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Was casino deal really a ‘win-win-win’?

When Gov. Andrew M. Cuomo and Seneca Nation President Barry E. Snyder Sr. agreed in June to end their casino standoff, the governor described the agreement as a “win-win-win” – for the state, the Senecas, and the cities of Buffalo, Niagara Falls and Salamanca.

Cuomo acknowledged merit in Seneca complaints that the state had violated the casino compact that the two sides signed in 2002. He agreed that the racetrack casinos in Hamburg, Batavia and the Finger Lakes would stop marketing themselves as “casinos” and remove certain video lottery terminals that the Senecas thought looked too much like slot machines, which the Senecas have exclusive rights to offer in this part of the state.

In exchange, the Seneca Nation released to the state and to the three cities a total of $349.7 million in casino revenue-sharing money it had withheld over the previous 4 ½ years.

The deal also allowed the Senecas to keep $209.8 million they owed to the state under the original compact.

Was the settlement a “win-win-win,” as the governor had declared?

The deal was a wash, in the best-case scenario for the state, a Buffalo News analysis shows. That’s if the three racetrack casinos’ profit over 4 ½ years is compared to the amount they would have made if profits had remained flat at 2008 levels.

Under another scenario – one that experts say is more realistic – that presumes the racetrack casinos would have continued to experience an established pattern of profit growth, the state ceded tens of millions of dollars to the Senecas.

In fact, under this scenario, the profits of the racetrack casinos fell short of projected profits by $62.5 million.

Gambling experts said that the reality probably falls somewhere in between those two extremes.

“It’s hard to say whether that $209 million was a sensible kickback or not,” said Mark W. Nichols, a University of Nevada economics professor who studies the impact of casinos. “You can’t attribute all of that to marketing.”

Gordon Medenica was the director of the New York State Lottery, which had oversight over the racetrack casinos, from 2007 to 2012, and was responsible for the state’s decision to change the marketing rules for the racetrack casinos. He thinks the marketing changes account for very little of the racetrack casinos’ increase in profits over the past few years.

“On the new agreement, the Senecas have just won on every account,” Medenica said.

In addition, the settlement was silent on the issue of tobacco and gasoline sales on Seneca reservations – unlike a settlement with the Oneida Nation that Cuomo announced a month earlier. As part of that settlement, which granted the Oneidas exclusive gaming rights in Central New York, the Oneidas agreed to charge a sales tax on cigarettes and gas for non-Native customers.

The history

In 2002, then-Gov. George E. Pataki signed a compact with the Seneca Nation, agreeing that the Senecas would be the only group allowed to offer slot machines anywhere west of Route 14, a state highway east of Rochester that runs from Lake Ontario to the Pennsylvania state line.

Nothing in the 793-page compact specifically mentioned marketing restrictions for the “racinos” that the state would begin opening soon afterward.

When the racetracks at Hamburg, Batavia and the Finger Lakes began offering video lottery terminals, state lottery officials, who oversaw the facilities, directed them to steer clear of using certain words such as “casino” and “slot machine,” in their marketing.

Technically, the machines at those facilities differ from slot machines. Whereas slot machines use random number generators to determine winners, all of the machines at racetrack casinos are connected to a central state computer system in Schenectady.

They are the electronic equivalent of instant lottery scratch-off tickets, Nichols said, meaning that the outcome is predetermined.

But, while the internal workings of the video lottery terminals differ from slot machines, they look very similar to slot machines – which is what many people call them.

“Players couldn’t tell the difference,” Medenica said in a recent interview with The Buffalo News.

In 2008, video lottery terminals with arms that players pull were installed at the racetrack casinos, according to Lee Park, a spokesman for the New York State Gaming Commission. That made the machines look especially slot-like, upsetting the Senecas.

The three racetrack casinos in the region each installed several dozen of those machines with arms. They eventually accounted for about 10 percent of the video lottery terminals in Hamburg, Batavia and the Finger Lakes.

Forbidden words

About a year after those machines were OK’d, the state Division of Lottery signalled the state’s intention to loosen the marketing restrictions for the three racetrack casinos.

The forbidden words “casino” and “slot machines” entered the marketing campaigns for the racetrack casinos.

“ ‘Racino’ was a made-up piece of jargon,” Medenica said. “The customers didn’t even know what it meant. All it is is a contraction of casino and racetrack. They were always casinos.”

The change officially took place in March 2009, according to state records, allowing the use of “casino,” “slot machine” and “gambling” in marketing and advertising for the racetrack casinos.

“The terms are widely used throughout the facilities and the State of New York in media coverage and among the general public,” Medenica wrote in late 2008, in an explanation of the state’s intention to change its rules.

“Due to the noncontroversial nature of this amendment, no person is likely to object to the repeal,” he wrote.

But the Senecas did object – to both the once-forbidden words and the new slot-like machines.

Boosting racetrack casinos

There is widespread agreement that the change in terminology for the racetrack casinos’ marketing helped boost business.

So, too, did those video lottery terminals.

Exactly how much either of those increased profits, though, is unclear.

When the racetrack casinos opened in Hamburg, Batavia and the Finger Lakes – the first of them in 2003 – each one initially enjoyed double-digit annual increases in profit.

Around 2008, their profit continued to increase each year, but generally at a slower pace.

That’s not unusual for a casino, according to Nichols, the economics professor.

“When a casino first opens, there’s a bit of a novelty effect,” he said. “It’s new, so you’re going to get people at first, and then over a period of time, some of those people are going to go away and not go back, or not go back as frequently. So the novelty sort of wears off. You have to give them a reason to go back.”

There was another factor taking hold toward the end of 2008: the recession. And that stalled the profits of many casinos elsewhere in the country, he said.

Best-case scenario

There’s no way to know exactly how much in increased profits at the three racetrack casinos can be directly attributed to that new marketing and the slot-like machines.

In the best-case scenario for the state, The Buffalo News attributed the entire increase in profits over the 4 ½ years to the use of the once-forbidden words and the installation of the machines that the Senecas said violated the compact.

The total profits for the three racetrack casinos in 2008 was $183.8 million.

In comparison, the total profits for the 4 ½ years, from January 2009 through May 2013, were $206.4 million more than they would have been, had profits remained flat at the 2008 levels.

That means the $209.8 million that the state ceded to the Senecas in the June agreement was nearly equal to the amount of additional money the racetrack casinos made during that time.

In addition, the “win-win-win” agreement did not take into account any accrued interest on the $559 million that the Senecas held in escrow during the dispute.

So if every additional dollar in profit could be attributed to the slot-like machines or the marketing changes, the settlement was a wash.

But industry experts say it is very unlikely that the marketing and the new machines were the only factors contributing to the additional profits.

During that time when the racetrack casinos were marketing themselves as casinos, other changes that did not violate the state’s compact with the Senecas also helped boost business, including upgrades and expansions of the facilities and expanded enticements for customers.

“We’ve expanded our smoking rooms,” said Michael Kane, who runs what is now called Batavia Downs Gaming. “In 2010, we opened a grandstand bar and restaurant.”

Beyond those changes specific to Batavia, he noted, a change in state law now enables all of the racetrack casinos in the state to use 10 percent of their profit each year to provide “free play” to attract new customers and reward existing customers.

Batavia’s annual profits grew anywhere from 3 percent to 10 percent since the state changed its marketing rules, compared to increases around 20 percent the first few years after it opened.

Of the three local racetrack casinos, Hamburg has enjoyed the biggest annual increases in recent years – as high as 17 percent in two recent years.

Officials there referred questions to Glen White, a spokesman for Delaware North, the company that manages the Hamburg facility and owns the Finger Lakes Casino.

White declined to answer questions for this story but issued a statement that Delaware North was pleased that the state and the Senecas resolved their conflict.

Medenica maintains that the marketing changes mattered very little and says the state gave too much away in its settlement with the Senecas.

“The whole marketing approach of the casinos became much improved – the promotions and the free play and giving customers a free buffet, free drinks,” he said. “I think actually calling them slot machines and calling them casinos accounted for very little of that.”

More realistic scenario

The News also projected how much profit the racetrack casinos would have made during those 4 ½ years if they maintained the annual increase in profits that they posted from 2007 to 2008.

If that growth curve were carried forward each year, the three racetrack casinos combined would have brought in $62.5 million more in profits than they actually did.

That means the state actually fell short of projected profits, even with the benefit of the changes in marketing and the slot-like machines – and on top of falling short, the state ceded to the Senecas another $209.8 million.

Experts said that scenario is a more realistic analysis.

The News performed its own analysis of the numbers, but Nichols, the economics professor, agreed with The News’ methodology. He said The News’ analysis employed the same methodology he would have used.

Spokesmen for Cuomo and for the Senecas had little to say when asked to comment for this story.

The $209.8 million figure was “the result of negotiations between the two parties,” said Gareth Rhodes, a Cuomo spokesman.

“The situation was resolved, and both the Senecas and the state are moving forward,” said Susan L. Asquith, a spokeswoman for the Senecas.