ARTHUR W. WRIGHT*

I’ll give you short odds that Massachusetts Governor Deval Patrick will eventually persuade his state’s legislature to legalize high-end, high-stakes casinos—something no other New England governor since Connecticut’s Lowell Weicker has done. It has been more a matter of when, not if, Massachusetts and Rhode Island would seek their own pieces of the action, given the spec-tacular growth of Connecticut’s casi-nos since 1992, and the eager patron-age of Foxwoods and Mohegan Sun by citizens of those two states. In Rhode Island, international casino develop-ers are betting $655 million that they can dress up the old Lincoln Park dog track into a flashy destination “racino” (re-dubbed Twin River). And the Great and General Court (that is, legislature) of Massachusetts is per-forming its usual kabuki ritual before taking up the governor’s proposal to put out bids for three large casinos spread strategically around the Bay State.

IfandwhenGovernorPatricksuc-ceeds, it will signal a new era in theNew England market for high-stakescasinogaming.Tillnow,Connecticuthas reapedmostof thenetbenefits—jobs and tax revenues on the upside,perhapscongestionandproblemgam-blingon thedown—fromitsmonop-oly in the southern New Englandmarket. ThreeMassachusetts casinos,added toTwin River and New York’snewcasinointheCatskills,wouldpro-foundlychange thatmarket. What ifanything can, or should, Connecticutdoinresponse?

Steadyhabitsarenottheonlypos-sible course. Passively accepting theinevitable could tip the region’s casi-

no market against Connecticut. Butrevamping our state’s policies towardshigh-stakesgaming—inessence,fight-ingfirewithfire—could,well,backfireunless the revenues from new casinodevelopmentmorethanreplacedthosetheStatenowrealizes fromitscrown-monopoly deal with Mohegan SunandFoxwoodsontheslots“win”(total“handle”lesspayments).

A DISTINCTION WITh A DIFFERENCE

AkeypointforConnecticutread-erstonoteisthat,unlikeFoxwoodsandMohegan Sun, none of the proposedMassachusettscasinoswouldbeownedandoperatedbyIndiantribes,ontriballands, under the aegis of the IndianGaming and Regulatory Act (IGRA)of 1988. True, Governor Patrick’sproposed law would give preferenceto joint bids involving MassachusettsIndian tribes. And the Narragansettswere expressly named as casino par-ticipants in the failed Rhode Islandconstitutional amendment on gaminginNovember2006.Butinbothcasesanytribalrolewouldbesimplythatofabusinesspartner.

History records that Connecticutwas different. In the early 1990s,the State lost a court battle to blockthe construction of Foxwoods by theMashantucket Pequots on their res-ervation land, under IGRA. But theoriginal casinobuildingshadnoareasfor lucrative slot machines, becauseConnecticut did not permit anyonetoruntheminthestate. Hadthingsended there, Foxwoods would likelyhave been a far smaller, less notewor-thyattractionthanithasbecome,andMohegan Sun might never have beenbuilt,atleastnotinallitscurrentand

4 THE CONNECTICUT ECONOMY WINTER 2008

It has been a matter of

when, not if, Massachusetts

and Rhode Island would

seek their pieces of

the casino action.

The State of Play in New England Casino Gaming

WINTER 2008 THE CONNECTICUT ECONOMY 5

growing splendor. And the State ofConnecticutwouldhavereceivedlittleadditional revenue, along with mod-est amounts of added congestion andproblemgambling.

The tribe and GovernorWeicker,however, not wanting to leave moneyon the table, struck a deal permit-tingFoxwoods—alone—to install slotmachines; in return, the State wouldgetaquarteroftheslots’win.In1996,Foxwoods allowed Mohegan Sun torun slots, too, but under the sametermswith theState. With the addi-tion of slot machines, Connecticut’scasino industry took off, and with ittheState’sspecialrevenuesfromits25percent skim, which rose from $30millioninfiscal1993to$435millioninfiscal2007.

The Foxwoods-Weicker dealhas proved to be a classic barrier toentry. In the mid-1990s, it effec-tivelydeterredLasVegasinterestsfromopening so-called commercial (non-Indian)casinosinBridgeport,Hartfordand Waterbury, because the State ofConnecticutdemandedalargesumupfronttocompensate forthe lossof itsshareoftheslotswinatFoxwoodsandMohegan Sun if slot machines werepermittedelsewhereinthestate.

The threatened competition fromMassachusetts, Rhode Island andNew York again poses a choice forConnecticut,one thatmaybe framedbytheanswerstotwoquestions:Howmuch will the new entrants erodeslots revenues (hence also the State’sshare of the slots win) at MoheganSun and Foxwoods? And how muchcouldConnecticutreapinreplacementrevenuesifitrenegedonthedealwiththetwotribesandalloweditsownnewcommercial casinos? Also at stake,of

course, are state jobs, incomes, andregulatorycosts.

The answers to those questionsturnonthequalityofthenewentrants’productsandwhethertheregion’smar-ket forhigh-stakesgamingcanabsorball the new capacity without cuttingintoprofitability.

MEDIEVAL CASTLES REVISITED Once upon a time, in the Grand

Duchy of Connecticut, there weretwo fairy-tale castles that for 15 yearsenjoyedsecurityconferredbythedukeand enabled by the timorousness oftheadjacentNearly-As-GrandDuchiesof Rhode Island, Massachusetts, andNewYork.Bitbybit,though,envyofthetwoConnecticutcastles’prosperityovercametheotherdukes’trepidations,and so they decided to build theirown castles from which they couldmount raids on the fairy-tale castlesand assert control over the flow ofcustom between their fiefdoms andConnecticut.

At the end of the 13th century,England’s Edward I (“Longshanks”),having conquered Wales, built a ringof coastal castles to secure his gains.(Atoneofthem,hechristenedhissonthefirstPrinceofWales.)Takingaleaffrom Longshanks’ notebook, RhodeIsland and Massachusetts appear tobeconstructingtheirownringofcas-tles…, er, casinos, around those ofConnecticut. (See map, next page.)NewYorkhas built its ownmid-levelcasino in the Catskill Mountains, totemptresidentstostayhome,butitmaybe too far from Connecticut to posemuch of an offensive threat. As oneproceedsnorthwestfromanimaginaryline connecting Newark, New Jersey,and Manchester, New Hampshire,

Everything turns on

the quality of the new

entrants’ products and

whether the market can

absorb the new capacity.

6 THE CONNECTICUT ECONOMY WINTER 2008

population density declines rathersharply.(Putdifferently,some27mil-lionpeoplelivewithina2.5-hourdriveof Connecticut’s casinos.) Thus, theRhode Island and Massachusetts casi-nossitathwartmanyofthemaintravelarteriesthatunderlietheprosperityofthe Connecticut casinos. Interstate95,thearteryfromthewest,ofcourse,suffers fromappallingcongestionovermuchofitslength.

Fairy tales can come true. Asnotedearlier, investorsheadedbyLenWolman and Sol Kerzner, who col-laboratedwiththeMohegansontheirConnecticut casino and still retain a5% royalty interest, have bought theoldLincolnParkracino(anagingdog-track with a slots parlor) in Lincoln,RI,andareglitzingituptothetuneof$220millionand1,000additionalslotmachines. They’re hoping to changethe composition as well as increasethesizeof thecustomerdraw, thoughthe lackof table games (still illegal inRhode Island)maydull the luster fortheyoungermalegamblersdrivingthecurrent boom in professional poker.MGM Mirage bid unsuccessfullyagainsttheWolman-KerznergroupforLincolnPark.

Massachusetts Governor Patrick’sproposed casino bill would authorizebids to license up to three “destina-tion resort” casinos, one each in theBoston area and the southeastern andwesternpartsof the state;no investorcould participate in more than onecasino.Thebillwouldgivepreference(amongotherthings)toprojectshavingMassachusetts Indian tribe partners,

andrequirebidderstoownthelandforthe casinos. It also stipulates amini-mumfacilitiesinvestmentof$1billioneach,aninitialfeeof$200million,andyearlylicensefeesof27%ofgrossgam-ing revenues (GGR)—another termforthe“win”—butnotlessthan$100millionayear. Thelicenseswouldbefor 10 years, renewable under proce-dures TBA; presumably option termswouldbeincludedinanybid.Finally,thePatrickbillspellsoutahostofstatetrust funds into which the proceedswould be deposited, and provides forextra fees to cover administrative andregulatorycosts.

For perspective, Foxwoods andMohegan Sun are currently finishingupmajorexpansions,adding2millionand 1.4 million square feet, respec-tively, and costing a combined $1.4billion. (Foxwoods bills its expan-sion, with partner MGM Grand, as“Connecticut’sthirdcasino”.)Themin-imumtargetjobcreationinthePatrickbillis5,000jobsateachcasino;currentemployment at the two Connecticutcasinosexceeds20,000.AndwhiletheimpliedminimumyearlyGGRateachMassachusetts casino is $370 million;the comparable figure for MoheganSunandFoxwoodscombinedin2006wassome$2.5billion. It isexpected,of course, that theBoston-area casinowould be the largest, and the one inwesternMassachusettsthesmallest.

SIGNS OF INTELLIGENT LIFE IN FINANCIAL MARkETS

Every proposal for a new casinooutside Las Vegas or Atlantic Cityseems to elicit the charge that themarketis“saturated”,raisingthespec-tre that building the new facility willleave behind a wasteland of once-glitzy gaming parlors haunted by theghosts of problem gamblers. Soonerorlatersuchwarningsmayproveright.But the astonishing thing about thedevelopment of legalized gaming inthe U.S. over the last two decades ishow few of the ventures, new or old,havefailed.Hardlylessastonishingishow eager the smart money (like the

CARvING UP THE CASINO kINGDOM

Catskills

S.E. Mass. (New Bedford)

S.E. Mass. (Middleboroough)

Boston Area (Suffolk Downs)

W. Mass. (Palmer)

Mohegan Sun and Foxwoods

VT NH

MA

CT RI

NY

If you were Connecticut,

would you stick with the

hand you’ve been dealt, or

ask for more cards?

national firms based in Las Vegas, ortheWolman-Kerznerconsortium)istoqueueupwheneversomeonesomuchas hints that another casinomight beapproved.

Economists are in the habit oflooking to financial markets to get ahandle on whether markets are “satu-rated”—in effect, whether there arestill so-called super-normal profits tobe made from adding capacity. Notthat financialmarketsareprescientorinfallible (think sub-prime mortgagedebacle). But market participants dotrytogatherandmakesenseofmarketinformationinordertoreduceinvest-mentriskstotolerablelevels.

In the early 1990s, conventionalfinancialmarketsknewverylittleaboutthe prospects for a high-stakes casinoon a remote Indian reservation inthebackwoodsofeasternConnecticut.Thus, when it came time for theMashantucket Pequots to renovatetheir former bingo hall, under thetermsofIGRA,theyhadtoturntoaMalaysianfinancier(withpriorexperi-enceindevelopinghigh-stakescasinos)for funds. Once Foxwoods took off,though, the Mohegans were able toarrange for initial financing in moretraditional circles. Today, financialmarkets have grown used to dealingwith large business entities operatingcasinos and are on the lookout forplausibleproposals.

Before Massachusetts has evenbegunmovingitscasino-authorizationbill through the legislative process,interestedpartieshavebegunannounc-ing casino plans for one or anotherof the three bidding sites. Amongthe parties is Mohegan Sun, which isa partner in a proposal to invest in acasino in Palmer, near an exit on theMassPike15mileseastofI-91—andjust 35 miles up Route 32 from theUniversity of Connecticut campus inStorrs.

AndalltheearlyinterestisbeforetheStateofConnecticuthassaidany-thingaboutMassachusetts’plansotherthan “we expect that the impact isyears down the road” (an official in

theOfficeofPolicyandManagement,quoted in the New York Times onOctober21,2007).

FRAMING CONNECTICUT’S ChOICE

IfyouweretheStateofConnecticut,what would you do? Stick with thehand you’ve been dealt? Or ask formore cards—but at the risk of los-ing the nearly $450 million you nowreceiveinslotsroyalties?

What’s best for the entirestate depends on the effect of theMassachusetts casinos on both Staterevenues and the profitability ofMohegan Sun and Foxwoods, whichafterallaremajoremployersandgen-erators of income. Let’s compare thefollowingsimplifiedstrategies.

As the base case, suppose that,if no Massachusetts casino was built,the twocasinos’ total slotswinwouldremain constant at $1.8 million peryear; thatwould imply constantStateslotsroyaltiesof$450millionayear.

(A) Now suppose that three casi-nos, built asproposed in threediffer-ent regions of Massachusetts, wouldcause aprecipitous initialdrop in theConnecticutcasinos’slotswin,butthatitwouldrecoverafterthenoveltyworeoff to one-half theno-casino level, or$900millionperyear.OurStateslotsroyaltieswouldthendrop,inthelongrun,to$225millionayear—aperma-nentloss, ifConnecticutdidnothing,of half the current slots royalties, orabout1percentoftotalStaterevenue.

(B) Now suppose that, instead ofdoing nothing, Connecticut insteadauthorized two new commercial casi-nos, and by so doing deterred thetwonon-BostonMassachusettscasinosfrom being built. (I strongly doubtthat any move by Connecticut coulddeteraBoston-areacasino.)Underthecurrent deal, Connecticut would loseall of its (reduced) slots royalties, butstartearningashareofthewinatthenew commercial casinos. Thus, theState’s loss of gaming royalties wouldnotbepermanent.Thisstrategywoulddominate (A) if the new Connecticut

casinos had about the same effect onFoxwoods and Mohegan Sun as thetwodeterredMassachusettscasinos.Itcouldevenbeworthwhileforthetribalcasinos to seek a new deal with theStateofConnecticutoverthetermsofthe new casinos, in exchange for notcuttingofftheentirecurrentslotsroy-altypaymentsunderthecurrentdeal.

The above simple calculationsomit a lot of the nitty-gritty detailsthatmatteralotinmostpoliticaldeci-sions. Nonetheless, theygiveaprettyfair senseofwhatmaybe in store forthe State of Connecticut if GovernorPatrick persuades the Massachusettslegislature to adopt his proposal.Woulditbe“theendofeasymoney”,as the Hartford Courant editorializedon September 23 last? Not necessar-ily,thoughadoptinganewhigh-stakesgamingpolicy forConnecticutwouldbeanythingbuteasy.

WINTER 2008 THE CONNECTICUT ECONOMY 7

Disclaimer: Mohegan Sun is, and Foxwoods was formerly, a Sustaining Partner of The Connecticut Economy. The author was a consultant to Foxwoods in 1993 and to Mohegan Sun in 1995. Neither business had any role in the writing of this piece.