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Illinois: Wasteland or Promised Land?

Massive gaming expansion bill sits on shelf while politicians ponder

Illinois: Wasteland or Promised Land?

Senate Bill 744, which the Illinois legislature approved in May, would vastly increase gaming opportunities—more than in almost any other state, except perhaps Nevada. The bill to add casinos and authorize slots at racetracks—tripling the number of machines in the state—will, depending on who is talking, destroy the existing casino market or be the promised land, generating jobs and prosperity.

Whether or not Governor Pat Quinn signs the bill, the fact remains that Illinois is considered by many to be a hard place for a casino operator to do business or make an investment.

As Innovation Group President Steve Rittvo puts it, “Illinois’ greatest asset and its greatest problem are the same thing.”

Problem or Solution

An existing casino operator, who prefers not to give his name, agrees. “Existing operators are very unhappy with the bill because of the additional competition,” he says. “When the bill that legalized casinos passed in 1992 they weren’t talking about maximizing revenue. This new legislation really adds casinos to all of the populous areas of the state.”

This operator blames fallen revenues on two things: “It’s the smoking ban and competition from the two Indian casinos in Milwaukee, and Four Winds and the Horseshoe Hammond, where they spent $500 million. The smoking and the new competition in neighboring states had the impact on profits. The economy is the third thing, but that is across the board in any market.”

SB 744 represents the worst tendency of Illinois politicians, says the operator. “Politicians tend to overestimate the size of the market, and they don’t understand the business from a competitive standpoint. They don’t understand how the business operates.”

Illinois politics are different from other states. They don’t do anything by halves. If they are going to buy an election, they buy it, although as Joseph Kennedy said, nobody is willing to pay for a landslide. Illinois produced the current president of the United States, who pointedly runs a squeaky-clean administration, but it is also where a former governor languishes in federal prison and his successor was impeached and just convicted on federal corruption charges.

In this state that doesn’t believe in half measures, it isn’t surprising to see that philosophy extended to gaming, where a 400-page bill that would expand slots and gaming tables from 12,000 to possibly 38,300 sits on the desk of Quinn, a self-proclaimed reformer. Also known for a John Kerry-like tendency to be against an issue before he is for it, Quinn has 90 days—until the fall—to decide whether he is actually for the bill he has called “too top-heavy” and “excessive.”

In addition to SB 744’s new riverboats, a Chicago casino and slots at the Chicago-area airports, O’Hare and Midway,  a law just upheld by the state Supreme Court will allow up to five slot machines/VLTs at state bars and restaurants, with the approval of the local communities.

Expansion or Explosion?

It is a big expansion. The new legislation would add five to the existing nine riverboat casinos, which could expand from 1,200 to 2,000 slots. It would allow slots at racetracks, fairgrounds and at two municipal airports, generating an estimated $1.6 billion in tax revenues.

Knowing that Quinn leans against it, Illinois Senate President John Cullerton employed a legislative tactic to give supporters more time to lobby the governor. “There’s no sense in giving it to him to veto it,” commented Cullerton. The parliamentary tactic prevents the bill from being forwarded to Quinn for 90 days.

Quinn is confused by Cullerton’s action.

“If you believe in a bill—and apparently there are members of the House and Senate who believe in this bill—then not to send it to the governor is, I feel, kind of curious, sort of odd,” said the governor.

Nevertheless, Quinn said it would be weeks before he decides. He promised to look at “every sentence” of the bill.  Supporters cite Quinn’s most recent Hamlet act, when he was against the bill that abolished the death penalty, then signed it.

Just-minted Chicago Mayor Rahm Emanuel, a new Illinois heavyweight, strongly favors the bill because it includes a casino in Chicago and two in the suburbs. Some see Quinn’s indecision as a way to wrest some political influence away from Emanuel.

When his support of the bill came up during a news conference, Quinn snapped, “I’m beholden to the people of Illinois, not to legislators, not to mayors. The people of our state, all 13 million good and true, they’re the ones who I get up in the morning every day and say, ‘What’s best for them?’”

Meanwhile, supporters are meeting with Quinn to try to sway him. Besides a veto, he could offer an amendatory veto  to throw out what he doesn’t like. It would be subject to an override vote by both houses.

During these meetings, Quinn reportedly has been keen to learn how agriculture and horse racing interweave. Trainers, grooms, horse breeders, race officials, blacksmiths, veterinarians, racetrack employers and farmers all make a living from the sport. As many as 40,000 agricultural jobs are connected to horse racing, say advocates.

Jay Hochstetler, an 18-year old fourth-generation harness driver, recently appealed to Quinn. “If Governor Quinn doesn’t sign it, horse racing is done in Illinois,” he said. “If he does not sign the bill, it will destroy the harness racing and thoroughbred racing industries in Illinois, and will create a chain effect from there.”

For and Against

Quinn’s agonizing may be an allegory for the state, where, despite a 2009 law that allows taverns and restaurants to operate five video lottery terminals apiece, many people are hostile to gaming.

Polls show SB 744 is very unpopular. A recent survey of 600 showed that most want the governor to veto it: 54 percent oppose the bill; 35 percent support it.

But in cities like Rockford and Danville, where unemployment is high, it is a different story. Some estimates say a casino in either town would employ 1,300 permanent workers and 400 construction jobs for 18 months. Estimates are that the casino would contribute $12 million in taxes. Rockford and Danville have organized letter-writing campaigns and rallies, and chambers of commerce and businesses are pressuring Quinn.

Rittvo’s Innovation Group helped Chicago billionaire Neil Bluhm, the owner of Midwest Gaming, obtain his gaming license to open what is currently the last Illinois casino, the Rivers Casino in Des Plaines. It represented racetracks in their effort to get slots and individual casinos in their fight against the 2009 law.

According to Rittvo, the Illinois gaming industry “provides a fulcrum to the state itself to look at raising taxes because of the revenues that the state gaming operators are generating. Because of that, the state has been in a state of flux. There has been fairly continuous consideration of expanding gaming alternatives within the state.”

These alternatives have run the gamut from racinos, to VLTs in bars and restaurants, to a downtown Chicago casino, to expanding the number of riverboat casinos. “Everything in this bill has been discussed over time,” he says.

Tax Terror

Meanwhile, Illinois has had one of the most volatile gaming tax rates in the country, reaching 70 percent at one point. Then, the smoking ban caused a major shift in revenue from Illinois to other states, particularly Indiana. “When you look at revenue it is volatile, as well,” says Rittvo. “If you are looking to do business there, you must realize that tax rates have increased and they are considering increasing them more, and they have considered every form of competition to existing casinos.”

Bluhm just made a huge capital investment in the Des Plaines facility, more than $400 million.

“And as he planned to open, there was a change in the entire tableau of gaming,” Rittvo says. “He has the closest casino to downtown Chicago, where there is talk of another casino, and talk of racinos. His facility is five miles from the airport, where they are also talking about slot machines.”

Adding to the uncertainty, gaming bills have been introduced every year for the past seven or eight years. It makes it difficult to plan how they are going to go forward, and most importantly, how you are going to make investments in Illinois right now.

“I think the basic tenet of the bill is OK,” Rittvo says. “The scale is somewhat large. Four thousand positions for downtown Chicago might be somewhat large. The number of new riverboats may be too many. The inclusion of the tracks is legitimate. And we’re not even talking about VLTs at bars and restaurants. I think it’s the scale and the number of new positions that are excessive.” Remember, he says, “the guys who are there now can’t leave.”

Many believe if the bill becomes law, the market will be at absolute capacity, with no room for expansion and too much supply for the existing demand.

Cory Aronovitz, of the Casino Law Group, disagrees. Illinois is, in his words, “an underserved market.” A former legal counsel to the Illinois gaming board and adjunct professor of casino law at John Marshal Law School in Chicago, Aronovitz is a founding member of the International Masters of Gaming Law.

Aronovitz helped lobby the bill. “I like the bill,” he says.

He doesn’t believe a saturated market caused the decline in Illinois casino revenues. “This bill will increase jobs and create economic development,” he says. “Having a casino in Chicago will dissuade patrons from going to Indiana, where they have (smoking). It will attract non-smokers and even those who smoke but don’t have to smoke and gamble at the same time—and those who don’t want to drive to Indiana. Having gaming at airports will attract a market that is not local. A Chicago casino could be a destination, and aside from the Horseshoe in Hammond I can’t think of a property in the Midwest that is a destination. Racinos will also do well without having a significant impact on existing casinos.”

It will “grow the market, without significant cannibalization,” Aronovitz says. “The one case study will be the Des Plaines casino, and how the Arlington racetrack is impacted. And the Casino Queen in East St. Louis. Aside from that, I don’t think there will be much cannibalization.”

Stopping the Madness

Rep. Lou Lang, although he wrote the bill that will shake the gaming landscape, agrees that the state has created an atmosphere of uncertainty.

“We have mistreated the gaming industry, whether video, horse racing or casinos, because we made their statutory and regulatory scheme a moving target,” Lang says. “If this was any other industry, we would be doing everything to enhance their ability, but whenever we talk about gaming or gambling, the hairs on the back of peoples’ necks stand up.”

During Lang’s time in the legislature, “we have had 15 percent, 20 percent, 40 percent, 50 percent and 70 percent tax rates, and then back to 50 percent. In Illinois, taxes are based on gross revenue. Imagine any business paying 70 percent of its gross, and paying for the rest of it out to the other 30 percent. It’s insane! No other business is subjected to that kind of process!”

He adds, “You ask why the industry does not do better? It is because they are unsure whether the state will hit them over the head further.”

Lang won’t agree to changes to his bill that cut into its “core.”

“The governor has made comments about how the bill is ‘heavy,’ but that might be visceral reaction to something he hadn’t read yet,” says Lang. “If he has some reasonable adjustments that won’t change the bill, I might buy it. I won’t agree to adjust the core. The purpose of the bill is economic growth over the entire state, not just two places. The places were chosen for a good reason. If he said give everybody something, but less, I wouldn’t like it but I would talk about it. If the idea is to bring jobs to areas that don’t have them today, then a change that would dramatically and significantly impact any section of the state negatively I would not agree to.”

He also won’t agree to any bill without racinos. “Today there are 30,000 to 40,000 jobs in the horse racing industry, which is dying because other states treat their racetracks better; they have quintupled their purses. We need to bring them back. We can’t lose 40,000 agribusiness jobs.”

Without racinos, he can’t pass the bill. “Otherwise, why would lawmakers from Cairo, East St. Louis, and legislators who are not going to be near a casino vote for it? They voted for it because there are tons of jobs created by it. I will agree to no bill that doesn’t help horse racing.”

Meanwhile, Greg Carlin, president of Illinois’ newest casino, Bluhm’s Rivers Casino in Des Plaines, expects to do just fine in the current economy.

“I think, given that we are the first casino in Cook County and the first on the Illinois side since the mid-’90s, that we will do very well,” Carlin says. “We have a great location and we have designed a very nice casino different from what is currently in the market. Over 3 million people live within 20 miles and there is no casino in that range. We have built a really nice facility.”

If Quinn signs SB 744, there stands to be quite a few more facilities in Illinois, nice and not-so-nice. The only thing left would be to see what, in fact, the market will bear.