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Cost-Benefit Analysis of Legalizing Casino Gambling in Virginia

MGT 5064Cost and Economic Analysis

INTRODUCTION

Modern legalized gambling in the United States has been on the rise in states and tribal

lands since the passing of Indian Gaming Regulatory Act of 1988. It spread from tribal origins to

the riverboats of the Mississippi Delta to land-based facilities in states. This spread of legalized

gambling has created numerous concerns exist about legalizing gambling such as the potential

for increased crime, reduced productivity, and domestic and personal problems among other ills.

Conceptually, many issues in regional public economics and cost benefit analysis are illustrated

by an analysis of gambling; among them the role of government revenue, social costs based on

the actions of non-normal gamblers, employment benefits, and uncertainty about quantitative

measures. However, any decision which results in a major policy change such as legalizing

gambling should be supported or refuted with a well thought out cost benefit analysis so policy

decision makers have the right information from which to decide.

This paper will explore implementing legalized casino gambling in Virginia by providing

a cost benefit analysis of the data leading to a conclusion that is based on quantitative measures.

The proposed site for this establishment is the Eastern Shore of Virginia where a primarily

agricultural economy has been in a down turn and unemployment is higher than the state

average. The proposed facility will have both Video Lottery Terminals (slot machines) and table

games which together have proven to have the most revenue. The method used to produce the

cost benefit analysis will be the nine major steps outlined by Boardman et al. (2011) in Cost-

Benefit Analysis Concepts and Practice. The theory is the revenue and other benefits generated

for the state and public would outweigh the cost to society.

BACKGROUND

The state of Maryland currently has five operating casinos and one under construction.

Data from these operations will be used as a market analogy method to determine the costs and

benefits of this proposed policy change. According to the Maryland Lottery and Gaming Control

Agency, Maryland’s casinos contribute hundreds of millions of dollars annually to state

programs. Casinos in Maryland have contributed more than $1 billion in profit to the Education

Trust Fund, which supports pre-K through 12 public education, public school and higher-

education construction and capital improvements including community colleges. (Maryland

Lottery and Gaming Control Agency, 2015) Casino profits also support local impact grants,

racing industry purses and small, minority and women-owned businesses. The casinos created

thousands of new jobs and made the communities in which they are located more attractive to

new businesses. (Maryland Lottery and Gaming Control Agency, 2015) With the influx of new

enterprise, both businesses and residents can benefit from visitor spending as well as revenue

generated through gaming, property and sales taxes.

Alternatively, gambling can be a drain on society as it creates economic costs for

taxpayers, including non-users (non-visitors and non-gamblers). (Grinols, 2011) The majority of

costs are attributed to addictive gamblers. These addictive/societal impacts are explained by

Grinols (2011) as the following:

- Increased Crime. E.g. assault, rape, robbery, burglary, auto theft, embezzlement, fraud.

- Business and Employment Costs. Lost productivity, unemployment related costs.

- Bankruptcy.

- Suicide.

- Illness. E.g. Stress related, cardiovascular, anxiety, depression, cognitive.

- Social Service Costs. Treatment, unemployment, and other social services.

- Family Costs. Divorce, separation, child abuse and neglect, domestic violence.

- Social Connection Costs. Reduction in social capital (employer, family, friends).

- Political. Concentration of power, disproportionate political influence.

The assumption is that the state of Virginia could use an additional source of revenue to

provide increased services to its constituency and perhaps fund other projects that would benefit

society as a whole such as education (in keeping with the lottery philosophy), roads and other

infrastructure, or its “rainy day fund” for disaster relief.

STEP 1: SPECIFIY THE SET OF ALTERNATIVES

Legalized gambling exists in several neighboring states (Maryland, West Virginia, and

Delaware to name a few). The status quo is no casino gambling in Virginia and if additional

funds are required by the state the only available source would be through raising taxes (income,

sales, tourism, etc.). The proposed alternative is to legalize casino gambling in Virginia and have

additional funds from the gross revenue of the casino available for the common good. The scope

of this analysis focuses on the cost of raising the desired funds without analyzing the purpose to

which the funds are spent. The basic analysis compares Virginia with and without the casino

business.

STEP 2: DECIDE WHOSE BENEFITS AND COSTS COUNT

Standing is determining whose costs and benefits should be included in the analysis.

(Bordman, Greenberg, Vining, & Weimer, 2011) Those with standing in the proposed policy

change of legalizing casino gambling in Virginia are the state of Virginia and its constituents.

The potential company that would be awarded the license to build a casino has a profit motive

and would only do so if the economics of the project yielded positive return for its shareholders.

Therefore the company’s costs and benefits will not be included in this cost benefit analysis.

STEP 3: IDENTIFY THE IMPACT CATEGORIES, CATALGUE THEM AND SELECT

THE MEASUREMENT INDICATORS

The costs and benefits categories for this analysis are listed in the table below.

Costs Benefits

State Administrative Fees State Revenue

Addictive/Societal Costs Toll Revenue

Cannibalization Increased Employment

Casino Value

Under the Costs category, State Administrative Fees are those expenses the state is

expected to pay for administration of the casino and other costs. The state of Maryland lists these

costs as “safety and security, internal controls, employee background investigations and

licensing, surveillance, auditing and accounting, day-to-day operation of machines, compliance,

and responsible gambling program.” (Maryland Lottery and Gaming Control Agency, 2015)

Addictive/Societal Costs are those described above as defined by Grinols (2011).

Cannibalization” is that cost attributed to the new casino business taking away consumers from

existing businesses causing them to close. (Walker, 2014)

Under the Benefits category, the State Revenue is that portion of the gross revenue from

the slots and the table games that goes to Virginia for its use. These percentages can vary in

range from 50% to 61% for slot machine games, and is 20% of the total table game revenue.

(Maryland Lottery and Gaming Control Agency, 2015) Toll Revenue is the amount paid per car

that travels the Chesapeake Bay Bridge Tunnel from the south side of Virginia (Hampton Roads

area) to get to the proposed casino location. Increased Employment is the expected increase in

jobs on the Eastern Shore of Virginia. The Casino Value is the willingness to pay amount as

determined using the travel cost method which places a monetary value on a recreational site.

STEP 4: PREDICT THE IMPACTS QUANTITATIVELY OVER THE LIFE OF THE

PROJECT

The population of visitors to the proposed casino site is derived from taking 46% of the

populations in Hampton Roads Virginia (1,805,078), Eastern Shore of Virginia (49,395), and

half of the total population of the Eastern Shore of Maryland (462,855). Half of the Maryland

Eastern Shore population was used due to competition from Maryland and Delaware casinos.

Using the market analogy method and the state of Maryland as the basis, Maryland

estimated the State Administrative Fees to be 4.8% of the total State Revenue for the casino.

(Maryland Lottery and Gaming Control Agency, 2015) This figure will be applied to the

estimated gross revenue for the casino in Virginia.

The Addictive/Societal Costs can range from $13,200 to $52,000 per pathological

gambler. (Kindt, 1994) The National Center for Responsible Gaming’s research suggests that on

tenth (0.1%) to one (1%) percent of the total U.S. population has a gambling problem with six

tenths percent (0.6%) being the most likely case. Using population statistics from the Virginia

Economic partnership for Hampton Roads and Virginia Eastern Shore, we can arrive at a

potential number of addicted gamblers in Virginia.

Due to the site location and the predominately agricultural economy of the proposed site

of the casino, Cannibalization is not a factor in this cost benefit analysis. The likelihood of the

existing businesses on the Eastern Shore of Virginia losing out to the casino and the

complementary businesses it would attract (hotels, restaurants, pawn shops) is negligible because

there are so few businesses of this type for competition, and the enticement of local may be

attractive.

Again using the market analogy method and the data from the state of Maryland, we can

use the median annual gross revenue as a starting point and perform sensitivity analysis to

assume higher and lower gross revenues. This data is in the table below.

The toll revenue is derived from data that show 46% of the population gambles in casinos

and the toll rate of $20. (Hills, 2010) A low estimate is to use 46% of the Hampton Roads

population making one visit to the casino per year which would have to use the Chesapeake Bay

Bridge Tunnel. Data reported by the Virginia Economic Development Partnership shows

1,805,078 adult aged people in this region. (Virginia Economic Development Partnership, 2015)

Month/Year Hollywood Casino Horseshoe Casino Maryland Live Casino Casino at Ocean Downs* Rocky Gap Casino Resort Monthly Total for all Casinos

Nov-14 $6,162,925 $23,371,051 $53,779,355 $3,336,323 $3,521,211 $90,170,865

Dec-14 $6,036,498 $22,909,698 $50,234,547 $3,372,910 $3,076,249 $85,629,902

Jan-15 $6,003,204 $23,157,788 $49,452,221 $3,379,632 $2,973,875 $84,966,720

Feb-15 $6,022,954 $22,989,376 $46,970,008 $3,338,100 $3,474,575 $82,795,013

Mar-15 $6,518,118 $24,700,048 $51,934,173 $4,022,716 $3,855,680 $91,030,735

Apr-15 $6,875,184 $22,941,879 $50,943,770 $4,294,554 $3,927,429 $88,982,816

May-15 $7,120,611 $21,923,621 $58,042,088 $4,991,577 $4,248,398 $96,326,295

Jun-15 $6,435,945 $23,096,716 $52,926,123 $5,288,777 $3,699,504 $91,447,065

Jul-15 $6,900,049 $24,380,317 $56,949,080 $6,391,554 $4,330,644 $98,951,644

Aug-15 $6,558,172 $27,583,023 $52,124,829 $6,075,822 $4,402,613 $96,744,459

Sep-15 $6,204,696 $22,147,812 $49,571,257 $5,712,269 $3,861,627 $87,497,661

Oct-15 $6,228,069 $24,682,772 $54,979,654 $4,658,909 $4,211,180 $94,760,584

Annual Total Revenue $77,066,425 $283,884,101 $627,907,105 $54,863,143 $45,582,985 $1,089,303,759

Average Monthly Revenue $6,422,202 $23,657,008 $52,325,592 $4,571,929 $3,798,582

Notes: * Slots only

The value for increased employment is assuming the casino would generate enough jobs

to bring the Eastern Shore’s unemployment rate 6.1% down to the state average of 4.5% times

the population of the Eastern Shore (49,395) times the average casino salary of $41,805.

(Virginia Economic Development Partnership, 2015) (Payscale, 2015)

The Casino Value is calculated using the travel cost method of estimating the willingness

to pay as a value for the attraction. The cost per mile of 57.5 cents is the General Services

Agency’s vehicle reimbursement rate. The average wage rates were extracted from the Virginia

Economic Development Partnership data and Maryland Bureau of Labor Statistics data. Travel

time was estimated from the distances to the site. The number of visitors was again

conservatively estimated using the 46% of the population gambles statistic at one visit per year

with two passengers in each car, except for Maryland’s Eastern Shore where the total number

was halved due to competition within the state and Delaware.

Vehicle Operating Cost $0.575

Percent of Wages for Travel Opportunity Cost 20%

Average Number of Passengers 2

Location

Round

tripTravel

time

One-way

Distance

Average

Wage Rate

% Wages

Opportunity

Cost Visitors

Total Cost per

Vehicle Visit

Average

Cost per

Person

Value of the

Casino

Hampton Roads 2 60 $22.77 20% 830,336 $87.22 $43.61 $36,209,287

VA Eastern Shore 1.5 30 $18.77 20% 22,722 $45.76 $22.88 $519,895

MD Eastern Shore 4 90 $19.63 20% 107,255 $134.91 $67.45 $7,234,793

$43,963,975

*Total visitors = 46%*population

Travel Cost Method

STEP 5: MONITIZE ALL IMPACTS

The table below list the expected costs and benefits of legalizing casino gambling in

Virginia showing a $20,100,857 positive net benefit for the policy change.

Cost Benefit Analysis for Legalized Gambling in Virginia

Costs Amount

State Administrative Fees $3,699,188

Addictive/Societal Costs $146,876,400

Cannibalization $0.00

Total Cost $150,575,588

Benefits Amount

State Revenue $77,066,425

Toll Revenue $16,606,718

Increased Employment $33,039,328

Casino Value $43,963,975

Total Benefit $170,676,445

Annual Net Benefit $20,100,857

STEPS 6 & 7: DISCOUNT BENEFITS AND COSTS TO OBTAIN PRESENT VALUES

AND COMPUTE THE NETPRESENT VALUE OF THE ALTERNATIVE

Legalizing casino gambling in Virginia is a policy change which does not easily lend

itself to discounting or net present value calculations because of the variability in the benefits

and costs. The purpose of this cost benefit analysis is to show that legalizing gambling can have

a net positive effect on state revenue to be applied how the state feels will benefit society as a

whole. By combining the monthly gross revenue data presented earlier with the table below

showing the percent increase in revenue compared to the same month in the previous year we

can see there will most likely be growth in revenue in future years. Although, if Virginia chooses

to add other casinos throughout the state the growth can be significant. The below data was

extracted from the Maryland Lottery and Gaming Control Agency financial presentations.

Month

Percent increase in

revenue same month

2014

Nov-14 34.9%

Dec-14 31.7%

Jan-15 28.5%

Feb-15 25.4%

Mar-15 16.9%

Apr-15 24.5%

May-15 27.0%

Jun-15 26.9%

Jul-15 30.2%

Aug-15 20.0%

Sep-15 6.2%

Oct-15 9.2%

Of note, the Horseshoe Casino in Baltimore opened on 24 August 2014 which accounts

for the relatively high percentage increases from November 2014 to August 2015. A true

measure of percentage increase is only seen after the data has normalized in September and

October of 2015. Using two months of data to attain an increase rate does not support a solid

conclusion for growth calculations.

STEP 8: PERFORM SENSITIVITY ANALYSIS

The data presented thus far is a conservative estimate of attendance (once per year) and

uses median measures for gross revenue and most likely case for addictive behavior. The worst

case scenario is presented below using 1% addictive behavior and the lowest gross revenue.

Worst Case Cost Benefit Analysis for Legalized Gambling in

Virginia

Costs Amount

State Administrative Fees $2,187,983

Addictive/Societal Costs $244,794,000

Cannibalization $0.00

Total Cost $246,981,983

Benefits Amount

State Revenue $45,582,985

Toll Revenue $16,606,718

Increased Employment $33,039,328

Casino Value $43,963,975

Total Benefit $139,193,005

Annual Net Benefit -$107,788,978

The best case scenario is presented below using .1% addictive behavior, an average gross

revenue from the existing Maryland casinos, and assumes two visits per year of the affected

population. By doubling the visits, not only are the visitors doubled but the percent wages

opportunity costs are also doubled. Both the travel cost method data and the cost benefit analysis

are shown.

Vehicle Operating Cost $0.575

Percent of Wages for Travel Opportunity Cost 20%

Average Number of Passengers 2

Location

Round

tripTravel

time

One-way

Distance

Average

Wage Rate

% Wages

Opportunity

Cost Visitors

Total Cost per

Vehicle Visit

Average

Cost per

Person

Value of the

Casino

Hampton Roads 2 60 $22.77 40% 1,660,672 $105.43 $52.72 $87,543,973

VA Eastern Shore 1.5 30 $18.77 40% 45,443 $57.02 $28.51 $1,295,682

MD Eastern Shore 4 90 $19.63 40% 214,510 $166.32 $83.16 $17,838,258

$106,677,912

*Total visitors = 46%*population 2 times a year

Travel Cost Method

Best Case Cost Benefit Analysis for Legalized Gambling in

Virginia

Costs Amount

State Administrative Fees $10,457,316

Addictive/Societal Costs $24,472,800

Cannibalization $0.00

Total Cost $34,930,116

Benefits Amount

State Revenue $217,860,752

Toll Revenue $16,606,718

Increased Employment $33,039,328

Casino Value $106,677,912

Total Benefit $374,184,709

Annual Net Benefit $339,254,593

From the data presented, the worst case scenario has a negative net benefit to society of

-$107,788,978 and the best case has a positive net benefit to society of $339,254,593. This

variation of $447 million and compared to the conservative positive net benefit of $20,100,857

shows that this data is extremely sensitive to changes in number of people who visit the casino,

the number of people who cause an addictive/societal cost, and the predicted state revenue.

Lastly, although uncalculated, if Virginia were to take more of a percentage of gross revenue

than that of Maryland then the potential to positively affect net benefits is true as well.

STEP 9: MAKE A RECOMMENDATION

The data show that there is a positive net benefit of $20 million using conservative measures and

a $339 million positive net benefit using the most optimistic measures. The recommendation is

to proceed with the proposed policy change and allow legal casino gambling in Virginia. The

potential exists for Virginia to use the proceeds as Maryland does to fund an education trust

fund, horse racing, local impact grants for government, and small, minority and women-owned

business efforts. Or if Virginia has other priorities, it could apply the revenue to those projects.

Works Cited

Bordman, A. E., Greenberg, D. H., Vining, A. R., & Weimer, D. L. (2011). Cost-Benefit

Analysis Concepts and Practice. Boston: Prentice Hall.

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http://freedomfoundation.publishpath.com/Websites/freedomfoundation/Images/Gambling%20E

conomics-%20Summary%20Facts%20by%20Professor%20Earl%20Grinols,%204.29.11.pdf

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Boylan, Editor) Retrieved Nov 22, 2015, from CitizenLink:

http://www.citizenlink.com/2010/06/14/frequently-asked-questions-gambling-in-the-united-

states/

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http://gaming.mdlottery.com/financial-reporting/

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there

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Nov 26, 2015, from Payscale.com:

http://www.payscale.com/research/US/Industry=Casino/Salary

Virginia Economic Development Partnership. (2015). Community Profile Eastern Shore,

Virginia. Richmond: Virginia Economic Development Partnership. Retrieved November 15,

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www.yesvirginia.org

Walker, D. (2014, October 28). Economic benefits of casinos likely to outweigh costs. (K.

Boylan, Editor) Retrieved November 16, 2015, from The Conversation:

http://theconversation.com/economic-benefits-of-casinos-likely-to-outweigh-costs-33443