Lottery and Gaming Study Commission Minutes 10/08/14 Meeting

Minutes of the Lottery and Gaming Study Commission

Legislative Hall – 10/08/14

Attendance:

Member	Present
T. Cook, Chair	Yes
A. Levin	Yes
B. Hall-Long	Yes
B. Bushweller	Yes
B. Pettyjohn	Yes
V. Longhurst	Yes
C. Potter	Yes
T. Dukes	No
G. Forbes	Yes

Others Present: D. Gregor, V.Kirk, D. McGlynn, W. Rickman Jr., W. Fasy, T. Horn, L. Tranchitella, P. Key, S. DeMario

1. 
   Call to Order
   

2. 
   Approval of Minutes
   

3. 
   Presentations from the State’s Casinos
   
   1. 
      Delaware Park
      

William Fasy, President of Delaware Park, presents seven years of historical data on gross and net slot revenues to Delaware Park. Mr. Fasy notes that it is too early to measure the effects of the opening of the Horseshoe casino in projected numbers listed, but also that the closing of various New Jersey casinos has been beneficial for Delaware Park slots. Mr. Fasy state that the Horseshoe brand is well known for its table gaming products and has had a negative impact on Delaware Park as a result.

Mr. Cook asks if the Horseshoe facility is complete and if not when might completion be expected.

Mr. Fasy states that the Horseshoe will have a major impact because northern Baltimore table gaming business that had been driving to Delaware Park now has a different nearby alternative. Mr. Fasy believes the Horseshoe will expand its tournament poker product which will erode Delaware Park’s poker product. Mr. Fasy states that poker is a very low margin product for Delaware Park before considering the effect of increased poker tables at the Horsehoe. Mr. Fasy notes a concern that Delaware Park could be a damaged bystander of any future marketing wars between the Horseshoe Casino and Maryland Live.

Mr. Fasy presents 4 years of table game revenues noting large quarterly erosion in table games revenue. Mr. Fasy notes that quarterly table game revenues understate the erosion seen in September partly due to bad luck and part due to the opening of the Horseshoe.

Mr. Levin asks if there is any data on the volume of people entering Delaware Park and the average wagers placed by customers.

Mr. Fasy states that Delaware Park stopped taking head counts in 1995, but since 2011 volume of customers has been stagnant. Mr. Fasy notes players in the immediate vicinity of Delaware Park are coming, but not spending as much. Mr. Fasy states that middle distance and outer markets have declined drastically.

Mr. Levin asks if the customers in the immediate vicinity are primarily focused on gambling as entertainment.

Mr. Fasy notes that the multiplier on marketing dollars for slots has decline dramatically, meaning local customers are spending less out of pocket once their promotional options have been exhausted.

Mr. Fasy presents 4 years of employment data for Delaware Park. Mr. Fasy notes that some employee change relates to regular turnover—which has declined—but notes that the drop in employees is not as drastic as the drops in revenues over the presented timeframe.

Mr. Fasy presents a detailed list of capital improvements that were enabled by revenue sharing changes made by the state in June. Mr. Fasy notes that $3.6 million in revenue comes to Delaware Park as a result of the legislation in June, but only $762,000 is available as net relief once projected revenue declines and debt service are taken into account. Mr. Fasy’s presentation suggests as much as $6 million in completed and planned capital investments for fiscal year 2015 to be made to the Delaware Park facility. Mr. Fasy details the import and necessity of completed IT and physical capital improvements and outlines planned investments including equipment upgrades and replacement of a variety of depreciated capital.

Mr. Cook solicits questions from the members.

Mr. Potter asks if there are plans for more entertainment or incentives to drive customer traffic.

Mr. Fasy states that richer marketing plans exist subject to the availability of funds, but that going into further detail would be a competitive disadvantage.

Mr. Potter states a concern about what is driving people to visit the Horseshoe over Delaware Park.

Mr. Fasy notes that gamers are always interested in new casinos seeking a comparison and the possibility of increased incentives. Mr. Fasy notes the benefit the Horseshoe receives being able to offer World Series of Poker entries and existing in a lower tax area.

Ms. Hall-Long asks if there is a payout rate difference between Maryland and Delaware casinos that is acting as an incentive.

Mr. Fasy states that Delaware’s table games tax rate is 29.4% while in Maryland that rate is 20% and in Pennsylvania the tax rate is 15%. Mr. Fasy notes that under current rates to break even requires $1700 per table while poker at Delaware Park currently makes $700 per table.

Ms. Hall-Long asks if there are things Delaware should be doing differently with horse racing facilities as well.

Mr. Fasy states that there are in market discussion with Maryland to ensure that thoroughbred races in the two states do not overlap. Mr. Fasy notes that as Maryland casinos open, Maryland thoroughbred purses are increasing while Delaware’s purses are shrinking.

William Rickman Jr., CEO of Delaware Park, state that Delaware’s success in horse racing is dependent upon larger purses to attract horses from other districts and better co-ordination with neighboring states.

Mr. Cook asks the year over year growth rate of slot revenues in the third quarter is related to positive effects from casino closures in New Jersey.

Mr. Fasy states that since the beginning of September there is a 12% growth with New Jersey market players. Mr. Fasy notes this is could be a case of luck as volume is down.

Mr. Cook restates that the downward trend in table games is a result of intrastate competition.

Mr. Fasy notes that Horseshoe related activity has led to a 12% decline since the Horseshoe’s opening.

Mr. Cooks asks about the 2016 opening date on the National Harbor casino.

Mr. Potter asks about the expected return on investment the casinos forecast for any revenue redistribution the state can provide.

Mr. Fasy state that the listed capital investments have no return on investment

Mr. Potter asks if that fact implies the casino would be asking for further redistribution in the future.

Mr. Fasy states that the casino industry is a capital intensive one and that capital depreciation requires significant investment just to maintain competitiveness. Mr. Fasy notes that marketing, technology, and new customer attraction are the sorts of investments that are judged on a return to investment basis.

Mr. Potter states a concern that if revenue redistribution from the state isn’t focused on increasing profits via marketing, then not much will change for the casinos’ profit long term future.

Mr. Fasy notes that revenue has declined dramatically because necessary capital investments have been made at a time when revenues were not available. Mr. Fasy states that without changes to revenue sharing on the table games side it is likely this revenue stream with go away in the face of stiff regional competition.

Mr. Levin asks if the state will, at best, maintain the current revenue stream or if growth in the market is possible.

Mr. Fasy states that stability and certainty in the casino market are unlikely in the near future regionally. Mr. Fasy notes that capital and marketing investments are projected to increase revenue, but not enough to project growth in the face of rising costs.

Mr. Levin restates that maintenance is the best case outcome.

Mr. Rickman states that Delaware is in the most competitive gaming region in the country. Mr. Rickman notes that tolls have significant influence on customer decisions. Mr. Rickman notes that leveling off in revenues similar to that in Europe is a realistic outcome at some point.

Mr. Potter asks if the casinos have considered selling the business.

Mr. Rickman states that there are offers for Delaware Park consistently, but that no one wants to be involved in the horseracing aspects.

Mr. Potter asks if horseracing is dragging down the casinos.

Mr. Rickman states that Delaware Park is doing its duty with respect to the Horseracing Redevelopment Act. Mr. Rickman notes he has no complaints about the duty, but that there are not a lot of individuals who would take this duty upon themselves.

Mr. Potter states that Delaware is selling itself short if it does not consider bringing on new casinos as a means to defend against the potential failure of the current casinos.

Mr. Rickman states that race tracks cannot compete with a free standing casino and would result in the end of horseracing in the state.

2. 
   Dover Downs
   

Mr. McGlynn states an appreciation for the revenue redistribution that occurred during the last legislative session which enabled maintenance of employee levels and the extension of Dover Downs bank loans through September 30 of 2015.

Mr. McGlynn presents plans for any revenue redistribution the state provides concerning capital spending, marketing, customer service, and debt reduction. Mr. McGlynn states the capital spending will focus on new amenities such as refreshed dining options and more efficient slot software, renovations to the hotel and casino, and infrastructure upgrades. Mr. McGlynn states that the hotel was a $100 million initial investment and demonstrates with pictures the sort of renovations necessary. Mr. McGlynn states Dover Down projects $40 million in possible investments. Mr. McGlynn notes that marketing plans are of competitive importance but that Dover Downs has plans to expand their market.

McGlynn presents two years of table game revenues noting that various distributions to other entities approximate 40% of table game revenue and the various expenses related to operating table games cost nearly 70% of table game revenues. Mr. McGlynn demonstrates the various distributions to the state, horsemen, and slot vendors for the past 18 months in comparison with the losses faced by Dover Downs.

Mr. McGlynn presents several possible long term solutions to the revenue concerns being discussed and offers to answer any of the committee members’ questions.

Mr. Cook clarifies how slot promotional dollars formulations works and asks if free play is adequate.

Mr. McGlynn states that promo dollars are adequate and might have been too generous in recent months. Mr. McGlynn notes that some of the software investments discussed would allow more targeted promo dollars levels for individual players.

Mr. Potter commends Dover Downs for their work with the hotel and states that other casinos could do more with their properties.

Mr. Levin asks if the Firefly concert series has an effect on Dover Downs.

Mr. McGlynn states that Firefly is not a lift to the casino.

Mr. Levin states that the merger between Coachella and Firefly and the expectation of additional days or events will then not likely improve Dover Downs position.

Mr. McGlynn states that Dover Downs would like to do a better job of ushering casino regulars during Firefly as the traffic generated tends to keep customers away similar to the situation seen when NASCAR events began in Dover. Mr. McGlynn notes that people who come to Firefly are much like beach goers who travel for the specific event and not to gamble.

Mr. Forbes restates Mr. Fasy’s opinion that a leveling off in revenue is on the horizon.

Mr. McGlynn states that Dover has likely seen the worst of the impact from Maryland competition. Mr. McGlynn states a hope that National Harbor will not be as bad as Maryland Live.

Mr. Levin asks about Dover Downs plans to grow given we’ve seen the worst of competition.

Mr. McGlynn states that development of the conference and business meeting traffic and the ability to build a beautiful resort that attracts high roller customers is the basis of Dover Downs strategy for making a return to growing revenues.

Mr. Cook asks if contraction in Atlantic City has been caused by lack of investment or if contraction occurred for some other reason.

Mr. McGlynn states that investments levels were not the problem, but rather that competition in north New Jersey and New York markets reduced demand in Atlantic City. Mr. McGlynn states that the market is directly tied to population density and household income. Mr. McGlynn states that competitor states have denser populations and higher earning power within households.

3. 
   Harrington
   

Ms. Key states that competition incentivized a change to a local drive up casino strategy and as such led Harrington to sell their hotel property. Ms. Key notes that business has shift from 60% Maryland and 40% Delaware to 40% Maryland. Ms. Key states Harrington has had a decrease in weekday foot traffic, but on weekends traffic is constant, though Ms. Key agrees with the other casinos that players are spending less.

Ms. Key states that previous revenue redistribution proceeds were used for restaurant renovations and marketing changes involving concerts targeted at the local customer base. Ms. Key presents six years of table revenue demonstrating a levelling off of revenues with little impact from the Horseshoe. Ms. Key states that revenue redistribution has also helped with effective, targeted marketing.

Ms. Key presents total employee numbers and notes employee losses are due to attrition as opposed to layoffs. Ms. Key notes there is a shift from full time employment to part time employment as a result of the Healthcare Reform Act.

Mr. Cook asks about 2013 revenues which are absent from the tables presented.

Ms. Key states that 2013 mirrors 2012.

Mr. Cook states that the information from the three tracks can be combined into one larger table for ease of comparison by next meeting. Mr. Cook asks about Harrington’s investments in iGaming as a potential way to reach younger players.

Ms. Key states a projection of zero from iGaming.

Len Tranchitella, COO of Harrington Raceway & Casino, notes the goal from the casino perspective was to attract iGaming customers into brick and mortar casinos. Mr. Tranchitella states that rewards from iGaming require visits to the brick and mortar facility, but the traffic has not materialized. Mr. Tranchitella notes that the population of Delaware is an impediment to iGaming, but is hopeful that Nevada’s involvement will be beneficial.

Mr. Cooks clarifies that rewards at the brick and mortar have been offered, but that responses have been quite low.

Mr. Potter states that online gaming is the wave of the future and suggests bringing in venture capitalists with experience in online gaming to talk about some tactics that have worked in the past.

Mr. Cook notes that the state receives the first $3.75 million for iGaming. Mr. Cook states that hope is the Delaware and Nevada interstate poker initiative will be up and running in the first quarter of 2015.

Mr. Bushweller clarifies that the $3.75 million is of net iGaming proceeds.

4. 
   Review of Horsemen Purse Information
   

Mr. Potter asks how the historical data is affected by the reduction of racing days of the time period in question.

Mr. Cook notes that reducing the number of days was an attempt to keep larger pursues in order to stay competitive with surround tracks.

Mr. Fasy states that the number of racing days was 142 at peak and that currently Delaware Park races 81 days a year. Mr. Fasy notes that the statute requires 100 days, but a lower number of race days is acceptable if there is an agreement with the horsemen.

Mr. Potter notes that as purses continued to decrease, even as the number of race days have decreased, the result is a phasing out of horse racing.

Mr. Forbes asks about what purse sizes were before the mid-nineties legislation surrounding horse racing.

Mr. Fasy states that prior to the enactment of slots and the arrival of simulcast races, purses per days were roughly $35,000, today purses are $145,000 per day, and at peak were in excess of $250,000.

Mr. Cook notes that the lottery does not play a role in determining purses, but only moves the purse money along to the appropriate parties.

Sal DeMario, executive director of the Delaware Standardbred Owners’ Association, states that prior to the passage of the Horseracing Redevelopment Act total purses per year in state were roughly $750,000. Mr. DeMario states peak race day volume to be 142 days at Harrington and 109 days at Dover, which is 20% higher than current volumes because of decreased purse revenues.

Mr. Potter asks what can be done to increase the purses.

Mr. DeMario states that the bulk of the horsemen revenue comes from the video lottery. Mr. DeMario states a hope that as revenue increases the race tracks would do more to promote horse racing. Mr. DeMario notes that significant wagering is done away from the race track through simulcast and online wagering. Mr. DeMario states that simulcast models were set up to provide the wager receiving race track the lion’s share of the wager revenue while the broadcast sending track gets a small percentage;, roughly 3%. Mr. DeMario states that Delaware races are well received in the simulcast world, but provides one seventh or one eighth the value of a wager made at the Delaware track.

Mr. Cook clarifies the online wagering for horse racing is legal.

Mr. DeMario outlines the revenue shares for the horsemen for bets made at the tracks and for simulcast imports and exports.

Mr. Bushweller asks if the simulcast amounts appear in Mr. Cook’s presentation.

Mr. Cook clarifies that the presentation is the contribution of the video lottery to the horseracing purse.

Mr. Bushweller clarifies that there are other sources of horseracing revenues.

Mr. DeMario states that a large portion of the other revenue sources has been retained by the racetracks in order to enable more racing days.

Mr. Bushweller asks for estimates of horsemen revenue per track outside of video lottery revenue.

Mr. DeMario discusses the process behind the annual share of horseracing handle and states that these non-video lottery revenues are not substantial; at best $1 million at each track.

Mr. Bushweller asks if the horsemen have undertaken promotional increases independent of the tracks.

Mr. DeMario discusses a variety of promotional efforts both matching with the tracks and other options and states that the tracks have made it clear that the return on horse racing promotion is inferior to that of casino promotions.

Mr. Potter asks if more promotion would lead to great investment in horseracing.

Mr. DeMario states that attracting greater investment is a different issue to increased promotion. Mr Demario states that investment dollars are not as available as in previous times, but the Delaware’s breeding program is relatively promising. Mr. DeMario states that purse money is the life blood of the racing industry and investment fluctuates with those purses.

5. 
   Path Forward and Proposed Timeline for the Commission
   

Mr. Potter states that he will adjust his schedule in order to attend November 7^th.

Mr. Cook states the next meeting would likely be at 10 a.m. on November 7^th in the Joint Finance Committee Hearing Room.

Mr. Cook states that the best date for availability is December 17^th which happens to be Ms. Longhurst’s birthday.

Ms. Longhurst commits to attendance in return for the provision of a coconut cake.

Mr. Cook mentions having the American Gaming Association talk at the November meeting to provide a national perspective on the gaming industry.

Mr. Potter asks to invite some iGaming venture capitalists to speak about how to boost Delaware’s performance for the November meeting.

Mr. Cook agrees and suggests the December meeting be held for a lengthy discussion of the commission’s recommendations to the legislature.

6. 
   Other Business-Public Comment
   

7. 
   Adjournment