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November 22, 2006

Casinos: Will the state be the biggest loser?

$hould politicians depend on gambling revenues to provide public services? What happens when government begins to rely on money from so-called “sin” taxes on tobacco or gambling? And what are the economic, social and political impacts?

Author and researcher Robert Goodman, a professor of architecture at Hampshire College, addressed those issues and offered his insights in his Nov. 15 talk, “The Government as Gambling Entrepreneur,” sponsored by the Pitt School of Social Work.

With a decision by the Pennsylvania Gaming Board on who will win the slots license for Pittsburgh expected in late December and a series of public meetings by the Pittsburgh Gaming Task Force recently concluded, Goodman’s timely lecture drew an audience of nearly 100 people.

An expert on urban planning and economic development, Goodman is the author of the 1995 book, “The Luck Business: The Devastating Consequences and Broken Promises of America’s Gambling Explosion.” The book grew out of his role as director of the U.S. Gambling Study, a two-year project funded by the Ford Foundation and the Aspen Institute in the 1990s.

Goodman began his lecture by noting that he prefers the term “pariah activities” as a less-judgmental alternative to “sin” taxes, adding that he doesn’t believe that gambling, smoking or drinking are sins, “but there are certain problems associated with these activities.”

Goodman said his problem comes when legislators turn to the expansion of such activities to pay for public services. “The interesting thing is how politicians have trapped themselves into this phenomenon,” he said.

“What’s happened is we’re moving in a direction where governments … have moved from being a regulator of certain activities to becoming, certainly in the case of gambling, one of the chief promoters of it,” he said.

“When the mafia controlled most of the gambling in this country, they weren’t running full-page ads in the newspapers or advertisements on TV to get people to gamble,” Goodman said. “Here you have governments moving in a very different direction.”

The result: “Just like the addicted gambler, they’re finding themselves more and more addicted to these revenues,” Goodman said.

Goodman sees parallels between the way politicians have related to tobacco and gambling, although with smoking, the government’s involvement centers on getting people to stop. Gambling, however, has been transformed from a dangerous activity that needs to be regulated tightly and renamed “gaming” — “more like entertainment,” he said.

Gambling proponents rationalize that only a tiny percentage of gamblers become problem gamblers and that people will gamble anyway, so why not just trap those revenues?

However, when that scenario plays out, Goodman said, the picture is not as rosy.

First, he said, not all the revenue is trapped. Depending on location, the percentage could be large or small. In addition, convenience leads to increases in gambling, adding to the risk of creating problem gamblers.

“Any time you locate a gambling facility within a community, you get more people to gamble,” he said. “The more accessible it is, the more gambling there’s going to be.”

And legislators often make the mistake of not differentiating between tourist-destination gambling, such as occurs in Las Vegas, and convenience gambling, which draws mainly local players and merely redistributes discretionary dollars, he said.

Tourist gamblers spend money in casinos as well as in related activities such as shows, restaurants, hotels and taxis. And when tourists gamble, “you import the dollars, you export the problems,” Goodman said, noting that the people who become problem gamblers mainly live outside the community.

Aside from gambling industry representatives and overly optimistic legislators, no one envisions flocks of tourists will fly to Pittsburgh to gamble, Goodman said, drawing chuckles from the crowd. “I don’t believe it’s going to happen,” he said.

What will happen is that some people who gamble in nearby states will come to Pittsburgh instead. And the number of convenience gamblers, who typically come from a 50-75 mile radius of a casino or racetrack-casino will expand, adding to the region’s gambling-related social costs.

The change will have the economic effect of redistributing local discretionary dollars, he said, calling it a “zero-sum game” in which instead of buying a shirt or going to a movie, local money might be spent in a casino instead.

But “the real net costs have to deal with problem gamblers,” and the effects of their behavior on other people, he said. When a gambler uses up his own money, he may borrow from friends or family, quit paying his bills, go bankrupt, commit fraud, embezzle or write bad checks. He might even commit robbery to support a gambling habit.

In addition, there’s the expense of prosecuting such cases.

Depending on the community, 1-3 percent of the adult population may develop into problem gamblers. Before gambling was legalized in Iowa, Goodman said, 1.7 percent of adults had the problem. Four years later, the number had risen to 5.4 percent. The highest figures are in Louisiana, at 7 percent, he said.

“These costs, even though it’s a small percentage, can be quite high,” he said, estimating the cost to society per problem gambler at $13,200 a year.

While Goodman said that better research is needed, he noted that a conservative estimate of the cost of a 1 percent increase in the number of problem gamblers in Pennsylvania multiplied by a conservative $10,000 per gambler totals $800 million a year. “We’re not talking about small amounts of money.”

Problem gamblers have a different effect on the casino industry, Goodman said. Research has shown that 25-50 percent of a casino’s revenue typically comes from problem gamblers, he said.

“So now you’re looking at an industry, just like the tobacco industry, that’s dependent on people with behavioral problems. Translate that back into public policy and now you have the government paying for services on the backs of people with problems,” Goodman said. Legislators ought to be prepared to debate the issue, he said. “To what extent are they willing to depend on people with behavioral problems to finance services?”

Goodman cited the 1998 multi-state tobacco settlement agreement as an illustration of the tangles that can be created when governments begin to rely on these revenues. In response to an attempt by attorneys general from a number of states who sought to recover the health care costs to taxpayers resulting from tobacco use, the tobacco industry agreed to pay about $250 billion over 25 years, ostensibly to cover the costs of dealing with those issues. But, Goodman said, as little as 10 percent goes toward that, while most is used for other purposes.

For instance, he said that New York has sold tobacco revenue anticipation bonds on the financial markets in anticipation of its tobacco settlement revenues.

“If a tobacco company were to suddenly go bankrupt, that money would be in jeopardy. So now, the finance market is paying very close attention not to the health of people, but the health of the tobacco company. And that’s what politicians are paying attention to,” he said, adding that the tobacco industry is aware of the value of keeping states hooked on tobacco money as a way to ensure the support of those government agencies dependent on that funding.

Goodman cautioned that expansion of gambling will occur if legislators view casino taxes as a way to provide the better schools, roads, health care, transit and other public services that their constituents are clamoring for without raising individuals’ taxes.

“This is not theory,” he said. “There is state after state where this has happened.”

Goodman said he believes that any tax revenue generated by the gambling industry ought to be directed to the problems created by the industry, rather than to the general fund.

Other issues to consider:

• Advertising costs. States spend $400 million a year advertising their gambling ventures, Goodman said, questioning why that is necessary when the original logic was that people are going to gamble regardless.

• Tax policy. The more pariah taxes are used, the more alternatives are overlooked, he said.

• The monopoly issue. “If you’re interested both in improving the local economy and supporting an industry that’s going to be important in the future, why do you pick gambling?” he asked, curious that governments wouldn’t choose additional industries to protect as well. “The gambling industry is a bottom-feeding industry” rather than cutting-edge, he said.

• The competition. Pennsylvania’s horse racing industry fomented initial talks on legalizing gambling in the state, complaining that neighboring West Virginia, with legal gambling, had the advantage. “Others are being decimated, too,” Goodman said, asking once again, why pick racing? “Is that where the future is? I don’t think so.”


Audience members and respondents in Pittsburgh and at Pitt-Bradford, where Goodman’s talk was broadcast live, raised questions and offered comments following the lecture.

Hill District resident and former Pitt professor Kimberly Ellis, active in a “Raise Your Hand, No Casino on the Hill” effort, asked how to communicate with residents about the negatives of locating a casino in their neighborhood when residents are dealing with unemployment.

“It’s been very hard trying to talk to residents about why this is not going to work,” she said. “Some of them really believe it’s either a casino or no development.”

Goodman replied, “Solving economic development problems of low-income communities is a very difficult task and it’s not going to be solved by how you deal with casinos. It’s a much broader problem. It seems to me the most critical thing is not the location of the casino next to the community, but the kind of economic benefits that community can get through jobs.” He added that local government representatives should be using the employment issue as a bargaining chip with casinos that want to locate in Pittsburgh.

“One of the critical things would be for the city to negotiate in terms of having the casino, to make sure that a certain number of residents from communities like yours that need the jobs actually get jobs, and not just any jobs,” he said.

Terri Baltimore, director of neighborhood development and arts at Hill House Association, noted that while the community did not respond quickly to changes proposed for the Hill District during urban renewal in the 1950s and 1960s, that’s not so today. She said the gaming companies have been invited to speak to the community and feedback from residents has been solicited.

“There’s room in the community for a lot of different voices on this issue,” she said. “What we’ve tried to do with the gaming task force is to make sure that people in the community have information about gaming so they could make the best informed choice.”

Baltimore added, “As a neighborhood, we realize we’re going to be impacted by gaming no matter where it is.”

Speaking from Bradford, Sandra Brundage, director of the Salamanca Youth Bureau, lauded the discussion of social issues, saying there had been little such discussion before the Seneca Allegany Casino opened in 2004, only a few miles from Pitt-Bradford.

The impact has been evident at the youth center, which is open from 2:30 to 8:30 p.m. daily, she said, noting the number of children served has doubled. Some come for afterschool supervision or dinner because their parents are working at the casino.

Some are alone for other reasons, with “parents to whom we have to make a phone call and say, ‘I know they’re doing the draw at 8:30 but you need to get here and pick your child up, and the next time the phone call I make won’t be to you, it will be to the police or child protection or something like that,’” she said.

Joni Schwager, executive director of the Staunton Farms Foundation, said that focusing on developing economic opportunities through gambling takes time away from developing other types of economic opportunities, and she expressed concern for the impact on roads, parking and traffic. “I’m very concerned that the funds that will come from the casinos will not begin to address any of the infrastructure issues that gambling is going to bring to our community,” she said.

Schwager also said that while casino jobs will be created, “the casinos’ rule is that nobody can work in a gambling casino who has a misdemeanor or above. And if you’re looking at a depressed community you’ve got a lot of folks who already aren’t going to be able to get jobs at the casino.”

Pennsylvania’s high casino tax rate of 54 percent gives no incentive for casino operators to advertise in other states. “I’m concerned that there are not going to be people coming into the community,” she said.

Schwager said social issues are of even greater concern. Using a middle-of-the-road estimate of 2.9 percent of the adult population becoming problem gamblers, she said, that would mean 27,574 new problem gamblers in Allegheny County.

“The public and the private community is going to have to pay for the impact of gambling,” she said. “We’ve already been asked for a grant to study potential human service capacity for gambling.”

Economist Christopher Briem of Pitt’s University Center for Social and Urban Research said the local labor force will be affected when 1,000 to 2,000 casino jobs need to be filled. “You’re going to see some real impacts on local hiring pretty quickly,” he said.

Briem said revenues indeed will come largely from a redistribution of local dollars rather than a large infusion of money from outside the region and he predicted that the impact will be felt widely. “We have a host of churches and social agencies that rely on bingo revenue. No one’s really pondered the question of how much of that gambling money’s going to come out of local bingo revenue, which is a source of revenue for local nonprofits.”

James Allen, director of the Allegheny County Department of Human Services drug and alcohol division, said agencies such as his will need to treat gambling addictions in addition to the addictions they already treat. “The problem is, in drug and alcohol, we’re currently underfunded,” he said. “There’s no way at this point we can really respond to this obvious disaster.”

“I don’t know of any location that solved its economic problems by doing this,” Goodman said, adding that using gambling revenues as a financial Band-Aid spells trouble. Looking ahead, he predicted that neighboring states will up the ante to compete with Pennsylvania’s new casinos, saying that West Virginia’s casinos likely will move to increase comps [casino freebies] or raise payouts, “then Pennsylvania will compete with that,” he said.

Noting gaming companies’ “ladder” strategy of getting a foot on the first rung, then working their way up, he advised the community to ask now, before a casino arrives, for the benefits it wants as part of the deal — whether it be guaranteed jobs, street lights or parks. “As it goes on, it’s going to change. [The casino operator] is going to want more machines, and less benefits,” he said.

What is certain, Goodman said, is that Pennsylvania’s decision to allow casinos will have a lasting impact. “You’ve changed the political landscape of the state,” he said.

—Kimberly K. Barlow

Filed under: Feature,Volume 39 Issue 7

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