Sunday, March 19, 2006
Got The Slots - Where's The $ Billions
While seeking information for my last post on Pennsylvania lobbyist-disclosure rules, I learned about some other current issues worthy of discussion. Since the Governor's toothless edict on lobbying is about money influencing political decisions, it might be interesting to look at political decisions influencing money. Let's start with his signature issues of slot machine gambling and what may be a $2 Billion giveaway.
The gambling initiative was supposed to bring about major reductions in our property taxes while benefitting the schools, among other things. But it ran afoul of school districts that refused to sign up. Now there are different bills pending to reduce property taxes for some or all property owners, using mostly future gambling income or supplementing that with new taxes on sales or income. Reforming the way we pay for education is a story for another time.
For now, focus on what's missing in the current discussions and legislation ; namely how to allocate the $2-3 Billion that the state should get up front from the sales of those slot machine gambling licenses. $2-3 Billion ? Where?? Good Question.
You don't hear about it, because most of that money has been or is being given away by the State to a smal number of real estate and gambling investors, according to this Alleghany Institute for Public Policy report (pdf here). It's a classic case of political decisions influencing money - often, as here, not to the advantage of the citizens.
This PittsburghLIVE article calls it The state's $2.1 billion giveaway: "Legislation authorizing the slot machines set the price for a slots license at $50 million, even though experts argued that price would leave money on the table. One expert, Jeff Hooke, chairman of the Maryland Tax Education Foundation, claimed that 'by the time the remaining licenses are flipped, the State of Pennsylvania will have lost over $2 billion.'
Government officials rejected the arguments for holding an auction and now appear to have been terribly wrong. "
Once the State decided to issue 14 gambling licenses, those 14 licenses became a limited number of 'shares' in a state sponsored gambling monopoly and worth a considerable amount of money. The state knew this and planned to sell the licenses; but the real question was how to get the most money or the best price for them. When in doubt about fair value, a market approach (e.g. an auction) is a good idea. It's the way the federal government sells communications spectrum for cell phones and other uses. That was the approach that Mr. Hooke advised and that the State did not take; instead it is selling each license for $50 Million or a total of $700 Million (or $0.7 Billion).
Was that the best, or even a fair price? Probably not. Based on an analysis of the sales of three racetracks which will obtain licenses, there is a good case that the State could have sold each license for $200 Million, making the14 licenses worth a total of $2.8 Billion. If so, the State lost over $2 Billion in sales revenue. That would sure go a long way to help reduce property taxes.
Let's follow the money anaysis of three racetrack transactions in the article :
"The parent company of the Meadows, Magna Entertainment, which bought the track in 2001 for $53 million, just recently sold the track for $225 million -- an increase of $172 million or 325 percent. Pocono Downs, with an estimated value of $20 million, was sold for $280 million -- an increase of $260 million. Harrah's bought a half interest in Chester Downs for $275 million.
In addition to these payments, the new owners will still have to pay $50 million for the licenses themselves and for improvements at the tracks to accommodate the slots machines. The new owners of Pocono Downs, the Mohegan Tribal Game Authority, has estimated it will cost $175 million to upgrade the facility to handle slots while Harrah's estimates it will spend $100 million on upgrades at Chester Downs."
Looking at the difference between the racetrack "value" before slot licenses and after indicates, for example, that the ability to have slots increased the real estate value of Pocono Downs by $260 Million. Since a very savvy casino operator bought the track with the intention of paying another $50 Million for the license, it's reasonable to say that the total increased value of Pocono Downs, due solely to the ability to operate gambling there, was at least $310 Million . The State created that increased value by legislation that authorized gambling and allowed for one of 14 slot machine licenses to go to Pocono Downs. By selling the license for $50 Million, the State left a $260 Million windfall profit for the real estate investors who owned the track.
A more market-savvy approach, like an auction, would have kept a large part of that windfall profit for the State by forcing real estate investors and gambling operators to team on bids for the licenses. And they might well have bid more than $310 Million for slots at Pocono Downs. We don't know how much more, if any; but we do know that a very savvy gambling operator is planning to spend another $175 Million to upgrade the facilties. That tells us there is a lot of money for slots investment in a very limited number (14) of licenses. If the real value is about $300 Million, instead of $50 Million, then the State might have gotten a total of $4.2 Billion for the 14 licenses or $3.5 Billion more than it will get under the current approach.
The article follows the same logic to an even more conservative estimate of lost revenue:
"If the slots licenses can be very conservatively estimated to average $200 million each, then the 14 licenses (seven at racetracks, five stand-alone parlors, and two resort casinos) could have netted the commonwealth $2.8 billion. Instead, by selling them at $50 million, the state will collect $700 million, leaving $2.1 billion on the table -- the amount Mr. Hooke, as quoted earlier, estimated. Even if the number is $1.5 billion, it still represents a huge amount of money the state should have gone after rather than ill-advisedly settling for $50 million per license."
Well, that's the story of how poltical decisions can influence money. The decisions created a gambling industry, causing money to flow to a few investors and operators but did not get a very good price for the increased value created. The tax payer lost on the deal and can look forward to getting property tax reductions at the added cost of sales or income tax increases.
Some deal! The Governor got his Slots. Where's our Billions??
PS - If you are concerned about the corrupting influence of money on politics, look first and hard at how politcal decisions influence money and profits. Fix that process and the lobbyist problem will take care of itself.
The gambling initiative was supposed to bring about major reductions in our property taxes while benefitting the schools, among other things. But it ran afoul of school districts that refused to sign up. Now there are different bills pending to reduce property taxes for some or all property owners, using mostly future gambling income or supplementing that with new taxes on sales or income. Reforming the way we pay for education is a story for another time.
For now, focus on what's missing in the current discussions and legislation ; namely how to allocate the $2-3 Billion that the state should get up front from the sales of those slot machine gambling licenses. $2-3 Billion ? Where?? Good Question.
You don't hear about it, because most of that money has been or is being given away by the State to a smal number of real estate and gambling investors, according to this Alleghany Institute for Public Policy report (pdf here). It's a classic case of political decisions influencing money - often, as here, not to the advantage of the citizens.
This PittsburghLIVE article calls it The state's $2.1 billion giveaway: "Legislation authorizing the slot machines set the price for a slots license at $50 million, even though experts argued that price would leave money on the table. One expert, Jeff Hooke, chairman of the Maryland Tax Education Foundation, claimed that 'by the time the remaining licenses are flipped, the State of Pennsylvania will have lost over $2 billion.'
Government officials rejected the arguments for holding an auction and now appear to have been terribly wrong. "
Once the State decided to issue 14 gambling licenses, those 14 licenses became a limited number of 'shares' in a state sponsored gambling monopoly and worth a considerable amount of money. The state knew this and planned to sell the licenses; but the real question was how to get the most money or the best price for them. When in doubt about fair value, a market approach (e.g. an auction) is a good idea. It's the way the federal government sells communications spectrum for cell phones and other uses. That was the approach that Mr. Hooke advised and that the State did not take; instead it is selling each license for $50 Million or a total of $700 Million (or $0.7 Billion).
Was that the best, or even a fair price? Probably not. Based on an analysis of the sales of three racetracks which will obtain licenses, there is a good case that the State could have sold each license for $200 Million, making the14 licenses worth a total of $2.8 Billion. If so, the State lost over $2 Billion in sales revenue. That would sure go a long way to help reduce property taxes.
Let's follow the money anaysis of three racetrack transactions in the article :
"The parent company of the Meadows, Magna Entertainment, which bought the track in 2001 for $53 million, just recently sold the track for $225 million -- an increase of $172 million or 325 percent. Pocono Downs, with an estimated value of $20 million, was sold for $280 million -- an increase of $260 million. Harrah's bought a half interest in Chester Downs for $275 million.
In addition to these payments, the new owners will still have to pay $50 million for the licenses themselves and for improvements at the tracks to accommodate the slots machines. The new owners of Pocono Downs, the Mohegan Tribal Game Authority, has estimated it will cost $175 million to upgrade the facility to handle slots while Harrah's estimates it will spend $100 million on upgrades at Chester Downs."
Looking at the difference between the racetrack "value" before slot licenses and after indicates, for example, that the ability to have slots increased the real estate value of Pocono Downs by $260 Million. Since a very savvy casino operator bought the track with the intention of paying another $50 Million for the license, it's reasonable to say that the total increased value of Pocono Downs, due solely to the ability to operate gambling there, was at least $310 Million . The State created that increased value by legislation that authorized gambling and allowed for one of 14 slot machine licenses to go to Pocono Downs. By selling the license for $50 Million, the State left a $260 Million windfall profit for the real estate investors who owned the track.
A more market-savvy approach, like an auction, would have kept a large part of that windfall profit for the State by forcing real estate investors and gambling operators to team on bids for the licenses. And they might well have bid more than $310 Million for slots at Pocono Downs. We don't know how much more, if any; but we do know that a very savvy gambling operator is planning to spend another $175 Million to upgrade the facilties. That tells us there is a lot of money for slots investment in a very limited number (14) of licenses. If the real value is about $300 Million, instead of $50 Million, then the State might have gotten a total of $4.2 Billion for the 14 licenses or $3.5 Billion more than it will get under the current approach.
The article follows the same logic to an even more conservative estimate of lost revenue:
"If the slots licenses can be very conservatively estimated to average $200 million each, then the 14 licenses (seven at racetracks, five stand-alone parlors, and two resort casinos) could have netted the commonwealth $2.8 billion. Instead, by selling them at $50 million, the state will collect $700 million, leaving $2.1 billion on the table -- the amount Mr. Hooke, as quoted earlier, estimated. Even if the number is $1.5 billion, it still represents a huge amount of money the state should have gone after rather than ill-advisedly settling for $50 million per license."
Well, that's the story of how poltical decisions can influence money. The decisions created a gambling industry, causing money to flow to a few investors and operators but did not get a very good price for the increased value created. The tax payer lost on the deal and can look forward to getting property tax reductions at the added cost of sales or income tax increases.
Some deal! The Governor got his Slots. Where's our Billions??
PS - If you are concerned about the corrupting influence of money on politics, look first and hard at how politcal decisions influence money and profits. Fix that process and the lobbyist problem will take care of itself.
