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Penn National's Plans in Rosemont

13 April 2004

A shuffle through the Gaming mailbag, which is chock full of questions raised by Penn National's $506 million bid to purchase the Emerald Casino license, build a casino in Rosemont, then turn it back to the state in exchange for a long-term contract to manage the casino.

Q. Months ago, you wrote that state ownership of casinos was a bad idea. Now that the bids are in for the license, and the one that would bring the most money would have the state as owner, do you still think so?

Gail, via e-mail

A. Absolutely. It's had to be tempting for the Illinois Gaming Board to accept a bid that would not only put at least $150 million more in state coffers up front than any other bid, but also leave the state all revenue - minus a 10 percent management fee and operating expenses - instead of "only" up to 70 percent of gaming income. That the field ultimately was narrowed to three bids for less money should tell you that even within the board, there are reservations about a plan to turn the license back over to the state.

State ownership remains a terrible idea on a couple of fronts.

First, state ownership means that the same entity owns and regulates the casino. The fox guarding the henhouse is far from the ideal situation in a business that handles billions of dollars a year in cash.

The noises out of the governor's office about appropriate safeguards are almost amusing. Are we talking about the kinds of safeguards that prevented Paul Powell from stuffing shoeboxes with loot when he was Illinois secretary of state, or the safeguards that headed off the tollway scandal, or those who stopped the trucks-for-hire mess? Without an outside agency regulating a state-owned casino - one with the authority to levy large fines and send the cash to Timbuktu if necessary - there are no appropriate safeguards.

Second, state ownership would put government in direct competition with private enterprise.

That alone should raise a few eyebrows among those who believe in a free-enterprise system, but it gets worse. State ownership would put government in direct competition with businesses whose largest recurring expense is a tax they pay to the owners of their new competition.

Ugh.

Q. OK, no doubt you've been following this whole Emerald mess. The bids are in, and one would give the license to the state, while the others are for much less money. Let me put it to you. What would you do if you could decide who gets the license?

J.L., via e-mail

A. If someone came along and made me state casino czar, with authority to do what needs to be done without worrying about the politics of getting legislative approval and the governor's signature, I'd do what should have been done in the first place:

First, I'd reject all bids, including Penn National's proposal to let the state own the casino. Next, I'd roll back the gaming tax to levels that were in effect before the hike to a 70-percent max was enacted last summer, and I'd increase the legal number of gaming positions per license from 1,200 to 2,000.

That done, I'd open the license for rebidding. Under those conditions, the major casino companies would show far more interest than they did with their lukewarm bids this time around. We could expect bids of $600 million, perhaps even $700 million in the right location.

On top of that, the new conditions would spark a round of hiring and construction. Tax revenue would increase as operators worked to bring customers back into Illinois who switched to Indiana casinos when the tax hike prompted admission fees and other charges.

Q. Are you a bit chagrined by the bids for the Emerald Casino license? It seems to me you wrote that the increase in the gaming tax would decrease the value of the license. Looks like the state's going to get its money after all.

No name, via e-mail

A. Au contraire. The bids proved the point. It would have taken bids of $500 million-plus to meet the $150 million-plus in Emerald liabilities the state had agreed to pay out of the sale of the license, and still funnel $350 million to state coffers as Gov. Blagojevich had budgeted.

All but one of the bids fell far short of that level. The state is going to wind up with about $200 million or so of the sale price.

The one bid that was up to the hoped-for price is from a company that doesn't want to keep the license. Penn National was basically saying it doesn't need to be a player; it can make more money just dealing the cards.

If it had secured its management deal, which would have given Penn National 10 percent of gaming revenue, the company could have just tried to generate as much revenue as possible without worrying about the state gaming tax that competitors face. That tax makes excess revenue unprofitable in some situations, but Penn National would never have had to face that.

The handling of the Emerald situation along with the gaming tax increase last year smacks of hidden agendas. The government's actions have depressed the value of gaming licenses to private companies by so much that it would have been difficult for anything but a government-owned casino to meet the budgetary goals that were set for the sale of the Emerald license. This whole process needs a serious rethink.

Recent Articles
Best of John Grochowski
John Grochowski

John Grochowski is the best-selling author of The Craps Answer Book, The Slot Machine Answer Book and The Video Poker Answer Book. His weekly column is syndicated to newspapers and Web sites, and he contributes to many of the major magazines and newspapers in the gaming field, including Midwest Gaming and Travel, Slot Manager, Casino Journal, Strictly Slots and Casino Player.

Listen to John Grochowski's "Casino Answer Man" tips Tuesday through Friday at 5:18 p.m. on WLS-AM (890) in Chicago. Look for John Grochowski on Facebook and Twitter @GrochowskiJ.

John Grochowski Websites:

www.casinoanswerman.com

Books by John Grochowski:

> More Books By John Grochowski

John Grochowski
John Grochowski is the best-selling author of The Craps Answer Book, The Slot Machine Answer Book and The Video Poker Answer Book. His weekly column is syndicated to newspapers and Web sites, and he contributes to many of the major magazines and newspapers in the gaming field, including Midwest Gaming and Travel, Slot Manager, Casino Journal, Strictly Slots and Casino Player.

Listen to John Grochowski's "Casino Answer Man" tips Tuesday through Friday at 5:18 p.m. on WLS-AM (890) in Chicago. Look for John Grochowski on Facebook and Twitter @GrochowskiJ.

John Grochowski Websites:

www.casinoanswerman.com

Books by John Grochowski:

> More Books By John Grochowski