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.
