NV regulation’s just changed

Anyone else catch this Notice to Licensees from the Nevada Gaming Control Board last week?

DATE: February 8, 2011
TO: All Gaming Licensees and Other Interested Persons
FROM: Mark A. Lipparelli, Chairman
SUBJECT: Merging of the Board’s Investigations and Corporate Securities Divisions

Effective Monday, February 14, 2011, the Investigations and Corporate Securities Divisions of the State Gaming Control Board will be merged. The combined division will operate as the Investigations Division. As a result of this change, the Corporate Securities staff will become a Section within the Investigations Division.
Mike LaBadie, formerly Chief of the Corporate Securities Division, will serve as Chief of the newly combined Division. Mike started his career in the Investigations Division and has been at the Board for almost 24 years. He has served in increasing levels of responsibility including his appointment to Chief of Corporate Securities in May 2003. Marc Warren will be joining the Investigations Division as a Deputy Chief for the Corporate Securities Section. Marc is a licensed attorney and has been serving the Board in the position of Senior Research Specialist. He previously worked in the Corporate Securities Division.

As public companies emerged in our industry in the late 1980s our agency was under great pressure to build financial expertise as quickly as possible. Attracting and developing a team ultimately leading to the formation of Corporate Securities as a new Division to support those changes made sense. Over time, as our expertise has matured (and to the credit of the agency), it is readily apparent that many of the functions of each of these divisions are common and we are now in a position to allow our managers to use our resources/expertise in a more flexible and efficient manner.
No other changes are anticipated and all contact information relating to your interaction with these groups within the Board remains unchanged.

Here’s the letter

Is this a ground-breaking change? No, but I think it speaks to how the GCB is dealing with budget cuts (getting more out of less), and how it is willing to be flexible in its evolution.

This is the sort of thing that might be worthy of a more in-depth follow-up, which I might do…provided no one beats me to it. In my opinion, the elimination of one of the seven divisions of the agency tasked with policing Nevada’s biggest industry merits at least a mention in the local dailies.

A new hope for AC? in the Las Vegas Business Press

In this week’s Las Vegas Business Press, I share my thoughts about the just-passed Atlantic City casino regulatory reform:

After suffering its fourth consecutive year of declining casino revenues, Atlantic City might finally be feeling the winds of reform. But will a planned regulatory overhaul be too little, too late to save the city’s slumping gaming industry?

First, a look at where Atlantic City is today. After about 20 years (1986-2006) of steady growth at an annual rate of more than 4 percent, the city’s casino revenues began to nosedive in 2007 — a year before Nevada’s revenues started to slip. Although Nevada is on pace for a slight gain in revenues for 2010, Atlantic City suffered another nearly double-digit decline.

via Las Vegas Business Press :: David G. Schwartz : Casino-rule reforms may offer Atlantic City hope.

The interesting thing is to look at Atlantic City’s historical growth. From 1978 to 1985, when the industry was adding casinos, there was incredible growth. After that, it was decent, just about outpacing inflation for the next twenty years. Table play, however, stagnated. Since 2007, both table and slot play have plunged.

So it’s a problem that goes beyond the recession and beyond the internal working of the state’s regulatory structure. By itself the reforms won’t save the city’s gaming industry, but they might be the first step in the right direction.

Inside the NJ casino overhaul

As promised, I’ve taken a deeper look at the recent casino regulatory overhaul that passed the New Jersey legislature. My comments are based on version of the bill that was current as of 1/10/11. You can find it right here.

First of all, the bill codifies into law the current existential angst the industry is facing:

(18) As recognized in the July 2010 Report of the Governor’s Advisory Commission on New Jersey Gaming, Sports, and Entertainment, and as confirmed in subsequent legislative hearings held throughout the State, legalized casino gaming in New Jersey presently stands at a crossroads, facing critical challenges that jeopardize its important role in the State economy, and it is in the public interest to modernize and streamline the current outdated casino regulatory structure in order to achieve efficiencies and cost savings that are more appropriately directed to marketing and infrastructure improvement efforts while, at the same time, maintaining strict integrity in the regulation of casino operations.

(19) The ability of the legalized casino gaming industry in New Jersey to compete in an ever-expanding national gaming market requires a regulatory system that is sufficiently flexible to encourage persons and entities holding casino gaming licenses outside of New Jersey to participate in casino gaming in Atlantic City, to allow licensees to take full and timely advantage of advancements in technology, particularly in information technology, and business management, and to encourage the efficient utilization of resources between and among affiliated New Jersey licensees operating casinos located in Atlantic City and between and among a New Jersey affiliate and its licensed affiliates in other jurisdictions.

There are some small but interesting changes throughout the bill.

It broadens the definition of “family” to include domestic partners and partners in a civil union in addition to the traditional array of blood and marriage relations.

Non-cashable credits are explicitly defined as “not gross gaming revenue,” and therefore not taxable/

Adds a definition:

Multi-casino employee” – Any registered casino employee or licensed casino key employee who, upon the petition of two or more affiliated casino licensees, is endorsed by the commission or division, as applicable, to perform any compatible functions for any of the petitioning casino licensees.

Which suggests we’ll be seeing more cross-staffing in multiple-owner casino groups.

The bill changes virtually every mention of “commission” in the existing Casino Control Act to “division,” reflecting the big shift in regulation.

The bill gives the following responsibilities to the Division of Gaming Enforcement:

conducting investigative hearings on the conduct of gaming and
gaming operations and the enforcement of the casino control act;
issuing reports and recommendations to the commission on entities or persons required to qualify for a casino license, on applications for interim casino authorization, or on petitions for a statement of compliance;
examining records and procedures, and conducting periodic
reviews of operations and facilities, to evaluate provisions of law;
collecting certain fees and assessments;
issuing operation certificates to casino licensees;
accepting impact statements submitted by casino license applicants;
issuing emergency orders;
taking action against licensees or registrants for violations of the act;
imposing sanctions and collecting penalties;
accepting and maintaining registrations for casino employees and certain vendors;
receiving complaints from the public;
certifying the revenue of a casino or simulcasting facility;
creating and maintaining the list of excluded patrons;
using private contractors to process criminal history record background checks.

The Commission still actually issues licenses and hears appeals on Division decisions. One notable change: neither DGE agents nor Commission inspectors will have to be present in casinos anymore. I wonder what they’ll do with the CCC podiums in the casinos. Taking a cue from Vegas casino party pits, I suggest “cage dancers.” Bonus points if they dress in Commission garb before stripping it off. Extra bonus points if a patron interrupts their dance to file a dispute.

The Commission also loses the right to have an in-house legal counsel, and instead has to contract that work out.

The Division’s office must be in Atlantic City, although it’s allowed to have a secondary office in Trenton, too.

The amount of fines are doubled.

From its signing, the CCC has 90 days to make an “orderly” transfer of its powers to the DGE.

The moves will have a definite fiscal impact, but according to the fiscal estimate, the exact impact can’t be determined yet. The Office of Legislative Services offers some good reasons why:

It should be noted that estimating the cost or possible savings to the Casino Control Fund resulting from the transfer of various regulatory functions from the CCC to the DGE would require the Executive Branch to provide a strategic reorganization plan that details the functions and regulations being transferred and any changes in scope and importance of those functions and regulations. In addition, an estimate of the costs or savings would require the Executive Branch to provide a workload analysis describing how the functions that are transferred will be handled by the DGE in terms of staffing and position restructuring. For example, will the DGE hire new employees to perform the transferred functions, will the existing DGE staff absorb the new job duties by having their job duties expanded to include the new functions, or will some functions be eliminated entirely? Furthermore, because the bill changes the language in current law requiring the DGE to be principally located in Atlantic City, will the State incur new building or facility costs?

In other words, it’s anyone guess how all this will play out. It could save money, but it might cost money in the short term.

NJ to take over AC casino district

New Jersey governor Chris Christie’s Advisory Committee on New Jersey Gaming, Sports, and Entertainment has issued its report, which calls for a partial state takeover of Atlantic City. From the AC Press:

But Atlantic city and state officials have naturally focused most on the governor’s plan to create a state-run portion of Atlantic City, in a plan already described as a city within a city. Christie said he could no longer watch the “teetering”; of Atlantic City’s institutions.

He said he gave “fair warning” to Atlantic City’s government to fix problems pointed out in a recent state audit or face state takeover.

He said he wanted to see the state run a clean and safe tourism district there within a year.

“Delay leads to demise,” he said.

Gaming enforcement would be streamlined, he said. He described the current system as an “antique car.”

via Christie unveils state takeover plan for Atlantic City gaming district – pressofAtlanticCity.com.

You can look at the report itself here. The Atlantic City section starts on page 13.

According to the report, Atlantic City’s gaming industry is in decline–no argument there. They attribute the decline to nine chief factors:

• The perception of the City as unclean and unsafe, and the failure of City government to effectively address such concerns (including blight and the overall image of the City) at any level or to work effectively with the industry to create a tourist-friendly environment.
• The City’s fiscal mismanagement of the large tax base provided by the industry (as much as $175 million/year in property taxes alone). Atlantic City spends almost four times as much per capita than comparable New Jersey Cities, such as Edison, Long Branch, and New Brunswick.
• 2003 audit results, which reveal that staffing in Atlantic City per 1,000 residents was twice the level of benchmark cities like Orlando and Norfolk.
• The absence of a visible police presence or effective law enforcement on the Boardwalk.
• The absence of evidence of a Master Plan that addresses the primary tourist area or the large swaths of urban blight surrounding the tourist area.
• Underinvestment by the casino industry in development of non-gaming amenities, attractions and surrounding areas appropriate for a “destination resort.”
• An outdated regulatory process marked by both high costs and the inability to attract development activity by other world-class ownership to the New Jersey market.
• Lack of coordination in positioning and marketing Atlantic City as a competitive tourist resort.
• Failure to effectively attract meeting and convention business to Atlantic City and to integrate such business with the existing destination resort hotels.

I think in general these are true, but point 5, underinvestment, isn’t across the board: you can’t look at the Borgata, or Harrah’s Resort, or the Pier at Caesars and say that these aren’t filled with good non-gaming amenities. Some companies have consistently put more into capital expenditures and expansion than others, and they’ve been rewarded with a bigger share of the market. You can’t legislate that you have to run your casino intelligently. It its recommendations, the committee acknowledged this. Here’s a crucial section:
Research provided to the

Commission by McKinsey & Co. indicates that the Atlantic City “brand” still has value with customers, and if the reality met customers’ expectations, there would be sufficient latent demand to more than double Atlantic City’s revenues in the medium term. The Commission is also encouraged by the economic success enjoyed by properties where proper investment has been made, including the Borgata, the Walk, Harrah’s and Taj Mahal, all of which are generating encouraging results. It appears that in Atlantic City, customers will come to quality offerings.

However, the status quo is not workable. In simple terms, almost every potential Atlantic City customer has a closer, more convenient place to gamble. If Atlantic City cannot provide reasons for customers to make the trip, its decline will continue. Atlantic City has no choice but to try to reestablish itself as a true “destination resort” against its new convenience gaming competitors in surrounding states. Meeting this challenge will require aggressive actions by both the public and private sectors.
(emphasis mine)

That’s exactly what the city has to do, but unfortunately that’s what the city’s had to do for the last twenty years.

To get the city back on track, the committee recommended seven goals:

• Creating a “Clean and Safe” Tourism District with State oversight, with the goal of making Atlantic City clean and safe by July 1, 2011.
• Creating a Master Plan for the new Tourism District, focused on enticing new entrants to build both gaming and non􀍲gaming attractions that will increase demand in the City. The Plan should be delivered to the Governor no later than July 1, 2011.
• Improving the financial stability of Atlantic City by attracting other world class operators to ownership of the eleven existing facilities as well as any new ones. These operators should be committed to supporting both their properties and the District.
• Increasing the meeting and convention business in the Atlantic City market by at least 30% per year for the next five years.
• Bringing the New Jersey regulatory structure into the 21st century by reducing costs and redundancies and by supporting the attraction of operators while maintaining strict integrity.
• Increasing visitation and spending through joint marketing efforts on par with other national destination resorts.
• Improving intermodal transport to Atlantic City, including increasing air, rail and ferry options.

Great plan, but the devil’s always in the details. As far as attraction more investment, look at the country’s biggest gaming companies: one of them already owns 40% of the market (Harrah’s), one of them’s just been given its walking papers (MGM), one of them operates the city’s top casino (Boyd), one’s shown no interest at all in the city (Las Vegas Sands), one’s declared a “death spiral” (Penn National), one can’t build a casino on the land it owns (Pinnacle), and one left the city 25 years ago but might be tempted back (Wynn). So the options there are limited, unless you’re going to go the private equity route or open it up to international companies like Genting.

The changes we’ll see are:

1. Creation of an Atlantic City Tourism District
Following models established in other parts of the State, the Administration should support legislative enactment of an Atlantic City Tourism District (the “ACT District”) with representatives from State, City, County and Industry. The ACT District will assume full and complete control of certain governmental activities and operations within a defined Tourism District covering the casino areas and Boardwalk, as well as jurisdiction over related amenities and infrastructure.

This is the most controversial part of the plan. Basically it means getting the city government out of running much of the city.

2. Public􀍲Private Partnership (the “Partnership”)
The government should establish a structure for a Public􀍲Private Partnership with state and local government, the casino industry, and the greater Atlantic City community all represented. The new ACT District Commission would assume the role of the public component. The Commission recommends that the private component be represented by the Atlantic City Partnership (“ACP”) – a local consortium of businesses modeled after the Johnson and Johnson􀍲led structure that has proven successful in the revitalization of the City of New Brunswick.

This group will develop the master plan and try to get more purveyors from other New Jersey boardwalks in AC. Hey, anything that brings Mack and Manco pizza or Johnson’s popcorn to Atlantic City is fine by me. If they want to re-launch Mr. Peanut, I’m available for consultations. They’re also going to oversee more effective use of Marina facilities, which I hope means reopening the marina at Harrah’s.

3. Coordinating Marketing, Boardwalk Hall and Convention Business Between ACCVA and ACP
Efforts should be made to encourage marketing “Atlantic City” as a brand. Theseefforts should include more joint industry efforts throughout the City, including efforts to increase use of Boardwalk Hall and efforts to capture a larger share of convention business.

Basically, doing what the LVCVA’s been doing in Las Vegas for the past 50 years.

4. Legislative Enactment of Regulatory Reform
Costs of New Jersey regulation are almost ten times those in Nevada and other mature gaming jurisdictions with strong, effective regulation. In 1978, 24/7 inspectors and built in regulatory redundancies made sense, but with the increased sophistication of camera surveillance, information technology, and audit abilities, they are unnecessary now.
Furthermore, these outmoded concepts and a licensing procedure that is unnecessarily adversarial have made the market less attractive to many respected world class operators.

To me, this is the most interesting idea. Is this an olive branch to MGM and Wynn? Maybe. It’s encouraging that they want to realign regulation with the technological realities of 2010.

5. Establishment of a Joint Atlantic City Marketing Fund
Once the ACT has gained traction on the initiatives above, it should work with the ACP to establish a fund dedicated to marketing the City, as compared to current marketing efforts with a limited $4 million spending limit.

Basically, market the city better–no argument there.

6. Transport
To contribute to the goal of making Atlantic City a destination resort, the Atlantic City International Airport needs to be expanded in terms of service – e.g., more airlines and additional intermodal connections – and in terms of its physical plant through capital improvements.

Make it easier to get to the city, and visitation will go up. If I ran a casino marketing department, I might go even further to try to attract Pennsylvania gamblers: show me your toll receipts, and I’ll give you double that in free play. It’s not that much money, but psychologically it makes a big difference, since the casino is now “paying for” your tolls. It should be much easier to get to the casinos from ACY or PHL for the casual visitor.

7. Related Issues
The Commission also considered whether the State should entertain gaming outside of Atlantic City at this point in time. Given the importance of the industry to the State, as well as the need for meaningful reform to foster sustainability and, hopefully, growth, this issue is best considered in the future when either: 1) the transformation of Atlantic City to a more destination􀍲oriented model has meaningful enough traction to compete with in􀍲state rivals; 2) Atlantic City stakeholders support additional outlets; or 3) the new model is deemed to have failed.

In a nutshell, this means: no more subsidy for the racetracks; no slots at racetracks; no interstate Internet gambling; no sports betting.

It’s a major plan that will require several breaks from the past. Even if I knew all of the details, I couldn’t say definitively whether it will or won’t work, since there’s many moving parts here that are impossible to predict. But at least someone’s interested in reviving the city.

Casino regulation in context

I’ve got a new column in the Las Vegas Business Press about that Arkansas casino nirvana, with some more exploration of a state without gaming regulation:

Recent events in a state that's considering getting into the casino game have raised the question of casino regulation. Looking at intent and practice of regulation anew provides a fresh perspective that can benefit everyone, even in a state where gaming regulation is as much a part of life as slot machines in gas stations and the lack of a state income tax.A proposed Arkansas constitutional amendment would give a single company a statutory monopoly on casinos in the state, cap gaming taxes at 5 percent of gross revenues Nevada's, the lowest in the nation, is 6.75 percent, plus fees, and forbid the state from having any kind of regulatory oversight over the casinos.

via Las Vegas Business Press :: David G. Schwartz : Gaming without regulation a recipe for disaster.

Wondering what casinos would be like without regulation is a good thought experiment that hopefully demonstrates the optimal boundaries of regulation. I’ve got to laugh at the big overhaul of Atlantic City casino regulation that’s being proposed: let new casinos build 200-room hotels instead of 500-room ones. If they don’t address the more substantive issues of regulatory overhaul, it doesn’t make much difference. And it would take some serious overhaul to actually make the market more attractive to investors. But the more attractive it is to investors, the more control the state is giving up, which can have some unforeseen consequences.