When Casinos Are Too Much of a Good Thing

By Jake Blumgart

On November 18, 2014, the Pennsylvania Gaming Control Board awarded Philadelphia's second casino license to Greenwood Racing and the Cordish Companies. The companies promise a location in deep South Philadelphia, and a box-like design, amid the cluster of sports stadiums and entertainment venues at the city limits.

The victorious executives responsible for the new Live! Hotel and Casino project shrugged off reporters' questions about market saturation and the decline of Atlantic City, where four casinos closed during 2014.

"We know this market intimately. ... We know that this location will expand the market," Tony Ricci, CEO of Greenwood Racing, told reporters after the hearing. Local opposition wouldn't be a problem either. "All they have to do is look at the great work Cordish Properties has done in Maryland and what we've done in Bensalem [the suburban township outside Philadelphia where the company's other casino, Parx, is located]. We'll deliver a top-notch project, and we'll actually be good for the neighborhood."

The blithe confidence shown by Ricci and his partners is a requirement for press conferences of this kind. But most experts agree that the Philadelphia metropolitan area's casino market will not grow larger, and that new entrants will only eat into the customer base of nearby competitors.

"If you look at the performance of casinos in eastern Pennsylvania, they've done very well over the past few years but that has started to flatten out," says Keith Foley, senior vice president at Moody's and a longtime analyst of the gambling industry. "You are in a situation where it appears the market is saturated. If you look at the revenues for the Northeast region, they are flat at a time when a lot of new casinos went up. Any new casinos going in the area would certainly cause a market share war."

From Atlantic City's perspective, of course, the war has already been lost. Since casinos started opening in Pennsylvania in 2006, with seven of its entrants strategically positioned along the New Jersey border, the seaside resort's profits have declined every year (from 2006's $5.2 billion in gross gaming revenue to $2.86 billion in 2013). Casino executives like Ricci think there is still money to be made, even if it does come out of their neighbors' pockets. Five other projects competed for the license won by the Live! Hotel and Casino, including two with locations in stubbornly underdeveloped corners of Philadelphia's burgeoning Center City.

Foley argues that the situation in the rest of the Northeast is similar to the market in Philadelphia, if not as drastic. Seven new casinos are slated for construction across upstate New York and Massachusetts in the coming years. Not to be further outdone, New Jersey is considering changing the state constitution to allow casinos in the northern half of the state. As the industry continues to march across the region, it is heralded with promises of Las Vegas-style economic development and good jobs at a time when many Americans, especially those without higher education, are struggling to get by.

The rationale is easy to understand. Atlantic City and later, Connecticut's tribal casinos, enjoyed a monopoly on casino gambling in the Northeast, so gamblers from the populous Philadelphia and New York metropolitan regions spent their money there. This influx of cash supported tens of thousands of jobs for the lucky localities and hundreds of millions in revenues for their state's political priorities.

Reaping rewards

Pennsylvania's Democratic former governor Ed Rendell was the first to decide his state shouldn't let the benefits slip away. If residents are going to gamble, the thinking went, they should do it close to home where their state and municipality can reap the rewards and, perhaps, their neighbors can get a job. Today Pennsylvania is the second largest casino market in the country after Nevada.

After the recession, Rendell's logic appealed to revenue-starved politicians who feared tax increases. Local governments generally do not reap many taxes from gambling, with the major exception of Detroit — where three casinos provide the city's third largest source of revenue. In Pennsylvania, municipal and county governments split four percent of revenue from slot machines and two percent from table games. But in Chester, a crushingly depressed city of 34,000, Harrah's casino provides almost 20 percent of the city's $50 million budget.

Local officials are more likely to be enticed by the promise of jobs and development. In Bethlehem, a relatively prosperous postindustrial city in Pennsylvania's growing Lehigh Valley, the Sands is often highlighted as the state's most impressive example of a casino as a revitalization tool. The former steel town had been struggling with the 1995 closure of Bethlehem Steel, which left 1,800 acres of abandoned industrial space — one of the largest brownfields in America. While the rest of the city began to revive, the massive former factory site became a blot on the south side. The Sands changed that.

"It's a critical component because it really started redevelopment. ... Right in the heart of south Bethlehem, they took the most difficult portion of the land [the former ore pit] and redeveloped it," says Joseph Kelly, the city's former director of community and economic development under the mayoral administration of the recently retired John Callahan. "We get a lot of the traffic from northern New Jersey that would otherwise be going to Atlantic City, so we are in the best of both worlds. We aren't overly reliant upon local dollars to be successful. It does really well in terms of traffic from New York City." The Sands marketing specifically targets Asian customers, and buses regularly run from Chinatown in Flushing, Queens, to the complex.

As part of the Sands deal, the city got free land for a new arts center (SteelStacks), movie theaters, and the local public television station. The contract also included strange language prohibiting labor rallies or other gatherings critical of Sands, although it would be unlikely to hold up in court. (Sands CEO Sheldon Adelson is vehemently anti-union and operates the only unorganized casinos on the Las Vegas strip, the Venetian and the Palazzo.) Unlike some Pennsylvania casinos, such as Parx or Philadelphia's Sugarhouse, the Sands includes a hotel and convention space as well. The casino also pays host fees to the surrounding communities, including Bethlehem and the neighboring city of Allentown, which the Morning Call reports comes to a total of $20 million annually. (In Pennsylvania casinos get to keep less than half of their winnings; the lion's share of the remainder goes toward property tax relief and the rest to the horseracing industry, economic development, and local governments.)

Plenty of risk

But Bethlehem and the Lehigh Valley were already rebounding without the casino. Las Vegas is the only city that can be said to have successfully anchored itself with a casino economy, largely because it managed to become America's hub for the convention business and a year-round tourist destination. Elsewhere the results have been distinctly less impressive. In a 2010 survey for the Federal Reserve Bank of Philadelphia, where he is a visiting scholar, Alan Mallach, FAICP, nonresident senior fellow in the Metropolitan Policy Program at the Brookings Institution, wrote, "A further area in which casinos may have an economic development impact is in the redevelopment of distressed areas. ... The literature, however, on that last point tends to be, at best, descriptive or anecdotal." Today, however, he seems less equivocal.

"Casinos have about as much to do with economic development as they have to with landing a manned expedition on Mars," Mallach said in an interview. "The point is taxes. [In terms of economic development] every dollar spent in that casino is going to be a dollar not spent in some [other establishment]. A job created in the casino is a job taken away from something else."

A 2006 analytic memorandum to the Federal Reserve Bank of Boston supports this contention: "Whether a casino will benefit or harm a local economy hinges on whether the casino is likely to attract tourists to the region."

The Midwestern casino market is organized in the diffuse manner of the Northeast (outside Atlantic City) and is the nation's other oversaturated region. Mallach's 2010 review found that casinos in Michigan, Wisconsin, Illinois, and Missouri drew between 75 and 84 percent of their customers from their local area.

In 1995 Las Vegas and Atlantic City were the exact reverse: Three-quarters or more of their customers were so-called destination gamblers. But even the tourist trade didn't sustain the local economy in the New Jersey city, where casino executives and local politicians put little effort into ensuring that the economy beyond the casino walls thrived. (Most of Atlantic City's casinos have no windows and allow gamblers to drive over the expressway to attached parking lots so they never need set foot on the sidewalk.)

The congressionally mandated National Gambling Impact Study Commission's comprehensive report of 1999 includes a quote from an Atlantic City witness who claimed there had been 311 bars and restaurants in the municipality the year the casinos opened. After almost 20 years of domination by the windowless complexes, only 66 remained.

The jobs picture

The money locals spend at these establishments is largely whisked away to the casino owners and to the state capitol. But a certain percentage is retained in the region through the thousands of working-class jobs available in most casinos. Where strong unions force owners to share the winnings more liberally, the results look even better.

"Casinos are one of the few service industries that pay a living wage, with health care and pensions," says Clyde Barrow, chair of the Department of Political Science at the University of Texas–Pan American. "A full-time job with benefits and health care is somehow worse than a job in a locally owned restaurant, part-time, with no benefits? Segments of the casino industry that are unionized have average wages that are about $10,000 a year more than nonunionized [casino] jobs."

In a 2008 analysis for the policy journal Mass Benchmarks, Barrow found that 70 to 95 percent of casino jobs are full-time with benefits. He also found that commercial casinos paid average annual wages of $36,276, substantially higher than the average wage of $20,176 in Massachusetts's leisure and hospitality industry or $30,784 in the state's arts, entertainment, and recreation sector. (The Massachusetts minimum wage is $8, so these numbers are higher than they would be nationally.)

Industry-wide generosity does not come from the good will of casino owners. The industry, especially in Atlantic City and Las Vegas, has a union density matched in few other corners of the private sector. In contemporary Sin City, the base wage of a unionized restaurant server was three times higher than that of her average counterpart in New York City, as James Kraft reported in 2009's Vegas at Odds. The principal casino and hotel union, Unite Here, reports that the average housekeeper in Vegas earns almost twice the wage of a housekeeper elsewhere and that doesn't include thousands of dollars in benefits.

Such security is not easily won. Today the Las Vegas strip is almost entirely organized, but it easily could have been otherwise. Intense labor strife wracked Las Vegas from the 1970s through the 1990s, culminating in the longest strike in postwar American history. Meanwhile, Atlantic City's entirely union operations have been hemorrhaging jobs as Pennsylvania's casinos have opened — only three of which are organized. "We have a longstanding relationship here in the Philadelphia area with every union, and we intend to continue that," said Parx CEO Ricci in an interview. (Parx is not a unionized casino.)

"A minority of the industry as a whole [is organized]," says Barrow, "and it's strongest in places like Nevada and New Jersey. After that it's kind of hit or miss."

Casinos keep coming

The uncertain and uneven benefits of the casino industry — not even touching on the potential social impacts of gambling — have not dissuaded politicians or industry leaders from pushing for new casinos wherever they see the possibility of attracting gamblers from a rival state or business.

When Democratic Massachusetts Gov. Deval Patrick announced his push for three casino sites in 2007, economic development and jobs were his stated goals. This past November, voters overwhelmingly voted to retain the 2011 enabling law that Patrick shepherded through the legislature. Three casinos will be erected in the coming years, with two major sites in the economically stagnant western city of Springfield and in Everett, a small working-class city outside Boston. The latter development will be on the site of a massive brownfield, like the Bethlehem Sands, which used to be a Monsanto chemical production facility. A small slot parlor will be placed in Plainfield, in the southeastern part of Massachusetts, presumably to draw gamblers who would otherwise go to Rhode Island.

"The point is largely to cannibalize other markets," says Daniel Hodge, director of economic and public policy research at the University of Massachusetts Donahue Institute. "If you are fully saturated, the actual gains and opportunities are a lot less. It's directly a form of competition with other states. They are ideally trying to attract some gamblers from, say, Vermont, New York, and New Hampshire."

Even this limited market may be shrinking. During the summer of 2014, Moody's announced the company would be lowering its expectations regarding the gambling industry's fortunes. The forecasters stated a decline from "stable" to "negative" because of flat revenues from non-Nevada establishments. Moody's Foley says that his outlook remains unchanged almost six months later, citing as principal factors the continued stagnation of American wages and the increasing prevalence of digital entertainment, including online gambling.

The casino industry "hasn't recovered [its prerecession peak], and we don't expect it to recover," Foley adds. "We think it could take another bump down. The people who typically gamble don't have the money to do as much as they used to. Then in the regions that are oversaturated today, if you throw in more supply, [the] casinos could be fighting for less customers over time." n

Jake Blumgart is a reporter and editor based in Philadelphia.

Resources

Images: Top — The Sands Casino Resort is built on the site of the former Bethlehem Steel plant. Photo courtesy Wynn Resorts Limited. Middle — Bethlehem Steel by Jschnalzer, Wikipedia (CC-BY-2.5). Bottom — As part of the state licensing agreement, the Las Vegas Sands Corporation donated 10 acres of the site for the SteelStacks arts campus. Photo by Jonathon Davies.