03/04/09 - Treasurer Cahill's Comments to The Greater Boston Chamber of Commerce
L. Rush Hills is credited with saying: “The fundamental division of all mankind: between those who believe in getting things done and those who believe in doing things right.”
Today I offer an outline that includes an old idea – introducing Video Lottery Terminals, or slot machines, to Massachusetts – in a new way that provides maximum benefit to the greatest number of taxpayers and allows us not just to get it done but to do it right!
What I believe we should do is introduce VLTs to the state in the form of a public-private partnership.
The plan works like this: following Governor Patrick’s original outline for introducing casinos to Massachusetts in 2007, license three locations geographically around the state through a competitive bidding process and provide each location with approximately 2,500 to 3,000 VLTs for a total of 7,500 to 9,000 machines.
Each machine generates revenue (after paying out 90 percent to players) described as “Average Win Per Unit Per Day” (WPUD).
It is reasonable to estimate a WPUD of $275 per machine for the state, which is slightly higher than Rhode Island’s twin river facility but less than the Connecticut casinos.
This would generate gross annual revenue of between $752 million and $903 million dollars, depending on the number of machines licensed.
Using the Governor’s original proposal, we would set the tax rate at 27 percent for the state and assume that 20 percent of the gross would go towards expenses (included in the expenses are employee benefits, payments to facilities ownership, etc).
The rest would be the net operating cash flow.
I propose that rather than have the state operate and own the machines, we sell them to a private operator/owner in the form of a 15-20 year concession.
This plan as outlined, based on a conservative 5 to 7 times cash flow multiple, could generate between $1.95 and $3.35 billion dollars up front for the state.
In addition to the up front payment, the state would see annual revenue from these machines of between $203 to $243 million dollars.
Three questions that immediately come to mind:
- Number 1: why not resort destination casinos?
- Number 2: if VLTs, then why should the state give up the ownership and operation of these machines to a private operator?
- Number 3: what happens to the revenue stream of the Lottery?
First, the question, why not destination resort casinos?
The answer is that they are not economically feasible today.
Given the stock prices and values of casino companies as well as the conditions in the credit market, financing and building out full-scale resort, destination casinos is simply uneconomical.
In addition, last week’s federal court case ruling against the Mashpee Wampanoag plan to build a casino on non-tribal land means that we no longer have a gun to our head in trying to beat the tribe to casino revenues.
The answer to the second question-why give up the ownership and operation of these machines to a private operator is easy – because it is the right thing to do.
The proposed casinos were going to be privately owned and operated – VLTs should be as well.
The state, under a newly created authority, would still serve as regulators but not operators and this plan would allow us to capture a significant amount of up front capital when it is most needed without having to worry about long-term operational risk.
What happens to the Lottery and what do we do with it is more complicated.
The introduction of VLTs will have an impact on Lottery revenues.
Based on the Christensen report that the Lottery commissioned a few years back, the introduction of VLTs in the state would impact overall Lottery revenue by at least 3 percent and possibly as high as 8 percent for the first five years, with the lottery climbing back to previous levels after that.
But the flaw in previous plans for expanded gaming – both my plan and the Governor’s plan – was that breaking the Lottery’s monopoly on gaming and forcing it to compete as a public entity with up to three large private gaming institutions, would more than likely mean decreasing revenues that are vital to cities and towns.
In order to solve that potential future problem, I suggest that we be open to the notion of creating a public/private partnership for the Lottery as well.
This would mean that ultimately the state would serve as regulators and not as operators of gaming.
It would also allow the Lottery a fair chance to compete with VLTs and prosper going forward.
I do not make this suggestion lightly, and I have more than a little trepidation as to the financial – as well as the political – implications of such an option.
The Lottery has prospered under four State Treasurers for over 36 years, and has a national – as well as global – reputation as the best run and most efficient lottery in existence.
We have performed as well as any in the world despite increasing competition for available entertainment dollars.
However, placing that competition here in the state and creating a different operating structure for VLTs means that we must consider this option as both viable and maybe necessary.
What kind of concession could we obtain for the Lottery?
Quite possibly a guaranteed revenue stream that would continue to flow to cities and towns in excess of $900 million dollars per year as well as an up front payment of as much as $1 billion dollars for a 50 year concession.
Again, it is not simply a matter of doing something just to get it done but instead a belief in doing it right.
Which leads me to my final point.
If we were to accomplish all that I have outlined: creating public-private concessions for both VLTs and the Lottery, creating a new revenue stream of almost a quarter a billion dollars and locking in a recurring revenue stream of $900 million and getting up front payments of between $3 and $4 billion dollars – how would we allocate the revenue in a way that will best position Massachusetts for the future?
As a Treasurer I am always thinking about the state’s fiscal health and how this relates to our competitive position versus other states in regards to credit.
We own and issue a great deal of debt and need to have a strong balance sheet – especially in these turbulent times – if we are to guarantee to our citizens that we are not going to mortgage our future to solve today’s problems.
Therefore, I would respectfully suggest to both the Legislative and Executive branches of government that if we were to follow my plan and suddenly find ourselves $3 to $4 billion dollars richer, that we allocate and invest this revenue wisely and for the long term financial well-being of our state.
One-third of the up front payments for these public-private partnerships should go immediately to replenish the Stabilization Fund.
Its size and strength have thus far helped us to navigate two very striking downturns in revenue over the past six years, and this particular recession as predicted will surely test all of our abilities as political leaders.
Having a Stabilization Fund of considerable size – in excess of a billion to a billion-and-a-half dollars – will send a clear and unambiguous message to the credit markets that Massachusetts plans to navigate these stormy waters in the best possible shape.
The second portion of our proposed windfall should be invested in a fund similar to the state retirement fund that will pay for unfunded retiree health benefits known as, Other Post Employee Benefits, or OPEB.
A special legislative commission determined that OPEB represents a potential $13 billion dollar liability to the Commonwealth.
As a result, the state is faced with a debt that is likely even greater than that of the Big Dig – one that could adversely impact our credit rating in the very near future.
A figure that staggering needs to be addressed with a far greater sense of urgency than has thus far been demonstrated.
Let me be perfectly clear: this is not about increasing benefits for state retirees.
Rather, it is about solving a financial problem that has quietly ranked among the largest Massachusetts has ever encountered.
The plan I envision calls for investing this money wisely and for the future rather than spending it today.
Lastly, I’ll take off my Treasurer’s hat and put on my political hat in suggesting that we invest the final third – possibly as much as a billion dollars – in our higher education system in the form of an endowment.
Poll after poll around the country shows that the general public has become more supportive of expanded gaming if the resulting revenues are dedicated to education.
What better way to invest in our state’s future than to take up to a billion dollars and put it into the University of Massachusetts endowment?
Overnight, the UMASS endowment would climb from the bottom of the pack among public institutions into the top 15 nationally.
It would also provide a steady stream of revenue that would allow UMASS to invest in its campuses and students regardless of state revenues.
This would also allow the University of Massachusetts system to better compete with our state’s excellent lineup of private institutions.
Just as we would allow the Lottery to compete fairly and equally with privately-operated gaming institutions, this windfall would give the UMASS system the tools to compete with its private brethren as well as giving it the ability to contend nationally against great state institutions such as the University of Michigan, the University of Virginia and the University of Vermont, to name a few.
The outline I have presented today allows the Commonwealth to aggressively take control of its destiny by investing wisely in its future while at the same time being able to meet its ongoing commitments to cities and towns.
It does it by taking old solutions and reinventing them to solve current problems.
We did this at the Massachusetts School Building Authority in 2004.
It took time and was very painful.
We did not ask the citizens of Massachusetts to pay more in taxes, but yet solved a major liability for the Commonwealth and for cities and towns by overseeing and regulating the way money was appropriated to fix school buildings.
Our solutions then did not solve every problem and neither will this plan.
But we did succeed in creating a vision for the future by sharing both the revenue and the responsibilities more fairly and equitably.
I will repeat once again that we are not elected to office just to get things done but instead to do things right.
I believe that this plan – if executed properly – creates a path to lead this state out of its current economic malaise and into a brighter future.