Governments shouldn't bet on casinos

The flaw in the Vegas mirage: casinos are fickle business

The downtrodden look at a casino and see a way out of destitution. It doesn’t matter if the down-on-their-luck sap is an unemployed mechanic or an underpaid waitress or, say, an entire state or municipal government. As politicians confront untenable levels of deficit and debt, many—in New York, in Miami, in Detroit, in Boston—consider slots and card tables a viable financial strategy.

Ontario has lately joined the club: Las Vegas’s big boys are now vying to build a casino in downtown Toronto. MGM dangles the prospect of a $4-billion resort, home to a new Cirque Du Soleil show. Las Vegas Sands Corp. doesn’t offer clowns but will spend $2-billion to revitalize a dowdy convention centre. Caesars wants to build twin hotel towers and has a penchant for mentioning its famous friends (Elton! Shania! Celine!) who might come to visit. All of this razzle-dazzle is meant to fuel visions of Las Vegas North, a tourism destination sucking in cash from around the world to boost the economy and cover the municipal deficit.

But there is a flaw in this Vegas mirage: casinos are fickle businesses. Economic growth spurred by casinos is either short-term or non-existent, according to a study commissioned by the Canadian Gaming Association. Further, nobody outside Las Vegas builds casinos to attract tourists these days; they do it to stop local gamblers from leaving.

There are two places that have built a sustainable tourism market on gambling: Las Vegas and Macau. Elsewhere, casinos cater almost exclusively to locals within driving distance. Even once glitzy Atlantic City has seen its gaming revenues fall by 36% since 2006, when casinos opened in nearby Pennsylvania. As states like Ohio and Massachusetts introduce casinos, it spurs their neighbours to do the same.

In the last U.S. election, Rhode Island voters approved the state’s first gaming house—in part to stop losing gambling dollars to Massachusetts. Maryland expanded its casinos so its gamblers won’t wander to West Virginia. But the supply of gamblers isn’t growing, so added competition divides the market into tinier bits. This oversupply is evident on the operators’ balance sheets: Caesars last quarter reported a $20.2-million drop in its Atlantic City revenue alone, and a total operations loss of $221 million.

Moody’s Investor Services warns this “keeping-up-with-the-Joneses” mindset currently running rampant in the northeastern United States will force operators to reach farther afield to maintain attendance levels. Which, of course, is bad news for a Toronto casino. So, too, is Gov. Andrew Cuomo’s call to build three new gambling resorts in upstate New York. Surrounded by a saturated market, a Toronto facility will be reliant on separating local gamblers from their cash. Proponents claim international “high rollers” could be wooed by Toronto’s charms. But let’s say you’re a Hong Kong businessman with a fondness for blackjack. It’s January. Where do you go on vacation—frigid Toronto or balmy Vegas?

Casino proponents know this. An Ernst & Young study suggests as much as 76% of casino revenue would come from local residents. Any private operator would be expected to pay the province a significant cut of the gaming revenue; similar projects in other parts of the province pay out a “win tax” of 20%. Rob Ford, the city’s tax-averse mayor, has not objected to this idea, even though it amounts to a government surcharge on fun. Instead, he seems keen to collect a multimillion-dollar hosting fee and the creation of thousands of jobs.

Ford would be negligent not to explore bringing new jobs to his city. But he might also contemplate New Jersey Gov. Chris Christie’s flirtations with the gambling business. Christie backed the construction of Revel, a $2.6-billion luxury casino in Atlantic City. Open last April, the facility lost $46 million in its first six months of operations. It’s further proof of how fickle and unpredictable casino patrons can be. It’s tempting to say the citizens will pay if a Toronto casino fails. But with its reliance on the domestic market, the citizens will pay regardless.

James Cowan is deputy editor of Canadian Business where this article first appeared. More Cowan columns here.

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