N G I S C Chicago Meeting, May 20, 1998



CHAIRMAN JAMES: At this point I'll open it up to Commissioners for questions and comments. I would say this before we get started, however. For logistical reasons I need to let you know that we do need to clear this room at 5:30, and in order to get in our entire public comment period, we do need to begin that at 4:00. I just wanted to let you know that. And I'd like to take a brief break before we get into that. I do apologize, but that's the rules.

I'll just come right down the aisle.

COMMISSIONER LEONE: I have a lot of questions. In the interest of time and giving everybody a chance why don't I just confine my questions to two.

CHAIRMAN JAMES: Let me ask this. Would our panelists be open to receiving questions from the Commissioners in writing and respond for the record?

ALL: Sure. That's fine.

COMMISSIONER LEONE; This is the first time in the discussion of economic impact one of the most important questions has been raised, what's the national impact. Is there a significant national impact? I think there are a couple of economic concepts that we don't capture unless we discuss the national impact. If this were another economic activity, we would deal with the current economics or scarcity by saying that it's causing distortions in investment and pricing and therefore, we should eliminate the barriers to entry and have a more efficient production of this service.

I really would, because I think the cost benefit analysis also can only be captured on a national basis, I'd really like to ask Mr. Grinols to comment on how a national commission might try to make sensible arguments about a series of concepts that are as difficult as this when applied to a series of essentially local monopolies around the country or activities that are justified in terms of local revenues.

MR. GRINOLS: I'm glad you asked that question. There are three different computations that seem to be floating around in the discussion of casinos. One might be casino profitability. The other is regional economic development. And the third one is national cost benefit. They are different computations.

I would think that what this Commission should be looking at, because you are a national commission, is the economic costs and benefits, which is what I was describing. The benefits of casinos are not that they move a job from California to Nevada. That may be good for Nevada, may be bad for California but for the nation it's immaterial. This is just ordinary business. All kinds of businesses cause jobs to move from one place to another. An analogy could be made between states competing with each other to get a particular factory and these states offer all kinds of tax incentives and tax give-aways. What happens is if every state does this, no state increases its probability of getting the factory, but they all give away a lot of the tax money that would have gone somewhere.

I would urge the Commission to do the correct calculation which is the national benefits and national costs. From the point of view of free entry and exit and so on, if this industry had not problem in pathological gambling, nobody got hurt because of gambling, the Commission would have no reason for existing. We would let the industry expand. The high monopoly profits that we see in some areas now would disappear with free entry and casinos could locate on every corner if they felt like it. There would be no issue.

So the issue that the Commission I think needs to look at is what are the costs to society of an additional problem gambler, an additional pathological gambler, how many more of them do you get when you have casinos everywhere and then measure those against the benefits of casinos which are ordinary commercial benefits of having nearby entertainment for those people for which it's not a problem. I would recommend the Commission go to Pulitzer who did a study of this type in the 80's, Professor Gazel who has done a study in the Midwest, get another team in the Midwest to do that study, get a separate team on the West Coast, ask all three of them to come up a year and a half from now and answer the following question. What is the cost to society of an additional problem gambler and an additional pathological gambler? That is the single most useful thing that this Commission could do for this debate.

COMMISSIONER LEONE: My second question is I'd ask Mr. Phares to start but I'd welcome anybody else's comment. Another set of statistics that are thrown around a lot in this debate has to do with the increased government revenues which are quite striking when a small community of a few thousand eliminates taxes, like Alaska having oil revenues, but are claimed on a statewide basis as -- and I see you have a chart here.

To what extent does this chart reflect an analysis of what would have been spent or might have been spent if there had been no legalized gambling revenues from other tax sources on education, for example? Has per capita education grown faster in this circumstance than it has grown in other similar states or other similar periods during the business cycle? Is there any evidence that this is, in other words, extra money as opposed to replacement money? We certainly have had a lot of evidence, a lot of testimony that people do this to get tax revenues, I presume, so that they don't have to raise other taxes they might have otherwise have had to raise, or in many cases people brag about a reduction in taxes. If this propels reduction of taxes, then it's not a net addition to public sector spending on this or anything else.

I just wonder if you did any analysis that looked at what the incremental increase in spending is.

MR. PHARES: No, we didn't. I would say, however, that to the extent that there is new economic activity in the state of Missouri, then there will be new revenues generated for the state as a result of that. We didn't look at it in terms of incremental basis.

COMMISSIONER LEONE: No matter what the activity is, though, right?


COMMISSIONER LEONE: These are specialized taxes, however.

MR. PHARES: Right. But the fact is it is new revenue to the state to the extent there is new economic activity and Missouri has chosen to earmark most of that for funding of education purposes as opposed to other purposes. We didn't look at marginal changes.

COMMISSIONER LEONE: But if the sales tax on this service offsets a sales tax that might have been levied on some other service, then the state is no better off from those revenues.

MR. PHARES: That would be true. But again, to the extent that it is new money -- if it's a wash, there would be no net addition. To the extent that it's new money, then you would have additional sales tax being generated. In fact, the chart in the report that you have does not indicate all the additional revenues that come to the state, but focuses primarily on the gaming revenues. There are other monies that come in as well, both state and locally.

COMMISSIONER LEONE: There are studies that suggest that the net impact is zero for things like lottery or for casino revenues in other states because of offset.

MR. PHARES: I think part of it is also linked to the issue of the displacement effect. To the extent that you're moving it from one hand to another, it's a wash. It would address your point. But to the extent that we have accounted for the displacement effect, then you've got some possibility of there being additional revenues generated for government. As indicated earlier, we found that of the total amount, about 50 percent of it in fact was comprised of the so called displacement effect, that would displace other kind of spending.

CHAIRMAN JAMES: Commissioner Wilhelm.

COMMISSIONER WILHELM: I wish we had more time. These are really interesting and important issues. I would agree with Commissioner Leone and Mr. Grinols that if there's a way to depict the national cost benefit analysis of gambling then we should try to do that. On the other hand, it seems to me that a number of the Commissioners have said, and I agree with this point of view, that one of the things the Commission should try to produce is a set of tools that state and local policy makers can use to try to assess the Chair's question earlier, if you're a mayor is this a good idea or bad idea? I think that's fundamentally important.

It's a nice idea to say, well, you know, it doesn't make any difference if it's in California or New York, but the fact is that if there's an economic problem in the northern part of Indiana or in upstate New York or some other place, the policy makers and the citizens in that area are affected by it and a new job, in California, doesn't do them any good. While I think the national issue is important, I think the regional issue is extremely important.

In that regard, of all of the things that I have seen, Mr. Phares, I think you and your colleagues have made the most serious effort to try to assess, in your case for the state of Missouri, what the real bottom line is. You have pointed out in your study, which I read all the way through, some of the areas that still need to be looked at. But I really wanted to commend you and your colleagues. Compared to much of the stuff that comes out of the gaming industry, and compared to much of the stuff that comes out in the anti-gambling movement or academics who are attached to either, I think this is a very serious effort.

For example, you made the most serious effort that I've seen to assess the displacement issue and to try to figure out how much of it really is a wash and how much of it isn't. I wanted to commend you on that. I hope that if you -- I don't know if you plan to pursue this type of study any further, but if you do, in addition to the other issues that you've pointed out, I would urge you to try to take a look at the relationship of the quality of the jobs to all of this. Just as a gross example, if a job is created someplace that doesn't have any health benefits, then the reality in our society is that the public is going to pay for the health costs of that family. Whereas if a job is created that does have decent health benefits then the public is not going to have to pay for that.

I hope along with the other issues you've cited that you'll take a look at that if you pursue this. In conclusion, I was particularly struck by two other things you said in your full study. I don't know if these are repeated quite this way in the summary. For one thing you said Missouri casino patrons are similar to the general state population in terms of sex and race but are older, better educated and have a higher household income, which is a conclusion that appears to be supported in your study and is different from what one often hears.

And the second point that struck me was your statement that the bottom line is that significant additions to the Missouri economy have been achieved as of 1997, almost 18,000 net new jobs, 500 million in added personal income and over $750 million of added output have benefited the state's economy. You have pointed out in your study some of the open areas in all those calculations but I really think you've made by far the most serious effort that I have seen. I hope you'll pursue it and I would appreciate it if you would consider working with the Commission or its research committee in the future.

MR. PHARES: Thank you. I appreciate it. May I make one comment?


MR. PHARES: I think one of the roles this Commission could play would be to try to pull together a lot of intellectual talent that's at this table and elsewhere and perhaps come up with a standardized model for looking at what the gaming impact is, whether it's applied nationally or locally. But there are a variety of fundamental questions that need to be addressed when you get into the issue of social costs, particularly the issue of problem gaming. First of all, what is the social cost as opposed to what is an individual and private cost, where do you draw the line? If I'm sitting in a restaurant and someone is eating sloppily, an economist would call that a social cost. Is that significant? It certainly doesn't compare to addictive behavior to alcohol, tobacco or gaming.

The other issue I think needs to be addressed in terms of social cost is where is that line when one crosses it you become a problem gamer as opposed to someone who just enjoys spending a larger percentage of their income in gaming as opposed to something else. These are questions that need to be addressed.

You're in the unique position now to be able to begin to address those in a standardized format which I think would lend a lot of credibility to what's being done. There's an incredible amount of talent on which you could draw at this table and elsewhere that could come up with a model that everybody probably could agree on as the right way to approach it. Some of the cells may be zero, some of the cells may be very substantial. But without having hard empirical information, some of these cells are being guessed at, at this point in time. I thank you for your comments earlier.

CHAIRMAN JAMES: Commissioner Dobson.

COMMISSIONER DOBSON: Mr. Thanas, in your commentary on Joliet's economic windfall and the benefit from riverboat gambling, you didn't mention the fact that the largest mall in Joliet went bankrupt. It was one mile from the riverboat.

MR. THANAS: That's not accurate, Commissioner.

COMMISSIONER DOBSON: Explain that to me.

MR. THANAS: There are two malls in the city of Joliet. The largest mall is quite successful and has attracted all major retailers. It's been open for 20 years but during the last five years it has seen an onslaught of major retailers such as Target, MC Sports, Pet Smart, all the big box stores that you see in most suburban malls. Another mall known as the Jefferson Square mall which is probably about three miles from the nearest casino has not been successful and its lack of success was shown well before the riverboat gambling companies came to Joliet. It was a problem of having two major malls trying to compete for the same market.

No one in Joliet attributes the failure of the Jefferson Square mall to the riverboat companies.

COMMISSIONER DOBSON: Did I understand you to say that the majority of the people who gamble there come from more than 25 miles away?

MR. THANAS: That's correct. That's a statistic that was provided to the city of Joliet by the Illinois Gaming Board.

COMMISSIONER DOBSON: Yet, when you were describing the social impact, you described it in Joliet rather than elsewhere where the people are coming from. Did you make any effort to assess the impact on the communities from which those people are coming?

MR. THANAS: No. I've not contacted my counterparts in Flossmoor or Lisle or Naperville or anyplace else.

COMMISSIONER DOBSON: So we don't really know the social economic impact in those areas where people are coming from?

MR. THANAS: I think you can extrapolate from the impact its had on those Joliet residents who participate or patronize the riverboats. And our assessment from the city of Joliet is that there's minimal social impact caused by the riverboats. In my business, in the municipal business, if the city causes a problem, if we back up a sewer or we don't have cops out running radar in neighborhoods, we're going to have the City Council chambers filled with citizens saying we want something done now. It's a phenomena that all of you see in your own towns probably, let's go fight city hall a little bit. If there was a problem with riverboat gaming and the patrons from the city of Joliet, there would be the family members there knocking on the mayor's door, the city manager's door saying we've got a problem here in the city. This industry that you've allowed to create all this economic development that you perceive but it's creating havoc in our families. We don't have those people coming to city hall and telling the mayor that, the city manager that or the City Council members.

COMMISSIONER DOBSON: Are you aware of the story that was carried nationally about the semi-retired couple that committed suicide? And the coroner had to subpoena the documents from the riverboat organization and found that they each had $100,000 in debt associated with gambling.

MR. THANAS: I'm not aware of that story.

COMMISSIONER DOBSON: That story was carried in the Los Angeles Times syndicate all across the country.

MR. THANAS: I read the Chicago Tribune, the local paper, not the L.A. Times.

COMMISSIONER DOBSON: The L.A. Times syndicate is carried all over the country. You're not aware of the suicide that occurred there?

MR. THANAS: I'm aware of suicides that occur in many industries. I have lawyer friends, we had one -- I'm a fifth floor of a building and one on the sixth floor committed suicide a couple years ago, very tragic loss. He wasn't a riverboat gambler. He was just very frustrated with the law business.

COMMISSIONER DOBSON: These both were riverboat gamblers with a huge debt.

MR. THANAS: I'm just telling you that in every industry, in every walk of life, we're going to find people who commit suicide. But we're not going to condemn the law business because my friend who was upstairs from me committed suicide and we're not going to condemn a restaurant business where somebody has to spend seven days a week, 14 hours a day trying to make a living at it and decides it's best not to be alive. We don't try to close the restaurant businesses in those situations. I just don't think that's government's role.

MR. GRINOLS: Could I just add one little thing here?


MR. GRINOLS: Every now and then you get these spectacular cases that hit the newspaper. This one is from the March 7th Chicago Sun-Times. It's titled Baby Death Plot Told. I don't know if the Commission has seen this. It's local. I'll just read the first sentence.

A Hickory Hills woman with a love of gambling and a history of petty fraud resorted to killing her seven week old daughter to collect on a $200,000 insurance policy, federal prosecutors allege. They also checked into her history and there was an earlier child that died of sudden infant death syndrome that they're re-examining in light of this. The article does not say which casinos she gambled in, but it's likely that she was in the Joliet casinos at some point. I can't say that for sure.


CHAIRMAN JAMES; Commissioner Bible.

COMMISSIONER BIBLE: In your studies, has anyone assessed the economic impact of moving wagering or betting activity from an illegal site to a legal site of the business and subjecting it to taxation? Perhaps in Missouri I assume they had some illegal gaming activity in Missouri previous to the legalization.

MR. PHARES: Not the same type that would be at riverboat casinos. There's sport betting and other betting which in Missouri may still be illegal. How much of that has shifted from that type to riverboat casinos, I'm just not aware of it.

COMMISSIONER BIBLE: In your survey, you asked patrons if they engaged in illegal wagering?

MR. PHARES: It would have been a good question to ask. At the time we just didn't think of it.

COMMISSIONER BIBLE: The only reason I think of the question is last night the Bulls were in town and I assume there was a little wagering going on in Chicago, and if that had been subject to taxation, it would have produced some revenues for the city.

MR. PHARES: Right.

COMMISSIONER LEONE: I can't resist this. A lot of economists that I spend my time arguing with would say that subjecting an activity to taxation that wasn't formerly taxed would distort economic activity and be bad for the overall economy. In the old days they might have to argue by the logic of that point of view that we were better off, which is the trouble with that point of view, but that's another discussion.

MR. PHARES: If we could tax illegal activity, we could probably eliminate the national debt in a matter of a few years.


COMMISSIONER McCARTHY: Yes, to Mr. Phares, please. Do the members of Civic Progress in St. Louis representing a lot of large corporations in that metropolitan region, did they ask you to design the study that you undertook, that you've given us an outline of the results of?

MR. PHARES: Our charge from them was what is the economic impact of gambling in Missouri. They asked us to submit a budget, which we did and then we had completely free rein from there. We met with them once to give them a progress report on what had been found to date and made a few questions and comments but provided no directions in terms of where we should go from there.

COMMISSIONER McCARTHY; So you had fairly good latitude?

MR. PHARES; We had complete latitude and good funding to do it.

COMMISSIONER McCARTHY: One of the dilemmas we keep facing here is that we hear the good news from the people who are the heads of cities who give us, in effect, a budget report and of course, have no responsibility at the municipal or local level, which I understand having served there in the last century, and that's at least at a state level or a very large regional level to try to search out what the costs are of divorce courts, bankruptcy, crime, to employers for pathological gamblers. So my question to you is if you had brought latitude in designing the study and you knew that social cost data were lacking, and indeed they are because we've been searching for it continuously, why weren't questions on social costs included in your study to give a balanced economic picture of the cost to government, the cost to private sector employers for pathological gamblers?

Incidently I would insert that Dr. Howard Schaffer of the Harvard University Medical School who did an analysis of 120 selected studies -- you may be familiar with this -- on problem gambling in America has said, and he's been accused of being very conservative with this number, that there are four and a half million pathological gamblers in this country. So it's a reasonable assumption that lots of different kinds of costs come out of that. My question is why weren't any social costs, factors, questions included in your study?

MR. PHARES: Three reasons, and I'm not by any stretch trying to say that social costs shouldn't be considered. Like I said earlier, they should be. One was simply the fact that what is a social cost and what is problem gaming --

COMMISSIONER McCARTHY: I'll leave you define that.

MR. PHARES: I don't think it's been defined yet.

COMMISSIONER McCARTHY: Let's start right now.

MR. PHARES: I can't. What is a social cost and what is an individual cost requires a lot more empirical examination. What is a problem gamer versus someone who spends a large percentage of their money on entertainment as gaming is a question which has not been addressed. Is it $5,000 for a problem gamer or $105,000? What is the value of a human life? Why does somebody commit suicide?

One of the reasons why is that this issue is simply so wide open that it would have lead into the second two issues. One was a question of time. We had a time frame in which to do this. And the third was a question of budget. To do what you are suggesting would have required a budget several times what we had to the study. We felt it important to do the first part, to address the displacement effect which is key missing part, not to say that the third part that is yet remaining to be done, I think we indicated this in our closing chapter is the issue of problem gaming does need to be addressed. It will vary from state to state. It should be done in Missouri. It's not been done in Missouri for basically the reasons I indicated. I'd love to see it done. I'd love to have the opportunity to address it.

COMMISSIONER McCARTHY: The problem I have as a member of this Commission, getting a handle on trying to weigh all this out, is virtually no one funds studies dealing with social costs. They don't fund it, so we keep asking the questions you do, what is a social gambler versus a problem gambler and it's been defined for us. It's associated with a series of actions in a family, in a community, in a job site but that very imprecision is used as the reason why studies like yours don't ask social cost questions. It's a little bit frustrating to us who are trying to get a handle on this. I'm not heaping all the blame on you. It's sort of a collective thing.

MR. PHARES: I appreciate your frustration. I share it.

CHAIRMAN JAMES: Commissioner Lanni.

COMMISSIONER LANNI: I just actually had a couple questions for Mr. Grinols. I notice in the one report that you had, I think it was exhibit number one. You had indicated revenue per adult, casino revenue.

MR. GRINOLS: That's casino revenue per adult. That particular figure in the chart came from a Christensen and Cummings. It's a study for the state of Iowa. Of course, it would vary a little bit by region.

COMMISSIONER LANNI: That's just for the state of Iowa?

MR. GRINOLS: That represents what an average adult loses per year to casinos in the state of Iowa.

COMMISSIONER LANNI: For the state of Iowa. And then you have social cost, it's looked like about $340?

MR. GRINOLS: That was meant to be a range from around 110 at the low end to maybe as high as 340.

COMMISSIONER LANNI: I think it only showed 340. I didn't see a range.

MR. GRINOLS: There should have been a little box there showing the 110.

COMMISSIONER LANNI: Let's just say it's 110 to 340. What was the basis for that?

MR. GRINOLS: Okay. This gets back to the question that was just asked. Social costs consist of loss of productivity.

COMMISSIONER LANNI: I'm sorry. I was asking where did the numbers actually come from? Is that in Iowa?

MR. GRINOLS: Those numbers come from about three or four, half a dozen studies that have been done since the 1980's that have been put together. I have used parts of different studies. If you make an array and line up all the different social costs that you have associated with gambling, down your columns, line up all your studies across the rows, different studies have analyzed different things, for example, lost productivity, gamblers who lose control of their life over gambling, don't show up for work, they get fired, they have employment problems, so on. Take the studies that have estimated that, stick it into the cell. Then there's crime related costs, adjudication, apprehension, incarceration costs, how many people end up going to jail because of some embezzlement due to gambling. There have been some studies that have estimated those numbers, stick those into the cell. Continue this way, line up all the cells, take the maximum of the studies and the minimum of the studies, when you have different studies that have gotten equivalent numbers, take those as your range, put them together. That's where the number comes from.

COMMISSIONER LANNI: You seem to be saying I think what COMMISSIONER McCARTHY and maybe Dr. Phares was saying, we don't really have very good information on that issue.

MR. GRINOLS: No, I'm not saying that. I'm saying we do have studies and they do overlap. They come in fairly consistently. At the low end, one additional pathological gambler is likely to cost society on the order of $10,000. I'm saying roughly because I can't be too much more precise than that. At the upper end they could be as high as 30,000.

The studies are fairly consistent. But what I urge the Commission to do is to redo in three independent studies those studies that now exist and find out with modern data, with new studies, with new people, if the numbers are coming in consistently to what we already have. That's what I'm urging the Commission to do.

COMMISSIONER LANNI: On a national basis?

MR. GRINOLS: Well, take a team from the East Coast, a team from the Midwest and a team from the West Coast and let them work with different populations, let them do independent work and see what you get.

CHAIRMAN JAMES: I think Commissioner Wilhelm has one last question.

COMMISSIONER WILHELM: In trying to weigh up the social cost, given not quite enough is known, I don't know if you heard the testimony from the mayor and the State Senator from Gary, Indiana this morning, but in order to assess the social cost, wouldn't you have to also take into account the elimination of the social cost related to, for example, a person who was unemployed who got a job or a community that has lots of unemployed people that has fewer? Obviously unemployment has lots of social costs associated and lots of people have studied that. Wouldn't you have to balance things like that in order to assess the social costs?

MR. GRINOLS: Yes, you would, to the extent that anytime an unemployed person is a burden on resources of all of society, that's a social cost to society.

COMMISSIONER WILHELM: It produces lots of other things. It produces crime and some other things. Unemployment is well known to produce a whole range of social costs.

MR. GRINOLS: Right, and you would have to take that all into account. But a social cost is a burden, a use of resources because of the existence of an activity, in this case, gambling, that would not have to be expended uselessly in that direction. For example, if a police force has to be doubled in size to handle the crime because a casino is in town, the physical resources of that doubled police force represent a social cost. Those people otherwise could have been doing something else productive.

COMMISSIONER WILHELM: I understand, and you started that sentence with if. But if, also -- just in another example, crime was reduced, which was asserted by the mayor and State Senator in Gary, then you have to balance that against your $300.

MR. GRINOLS: Yes, absolutely. I'm just telling you that you have to do your calculations properly and balance the decreases versus the decline. But yes, of course.

COMMISSIONER LEONE: Can I just ask one question?

CHAIRMAN JAMES: You can have one quick question.

COMMISSIONER LEONE: This is the thing that has always troubled me about the sincerety of economics and gambling poses the question in as difficult a fashion as I know. One of the ways to get at the answer to Commissioner Wilhelm's question and other questions, whether there are net new jobs in the country because of an activity, recognizing that a certain amount of it is shifting around boxes on a table, whether the DDP has expanded, whether there's growth associated in a meaningful way with this activity versus the deployment of resources some other way, and that would tell you something about whether --clearly, a casino opens, a bunch of people get employed, many of them might not have been employed, but are those new jobs nationally or would there have been jobs, different kinds of jobs in some other place as a result of that.

It seems to me that one of the toughest assignments we have as a national commission is figuring out a way to get at that question. We don't have say to sort through the details of this particular activity, and there doesn't seem to be any law we can just apply. We've run out of time here, but I would welcome any of you dropping us a note or opining about how we can try to get a better handle on that question, because unless we can, we will never wrestle this particular beast to earth and be able to argue about it in the same terms. We still won't agree. I would argue on the margin many of these issues are not economic. But we will at least all be talking about the same thing in terms of the effect on our nation's economy. We could use some advice.

CHAIRMAN JAMES: I would certainly invite any of you to submit any thoughts that you may have on that or any other subject to the Commission. And I would invite those of you who are attending in the audience who perhaps have not had an opportunity to speak on a panel today to address the Commission on any of the subject areas that you've heard us talk about this morning and this afternoon. These are very complex and very difficult issues and we do struggle and wrestle with them a great deal.

Having said that, I do want to thank our panelists for being here, sharing their insights, sharing their thoughts and struggling with us. We're just beginning to really get into some of these areas and we would really welcome the opportunity to submit questions to you in writing and to encourage you to engage in a continuing dialogue with us as we go through this process.

It's now 4:00 and I do believe that in order to make it through 90 minutes of public comment period, it would be beneficial to the Commission to have about a five minute break at this point. We will come back together again at about five after 4:00.

(Whereupon, a recess was taken.)

Back Contents Forward