Video Gambling in Bars Holds Promise of Handsome Revenues - Monday 21st of January 2013

On Chicago’s gritty far southeast corner, which in the past few decades has seen factories rust and grandiose plans for a Lake Calumet airport fizzle, a couple of dozen neighborhood bar and restaurant owners gathered at the Knights of Columbus hall on a late winter evening to learn about the latest big-ticket plan: video gambling.

Alderman John Pope (10th Ward) told them he believed that a “large majority” of City Council members would soon join him in voting to lift the ban on gambling in Chicago, placing the city in a state program that will allow as many as five video gambling terminals in any business that has a license to sell liquor for on-site consumption.

“We’re interested in putting people to work; we’re interested in putting money in people’s pockets; and, honestly, we’re interested in legalizing what is happening already,” said Mr. Pope, referring to illegal gambling that takes place in many Chicago bars.

Illinois officials estimate that video gambling, legalized last summer by legislators and Gov. Patrick J. Quinn, will generate more than $1 billion a year in total revenues from at least 45,000 new machines across the state. The video gambling revenues will be taxed at 30 percent.

That would mean hundreds of millions of dollars for the financially struggling state, making it the most important source of money for Illinois’s first major spending spree on public works in a decade, officials predict. Proponents promise a long list of construction projects, like school and park fieldhouse renovations, new streetlights and rapid transit improvements.

But a deeper look reveals that the state will receive a far less lucrative deal from gambling than did other states that have adopted similar video gambling plans. The new gambling initiative is a richer deal for Illinois’s politically connected video gambling industry than for similar operators in other states. Moreover, state regulators say it will be nearly impossible for them to police the new form of gambling as closely as they scrutinize the state’s casinos.

Concerns about the regulation of gambling have festered since the days of Al Capone and could make the passage of a Chicago video machine ordinance far less certain than Mr. Pope predicted. Mayor Richard M. Daley has not yet publicly endorsed the issue, and if Chicago does not approve video gambling, the state’s potential new source of revenue would decrease sharply.

If video gambling does become a reality, the vast majority — 70 percent — of revenues from the new machines will be divided evenly between the liquor license holders and the companies licensed by the state to own and operate the new gambling terminals.

The state’s share from video gambling is set at 25 percent, and 5 percent of total gambling-machine revenues are left for municipalities. Even at that low rate, Illinois projects a potential $534 million a year in tax revenue.

Illinois’s share of video gambling revenue is in stark contrast to the situation for the state’s nine casinos, and a 10th planned in Des Plaines. The casinos must turn over in taxes as much as 50 percent of what they earn.

The new video betting legislation in Illinois is also far more lucrative for the gaming industry than in other states with similar laws. In South Dakota and West Virginia, the state gets 50 percent of what is earned at video gambling terminals in liquor-licensed establishments. In Oregon, where the state owns and operates the machines, the share jumps to 73 percent.

“Why are they giving this away for so little?” said Bridget Gainer, a Cook County commissioner who supported a measure banning video gambling in the unincorporated parts of the county. “In a rush to please the industry, we got stuck with a terrible deal.”

In forging the deal in Springfield, the gambling industry benefited from lobbyists with close connections to government leaders. One lobbyist, Joseph Berrios, is chairman of the Cook County Democratic Party and a close ally of Michael J. Madigan, the Illinois House speaker. Another is Tom Cullen, who worked for Mr. Madigan for 12 years, according to the organization’s Web site.

Video Gaming Technologies, a major manufacturer in Tennessee, also employs clout-heavy lobbyists: the firm of Michael Kasper, lawyer and treasurer for Mr. Madigan’s state Democratic Party organization. Mr. Kasper’s firm also includes David Dring, the former spokesman for Tom Cross, the Illinois House Republican leader.

The legislation received bipartisan support in both chambers of the General Assembly, and Governor Quinn signed it into law in July.

Even as the state is preparing to allow installation of gambling machines by the end of the year, regulators say they lack the resources to properly police the new form of gambling, as well as the manpower to scrutinize the machine makers, the terminal operators and the thousands of businesses that could agree to install the machines. The Illinois Gaming Board said it would have to at least double its staff of 150 to do what is required.

“You have to understand, it’s a completely different industry,” Aaron Jaffe, the board chairman, said after a board meeting this week.

“In a casino,” Mr. Jaffe said, “everything is confined in one area. We have our state police there. We have our revenue agents there. We have video cameras all over the place. With video poker, there are about 15,000 liquor licenses in the state.”

The law legalizing video gambling came together so quickly that Mr. Jaffe said he had “no idea” whether the state’s financial projections were accurate.

The revenue numbers hinge on whether Chicago is involved. Without its participation, state fiscal analysts say, the amount the state gets from the machines could plummet as much as $177.7 million. They had estimated that, with Chicago on board, video poker would produce $287.5 million to $534.2 million a year for Illinois.

More than 70 municipalities, most in the Chicago suburbs, have prohibited the machines.

To stem the tide of municipalities that opt out, and to make certain that Chicago opts in, business and labor leaders have joined forces and recruited the public relations and political consulting firm of Greg Goldner, a former campaign manager and aide to Mayor Daley. In November, Mr. Goldner formed a public advocacy group and gave it a populist-sounding name: Back to Work Illinois. The group’s initial budget of up to $700,000 is financed entirely by a Las Vegas-based trade group for video terminal makers and the state association of machine operators, Mr. Goldner said.

He said his company had contacted more than 40 of Chicago’s 50 aldermen and sent materials about video gambling to Mayor Daley’s office.

Despite the lobbying efforts, many aldermen remain uncommitted.

“I’m not sure these sources are where we want to go as a city,” said Alderman Thomas Tunney, whose 44th Ward includes the bar district around Wrigley Field. “At what point does the drive for revenue supersede other issues?”

The state long has allowed video game machines for amusement only, but that restriction is frequently flouted. As Mr. Gardner tried to drum up support at the meeting with tavern owners last month, he warned that anybody caught with a machine illegally paying out winnings will be banned from the new legal form of video gambling.

Mingling in the crowd was Anthony Abruzzo, whose new company, Midwest Gaming Technologies, plans to install and maintain video gambling machines. Mr. Abruzzo said he heard about the meeting from Sam Panayotovich, a former state legislator who works for Mr. Berrios’s Springfield lobbying firm.

“We saw the bright future that this could hold,” he said.

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