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Published: Thursday, 10/28/2010

Despite high hopes, casino's economic payoff not sure bet

BY JC REINDL
BLADE STAFF WRITER

Enthusiasm ran high among local government and business leaders this summer as they joined executives from a commercial gaming company to celebrate the ground-breaking for Toledo's first casino.

The ceremonial shovels shone as golden as the day's pronouncements of what the $250 million Hollywood Casino Toledo would do for the region's economy: thousands of jobs, millions in tax revenue, a wave of spendthrift tourists.

Toledo Mayor Mike Bell deployed metaphor to thank officials from Penn National Gaming, Inc., of Wyomissing, Pa., for handing a "life preserver" to those aboard the city's sinking ship of an economy.

Pete Gerken, president of the board of Lucas County commissioners, compared the casino's prospects to Toledo's $1.2 billion Jeep plant that opened in 2001 and the new $98.1 million downtown arena - "This is a game changer."

Yet a close analysis of the economics of casino gambling, in addition to interviews with experts in the gaming field, suggest a more modest long-term economic benefit for the Toledo area. Most of the benefits are added government revenues from taxing gambling proceeds. For the city, county, and all county public schools, that annual benefit is estimated to reach about $25 million, though with several caveats.

Standing in the way of a bigger payday is Toledo's time and place in the expansion of commercial gaming.

Once relative novelties in the United States, casinos have evolved into must-have amenities to stop the flow of local dollars to casinos elsewhere.

When casinos open in virgin gambling markets that had lacked access to gaming, they typically generate big money for their operators and generous tax receipts for host cities, research shows. Patrons will travel 100 miles or more.

An example is Atlantic City, N.J., which enjoyed a tourism renaissance after voters opened the door to casino gaming in the late 1970s. Only recently did Atlantic City fall on hard financial times as a growing number of out-of-state gambling options chipped away at its regional monopoly.

Jeremy McGorty, left, and Ron Sancrant, iron workers with Ivy Developing, piece together rebar for parking deck columns of the new casino. Jeremy McGorty, left, and Ron Sancrant, iron workers with Ivy Developing, piece together rebar for parking deck columns of the new casino.
THE BLADE/ANDY MORRISON Enlarge | Buy This Photo

But Hollywood Casino Toledo may be a little late.

Scheduled to open in the first half of 2012, it will compete with established casinos in Indiana and Michigan, including the three in Detroit often frequented by Toledoans. And it faces forthcoming competition from other Ohio casinos in Cleveland, Columbus, and Cincinnati that voters approved last year with Issue 3.

The competition will significantly dilute the Toledo casino's economic effects, some economists argue, because it must attract money from outside the region to generate a true economic boost for the city.

Otherwise, the new casino merely shifts dollars away from existing businesses and entertainment venues, said Thomas Pascarella, professor emeritus of economics and management at Hiram College in northeast Ohio.

"It's going to attract people predominately from the Toledo area. So there's no new wealth coming into the region; the money just gets reshuffled," he said.

Professor Pascarella was an author of a 2009 Hiram College study on casino gambling sponsored by an Ohio bar-and-restaurant trade group against Issue 3.

"We are not opposed to casinos per se, but to make claims that they're going to create economic development just doesn't seem to be a reasonable argument," he said.

A Penn National spokesman strongly disagreed with the professor's assessment. The company anticipates a 90-mile market radius for a casino such as Toledo's.

"Our intention is to build this as a destination casino, so it's a place where people from outside the area will come visit us and visit the city of Toledo," said Karen Bailey, director of public affairs for Penn National. "The placement of a casino really does ignite new economic development around it."

Geographically surrounded with competition, Toledo's casino along the banks of the Maumee River would be fighting for market share in what gaming consultant Steve Rittvo describes as a "border wars" stage of casino development.

States such as Ohio feel pressure to relax gambling restrictions or watch residents spend at out-of-state card tables and slot machines, or over the Internet. As new ventures get built, the older ones experience a shrinking market because gamblers stay closer to home.

"States are looking to bring back the money that's leaving their state and going to other places," said Mr. Rittvo, chairman of the Innovation Group, a gaming consultancy with headquarters in Denver, whose firm conducted economic analysis for Issue 3 proponents. "The border wars are really motivated by taxes."

Penn National says that Hollywood Casino Toledo will have 2,000 slot machines, 60 table games, and a 20-table poker room.

The company must by law divert 33 percent of the facility's gross gambling revenues to taxes - on top of local payroll and property taxes.

Because of the regional competition, Mr. Rittvo said he expects the Toledo casino's big-draw potential to be limited. He anticipates the majority of Toledo's casino revenues will be recaptured dollars that are currently spent out-of-state.

"That recapture to me is as legitimate as if it was new dollars coming in," Mr. Rittvo said. "The economic impact of that is still really good. It's dollars that have left your economy, and now you're capturing them back."

Not all gaming experts are as bullish.

Earl Grinols, distinguished professor of economic at Baylor University in Texas and author of Gambling in America: Costs and Benefits (2004), believes a casino's market area must be bigger than the region itself for a true economic boost.

That would require Toledo's casino to attract a lot of non-Toledoans. Failing that, economic development "can work in the reverse … you can have the prospect of a casino simply becoming a collection device for the owners to draw money out of an economy and shrink the economy," Mr. Grinols said.

Penn National has promised 1,200 permanent, full-time equivalent jobs at Hollywood Casino Toledo, on top of 2,100 short-term construction jobs. The company says annual starting salaries for the permanent jobs, which include benefits, will be about $40,000.

Yet economists warn that some of the gain in jobs and tax receipts will be offset by business losses at local shops, eateries, and entertainment venues that compete for local residents' spending dollars.

"People are going to reallocate their spending from other activities to this new activity," said Bill Eadington, economics professor and director of the Institute for the Study of Gambling and Commercial Gaming at University of Nevada, Reno. "The greatest proportion of spending is going to be from people who live within the region, and the parallel there is like adding an additional restaurant to Toledo."

Mr. Rittvo acknowledged that Toledo likely will experience some shift in spending away from existing businesses as locals visit the glitzy new attraction.

But Toledo already has experienced the bulk of that effect, as well as the attendant social costs of gambling, because residents are currently visiting out-of-state casinos - taking their money completely out of the local economy. "The majority of it has already left your market, and now you're capturing it back," he said.

In this "border wars" era, a new casino is a defensive strategy for economic development.

"It's become sort of an expectation for conventioneers to have that as an option, and so by not having it, you may lose out," Mr. Rittvo said. "People don't necessarily choose a town and say, 'We're going there because they have a casino,' because they've become so common, but they may say, 'We're not going there because they don't have one.'•"

The Toledo region's economy is expected to get a significant short-term jolt from the construction of the 290,000 square-foot casino facility, which would represent a $250 million investment from an out-of-state company.

Penn National operates Toledo's Raceway Park and 22 other gaming facilities in states such as Indiana, New Jersey, and Florida.

A local contractor, Rudolph/Libbe Inc., is the project's construction manager. Penn National is also required to fork over a $50 million licensing fee to the state, separate from the $250 million casino cost.

And there is big tax money at stake. Casino projects often prove popular with elected officials because they provide a new dedicated stream of tax revenue for balancing budgets.

"In other words, rather than raising sales taxes or income taxes or cutting spending … [politicians] can tax something new," said Douglas Walker, professor of economics at the College of Charleston and author of The Economics of Casino Gambling (2007).

Toledo, Lucas County, and all public schools in the county are projected to reap a combined $25.3 million in annual revenue from the 33 percent casino tax once all four Ohio casinos are operational, according to Penn National. That's in addition to a 2.25 percent income tax on payrolls from construction crews and casino workers Toledo will collect.

The $25.3 million figure was taken from projections in a 2009 report by Ohio's Office of Budget and Management and Department of Taxation. The report expects Toledo's casino to collect almost $250 million a year in pretax gross revenues, a number Penn National doesn't dispute. All four Ohio casinos are to generate a combined $1.9 billion in gross revenues.

State officials got their figures through a methodology that assumes every person over age 21 living within 15 minutes driving time of the Toledo casino will lose $530 each year gambling there. Every adult within 30 minutes is to lose $315 annually. Those within an hour - ostensibly as far as Archbold - are to spend $70 a year to bear out the projections.

Public officials often say they're pleased with the economic benefits from their city's casino.

The Par-a-Dice Hotel Casino in East Peoria, Ill., is a dockside riverboat casino and land-based hotel complex in central Illinois on and along the Illinois River. The casino opened in 1991 off the riverbank of neighboring Peoria, and plied across the river to East Peoria in 1993 with a tax-revenue-sharing agreement for the two Peorias.

Like Toledo's future casino, the Par-A-Dice is to a degree surrounded; it faces competition from casinos across Illinois and in nearby Indiana.

Still, it is the only gaming facility within 90 miles - a much bigger radius than the distance between Toledo and Detroit.

Ty Livingston, director of planning and community development for East Peoria, said the casino has been a positive experience for his city, providing tax revenues, jobs, and spurring development around the casino-hotel complex - three new restaurants, a gas station, and a Hampton Inn.

The city's waterfront experienced development momentum post-casino, with the arrival of a Lowe's home improvement center, a Wal-Mart Supercenter, and additional restaurants.

"They all kind of happened right around the same time," Mr. Livingston said.

He said East Peoria and Peoria each split annual tax revenues of about $7 million to $8 million from Par-A-Dice, which is owned by Nevada-based Boyd Gaming Corp.

The city uses its share of revenue for capital improvements, particularly road paving projects, Mr. Livingston said.

"It was a big game changer, particularly from the standpoint of the impact that its had on city finances," Mr. Livingston said.

Nevertheless, Professor Eadington of the Institute for the Study of Gambling and Commercial Gaming said communities have been surprised by how casinos sometimes hurt existing businesses rather than bolster them. One reason: Casinos are willing to lose money on generous restaurant deals to get people in the door.

Penn National plans to open "Epic Buffet" inside Hollywood Casino Toledo, plus additional food outlets and an entertainment lounge.

In addition, Mr. Eadington said that out-of-towners who visit a regional casino generally don't leave the gaming complex and wander the host city.

That's fine by casino operators, who add restaurants, entertainment, and hotels to their properties to keep visitors immersed in gambling.

"So even if they are driving 50 to 100 miles, their motivation is going to be to visit the casino to gamble and to do other things within the gambling complex," Mr. Eadington said. "They're not going to do what tourists in Las Vegas do."

Many in Toledo are excited for what Hollywood Casino Toledo could mean for the city's development prospects.

Mark V'Soske, president of the Toledo Regional Chamber of Commerce, said the chamber supports the casino and believes it will contribute to Toledo being a visitor destination. The new jobs also will have a welcome effect on the local economy, he said.

"It's not manufacturing, but what it is, is dollars in the community," Mr. V'Soske said. "Keep in mind that we are the entry point for people going from Ohio up to Michigan and up to Ontario. If it's cheaper to come here … I think it's a pretty good bet, no pun intended, that they will stop here as well."

Destination Toledo Inc., the county's lead tourism agency, is also energized. Interim president Cathy Miller said the casino will provide an additional attraction and another local venue for SeaGate Centre conventioneers to explore.

Penn National has committed to not building a hotel on or within 10 miles of its casino property at 1968 Miami St. until existing Toledo hotels reach a 68 percent occupancy rate. Though current citywide hotel occupancy numbers weren't available, Ms. Miller said the rate "isn't anywhere near 68 percent."

Penn National has also pledged to provide $300,000 over 10 years to Destination Toledo to promote local tourism, and will run a shuttle service between downtown and the casino for a minimum of three years.

"It doesn't make sense for us to build a hotel when local hoteliers are already hurting because of the economy," said Ms. Bailey, the Penn National spokesman. "Because the point of this is to bolster the local economy, we obviously don't want to take away from it; we want to build on what exists and build it up."

Mayor Bell recently restated his support for Hollywood Casino Toledo. He believes it will attract visitors to support new local restaurants and fill vacant hotel rooms.

It will also be a valuable marketing asset.

"It gives us a chance to develop a very strong marketing scheme to people who have never been to Toledo, but will probably come because of the casino," the mayor said.

In a later interview, Mr. Gerken, the county commissioner, said he expects a big short-term economic impact from the casino's construction, followed by a steadier long-term effect from new jobs and the accompanying benefits of having a big-draw attraction.

"It's not going to be an economic development panacea in itself," Mr. Gerken said. "But it is certainly a welcome development. It changes the way Toledo can be presented to the world."

Contact JC Reindl at:

jreindl@theblade.com

or 419-724-6065.



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