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Issue Date: Vol. 49, No.2, February 2009, Posted On: 3/1/2009


COIN-OP AND VLTs: As Economy Worsens, States And Operators Seek Video Poker Expansion


Marcus Webb
video lottery terminals, VLTs, state lottery, coin-op

U.S.A. -- With state governments coast to coast announcing budget deficits that range from Connecticut's $944 million to California's $42 billion, elected officials are considering a wide range of possible remedies, some of which may have a dramatic impact on their local music and games industries.

In addition to the usual tax hikes, cuts in jobs and services, and requests for federal assistance, some state governments are considering changing legal restrictions on gambling, regarding everything from casino games to operator-run video poker.

At least 14 states are reportedly mulling proposals to allow or expand slots and casinos. Examples include Kentucky, Texas and New York, where some lawmakers are talking about allowing video poker games or video slots at racetracks. Some Massachusetts lawmakers said they may revive a proposal to legalize casinos there.

Pennsylvania Gov. Ed Rendell (D) has proposed the legalization of operator-run video poker.

Lawmakers in South Dakota, where operator-run video lottery has long been legal, have toyed with increasing the state's share of video lottery proceeds to 70%.

Nearby Montana, first in the nation to legalize operator- run video lottery terminals, continues to find the machines profitable for industry and government alike. But the rate of growth in Montana VLT revenues has slowed for the first time since 2001.

West Virginia is one of the few states where the trend might be going the other way, toward a smaller gambling market. The governor has commissioned a panel to study reducing the number of video lottery terminals permitted in the Mountaineer State.

A superior court judge in North Carolina shocked his fellow citizens by ruling that the state's 2006 ban on video poker machines is unlawful. Meanwhile, some operators in the Tar Heel state are emulating the "sweepstakes" game strategy that has been successfully used in Texas.

Texas itself remains mired in a battle over eight liners - one that has raged for many years due to ambiguously written laws.

The Lone Star State's most prominent operator of eight liners, Aces Wired (Dallas), is fighting criminal charges in two different jurisdictions. To date, the only verdict in an Aces Wired case gave both sides grounds to claim victory.

An equally confusing legal environment prevails in Florida. There, operators of so-called adult arcades continue to run slot-type videogames.

The letter of Florida's state gambling law, as well as some Florida jury verdicts, appear to allow broad interpretation of legal prizes and awards. But local prosecutors and police frequently assert narrower views.

A recent opinion poll by a prominent newspaper indicated that most Florida voters prefer an expansion of legalized gambling to higher taxes.

Law enforcement officers in Cook County, near Chicago, Nassau County, NY, and several small towns in Nebraska staged extensive raids on a variety of street locations in February, seizing illegal gambling equipment, particularly video pokers.

Some 31 video pokers and more than $6,000 in cash were confiscated during raids on 10 businesses - including gas stations and convenience stores - in the southern suburbs of Chicago. Police said charges might be filed against location staff who made illegal cash payoffs to customers.

If there is a nationwide trend, it's that when the economy sours, many state governments become more willing to consider legalizing gambling, or expanding gambling if it is already legal, to pay the state's bills.

But details of the varied developments in different states also appear to bear out the old adage that "all politics is local." Unique factors in each state will likely influence the final outcomes.

PENN. GOVERNOR BACKS VIDEO POKER

Pennsylvania Gov. Ed Rendell (D) introduced a plan in February to legalize operator-run video poker in bars and private clubs across the Keystone State. He said taxes on the games would increase public funds for college student-aid programs by $556 million a year.

The Pennsylvania Amusement and Music Machine Association has been lobbying for operator-run video lottery for more than 20 years. Operators are "ecstatic" over Rendell's proposal, according to Amy Christie, who wears two hats - as executive director of PAMMA, and of the Pennsylvania Tavern Association.

Under Rendell's plan, about 35,000 video poker machines might eventually be installed in as many as 8,500 licensed liquor establishments (up to five machines in one location), according to the state revenue department.

Favorable comment came from a surprising source: state police, who say they prefer to spend their time on other issues. Pennsylvania legalized slot machines in 2003; state police have been cracking down harder on gray games ever since.

Some 17,000 illegal poker machines are believed to be operating in the Keystone State, each generating an average of $600 a week.

SOUTH CAROLINA VLT REVIVAL

In South Carolina, Sen. Robert Ford (D-Charleston) said he might assemble a coalition of lawmakers to put a referendum before the public that, if passed, would revive the state's payoff video poker market.

Payoff video poker was a legal, multibillion-dollar market in South Carolina until lawmakers shut it down in 2000. Ford said taxes on the equipment could raise $750 million annually to fund state programs for low-income citizens.

Ford said he would move forward with his referendum campaign in April unless the legislature proposes an acceptable alternative fundraising plan before then. Newspapers in the state said Ford's backing of the video poker measure might be a springboard for a run at the governor's office during the next election cycle.

SOUTH DAKOTA MULLS NEW VLT SPLIT

South Dakota takes 50% of the revenues from its legal video lottery market, receiving about $112 million annually from VLTs. Rep. Gerald Lange (D- Madison) said he would propose legislation that could increase taxes on the devices to as much as 70%.

His proposal is open to "negotiation," he explained, adding that the bill aims to spur discussion about the best tax rates on VLTs. Lange claimed hiking the state's share could put $40 million more in South Dakota's coffers.

In February, a panel of South Dakota lawmakers recommended to the full state legislature that the state keep its split with the video lottery industry on a 50-50 basis. The panel said increasing the state's share of VLT cashboxes would drive many operators out of business.

Operators have succeeded in defeating a long series of proposed tax hikes on the state's VLT industry since 1995.

COURTROOM BATTLES IN TEXAS

In Texas, missing documents and a not-guilty plea by the owner-operator at the center of the Aces Wired video gambling cases made a couple of controversial legal battles even more complicated.

In Corpus Christi, District Judge Jose Longoria called in the Texas Rangers to investigate how the District Clerk's Office managed to lose certified affidavits and search warrants that led to raids in May 2008.

Currently, 14 people are charged with participating in illegal gambling activities related to Aces Wired.

The trial of Gordon Graves, chairman of the company, was set to begin on Feb. 9 on charges of engaging in organized criminal activity. Aces Wired continues to maintain that its games are legal under Texas law. Graves pleaded not guilty on Jan. 23.

Separately, in Amarillo, TX, the FBI and six state agencies staged raids on adult arcades in early February. The eight-liner crackdown led to three arrests and the seizure of more than $150,000 in cash, stolen guns, cars, electronics and drugs.

Finally, in Brownsville, TX, police raided an Internet cafe that was suspected of providing eight-liner gambling.

MONTANA SEES VLT SLOWDOWN

Though tax receipts from legal video lottery terminals continued to climb in Montana's government last year, the rate of increase was the slowest since 2001, state officials said.

VLT operators paid Montana $63.4 million in taxes in 2008, up from $60.8 million in 2007 - a 4.4% increase. But most years, the rate of growth has topped 6%. Montana government takes just 15% of VLT earnings, leaving 85% to the industry.

Tax receipts from VLTs, a reflection of cashbox strength, climbed in the first two quarters, dipped in the third and rebounded somewhat in the fourth quarter, after consumers received economic stimulus checks from the fed.

The 4.4% growth rate for fiscal 2008 is the lowest recorded since 2001, which saw 2.5% growth. Montana Gambling Control Division administrator Gene Huntington said players wagered about $1.4 billion on VLTs last year.

The installed base of licensed VLT games dipped from 22,200 in 2007 to 20,420 last year, as more operators installed multigame cabinets, according to Forbes. The total gross income for some 18,350 VLTs in 2008 was $422.8 million, averaging $23,042 a machine and down just $300 a unit from 2007.

About 90% of Montana VLT operators voluntarily file tax reports online using an electronic collection system, according to the Billings Gazette. For the past four years, online filing has been mandatory for operators after upgrading equipment or installing multigame cabinets.

WEST VIRGINIA MAY REDUCE VLT MARKET

For several years now, West Virginia Gov. Joe Manchin (D) has said that he would like to reduce the number of legal video lottery terminals permitted in bars and clubs in the Mountaineer State.

A panel appointed by Manchin to study current regulations and earnings may move later in 2009 to recommend precisely such a reduction in the size of the VLT market.

Currently, the state's VLT sector is capped at 9,000 units, but complaints about the machines' being too prevalent - and too prominent - have been growing in towns and cities across the state. Licenses for all VLTs are due for renewal in 2011.

West Virginia lawmakers established a legal VLT market in 2001 as a way to ensure taxation and tight regulation of "risk-reward" video entertainment. The state's VLTs collectively grossed $411 million last year.

PRO-POKER RULING IN NORTH CAROLINA

North Carolina may be the jurisdiction with the most unusual video poker news. Wake County superior court judge Howard Manning ruled on Feb. 19 that the state's 2006 ban on video poker machines is unlawful.

But in a rarely seen legal maneuver, the judge simultaneously blocked operators from reviving the poker market until further legal proceedings take place.

Manning said it was unconstitutional for North Carolina to ban operator-run pokers while allowing the Eastern Band of Cherokee Indians to operate gambling equipment on tribal lands.

To give the state time to file an appeal, Manning issued a stay against his own order against the ban. Within 48 hours of Manning's ruling, one state sheriff termed the verdict "nuts," according to local press reports.

The speaker of North Carolina's House of Representatives, Joe Hackney, said he found the verdict puzzling, since other states permit gambling on Indian reservations while banning it elsewhere. Hackney said he would support revising state laws to keep the poker ban in effect.

The ruling resulted from a lawsuit filed by McCracken and Amick Inc. (Fayetteville), a former operator of video pokers. North Carolina permitted amusement-only pokers from 1993 to 2006, but outlawed them because police complained illegal payoffs were rampant and impossible to stop.

Former speaker of the house in the state legislature, Jim Black, went to prison after a federal investigation into his political advocacy of video poker led to evidence of criminal wrongdoing in other areas. Last year the sheriff of Buncombe County was convicted of accepting bribes from video poker operators.

After video poker games became illegal in North Carolina, some operators began running "sweepstakes"- style videogames that offered risk-reward entertainment, without a poker theme.

State lawmakers responded by passing SB 180, which outlawed sweepstakes games as of Dec. 1, 2008. Now some operators are back with modified sweepstakes games that do not have prepaid cards, one of the features specifically banned by the law.

The devices are popping up in bars, restaurants, Internet cafes and tobacco shops, according to The Wilmington Star-News. Sen. Tony Rand (D- Cumberland) said lawmakers might seek a broader ban in the next session.

So far, police in North Carolina have seized only five sweepstakes games. But no charges were filed because a Brunswick County district attorney said the devices did not meet all of the criteria specified by SB 180.


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