Slots bill seen as favoring tracks

Measure passed by Senate cheats public, study says

Financial official doesn't agree

UMBC professor's report criticizes application fees

March 27, 2003|By Michael Dresser | Michael Dresser,SUN STAFF

The Senate-passed bill legalizing slots at Maryland racetracks is a generous deal for the track owners but could shortchange taxpayers, according to an economic analysis released yesterday.

The independent study by Robert E. Carpenter, an economics professor at the University of Maryland, Baltimore County, estimates that the proposal would give the track owners as much as $649 million more than needed to get them to invest in the giant gambling halls envisioned in the legislation.

The release of the report could raise questions about the measure - the top priority of Gov. Robert L. Ehrlich Jr. - at a time when the bill has been put on indefinite hold in the House by Speaker Michael E. Busch.

FOR THE RECORD - An article in yesterday's Sun incorrectly stated the view of Ken Shea, of the investment baking firm Bear Stearns, regarding the financial contribution of ancillary services such as bars and restaurants to racetrack casino operations. In fact, Shea said that such services do not typically produce significant profits in a competitive market. The Sun regrets the error.

The report is particularly critical of the Senate's decision to charge upfront total application fees of only $15 million to the three Central Maryland racetrack casinos that would be home to 10,500 slot machines.

"The low price of the license set by the state in the current proposal, in combination with the current revenue distribution, will almost surely transfer several hundreds of millions of dollars of value from the people of Maryland to the casino owners," Carpenter concluded. "Simply put, the state has left a great deal of money on the table."

Ken Shea, senior managing director for Bear Stearns, disputed Carpenter's conclusion. "The operator's share is the lowest in the country except New York," where operators have balked at going forward with slots, said Shea, whose company provides investment banking services to the owner of Pimlico and Laurel racetracks.

Ehrlich initially proposed a split of the proceeds that would have given the state 64 percent and the tracks about 25 percent, while charging each track a $150 million upfront fee. The governor later revised that to give the tracks about 44 percent and schools a slightly smaller cut.

The Senate bill allocates 39 percent of the slots proceeds to the track owners and 46 percent to education, with the rest going to other purposes. However, the Senate also cut the licensing fees from the $40 million each in the governor's revised bill to a $5 million "application fee."

Carpenter's study, released by UMBC's Maryland Institute for Policy Analysis and Research, said Ehrlich came closest to getting it right the first time.

"His original proposed cut would have allowed the casinos to make plenty of money, and he should have stuck to that as well," the study said.

Donald F. Norris, director of the institute and a UMBC professor of policy sciences, called Carpenter's report "excellent."

"What I particularly like is it's totally independent," Norris said. "He doesn't have an ax to grind."

The House speaker said the report bolsters his contention that the legislature should set up a study commission to weigh the pros and cons of slots and report back next year - as called for in a bill passed by the House.

"This continues to prove this is not thoroughly thought-through and that there are many questions unanswered," said Busch, an Anne Arundel County Democrat.

Copies of the UMBC report were delivered to Senate President Thomas V. Mike Miller, a slots supporter, and Ehrlich communications director Paul E. Schurick. Neither returned calls seeking a comment.

Warren G. Deschenaux, the Assembly's chief policy analyst, said Carpenter's analysis tracks that of the Department of Legislative Services in many respects, but does not give enough weight to what the state is getting out of the deal.

Carpenter's study is highly critical of the consultant's report commissioned by the Ehrlich administration after the racetrack industry rejected his initial proposal on slots in January. The report also questions many of the assumptions in a presentation to a Senate committee by Magna Entertainment Corp., the owner of the Pimlico and Laurel tracks.

The criticism of Magna and the state's consultant, KPMG LLC, are echoed in a second critique by the Maryland Taxpayer Education Foundation in a letter sent to state Budget Secretary James C. DiPaula and released to the media.

"Taxpayers will be disappointed in the lack of independence exhibited by the state's financial adviser, KPMG, and the degree to which KPMG's financial analysis accepted track owners' assumptions without the proper level of scrutiny," said Jeffrey C. Hooke, a director of the foundation.

Hooke pointed to several instances in which he said the consultant appeared to adopt the assertions of the track owners without further analysis. He was particularly critical of KPMG for accepting the owners' assessment of the riskiness of getting into the slot machine business and its failure to question their estimates of construction costs.

"Either KPMG is incompetent or its marching orders were to underestimate the tracks' future earnings," said Hooke, a Chevy Chase investment banker who maintains that the state would fare better by auctioning licenses to operate slots, rather than simply awarding them to the tracks.

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