Local Revenues from Casino Gambling in Ohio 032114 attachment.pdf · Local Revenues from Casino...
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OBM Memo Page 1
Local Revenues from Casino Gambling in Ohio
Introduction
In recent months, the Office of Budget and Management (OBM) has been repeatedly called
upon as an agency to comment on the performance of casino revenues relative to the forecasts in the
executive budget for FY 2014. Some local governments and school districts have expressed concern that
casino revenues are not performing as well as forecast and have asked for advice about budgeting
casino revenues going forward. This research memo is part of OBM’s response to such requests. The
memo is advisory, insofar as OBM has no official role in forecasting the distributions of casino tax
revenues to the locals. Casino tax revenue distributions are actually established in the Constitution, and
no casino tax revenue goes to the state general fund, which means that OBM’s concern with casino tax
revenues is restricted to the state portion. That state share of casino tax revenues is only 10 percent of
the total, and is dedicated to regulatory and problem gambling purposes, as is explained in later
sections.
Nevertheless, in this memo OBM presents a brief analysis of the trends in Ohio casino tax
revenue, a comparison of performance in FY 2013-2014 with prior forecasts, and some cautions about
forecasting revenues in FY 2015 and subsequent years. The basic message of the memo is that the Ohio
casino tax is a new revenue source that is still subject to considerable uncertainty, competition for
gambling dollars is increasing, both within and without the state, and there is evidence across the nation
that overall gambling may be approaching saturation levels. In light of all this evidence, local
governments and school districts should budget casino revenues very conservatively and not be
surprised when performance does not match forecasts, from whatever source.
OBM Memo Page 2
History
From 1974 until 2009, the only legal gambling in Ohio, aside from charity gambling such as
bingo, and betting on horse racing, was run through the Ohio Lottery. The lottery was authorized by a
constitutional amendment in 1973, and the first tickets were sold in 1974. In 2009 the situation changed
when Ohio voters approved a constitutional amendment (Issue 3) to allow four full casinos, with both
slot machines and table games, in specified locations.
The constitutional amendment also set the casino tax rate at 33 percent of gross revenue
(although the tax base is called gross, it is actually after prize payouts) and defined how the tax revenue
would be distributed. A full 90 percent of casino tax revenue is distributed to local governments and
school districts, with the other 10 percent being shared among state agencies for casino commission
regulatory costs and tax administration (3%), for programs to prevent and treat problem gambling (2%),
for law enforcement training (2%), and for horse racing purses and other racing purposes (3%). As
mentioned earlier, the distribution of casino tax revenues is actually set forth in the Ohio Constitution,
Article 15, Section 6, Division (C) (3) and cannot be modified without a constitutional amendment. The
first Ohio casino, Horseshoe Casino Cleveland, opened in May 2012. The first distribution of casino tax
revenue in Ohio was in July 2012. The last of the four Ohio casinos, Horseshoe Casino Cincinnati, opened
in March 2013. Horseshoe Casino Cincinnati revenues were first distributed in July 2013.
Ohio Video Lottery Terminal (VLT) gambling is an entirely different type of enterprise than Ohio
casino gambling. Legislation authorizing VLT operations in Ohio was passed in HB 1 of the 128th General
Assembly, in 2009.1 The Ohio Lottery started regulating VLTs at Ohio horse racetracks in FY 2012. Scioto
1 As a part of Am. Sub. H.B. 1, the state’s biennial operating budget for FY 2010-2011, the General Assembly
amended R.C. 3770.03 and enacted R.C. 3770.21 to authorize the installation and operation of VLTs at seven horse racing tracks across the state under the control and regulation of the Ohio Lottery Commission.
OBM Memo Page 3
Downs Racino in Columbus opened in June 2012 with 1,787 VLTs.2 VLT revenues are not taxed, as casino
revenues are. Instead, because the lottery is a state enterprise and the VLT operator is essentially a
franchisee of the lottery, the state shares in the VLT gross proceeds. Gross proceeds from VLTs are
split between the horse racetrack operators (66.5%), and the Ohio Lottery (33.5%). Net profits
from the VLT program, similarly to net profits from traditional lottery ticket sales, are transferred to
the state Lottery Profits Education Fund (LPEF) and used to help pay for the state share of primary and
secondary education. There is no distribution of VLT profits to local governments.
The rest of this memo discusses the forecasts of operating revenue from casinos and racetrack
VLTs and the legal allocation of those revenues to state funds or local governments. The memo does not
address license fees, which are also a significant source of revenue but are received on a different
schedule and have different distributions than operating revenues.
Casino Tax Revenues – Forecast and Performance
Several estimates of casino tax revenue were created before any casino began operating and
generating revenue. The Ohio Department of Taxation was required by law to generate an estimate of
the revenue impact of the constitutional amendment (Issue 3) to allow four casinos in November 2009.3
That estimate projected that in the absence of competition from racetrack VLT gambling, gross revenue
from the four casinos would be $1.95 billion (tax revenue of $643 million) and that if all seven racetracks
had VLT gambling then gross revenue from the four casinos would be $1.42 billion (tax revenue of $470
million).
2 VLTs, while they are similar to slot machines and are sometimes referred to as slot machines, are technically not
the same as slot machines. For one thing, slot machines are controlled by computer chips physically located in the machines, while VLTs are controlled by a centralized computer network run by the Lottery Commission. 3 Section 3519.04 of the Revised Code requires the Tax Commissioner to estimate the annual tax revenue from a
constitutional amendment that proposes to levy taxes and to send it to Secretary of State to be posted on the Secretary’s Web site.
OBM Memo Page 4
A draft report from Spectrum Gaming in May 2011 prepared under contract for the Ohio
Department of Administrative Services had slightly lower projections for calendar year (CY) 2013. The
Spectrum analysis estimated that gross casino revenue would be $1.80 billion ($595 million tax revenue)
if there were no VLT racetrack gambling and would be either $1.10 billion or $1.20 billion ($364 million
or $396 million in tax revenue, respectively) if there were competition from VLT racetrack gambling,
depending on the locations of the tracks.
In fact, we now know that Ohio gross casino revenue was $821 million in CY 2013, with only two
racetrack VLT operations in effect for most of the year (two more opened in December, which is
discussed in further detail later in the memo). The $821 million total was reached with the Cincinnati
casino being in operation for only 10 months of the year, but even if it had been in operation for all
twelve months it is likely that gross revenues would have been only $858 million.4
The early estimates of casino tax revenue, such as those done by the casinos themselves, the
Department of Taxation, and Spectrum Gaming, were based on the application of “gravity” type
models, where the attractiveness of a gambling location and thus the likelihood of playing have a strong
inverse relationship to the distance of the population from the casino (similar to the physical
gravitational force). While the theory behind these models may be sound, using them to estimate
gambling revenues at any particular location depends crucially on historical data from existing casinos
on the probability of play and the amount gambled by the adult population within certain drive-time
bands from the casino. The actual experience of Ohio casinos suggests that the parameters used in the
early application of these models overstated the potential revenues of Ohio casinos. Exactly why this is
so is still not completely clear, but the hypotheses include (but are not limited to):
(i) Greater competition than anticipated from pre-existing gambling venues in other states;
4 The Cincinnati casino averaged $18.4 million in gross revenue per month for the 10 months that it was in
operation.
OBM Memo Page 5
(ii) Greater and more widespread competition than originally anticipated from illegal
gambling within the state (such as the recently banned “Internet cafes”);
(iii) Greater in-state racino (VLT) competition than predicted;
(iv) Restrained enthusiasm for in-state casinos;
(v) Features of the Ohio casinos that reduce play relative to other gambling venues, such as
difficulty in parking at or access to the casino.
The administration forecast of casino tax collections and distributions for FY 2014-2015, which
was part of the executive budget “Blue Book” issued in February 2013, had the advantage of being
informed by roughly seven months of actual revenue performance of the Cleveland and Toledo casinos
and three months of data from the Columbus casino.5 The administration FY 2014-2015 forecast of
casino gross revenues, tax revenue collections, and distributions is summarized in Table 1, below. Note
that the executive budget document did not actually publish the tax collection forecast, but instead
published the forecast of distributions to the three local funds: the county fund, the county student
fund, and the host city fund. In future budget submissions, OBM intends to more clearly state the total
forecasted tax collections for the biennium, as well as the distributions.
The executive budget forecasts of casino tax revenue are made on a state fiscal year basis, as
are all elements of the executive budget. Local officials need to be cognizant of the difference between
the state fiscal year and the local fiscal year, since the local fiscal years often coincide with the calendar
year, unlike the July-June state fiscal year.
5 OBM and Taxation produced casino tax estimates for the executive budget in fulfillment of the requirement that
OBM produce revenue estimates for each state fund.
OBM Memo Page 6
Actual casino tax collections for the quarter ended September 30, 2013 were $70.2 million, or
12.0% below the $79.8 million forecast (these collections were distributed in October 2013). Actual
casino tax collections for the quarter ended December 31, 2013 were $68.7 million, or 5.7% below the
$72.9 million forecast (these collections were distributed in January 2014).
Table 2 shows the estimated distributions to the three local distribution funds (90% of the total)
and the four state funds (10% of the total), by fiscal year, for FY 2013-2015.
The local distribution funds in Table 2 receive casino tax revenues in the following proportions:
(i) Gross Casino Revenue County Fund: this fund receives 51% of casino tax revenues.
Quarterly distributions from the county fund to individual counties are based upon each
county’s proportionate share of state population. Furthermore, the most populated city
located in a county with population over 80,000 (according to the 2000 Census) receives
fifty percent (50%) of the amount otherwise allocated to the county. The cities
receiving fifty percent (50%) of the county distribution are: Akron, Canton, Cincinnati,
Table 1: Tax Period Estimated Collections and Distributions: FY 2014-2015
Casino gross revenues Tax collections Tax distributions
Quarter ending Sep-30-2013 $241,808,580 $79,796,832 77,202,617
Quarter ending Dec-31-2013 $220,759,376 $72,850,594 79,796,832
Quarter ending Mar-31-2014 $242,316,123 $79,964,320 72,850,594
Quarter ending Jun-30-2014 $252,845,939 $83,439,160 79,964,320
Total FY 2014 quarters $957,730,018 $316,050,906 $309,814,363
Quarter ending Sep-30-2014 $259,718,449 $85,707,088 $83,439,160
Quarter ending Dec-31-2014 $234,805,904 $77,485,948 $85,707,088
Quarter ending Mar-31-2015 $256,657,881 $84,697,101 $77,485,948
Quarter ending Jun-30-2015 $265,317,498 $87,554,774 $84,697,101
Total FY 2015 quarters $1,016,499,732 $335,444,912 $331,329,297
OBM Memo Page 7
Cleveland, Columbus, Dayton, Toledo and Youngstown. In FY 2013, of the $89.0 million
distributed from the county fund, $68.3 million went to counties and $20.7 million went
to the eight eligible cities.
(ii) Gross Casino Revenue County Student Fund: this fund receives 34% of casino tax
revenues. Semi-annual distributions are made to school districts on the basis of school
district share of county enrollment.
(iii) Gross Casino Revenue Host City Fund: This fund receives 5% of casino tax revenues.
Cincinnati, Cleveland, Columbus, and Toledo receive quarterly distributions of five
percent (5%) of the gross casino tax revenue collected at the casino within that
respective city during the previous quarter.
Table 2: Executive Budget Forecasts of Casino Tax Revenue Distributions
Fund Fund Name FY 2013 FY 2014 FY 2015
5JG0 County Fund (5JG0) $89,996,921 $158,005,325 $168,977,942
5JH0 Student Fund (5JH0) $59,997,947 $105,336,883 $112,651,961
5JJ0 Host City Fund (5JJ0) $8,823,228 $15,490,718 $16,566,465
5HS0 Casino Control Commission Fund (5HS0) $5,293,937 $9,294,431 $9,939,879
5JK0 Ohio State Racing Commission Fund (5JK0) $5,293,937 $9,294,431 $9,939,879
5JN0 Law Enforcement Training Fund (5JN0) $3,529,291 $6,196,287 $6,626,586
5JL0 Problem Gambling & Addictions Fund (5JL0) $3,529,291 $6,196,287 $6,626,586
Estimated Total Distributions $176,464,551 $309,814,362 $331,329,298
Percent Change from Prior Year
75.6% 6.9%
Table 3 shows actual distributions for FY 2013, which were quite close to the estimates, as one
would hope they would be given that the forecast was made when half the fiscal year was known. The
right hand portion of the table also shows distributions made in the first half of FY 2014. Because the
casino tax is still relatively new and there are not well established patterns of play the normal seasonal
OBM Memo Page 8
variation in revenues is not yet known. Therefore, the partial year FY 2014 results should be
extrapolated with caution.6
Competition from Racetrack VLT Gambling
Unlike Ohio casino gambling, racetrack VLT gambling in Ohio is not taxed. Racetrack VLT
gambling is licensed and regulated by the Ohio Lottery Commission (OLC), and the state receives a share
of operating profits. The state receives 33.5% of VLT gross revenues (as with casino revenues, while this
is called gross, it is after prize payouts), which are transferred to the state LPEF, as are other lottery
profits. Unlike the casino tax allocations, local governments do not receive any of the VLT profits.
Racetrack gambling facilities, unlike casinos, do not have table games like roulette, blackjack,
poker, etc. They only offer VLTs, which from the viewpoint of gamblers are functionally equivalent to
slot machines. For the two racinos that have been open for months and competing directly with casinos
in close geographic proximity, the win per machine per day has been higher than for the casino
operating in the same market. The difference is especially pronounced for the Thistledown Racino
compared to the Cleveland Horseshoe Casino. Thistledown Racino has had greater overall VLT revenue
than the Cleveland Casino’s slot machine revenue for the first half of FY 2014, despite having far fewer
machines. These results are shown in Table 4, below.
6 Actual distributions are available at http://www.tax.ohio.gov/tax_analysis/tax_data_series/GrossCasinoRevenue.aspx
Table 3: Forecasts vs. Distributions, FY 2013-2014 (partial)
Fund Fund Name FY 2013 Forecast FY 2013 Actual Difference
FY 2014
Forecast, three
quarters FY 2014 Actual Difference
5JG0 County Fund (5JG0) $89,996,921 $89,021,910 ($975,011) $117,223,521 $106,886,430 ($10,337,091)
5JH0 Student Fund (5JH0) $59,997,947 $59,347,940 ($650,007) $78,149,014 $71,257,620 ($6,891,394)
5JJ0 Host City Fund (5JJ0) $8,823,228 $8,727,638 ($95,590) $11,492,502 $10,479,062 ($1,013,440)
Total of the Three Local
Distribution Funds $158,818,096 $157,097,488 ($1,720,608) $206,865,038 $188,623,112 ($18,241,925)
Total Statewide Distributions $176,464,551 $174,552,764 ($1,911,787) $229,850,042 $209,581,236 ($20,268,806)
Percent variance -1.1% -8.8%
OBM Memo Page 9
As more racetrack VLT facilities open, competition for gambling dollars between racetrack VLTs
and the four casinos will intensify. As of this writing, the only two racetrack VLT operations with
substantial history are the Scioto Downs Racino, which competes for slot machine gambling with the
Columbus casino, and the Thistledown Racino, which competes for slot machine gambling with the
Cleveland casino. Miami Valley Gaming in Lebanon (roughly 30 miles northeast of Cincinnati), opened on
December 12, 2013, and Hard Rock Rocksino in Northfield Park (about 20 miles southeast of Cleveland)
opened on December 18, 2013. Three more racinos are scheduled to open in 2014 in the Dayton (first
quarter), Cincinnati (second quarter), and Youngstown (third quarter) areas. Increased competition from
Table 4: Comparison of Casino Slot vs. Racino VLT Performance, FY 2014
Venue Month Machines Gross Revenue Win/Machine/Day
Columbus Hollywood Casino Jul-13 2,525 $11,618,767 $148.44
Aug-13 2,525 $11,350,003 $145.00
Sep-13 2,522 $10,786,135 $142.56
Oct-13 2,517 $11,640,183 $149.18
Nov-13 2,517 $11,764,169 $155.80
Dec-13 2,516 $10,849,125 $139.10
Pct difference
from Columbus
casino
Scioto Downs Racino Jul-13 2,106 $11,164,026 $171.00 15.2%
Aug-13 2,106 $11,103,808 $170.08 17.3%
Sep-13 2,107 $10,512,493 $166.31 16.7%
Oct-13 2,107 $11,241,957 $172.11 15.4%
Nov-13 2,104 $11,279,380 $178.70 14.7%
Dec-13 2,101 $10,974,120 $168.49 21.1%
Cleveland Horseshoe Casino Jul-13 1,849 $11,700,853 $204.14
Aug-13 1,849 $11,882,708 $207.31
Sep-13 1,827 $11,104,392 $202.60
Oct-13 1,827 $10,965,337 $193.61
Nov-13 1,827 $11,552,931 $210.78
Dec-13 1,781 $11,194,485 $202.76
Pct difference
from Cleveland
casino
Thistledown Racino Jul-13 1,123 $11,398,923 $327.43 60.4%
Aug-13 1,127 $11,802,047 $337.81 63.0%
Sep-13 1,141 $11,811,460 $345.06 70.3%
Oct-13 1,150 $12,874,230 $361.13 86.5%
Nov-13 1,152 $13,290,552 $384.56 82.4%
Dec-13 1,151 $10,710,794 $300.18 48.0%
OBM Memo Page 10
racinos is one of several reasons that local governments should use caution in budgeting estimated
casino tax distributions in 2014 and beyond.
Whether this pattern of racino VLTs outperforming casino slot machines will also persist in other
markets is unclear. A sample of two is not really sufficient to draw broad inferences. However, this is yet
more reason for local governments to be cautious in budgeting estimated casino revenues.
Gambling Revenues Overall, Interstate Competition, and Substitution (Cannibalization)
Competition for gambling dollars in the U.S. is fierce, and since 2008 has taken place in an
environment where discretionary consumer spending has been restrained by relatively high rates of
unemployment – and thus reduced consumer confidence – and consumers acting to reduce household
debt in response to the financial crisis and recession of 2008-2009. While some states or markets are
still experiencing growth in gambling revenue, they tend to be newer entrants into the gambling market
(like Ohio; see Table 2), and in many cases the growth for these new entrants is at the expense of
existing venue revenue. Examples of this “cannibalization” of existing markets, which is a term one sees
used by industry experts, has occurred in a number of places. We present a few as examples.
The Center for Gaming Research at the University of Nevada Las Vegas (UNLV) published a study
in March 2013 that stated that Atlantic City casino gross revenue fell by 41% from 2006 to 2012. Atlantic
City casino revenue has continued to fall in 2013. Competition from casinos in Maryland, Pennsylvania,
and New York is widely cited as a reason for the declines in Atlantic City.
In Saint Louis, the nation’s fifth largest casino market, gambling revenue has dropped by 5% to
7% from 2012 to 2013, and total St. Louis area gambling is expected to drop from $1.1 billion in 2012 to
about $1 billion in 2013. Analysts at Rubin Brown, an accounting and consulting firm that follows the
gambling markets, state that consumers are spending less on gambling in mature markets after the
OBM Memo Page 11
recession. “St. Louis is among mature gaming markets finding that some customers have decided they’d
rather do things other than roll dice or plug slot machines, the analysts said. “People, after the recent
recession, are spending their money elsewhere,” said Rubin Brown analyst Daniel Holmes.7
The Rubin Brown analysts note that nationally, U.S. casinos had 2013 revenue of $31.5 billion
through October, up 4 percent from a year earlier. But the rebound is very uneven: among the 23 states
with casinos, gambling revenue is down in 13 states. Eight of the 10 states that have had gambling
revenue increases in 2013 have expanded gambling in the last 18 months, they said. This is the pattern
of new entrants taking gambling business from neighboring states. One of the Rubin Brown analysts,
Brandon Loeschner, explicitly stated that “…cannibalization is happening in the regional markets.” 8
Similarly, officials at Penn National gaming, which owns the Columbus and Toledo casinos in
Ohio, acknowledged midway through 2013 that gambling revenue has grown more slowly than it
expected at those two casinos and that fierce regional competition is an issue.9
Finally, some analysts think that the win per machine per day at some Ohio casinos, such as
Columbus Hollywood, could be a sign of saturation. Fitch Ratings analyst Alex Bumazhny stated last
January that win per machine per day of less than $200 may be a sign of a saturated market: “"For me,
two hundred is a threshold, …Below two hundred is more a characteristic of a saturated market." 10
7 “St. Louis, Other Regional Casino Markets See Declining Revenue,” St. Louis Post Dispatch, by Tim Bryant,
December 07, 2013. 8 Ibid.
9 “Clearly the market has not met our expectations,” said Timothy Wilmott, Penn’s president and chief operating
officer. “We expected to be the market leader in slot win, and right now, we’re at a 50-50 level with Scioto (Downs).” Quoted in “Penn National Disappointed in Columbus Casino’s Revenue,” Columbus Dispatch, by Steve Wartenberg, July 24, 2013. 10
“Ohio Slot Machines, VLTs Will More Than Double in Number,” Cleveland Plain Dealer, by Thomas Ott, January 24, 2013.
OBM Memo Page 12
Conclusion
Gambling in Ohio is a developing industry, with traditional lottery games having been joined by
slot machines and table games at four casinos and VLT gambling at four racinos, with three more racinos
set to open in 2014. Competition within the state and across state borders is intense, and growing.
While the executive budget estimates of casino tax collections and distributions have tried to take these
competitive factors into account, the estimates are subject to a large degree of error. Historical patterns
of play are informative but cannot be relied on too heavily because current market saturation exceeds
what has been observed in past years in U.S. gambling markets. Increased enforcement of prohibitions
against illegal gambling may alleviate some of the competitive pressure on legal gambling facilities, but
the degree to which this will support legal gambling revenues is unknown. In reality, established
patterns of play that can be relied upon to make more accurate forecasts will probably not emerge until
2016, when all casino and racino facilities in Ohio have been operating for at least two years. Local
governments should be appropriately cautious in budgeting forecasted casino tax revenues in the
interim.