Redoing Slot Bidding Might Make Sense, Experts Say, but Lawmakers are Wary
By Dylan Waugh
Capital News Service
Friday, Feb. 20, 2009
ANNAPOLIS - State leaders appear ready to proceed with the disappointing return on Maryland's slots bids, even though experts say reconsidering the bidding process might bring in more money for the state in the long run.
"It certainly would make some sense" to postpone the process until the economy rebounds, said Dr. William Eadington, director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada, Reno.
Lowering the 67 percent tax rate on proceeds or the application fees might also bring in better bids, said Jeffrey C. Hooke, a Bethesda-based gambling expert.
But waiting out the current economic downturn or lowering the tax rate might require legislative action, and lawmakers appear hesitant to bring the controversial topic back to the chamber floors.
"We're going to wait and let the process play itself out," said Alexandra Hughes, spokeswoman for House Speaker Michael Busch, D-Anne Arundel.
Gov. Martin O'Malley, a Democrat, has repeatedly called for patience in letting the bidding process unfold.
Senate President Thomas V. Mike Miller Jr., D-Calvert, said Friday he doesn't think the Senate will revisit the process this session, although he would support such a move.
"I could revisit it any day, any week -- it's important," Miller said. "But I don't think the appetite is there for others."
The number of slot machines and counties eligible for bids are guided by the state Constitution, which voters amended in November.
But the tax rate is determined by law, making it open to legislative change.
Miller called for the state slots commission to consider restarting the bidding process a few weeks ago before backing off of his comments. He has also said the Rocky Gap site in Allegany County, which received no qualified proposals, needs to be rebid.
The state hoped for competing bids for its five slots licenses and 15,000 authorized machines, but the Video Lottery Facility Location Commission revealed only six bids -- two without millions in required licensing fees -- on the Feb. 2 deadline.
The four qualifying bids were for only 6,550 machines. The commission isn't expected to rule on any of the bids for several months.
The dearth of bids could cost Maryland big money.
Based on state projections, public schools stand to lose half of the $660 million the state had hoped the machines would generate annually by fiscal year 2013, even if all 6,550 terminals are approved. And the state was counting on $90 million in application fees but received $39.3 million.
Of the four bids, only the Arundel Mills proposal was for the maximum number of terminals allowed by law.
Bids for Baltimore City, Cecil and Worcester counties did not include as many terminals as the state wanted.
At the heart of the debate about whether to revisit the bidding process is determining why only four bidders submitted requests for licenses, and if changing the tax rate or license fees and restarting the process would bring better results.
Some point to the 67 percent tax rate on proceeds -- one of the highest rates in the country -- as one deterrent for bidders.
The 67 percent rate makes it difficult to justify a few hundred million dollars of investment, Eadington said.
Empire Rocky Gap LLC submitted a bid for the Rocky Gap site but withheld the required $4.5 million fee over concerns that the tax rate was too high. The slots commission last week disqualified the bid.
Just getting into the bidding process was an expensive measure. For every 500 machines requested, applicants were required to include $3 million and promise to spend $25 million in construction and related costs.
Magna Entertainment Corp. submitted a bid to install 3,000 machines at Laurel Park race track without the licensing fee for fear it wouldn't be returned if the bid was not selected or couldn't gain local zoning approval. The commission tossed out the bid, but lawyers for a Magna subsidiary are challenging the decision in court.
Reducing the capital expenditure requirement might be one way to draw more interest, Hooke said.
"You really don't need a Taj Mahal for a slot machine parlor," he said.
The economic downturn might also explain the paucity of bids, experts said, meaning lowering the tax rate or fees and restarting the bidding process might not bring in better bids.
"You can certainly make a very strong case that the economic condition eliminated most of the attractive bidders," said Eadington, adding that most gaming companies are in financial distress.
"It's like trying to field a baseball team in World War II," he said. "The good candidates just aren't in the game."
Waiting a few years for the economy to recover might mean more gaming companies would consider bidding, he said.
Changing the tax rate or fees for just one or a few of the locations is also an option, if lawmakers were to reconsider the process.
Without the large crowds of Anne Arundel County and Baltimore, developers for parlors in Cecil, Worcester and Allegany counties might have questioned their profit-generating ability while turning two-thirds of their proceeds over to the state, Hooke said.
In Baltimore, city officials wanted $36 million in rent on top of the other licensing fees and taxes.
"Baltimore City government scared away all of the bidders," Hooke said. "The effective tax rate was 77 percent. No one is going to make money at that tax rate."
But lawmakers acknowledge the desire to reopen the process might not exist.
Senate Minority Leader Allan Kittleman, R-Carroll, said the issue is worth revisiting, but the state's other financial woes are superseding the slots discussion.
"It would probably be wise to start all over," Kittleman said. "It's discussed, but right now we're all focusing on the other budget matters."
But House Majority Leader Kumar Barve, D-Montgomery, didn't see any reason to penalize qualified bidders by changing the rules.
"We've got a law and we've got a bidding process that exists, and we need to work with it," Barve said. "You can't change the rules just to accommodate people who are too dumb to play by them."