States' bet on gambling industry to balance budgets hasn't paid off

In many of the nation's cash-strapped statehouses, legislators have turned to increased gambling venues to fill gaping holes in their budgets. But rolling the dice on this industry does not appear to be a winning strategy, a new study from the Nelson A. Rockefeller Institute shows.

Why not? This past year has seen gaming revenue shortfalls, some tied to the recession and some part of long-term trends. More specifically, gaming revenue declined 2.6 percent nationally, with 28 of 42 states showing losses. The biggest losers were Oregon (-15.2 percent), Illinois (-14.6 percent) and Nevada (-12.5 percent).

The study looked at the four areas of gaming income; lotteries, casinos, racinos (race tracks with gaming machines) and pari-mutuel wagering. Only racinos have avoided a steep decline during the recession.

In the 10-year period before the recession, the states did pretty well, with gaming revenues growing an average of 4.9 percent annually. For most states, the revenue was still a minor part of the budget, between 2.1 percent and 2.5 percent. However, a few states were much more dependent; Nevada at 13.6 percent of its budget, West Virginia at 9.2 percent and Rhode Island, 7.7 percent.

But casinos no longer seem the bright beacon of prosperity they once did, even though companies like Penn National Gaming (PENN) continue to expand (currently pushing a ballot initiative in Ohio). The growth rate in state casino-derived gaming revenue has been declining since 2000 and actually went into the red in the past 12 months.

A study of six states showed that, despite an increase in the number of venues, the admission rate actually fell by 4 percent last year, a trend that had been developing since at least 2004. (The study did not include Native American casinos, for which numbers were not available. It did estimate that the total revenue from all of these, however, is less than $1.5 billion.)

Lotteries also have experienced a drop. Adjusted for inflation, 33 of the 40 states for which the study had information showed declines this year. Only the increase in video lottery terminals (VLT) in some states has propped up what is a disturbing trend. Without VLTs included, collections fell by 4.4 percent in the past year.

Pari-mutuel betting at horse and dog tracks and jai alai, has dropped precipitously, down 14.8 percent this year, including 41 percent in Pennsylvania. However, the aggregate of all state revenue from this sector is only $163 million, hardly enough to destroy any budget when it tanks.

The racino has been the one bright spot in this universe. The 12 states with these facilities have seen revenue more than double since 1998 and increase 6.7 percent this year. This increase, however, is almost all from Pennsylvania, where five new racinos were opened this year.

From these results, it seems clear that planning to offset weak tax returns in other sectors with gaming revenues is not a productive tactic, since gaming receipts also fall during recessions. It also appears that as the number of venues grows, the income per venue shrinks, like the same pat of butter spread across more pieces of toast.

The study points out that, historically, gaming revenue does not grow as quickly as other state tax revenue or expenditures on areas such as education, so depending on it to replace tax shortfalls or pay for schools is a long-term strategy bound to fail.

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