RD157 - Gaming in the Commonwealth – November 25, 2019
Casinos authorized in SB 1126 are projected to generate about $260 million annually in state gaming taxes and have a positive, but modest, economic impact on local economies
Resort-style casinos could be built and sustained in Bristol, Danville, Norfolk, Portsmouth, and Richmond, according to estimates from The Innovation Group, a national gaming consultant. These estimates assume an initial $200 million to $300 million capital investment and an annual gaming revenue state tax rate of 27 percent (the national median). Casinos in these five locations are projected to annually generate about $970 million in net gaming revenue and approximately $260 million in gaming tax revenue for the state. (For comparison, the Virginia Lottery generates over $600 million annually after prizes are paid out.) About one-third of total casino revenue is projected to be generated by out-of-state visitors. Out-of-state visitors would contribute especially to the viability of the Danville and Bristol casinos because of their small local markets; this would also make them vulnerable if casino development were to occur in North Carolina and Tennessee.
Each casino is projected to employ at least 1,000 people, which would have a more meaningful impact in Bristol and Danville because of the relatively small size of their local labor forces. The projected median wage of $33,000 for casino employees would be below the median wage in the five SB 1126 localities. Not all casino jobs would represent a net gain of employment for the localities, and nearly half of the jobs would be low-skill and low-wage. Still, many casino jobs would require higher skills levels and pay higher wages.
Authorizing a casino in the Northern Virginia market is projected to increase state revenue and economic benefits
A casino in Northern Virginia, which was not authorized in SB 1126 but examined as part of this study, would increase statewide gaming tax revenue by an estimated additional $155 million (59 percent) and employ an additional 3,200 workers. A Northern Virginia casino is projected to attract substantial revenue from out-of-state customers and retain in state about $100 million that Virginia residents are currently spending at casinos in other states.
Five casinos authorized by SB1126 would be viable under a nationwide median tax rate of 27 percent
The tax rate applied to casino gaming revenue significantly affects the total gaming tax revenue collected by the state. However, higher tax rates can affect casinos’ profitability, and therefore the size and amenities of the casinos. Developers typically size the scale of their casinos to what a market can support, and there is no guarantee that developers will build a larger casino under a lower tax rate. However, casinos in more populous locations can typically remain profitable at a higher tax rate. SB 1126 did not include a tax rate although previous versions of the bill and other similar legislation included tax rates between 10 and 15 percent. TIG found all five SB 1126 casino markets would be able to support “resort-style" casinos at the national median tax rate of 27 percent.
Sports wagering and online gaming are projected to have smaller fiscal and economic impacts
A fully developed sports wagering industry in Virginia could generate up to $55 million in annual gaming tax revenue for the state, depending on how it is structured, and online casino gaming could generate about $84 million each year. Unlike online casino gaming, which would most likely depend on the opening of casinos, sports wagering could be implemented without casinos and could be offered sooner.
Beneficiaries of existing gaming would see proceeds decline, especially historical horse racing
Casino gaming is projected to negatively affect revenue generated by most forms of existing gaming in Virginia, which would in turn decrease the revenue available for the causes they support. The biggest impact would be to revenue generated by historical horse racing (HHR), a small portion of which supports Virginia’s revived live horse racing events. This revenue is projected to decline substantially (45 percent) from what it likely would have been without casino competition, and therefore tax revenue generated by HHR wagering would also decline. Lottery proceeds for Virginia’s K–12 public education are projected to decline slightly ($30 million or 3.6 percent). Charitable gaming proceeds are projected to decline slightly at the statewide level ($3.1 million, or 4 percent), with larger localized impacts to charitable gaming operations located near casinos and the organizations they support.
Expanding gaming in Virginia will increase the number of people at risk of harm from problem gambling
The prevalence of problem gambling in Virginia has not been measured, but evidence from national studies and states with a broad array of gaming options suggests that an estimated 5 percent to 10 percent of adults may experience gambling problems. While research does not consistently show an increase in the prevalence of problem gambling after the introduction of casinos in a state, more people will at least be at risk of experiencing problems as gambling opportunities increase.
The negative impacts of gambling are not limited to problem gamblers; research consistently shows adverse effects on others, most often a spouse or partner, but also the parents and children of problem gamblers, as well as other family members and close friends. The negative effects of problem gambling can be severe in a small portion of cases, and include financial instability and mental health and relationship problems.
Virginia’s existing problem gambling prevention and treatment efforts are minimal despite the public’s access to gambling through the lottery, historical horse race wagering, charitable gaming, and other avenues. States typically fund problem gambling prevention and treatment programs with gaming tax revenue, which should be considered even if the General Assembly does not authorize additional forms of gaming.
States award licenses for casinos using a competitive selection process and in-depth investigations of key personnel
Most of Virginia’s peer states use a competitive bidding process to award casino licenses, which creates market competition. Market competition helps ensure that the few available casino licenses are awarded to the most qualified and financially stable owners/operators who submit the most realistic and responsible proposals. A competitive selection process is especially important in a limited casino market in which the limited number of casino licenses effectively creates a monopoly for casino owners/operators. A limited casino market is contemplated in SB 1126, but a competitive bidding process is not included in the legislation. Virginia could use a competitive process to maximize the financial and economic value of casino license and minimize risks to the state, localities, and the public.
A state’s gaming regulatory board, or a designated selection committee, typically creates specific selection criteria for evaluating casino proposals and issuing an award to the proposal or proposals most qualified to successfully operate a casino. These criteria could include, for example, a specific capital investment threshold, plans to maximize positive local impacts, or plans to prevent and treat problem gambling, among other criteria.
Criteria can also be included to reflect the interests and preferences of state policymakers and host communities. For example, a host community may prefer the use of local assets (such as an existing building), resources (such as the local labor force), or local ownership to maximize local impact and reflect the character of the local community. The General Assembly could also stipulate that special consideration be given to awarding a license to a recognized tribal nation to own or operate a casino. Specifying such preferences in an RFP would be similar to the preferences that are commonly used in the state procurement process for goods and services, such as the preference for veteran-owned businesses.
In addition to vetting casino development proposals through a competitive selection process, states conduct in-depth background and financial investigations of casino executives and key personnel. These investigations ensure that the executives and other personnel who will be operating a state’s casinos have a sound financial history and that they do not have a history of financial or other crimes.
Expanded gaming would be a major new undertaking, even if oversight and administration were assigned to the Virginia Lottery
SB 1126 would assign administration and oversight of casinos and additional forms of gaming to the Virginia Lottery. Regulatory Management Counselors—one of JLARC’s consultants for this study—and other industry experts indicated that a lottery agency can effectively oversee gaming. However, lottery would need to increase staffing by approximately 100 positions; the Virginia Lottery Board’s role and composition would need to change substantially; and lottery would need to expand its longstanding mission of benefiting K–12 education. The state and lottery also would need to mitigate potential conflicts of interest that may arise from the dual responsibility of running a state lottery and regulating the private gaming industry. The state could also consider creating a stand-alone agency to regulate expanded gaming.
Regardless of whether lottery or a stand-alone agency were to oversee and administer expanded gaming, this oversight would be a major new undertaking for the state, costing at least $16 million annually. Lottery’s existing leadership and administrative structure may provide some limited economies of scale (an estimated $2 million annually) for overseeing casino gaming compared to the creation of a new stand-alone agency. However, the majority of lottery staff perform roles specific to lottery and would not offer any economies of scale for overseeing casino gaming.
Expanded gaming would generate positive net revenues for the state, but magnitude depends primarily on the gaming revenue tax rate
Before expenses and reductions to other forms of revenue, total state revenue from the five SB 1126 casinos and additional forms of gaming would range from approximately $154 million to $571 million. Total revenue would depend on the extent to which gaming is implemented and the gaming tax rate applied to individual casinos’ net gaming revenue. After deducting $61 million to $71 million in estimated administrative costs and reductions in HHR generated state taxes and lotterygenerated K–12 proceeds, estimated annual net revenue to the state could range from:
• as low as about $81 million with the five SB 1126 casinos at a low gaming tax rate (12 percent), no other additional forms of gaming, and the highest oversight operational costs; to
• as high as $510 million with a high casino gaming tax rate (40 percent), widespread availability of sports wagering (brick and mortar and mobile options), online casino gaming, and the lowest oversight operational costs.
The more realistic scenario is likely somewhere in between. For example, the state would be projected to see $367 million in positive net revenues using a 27 percent tax rate on the five SB 1126 casinos, revenues from other state and local taxes, broad availability of sports wagering (brick and mortar and online), and online casino gaming. These revenues would be offset by negative impacts from existing forms of gaming and administration and oversight costs, including a problem gambling prevention and treatment program.
Casino development could take four years after authorization
Virginia casinos would likely open approximately four years after casino authorizing legislation passes if the process were similar to other states. Passing authorizing legislation represents the beginning of the casino development process. Following authorization in other states, authorized localities interested in hosting a casino have held popular referendums. Once at least one locality authorized gaming, states have undertaken activities that can be arranged broadly into three major phases: establishing the oversight environment, casino development selection, and casino development and construction. Chapter 10 outlines the key elements and decisions typically found in casino authorizing legislation.
WHAT WE RECOMMEND
This JLARC report offers projections and considerations to be used when deciding whether to authorize and how to implement casino gaming or other additional forms of gaming. The report does not attempt to recommend whether Virginia should pursue additional forms of gaming, or what types of gaming should be pursued. However, the report does include several recommendations should the General Assembly choose to expand gaming in the Commonwealth.
• Establish a dedicated, stable funding source for problem gambling prevention and treatment, even if additional forms of gaming are not authorized;
• Include a requirement in any casino authorizing gaming legislation that:
o applicants for a casino license submit a responsible gaming plan as part of their application, and casino operators obtain accreditation for responsible gaming practices;
o casino licenses will be awarded through a competitive selection process, overseen by a designated committee whose members have experience in business finances and operations and represent state and local interests;
o an independent consultant, hired by the state, assess the accuracy and feasibility of casino development proposals; and
o owners and officers of any company vying for a casino operators’ license submit to and pass in-depth background and financial investigations.
The complete list of recommendations is available on page ix of the report.