Gambling bill summarized

The Senate Budget and Taxation Committee has approved the administration's gambling expansion bill with minor amendments. It will likely receive a favorable vote in the full Senate and a hearing in the House Ways and Means Committee today, with House action occurring next week.

Senator Richard Madaleno of Montgomery County - one of the legislature's leading fiscal experts -  has prepared a clear and succinct summary of the administration's bill to expand gambling in the special session. The good Senator has agreed to let us share it with you: 

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"Background

During the 2012 Legislative Session, the General Assembly reviewed, and the Senate passed, two bills providing for the expansion of legal gambling in Maryland. As a result of a constitutional amendment passed by voters in 2008, state law currently allows five slots facilities located in the following jurisdictions: Allegany County, Anne Arundel County, Baltimore City, Cecil County and Worcester County. Three of these sites are already open and producing revenue for the state, while the other two sites – Baltimore City and Allegany County – are still in the conceptual phase. The two bills introduced during the 2012 Legislative Session would have allowed the current sites to additionally offer a range of table games, as well as authorized a sixth site to be located in Prince George’s County near the Woodrow Wilson Bridge, with National Harbor and Rosecroft Raceway both potential sites.

During the regular session, the legislature and the Governor could not come to an agreement on a gaming expansion package, resulting in neither of the two bills introduced passing into law. However, there was consensus regarding the need for additional work to properly assess gaming expansion proposals, which could provide additional revenue for state funded public education. Under the provisions of the 2008 constitutional amendment, any expansion beyond the five authorized gambling sites is automatically subject to a statewide voter referendum during the next regularly scheduled general election. Since general elections in Maryland only occur every two years, there was a predictable push to finalize a proposal before the August 20 deadline to place referendum issues on the 2012 General Election ballot.

As such, on May 21, Governor O’Malley announced the formation of a special “gaming” workgroup of eleven members to review the various expansion measures in preparation for a second Special Session in July/August. Together with two other Senators, [Senator Madaleno] was appointed to the “Workgroup to Consider Gaming Expansion”, which began its work on June 1 and issued its final recommendations on June 20. Despite broad consensus amongst workgroup members on a majority of recommendations, a unanimous agreement could not be reached on the conditions related to the addition of a sixth gaming site in Prince George’s County.

However, recognizing a significant opportunity to improve the effectiveness of the state’s gaming program and expand investment in public education, over the past several weeks the Governor has utilized the workgroup recommendations as a framework for continued discussions with members of the General Assembly and relevant stakeholders. With the recent announcement convening a Special Session, the Governor appears confident that a newly crafted gaming bill – based upon stakeholder and workgroup input - will pass the legislature. Below [is a summary of] the main provisions of the bill, a draft copy of which was released this week.

Bill Summary

As proposed, the Governor’s gaming legislation adopts a majority of the recommendations supported by the “Workgroup to Consider Gaming Expansion”, with several key additions:

• Establishes that 100% of all state proceeds from gaming revenue will be invested directly in public education, deposited in the Maryland Education Trust Fund. It is estimated that the Education Trust Fund will receive approximately $200 million per year once all six sites are functioning in 2016.

• Authorizes a sixth casino in Maryland, to be located in Prince George’s County, with the caveat that a majority of both Prince George’s County voters and statewide voters must approve the issue at referendum. If Prince George’s County voters reject the ballot question in November, a sixth casino site is not authorized. Should voters in Prince George’s County approve the issue at referendum, a competitive bidding process for the operating license will be administered by the State. Should Prince George’s County voters reject the ballot initiative but voters statewide approve, all legislative provisions unattached to the sixth site will go into effect.

• Authorizes table games (i.e. blackjack, poker, etc.) at all state gambling sites at a tax rate of 20%. Video Lottery Terminal (VLT) or “slots” will continue to be taxed at the current rate of 67%. However, if a sixth site is approved by voters, negatively impacted facilities in Baltimore City and Anne Arundel County may retain an additional 5% of VLT proceeds for advertising and capital improvement costs.

• Transitions “slots” procurement responsibilities from the State to casino operators. Currently the State is responsible for purchasing and leasing the “slots” machines at casino sites at a cost of 13% of total revenues. By transferring this responsibility, the State will generate significant savings for the Education Trust Fund. As compensation for the transfer, casino operators will receive an additional 6% of proceeds if they own or lease the VLTs and associated equipment/software.

• Establishes a Gaming Commission, under a reconstituted State Lottery Agency, to review and protect the State’s interests. The seven member commission would be appointed by the Governor with the advice and consent of the Senate and led by an “expert” Executive Director. Other stipulations require that the commission be bi-partisan, reflect the demographic diversity of the state, and consult with a third party consultant to provide continual analysis of the Maryland gaming industry. Additionally, with legislative oversight, the newly formed Gaming Control Commission may adjust the Baltimore City and Anne Arundel casino’s VLT revenue percentages by no more than 5%.

• Bans political donations from gambling companies.

• Allows the state’s casino’s to operate 24 hours a day, seven days a week. However, facilities would still have to abide by local liquor laws, so that while gaming operations could continue they would still have to close their bars.

• Incorporates a “hold harmless” provision, specifying that local jurisdictions currently authorized to host casino sites will not see a reduction in local impact revenues due to the addition of a sixth site. Under current law, local jurisdictions hosting one of the five authorized gaming facilities receive 5.5% of “slots” proceeds to compensate for additional public safety and transportation costs."

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Slot Machines, Schools, and The $718 million Thornton Gap

In the special legislative session that opened today, Governor Martin O’Malley and Maryland’s legislative leaders are promoting expanded gambling as a way to help Maryland’s schools. The Governor asserts that expanded gambling will provide $100 million for Maryland’s public schools.

So it’s important to look at how gambling revenue affects school funding. Even though 48.5 percent of casino proceeds go to an “Education Trust Fund,” it’s not quite right to say that this has increased funding for education. In fact, the typical public school classroom now gets $21,000 less in state funds than the amount intended by the landmark 2002 "Thornton Formula."

 

 

 

 

Here is what has Happened

The “Thornton Formula,” enacted in 2002 increased and reformed Maryland system of providing state funding for local schools. It was supposed to provide adequate funding for the “thorough and efficient” system of public education required by Maryland’s constitution, and to eliminate gaps in student achievement between richer and poorer school systems.

The program operated as intended from 2003 to 2008, increasing state aid to schools by nearly 80%.

After that time, the formula was supposed to adjust annually to keep pace with enrollment and education costs.

In 2008, Maryland voters approved slot machine gambling with the promise that the bulk of the funds would go to support schools. The legislature established the “Education Trust Fund” to receive these funds.

At the same time, the national recession hit, throwing Maryland and almost every other state into a severe revenue shortfall.

The Thornton Gap 

Part of Maryland’s budget balancing strategy was to freeze or limit the inflation factor in the per-pupil amount. The per-pupil amount, which drives the total funding, did not increase in fiscal years 2009, 2010, 2011, and 2012. The legislature allowed a 1 percent increase in the current fiscal year 2013. The increases are limited to 1 percent through fiscal year 2015. So, funding levels have adjusted for increases in student population, but not for cost increases.

What about the money from the slot machines? It did go to public schools, as advertised. But an equivalent amount of tax money went away to help balance the state budget.  The “Education Trust Fund” turns out to be a shell game.

If the formula had been adjusted for actual inflation and enrollment, the state’s school aid would be $718 million more than it is now. That comes to a difference of more than $21,000 for a typical classroom of 25 students. The graph above shows the “Thornton Gaps” for Maryland’s largest school systems.

Without this money, schools have increased class sizes; eliminated programs in foreign languages, physical education, and art; cut supplies and equipment in classrooms, libraries and labs; and reduced after-school and summer program opportunities. These cuts have hit all of Maryland’s schools systems, and they have fallen hardest on those that serve the most disadvantaged kids.

"For Maryland, for our Future"

That was the slogan Governor O'Malley and other gambling proponents used to support the 2008 slot machine referendum. At MBTPI, we understand that the state has to balance its budget, and we appreciate that Maryland’s Governor and legislature have protected education funding from the deepest and most severe cuts. Places like Virginia, Ohio, Arizona and Hawaii have cut their local schools much more severely.

But now there is a need to repair the damage. We need to make good on the promises for Maryland's future - and especially to Maryland's students. If the legislature and Maryland’s voters approve gambling expansion now, they must also make a commitment to restore the formula amounts to the levels required by the original Thornton formula over a reasonable period of time. If we leave the Thornton Gap open we break our promise to today’s kids and we disinvest in Maryland’s future.

Gambling workgroup falters

The Workgroup to Consider Gaming Expansion failed to reach a consensus yesterday, as the likelihood of a second special session retreated.  The sticking point appears to be whether to keep the 67 percent tax rate on casinos or reduce it. Members representing the House of Delegates were willing to support a sixth casino, if it delayed opening until 2016 and if the tax rate remained the same.  While supporters of a casino at National Harbor were willing to delay its opening, they argued that it only made business sense if the tax rate were lowered.

However, there was significant agreement on other issues, including:

• Allowing table games such as blackjack and poker.  This could net the state an additional $51 million, and create 1,900 jobs.
• Transferring ownership of slots machines from the state to the operators. This would save Maryland about $80 million annually.
  
• Establishing an independent gambling commission to oversee casino operations, separate from the lottery commission.
• Ending restrictions on casinos' hours of operation.

The consensus suggests some or all of these issues could be addressed in the 2013 regular legislative session. The 2013 legislature could act on the recommendations regarding ownership of the machines, the organization of the regulatory commission, and hours of operation. Of course, those are not the big issues. The legislature could also act to adjust the tax rate on gaming proceeds, which is one of the big issues.

However, any expansion of gaming - either to a new location or for table games, requires approval by the voters in a referendum. If there is indeed no special session prior to the November election, those issues will need to wait for the next statewide general election in November 2014.

Room for gambling expansion

That was the conclusion drawn by the Department of Legislative Services and its consultant, PricewaterhouseCoopers, in a report today to the General Assembly's Workgroup to Consider Gaming Expansion.

The report concluded that adding a casino at National Harbor and allowing table games would raise an additional $160 million for the state. That could go a significant way toward solving the roughly $400 million structural deficit. Even if the report proves somewhat optimistic, another $100 million in income would be welcome relief for legislators facing another year of difficult decisions.

Opponents of gaming expansion, particularly the current casino operators, were undoubtedly disappointed.  Others making moral arguments against gambling expansion-such as Dan Rodricks in a recent column-will likely be undaunted.  Yet it seems to us that the difference in moral hazard between five and six casinos is negligible. The larger difference might be in allowing live table games; there are some interesting questions about the income stratification of who plays what games. Allowing live table games might be the more progressive move.

This report makes it more likely that legislators will return in July for a special session to expand gambling.  How much more remains to be seen, however.  And of course any expansion would have to be put to Maryland voters in November.

MBTPI wrote a guide to the original slots referendum in 2008.  If the issue is put to referendum in November be sure to look for our update to that guide.