Casinos Saturating U.S. Midwest Cannibalize State Revenue

Mike Thomas, a retired salesman for a truck manufacturer, says odds are that he’ll stop driving 45 minutes five days a week from Ohio to play slot machines at Hollywood Casino in Lawrenceburg, Indiana.

Instead, he and his wife, Sandy, expect to do their betting at the Horseshoe Casino in downtown Cincinnati, set to open next month about 15 miles (24 kilometers) from their suburban home. He doesn’t think he’ll be alone, noting that most cars in the Indiana casino’s garage bore Ohio plates.

“They’re going to lose a lot of customers,” said Thomas, a 75-year-old in an Ohio State Buckeyes sweatshirt and cap. “I’m not going to drive 40 miles if I can do as well there.”

The Cincinnati casino will be the fourth to open in Ohio since voters approved them in 2009, and as many as seven horse tracks with slots also are planned. Yet even as revenue at the Ohio casinos has missed projections, they’re siphoning money from Indiana and Michigan. With most major Midwest markets now served, states that rely on gambling taxes for schools and other services are fighting for a piece of the action.

“It’s close to the saturation point,” Alex Bumazhny, director in Fitch Rating’s Gaming, Lodging & Leisure group, said in a telephone interview from New York. “It’s almost a zero-sum game whenever a new casino opens.”

Ben’s Bets

Atlantic City, the New Jersey resort that ruled the East Coast market for three decades after the first casino opened in 1978, is floundering after six years of declining revenue as a result of losing business to casinos in neighboring states. Pennsylvania, which opened its first gambling house in 2006 and now has 11, passed New Jersey in 2012 to become the second- largest U.S. betting market after Nevada.

Gambling has a long history as a pillar of U.S. public finance. A half-dozen lotteries sponsored by the likes of Benjamin Franklin and George Washington operated in the 13 colonies to pay for building projects, according to the American Gaming Association. Nevada in 1931 became the first state to legalize casinos, and now people can bet in every state except Utah and Hawaii. Commercial casinos operate in 23 states and tribal ones in 29, according to the association.

The market is especially crowded around the new $400 million Cincinnati casino developed by Rock Ohio Caesars LLC, a venture of Caesars Entertainment Corp. and Rock Gaming LLC.

Falling Revenue

Within about 50 miles, there are three places to gamble in Indiana -- the Hollywood Casino Lawrenceburg run by Penn National Gaming Inc., Pinnacle Entertainment Inc.’s Belterra Casino Resort & Spa in Florence and the Rising Star Casino Resort owned by Full House Resorts Inc. in Rising Sun. Pinnacle also plans a new track with slots -- a “racino” -- at Cincinnati’s River Downs horse track.

Tax revenue from Indiana’s 13 betting sites has declined every year since 2009, according to the state Gaming Commission. Projections for the next two fiscal years assume about $120 million less because of Ohio competition, Chris Atkins, director of the Indiana Office of Management and Budget, said in a telephone interview from Indianapolis. A forecast by the state’s Revenue Forecast Technical Committee in December pointed to “continuing casino market saturation.”

Meanwhile, the Hollywood Casino Toledo near the Michigan- Ohio border, which Penn National opened on May 29, may be siphoning business from Detroit’s three casinos.

Border Jumpers

In the first seven months that the Hollywood was open, Detroit casinos’ combined gross receipts fell 2.5 percent to $796.5 million compared with the same 2011 period, according to the Michigan Gaming Control Board.

“We see large amounts of people coming from Michigan,” said John McNamara, spokesman for the Hollywood.

Michigan also has 22 casinos run by autonomous Indian tribes, and a casino operates in Windsor, Ontario, across the Detroit River in Canada. It all adds up to bad news for Detroit, which faces a possible state takeover because of spiraling deficits. The city anticipates a $10.4 million drop in casino- tax revenue for the fiscal year that ends June 30. The 5.7 percent decrease would be the largest since the casinos opened in 1999 and 2000.

The gambling parlors had been “a godsend,” providing steady revenue while other sources dried up, said Bettie Buss, senior research associate for the nonprofit Citizens Research Council of Michigan, which analyzes state and local government.

Yet the casinos making Detroit suffer are no panacea for their states.

Slow Going

Revenue at the casinos that opened last year in Cleveland, Toledo and Columbus has been short of projections by the Ohio Department of Taxation in 2009, according to Mike Sobul, a former employee who helped calculate them and now is a Columbus financial consultant to local governments and schools.

Timothy J. Wilmott, president of Penn National, said in a Jan. 31 conference call that while the company is “seeing a slower ramp-up” in slots revenue than expected in Toledo and Columbus, he thinks the market needs time to develop.

Indiana lawmakers are considering ways bolster the industry. A bill by state Senator Phil Boots, a Crawfordsville Republican, would allow casinos to keep more revenue and gambling riverboats to move inland. It may be just a holding action.

“You lose your ability to out-entice somebody because everybody is pretty much the same, and everybody is on the same playing field,” Mark Nichols, a professor of economics at the University of Nevada, Reno, and its Institute for the Study of Gambling & Commercial Gaming, said in a telephone interview. “Then it just comes down to location.”

To contact the reporters on this story: Mark Niquette in Columbus at mniquette@bloomberg.net; Chris Christoff in Lansing, MI cchristoff@bloomberg.net.

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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