March 30th, 2006

To Boost Revenues, States Wager on Lotteries

By William Bulkeley
Wall Street Journal

Fighting Casino Competition, Tracks Become 'Racinos'; Risk to Problem Gamblers

The giant signs on the old dog track show greyhounds and thoroughbreds. But the thousands of New Englanders crossing the wind-swept parking lots on a late winter afternoon are here for another way to gamble: slot machines.

Rhode Island isn’t one of the 11 states that allow casino gambling. Its state lottery commission is one of a growing number to embrace slots—one of the most popular and addictive forms of betting—as a way to increase revenue.

Paul Musard, an 82-year-old retired engineer from nearby North Providence, says he and his wife come every two weeks. This day, they’ve both won. Other days, they lose their self-imposed daily limit of $40 each. “It’s an enjoyment,” Mr. Musard says. “A lot of people spend $150 going out to dinner. I’d rather spend $40 here.”

State lotteries have always cast themselves as relatively benign alternatives to casinos, which many states have kept out for fear of fostering problem gambling. But some states have grown frustrated that they are losing revenue as locals travel to neighboring states or Indian reservations to gamble.

Now, with slot machines accounting for about 70% of revenue in America’s casinos, even states such as New York, which has shunned commercial casinos, are moving to tap the slot market. They are teaming up with struggling horse and dog tracks, slot-machine makers and casino companies to create venues that are remarkably similar to commercial casinos. The allure to gamblers: no wait for nightly or weekly lottery drawings.

Currently, after debate and approval by state legislatures, state-sponsored slot machines are in use in nine states: Delaware, Iowa, Maine, New York, Oregon, Oklahoma, Rhode Island, South Dakota and West Virginia. Pennsylvania is preparing to add them, and others are debating such a move.

Most states won’t allow old-style “one-armed bandits” with mechanical spinning reels. States prefer to call their machines “video lottery terminals,” or VLTs. They resemble the electronic slot machines with push-buttons that have become common in casinos. They are made by the same companies, but are often modified slightly. They don’t spit out coins for winners, instead printing receipts that must be redeemed with a cashier. Betting generally goes from one cent to $5, and prizes go up to $100,000 or more.

Rhode Island, which added its first slot machines at a run-down dog track in 1992, has been a pioneer in the move to slick, casino-like “racinos,” which are slots-only facilities located at racetracks. Last year, the state lottery chose a company headed by South African gambling magnate Butch Kerzner to run Lincoln Park, which converted its shabby clubhouse into a racino. The state’s slot machines now produce 80% of lottery revenues.

Later this year, the New York lottery expects Yonkers Raceway, just north of the Bronx, to open a racino with 3,000 slots. And casino giant MGM Mirage has been given authorization to open next year a huge state-sponsored slots facility at Aqueduct Racetrack in Queens—the first casino-style gambling facility within New York City. MGM will operate the facility, and will get a percentage of the proceeds.

Pennsylvania has authorized 14 sites to install 61,000 slot machines, which would make it second to Nevada in total slots. Maine, working with big casino operator Penn National Gaming Inc., recently opened a “Hollywood Slots” parlor on Main Street in downtown Bangor, the state’s third-largest city. Late last year, Oklahoma introduced state-sponsored slots. Legislators in Massachusetts and Maryland are seriously considering slots operated by their lotteries, too.

Already, states have installed about 86,000 slot machines. By the end of 2007, under laws already passed, they expect to add 49,000 more, a gain of 57%. There are currently about 675,000 slots in private venues, including casinos and cruise ships.

New Concern

All this is sparking new concern among foes of gambling. Studies of compulsive gamblers suggest that slots are among the most addictive forms of gambling, and that proximity to a casino is a risk factor for turning casual players into compulsive gamblers.

Keith Whyte, executive director of the National Council on Problem Gambling, in Washington, D.C., says lotteries are displaying “a willful ignorance about the impact of problem gambling...because they’re both the regulator and the operator.” Slot-machine venues are more troublesome than lotteries, Mr. Whyte says, because they create “an enveloping environment. For someone who uses gambling as a way to escape their problems, it’s a much more narcotic effect.”

The nonprofit council says the boom in state slots is coming amid indications that problem gambling is rising. Its national help line received 227,000 calls in 2005, up 23.8% from 183,328 calls in 2004. A 1998 Harvard Medical School analysis of numerous studies concluded that 1.6% of adults in the U.S. and Canada had suffered from gambling addiction, and an additional 3.85% had experienced mild to moderate gambling problems.

Lotteries officials say they are aware of criticism that slot machines contribute to problem gambling, but that their legislative mandate is to raise revenue for their states. Some lotteries make contributions to gambling-treatment centers. “There are a small number who have a problem,” says Gerald Aubin, executive director of Rhode Island’s lottery department. “Without the lottery they’d have other [gambling] problems.”

Julie Muto, a 48-year-old truck-stop cashier from Carlisle, Iowa, says she became addicted to playing slots in Iowa’s riverboat casinos, then lost her house, her car, her truck and her teenage daughter, who moved in with relatives. She spent a year in jail for passing a bad check and 18 months in a residential gambling-treatment facility.

When she got out last year, she says, she avoided casinos. But in December, while gassing up her car, she recalls, she saw one of the “TouchPlay” machines the state lottery had placed in hundreds of convenience stores and restaurants beginning in 2003. It looked like her favorite casino slot. She says she drove to a loan office, got a $200 loan on her car, returned to the store and started playing.

Ms. Muto, who says she is recovering again, told her story to a task force appointed by the governor during a campaign earlier this year to eliminate the machines. On March 14, Iowa legislators passed a bill, since signed by Gov. Thomas Vilsack, requiring the removal of all the machines later this year.

The American Gaming Association, a trade group, says that a small percentage of people can’t control their gambling, but disputes that gambling problems have increased in recent years.

Attractive Alternative

Some states regard boosting lottery revenues as an attractive alternative to raising taxes. Although some states have posted budget surpluses recently, the costs of Medicaid, retirement programs and education are rising fast in many states. “In the current environment, raising taxes is politically radioactive,” so expanding lotteries is very popular, says Sujit Canagaretna, senior fiscal analyst for Washington-based Council of State Governments.

Rhode Island’s lottery is expected to contribute $325.1 million to state revenues during the current fiscal year, or 10.6% of the projected total, and legislators expect lottery revenues to increase by 12% next year. In New York, in the fiscal year ended last June 30, the lottery brought in $2.06 billion, paying for 5% of education spending.

Yet lottery players appear to be growing bored with traditional numbers games. LaFleur’s Magazine, a trade publication, says revenue from lottery games in which players choose numbers for daily or weekly drawings fell 8.3% to $9.44 billion last year. Revenue from lottery-operated slot machines rose 15% to $3.6 billion, the publication says. All told, U.S. lottery revenues, which also include popular instant scratch-ticket games, rose 6% last year to $46.9 billion.

Until recently, most states rejected slots and casino-style venues due to worries they would lead to problem gambling, crime and social problems. But slots and casinos were spreading anyway. Indian tribes opened 390 casinos since 1989, many in states such as Connecticut and California that otherwise forbid casino gambling. States such as Mississippi and Missouri permitted “riverboat” casinos that never leave the dock. States without casinos watched their citizens cross state lines. Mr. Aubin of Rhode Island’s lottery department says the state has tried to make Lincoln Park more appealing for gamblers to prevent them from driving across the border into Connecticut to Foxwoods Resort Casino and Mohegan Sun Resort Casino, two popular Native American venues.

During the 1990s, the two companies that dominate the business of operating lotteries as state contractors—Gtech Holdings Corp., of West Greenwich, R.I., and New York’s Scientific Games Corp.—acquired their own slots technology and wooed slumping racetracks as allies in marketing to state regulators. Rhode Island was the first to adopt racetrack slots.

The declining popularity of racetrack betting has heightened the interest of track owners in hosting state-sponsored slot operations. At Yonkers Raceway, after attendance fell to a few hundred a night last year from 20,000 in the early 1970s, the track shut down. Under a plan authorized by the state legislature, Pittsburgh’s Rooney family, owner of the track and the Pittsburgh Steelers football team, intends to install 3,000 slot machines and to reopen later this year with a refurbished and expanded facility.

Without the addition of slots, “it wasn’t feasible to keep going,” says Frank Drucker, a spokesman for the racetrack. The legislation authorizing the changes requires harness racing to resume, a measure intended to support the state’s horse breeders.

Racinos like Rhode Island’s Lincoln Park use some of the same management techniques as casino floors. The money plugged into each slot game is evaluated monthly, and unpopular games are replaced. In another echo of casinos, Lincoln Park expects to soon team up with Delaware and West Virginia racinos to link hundreds of machines in the three states to create jackpots that can run into the six figures.

The slots at Lincoln Park and at an old jai alai arena in Newport have boosted Rhode Island’s lottery revenue to $1,370.95 per resident, the highest in the nation and far higher than the national average of $183.70, according to the North American Association of State and Provincial Lotteries. Rhode Island benefits from numerous visitors from Massachusetts.

This year, as part of a $125 million expansion, Lincoln Park will add 600 slots, a comedy club and several restaurants. One of the owners of the management company, Len Wolman, who until last year helped run the Mohegan Sun, says that when upgrades are finished next year, except for the lack of table games, customers will see no difference between Lincoln Park and a casino. (The state doesn’t permit Lincoln Park to give away alcoholic beverages, a common practice in most casinos, because 18-year-olds are allowed by law to play the slots, but not to drink.)

Frank Termini, a construction worker from Uxbridge, Mass., says he started coming a year ago and has been visiting two or three times a week in recent months because the construction business is slow. “I think every state should have this,” he says.

Some studies suggest that slots pose a bigger risk of problem gambling than traditional lottery games do. In a recent telephone survey of 2,800 Nova Scotia residents commissioned by the province and conducted by Focal Research Consultants Ltd. of Halifax, 3.6% of respondents said they had trouble controlling the time and money they spent on the province’s video-lottery machines. These players accounted for 53% of revenue, Focal Research reported.

In a 2004 study of 180 people being treated for problem gambling, published in the International Journal of Mental Health, Rhode Island Hospital psychiatrist Robert Breen concluded that they become addicted to slot machines in about one year, compared to 3 1/2; years for card games and about five years for racetrack or sports betting. According to a 1996 Minnesota study of 944 gamblers in treatment, published in the Journal of Gambling Studies, 37% of gamblers in treatment programs related their problems to slot machines, while fewer than 1% related them to lottery play.

Easy access to casinos appears to lead more problem gamblers into trouble. A 2000 federal study said that problem gamblers are about twice as prevalent within 50 miles of a casino as farther away. Maureen Corbett, director of the Center for Problem Gambling in Albany, N.Y., says that she opened a new office in Saratoga, N.Y., because calls to the telephone help line in Albany increased 64% after a Saratoga harness-racing track added slots in 2004.

Lincoln Park posts messages on walls and slots urging players to gamble responsibly. The messages include phone numbers for gambling help lines. The New York racinos plan similar measures.

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