Washington, Colorado, Michigan, Arkansas, Louisiana and Arizona this election cycle alone, the big casino companies are facing a parallel challenge in the national arena. Like the Ohio players promoting gambling, the national players are also organizing and spending huge sums to advance their interests.

The big casinos' national organizing effort took off in 1994, after the Clinton administration floated a proposal to impose a gambling tax to pay for welfare reform. The proposal was quickly retracted in the face of obstreperous objections from gambling interests and senators from states with casino gambling and major horse track betting.

The incident "was a wake up call to the industry," says the AGA's Gannon. Recognizing that the sharp growth of gambling in the last decade -- in the traditional hubs of Las Vegas and Atlantic City, in the creation of a new hub in Mississippi, in various forms of gambling expansion in states across the country and on Native American reservations -- made the industry vulnerable to federal regulation or taxation, 14 large gambling operations created the AGA in June 1995. Membership in the AGA has now been widened to include other casinos, as well as gambling equipment makers and companies which provide services to the industry, including financial service providers such as Bear Stearns and Goldman Sachs.

The casinos tapped Washington, D.C. insider and power player Frank Fahrenkopf to head the AGA. Fahrenkopf is former chair of the Republican National Committee, and currently serves as co-chair of the Commission on Presidential Debates.

Flush with cash, the big casino interests are major campaign donors to both major parties, especially the Republicans. According to "Place Your Bets," a March 1996 report issued by the Washington, D.C.-based Center for Public Integrity, gambling interests gave more than $2.6 million in soft money to both parties from 1991 to early 1996, and contributed an additional $1.5 million to House of Representatives and Senate candidates.

The industry is hedging its bets with these huge contributions. Steve Wynn, head of industry leader Mirage Resorts, for example, raised more than $1 million for the Dole campaign by this summer, and more than $500,000 for the Clinton campaign.

A stacked deck?

T he major issue of concern for the industry over the past year has been the creation of the National Gambling Impact Study Commission.

The initiative for the Commission came from Senator Paul Simon, D-Illinois, who says he became interested in the issue when a member of his church committed suicide after gambling away her savings on a riverboat casino. Senator Richard Lugar, R-Indiana, co-sponsored the legislation in the Senate, and Representative Frank Wolf, R-Virginia, was the leading advocate in the House of Representatives.

"The industry fought [the proposal for a study commission] during the session," says Mike Briggs, press secretary for Simon. "They tried to keep it from being enacted."

The AGA's Gannon says only, "We asked and fought for a fair and balanced study of the entire industry," not just of casinos.

Once the pressure built for a commission to be formed, the dispute shifted to the Commission's powers, particularly its ability to subpoena industry officials as well as records from the industry. The compromise reached will allow the Commission to subpoena records only, although those records will not be made public.

Most parties seem satisfied with this compromise. Gannon says the compromise will prevent "intrusions into companies' rights," and will protect the privacy of the industry's customers. Grey says "the fact that we got a commission amazed everyone," and the subpoena power means the industry "can't hide the bodies and it can't hide the data."

What the Commission finds, however, will depend not only on what information it looks at, but who is doing the looking. And so the industry and its critics are now jockeying over who will be appointed to the Commission's nine spots. Three of those appointments will be made by President Clinton, two will be made by Speaker of the House Newt Gingrich, R-Georgia, one by House Minority Leader Richard Gephardt, D-Missouri, two by Senate Majority Leader Trent Lott, R-Mississippi, and one by Senate Minority Leader Tom Daschle, D-South Dakota.

Only Lott made his two appointments on time; he picked Mississippi radiologist Dr. Paul Moore, and James Dobson, the founder of the conservative Focus on the Family.

As the October 2 deadline for appointment of the remaining Commission members came and went without the remaining slots filled, rumors circulated that the industry was angling to get a casino executive on the panel. "We are not endorsing anyone," says Gannon. "We know our endorsement is the kiss of death."

Simon responded to the rumors by urging that only objective observers without ties to the gambling industry be appointed. "I think you have to have people of ability, people who have backbone and people who aren't going to be swayed by any kind of financial interest," Simon said. He worried that gambling interests were trying to "stack the deck," and said that "a commission of pro-gambling ringers could not be trusted to produce the unbiased report that is needed to help communities and states make informed decisions about the future of legalized gambling."

As the Monitor went to press, however, Gingrich announced his two appointees: J. Terrence Lanni, chair and chief executive officer of MGM Grand, one of the largest casino companies, and Kay James, dean of the school of government at Regent University in Virginia. Gingrich said in a statement that these appointments would lend "balance" to the Commission.

Consolidation and confrontation

While the Commission undertakes its two-year study, industry observers expect that Ohio-style battles may be replayed across the nation, but that the major casino companies will continue to focus their attention on the three gambling hubs.

(One exception to the concentration may be expansion south of the U.S.-Mexico border; with the major gambling companies lobbying heavily, Mexico is reconsidering its 60-year ban on casino gambling, and many of the big casino corporations are eager to enter a new Mexican market.)

Many of the major operations have announced dramatic expansion plans in the hubs, with Mirage leading the way. In Mississippi, four 1,000-room hotels are under construction and Mirage plans to build a $475 million, 1,800-room hotel and casino; in Las Vegas, Mirage is building an opulent, $1 billion, 3,000-room hotel and casino; and in Atlantic City, Mirage is planning a $500 million casino-theater complex.

But with the big casinos' geographical expansion apparently thwarted for the time being, the big companies are expected to seek growth in significant part through mergers and acquisitions. Industry analysts predict a handful of major casino companies -- Hilton, ITT, MGM Grand, Mirage Resorts and Circus Circus -- will swallow up most smaller competitors in the years ahead. Casino companies just below the top tier, such as Harrah's and those connected to Donald Trump, may survive independently.

Grey says he is not concerned about the increased political power that may accrue to the big companies as they expand in the hubs and as the industry consolidates. "I don't worry about them hunkering down in their lairs," he says.

The current project for anti-gambling forces, Grey says, is ensuring that there is no more geographic expansion. "But eventually we will have to go after" the major companies, he says.

He expects the conclusions of the National Gambling Impact Study Commission -- if it is not undermined by gambling interest members -- to highlight the social costs of gambling and create the political climate in which anti-gambling forces can change the way the big companies do business. One powerful tool, he suggests, would be suits by state attorneys general, similar to those now filed by numerous states against the tobacco industry, demanding compensation from the gambling industry for the costs incurred by states in dealing with compulsive gamblers.

"We are going to go after their predatory nature," says Grey.

Showdown in Ohio

Every local debate over gambling has its own permutations, and the Ohio controversy is no exception. Proponents of Issue One in Ohio are emphasizing a special everyone-is-doing-it argument. Studies commissioned by the Yes on One forces show that Ohioans would spend $1.3 billion on gambling outside of the state if the initiative fails, according to spokesperson Kate Hubben. Local riverboats, she claims, would recapture 70 percent of that sum, keeping more than $900 million in state. Tom Grey dismisses this claim outright. Citizens must reject this "race to the bottom" logic which holds that Ohio "should screw its own citizens before Indiana can screw them," he says. Opponents of Issue One have raised their own unique concerns, focusing on two unusual provisions of the proposed constitutional amendment. David Zanotti, chair of the Ohio Roundtable, a conservative public policy group, points out that the amendment would lock into place a 20 percent tax rate at a time when other states are considering tax rates as high as 35 percent and some studies show the industry can maintain profitability with a 50 percent rate. After the 20 percent rate is imposed, the amendment would create a "tax-free, fee-free zone" for the casinos, he says; the legislature will be unable to alter the rate in the absence of a subsequent constitutional amendment. A second unique feature of the proposed Ohio constitutional amendment is a provision requiring the state to assure the competitiveness of Ohio casinos versus gambling operations elsewhere in the country. Gregg Haught, treasurer and legal counsel for Yes on One, says the competitiveness language is designed only to ensure that, should the constitutional amendment pass, the legislature does not undermine the will of Ohio voters with restrictive enabling legislation that would, say, permit gambling only for two hours every other Sunday. He also says the competitiveness provision will have no effect once the legislature adopts a law establishing the regulatory framework for a newly legalized gambling industry. But Zanotti fears the provision is an open-ended invitation for the casinos to demand corporate welfare. Under his interpretation of the provision, casinos, citing competitive challenges from other states, could force the legislature to provide real estate tax abatements, state-provided infrastructural improvements or even direct subsidies. -- R.W.