As the Wynn Resort Casino breaks ground in Everett tomorrow, many predict a booming casino industry in Massachusetts. However, if the Commonwealth’s history with casinos says anything, we should proceed with caution.
Plainridge Park Casino, the initial Las Vegas-style slot parlor in Massachusetts, finished its first year of operations in June. As reported in the Boston Globe, its performance fell well short of its projections. When Penn National Gaming won the bid for this casino, the company projected revenue hitting $300 million in the first year. When they closed the books in June, the casino barely nudged past the halfway mark with sales of only $160 million.
What does this mean for Massachusetts?
In 2011, Massachusetts legalized casino gambling with the hope that local options would deter Bay Staters from going to Connecticut and Rhode Island to play. Additionally, state leaders believed that the $250 million Plainridge Park Casino would revitalize the horse-racing industry in the region by integrating a harness-racing track in its facilities. With the slots parlor being taxed 49% of its gross gaming revenue, Plainridge’s $300 million projection meant the state would earn just shy of $150 million.
Yet, the Massachusetts Gaming Commission’s June financial report disclosed that the Commonwealth received only $81 million in revenue due to the casino’s revenue shortfall.
Massachusetts was operating under the assumption that it was going to receive $150 million to invest into state-wide programs. Furthermore, projections also stated that the Twin Rivers Casino, a major Rhode Island casino about 11 miles away from Plainridge, would lose at least 15% of its revenue over the year. Yet, the Boston Globe cited that revenue decreased by only 5%. Plainridge Park Casino missed the mark on two of its major goals: generating revenue and keeping Massachusetts money within state borders.
As Massachusetts witnesses the construction of two large-scale, resort casinos, Plainridge’s revenue shortfall may foreshadow a larger issue. The $950 million MGM Resort will be built in Springfield, and is projected to open in 2018. According to the State House News Service, the $2.1 billion Wynn Resort will be built in Everett. Although first-year projections have not yet been made, both casinos will be taxed 25% of gross gaming revenues according to the criteria for resort casinos. MGM plans to create 3,000 permanent jobs, and 2,000 construction jobs, while Wynn projects 4,000 permanent jobs and 4,000 construction jobs. Both resort casinos are aimed at competing with Connecticut and Rhode Island casinos on a larger scale than Plainridge Park Casino was. With projects as large as these, realistic projections will better allow the Commonwealth to budget out money to its various agencies and programs.
Overly optimistic gaming projections are not unique to Massachusetts. Across the U.S., overall revenue for new casinos almost always falls below projections. Even with Massachusetts’ use of consulting firms to vet revenue projections, guarantees don’t exist. Projections are often made through “gravity models.” These models are based on the notion that the larger a casino, the farther away it can draw its consumers. Over and over again, this model’s margin of error has been too big for comfort.
When using the same data, developers tend present higher projections than regulators do. A study by Cummings Associates shows that, on average, developers and regulators came up with projections that were 20% apart. The model allows casino developers to integrate wishful thinking into projected outcomes.
Massachusetts’ choice to use external consulting firms is a prudent move, but studies may still not reflect accuracy realistic assessment of future results. The chief executive of Mohegan Sun, the company that lost the bid to Wynn Resorts, believes that the consulting firm hired by the Massachusetts Gaming Commission did not extensively question Wynn’s spending numbers during the bid.
Enrique Zuniga, Massachusetts Gaming Commissioner, stated that the commission looks into factors outside of projections like proposed property, clientele, and market research in order to better balance the inaccuracy that comes along with revenue forecasts. However, this seemingly thorough research may not be enough to calculate accurate projections.
Plainridge Park Casino is a perfect example of how the current system for projecting revenue is not sufficient for predicting the success of a gaming institution and its impact on the state budget. All three Massachusetts casinos have percentage-based taxes which are solely dependent on the casino’s success. Perhaps it would be wiser for the Commonwealth to implement a minimum monthly payment. In other words, the casinos would pay a monthly payment not dependent on their revenue on top of their percentage tax. According to the National Conference of State Legislatures, no other state has experimented with this type of flat payment. That way some of the risk moves from the state’s shoulders to those of the casinos.
The casino industry forecasting has a weak track record. Forecasting techniques are especially poignant as Connecticut is looking into opening a third casino to compete with Springfield’s MGM. Springfield is six miles from the Connecticut border. MGM forecasts to draw about one-third of its consumers from the affluent areas of Hartford. A border casino in Connecticut could have disastrous effects on MGM’s revenue projections.
Predicting revenue is no easy exercise. When it comes to casinos, viewing industry projections with a healthy degree of skepticism should be a sure bet.
Roger Perry Transparency Intern