What Happens Now with VIGL Slots Plan?

What happens now that the Legislature has approved changes to V.I. law to allow slot machines at the St. Thomas horse track and approved a franchise agreement with VIGL to run both tracks? The answer may be: not much for awhile.

Divi Carina Bay Casino will see its casino taxes go down right away, from 12 percent now to 8 percent for the first two years after the bill is enacted; 10 percent for the next two years; then returning to 12 percent. That is the only part of the law or the franchise agreement that has an immediate, measurable impact.

Casino Control Commission Chairwoman Violet Ann Golden told senators in 2013 that Divi’s revenues had been dropping from a high of $24.1 million in 2007, before the recession and the 2011 opening of slot machines at the St. Croix horse track, down to $12.5 million in 2012. Since then, revenues have held relatively steady, according to CCC testimony in budget hearings. At that 2012 level, Divi’s tax cut would cost the V.I. government about $1.5 million in lost tax revenue over the next four years.

The plan was promoted as a way to bring more money into horse racing and to improve the racing facilities in both districts. As VIGL, V.I. Horse Racing Commission members and members of Gov. Kenneth Mapp’s administration emphasized to the Senate on Nov. 30, the franchise agreement does call for $27 million in investments in the tracks and a performance bond for $25 million.

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Increased races and purse sizes were part of the deal too, with at least 18 races in both districts combined – an average of nine or more per district, per year – for the first three years after the "effective date" of the 20-year franchise agreement with VIGL.

But the "effective date" does not begin until a long list of things happen first, including designing major improvements to one track, getting V.I. government approval for the designs and getting construction and other permits to build the designs.

Designs and permits can sometimes take a long time. Plans were originally presented for the Paul E. Joseph sports complex in Frederiksted in 2012 and have been restarted twice. Sports, Parks and Recreation Commissioner Pedro Cruz told senators in July the designs were "60 percent under review" and no one knows when permits will be issued.

But VIGL Vice President Lance Griffith expects things to get going much faster than that.

"We have 30 days to present the project outline to the governor," Griffith said. Once it’s presented there are 15 days for the government to ask for changes and another 15 days for VIGL to address proposed changes, so there will be about 60 days before the overall construction plan is finalized for one of the tracks, he said.

The franchise agreement gives a timeline of two years for 40 percent of the redevelopment work, with both projects being “substantially completed” within three and a half years. As part of the agreement, VIGL will be allowed to operate slot machine parlors at both tracks, once it has a license from the Casino Control Commission.

Work may begin first on St. Thomas.

During the Nov. 30 Senate hearing, Kye Walker, lawyer for the Flambouyant Park Horsemen Association, said that "pursuant to an Oct. 27, 2016, settlement agreement between the government of the Virgin Islands and TRAXCO, the most recent operator of the racetrack, TRAXCO’s parent company, Treasure Bay, would operate a temporary racino for two years after the Casino Control Commission authorizes Treasure Bay’s operation of the temporary racino."

Walker also said Treasure Bay "will not be required to operate the race track" during this period. Since the Mapp administration evicted TRAXCO from the track in May 2016, the Flambouyant Park Horsemen Association has been running the races, paying purses. It may also be operating the tracks pari-mutuel betting window. The slot machine parlor closed when TRAXO left. With this new agreement, the slots will soon reopen under Treasure Bay’s management.

Asked about the agreement, Griffith said Treasure Bay has a contract for up to two years on St. Croix, but "if we get all of our permitting in place… after the first year we can take over operation of the slots at that point," Griffith said. So Treasure Bay will run the St. Croix racetrack slots for a minimum of one year and a maximum of two years, he said.

That VIGL is required to post a $25 million performance bond on planned improvements was touted as insurance that the money would be spent soon and work would begin on the two tracks. But according to that franchise agreement, VIGL is not required to get the bond until after the "effective" date of the franchise agreement. And the "effective date" is set to be after a long list of other conditions are met, including granting of "racino" slot machine licenses and "(a)pproval of all licenses and permits for the construction of at least one of the racetracks contemplated in this agreement."

Since slot machine licenses are one of many preconditions that have to be met first, could slots be installed on the St. Thomas track in the meanwhile, generating revenue for years, before all the preconditions for the "effective date" of the franchise agreement are completed?

Asked if there was any chance of slots being put in place before the effective date of the contract, Griffith said, "Until we get an effective date in the contract, we won’t have slots at the Clinton Phipps track."

What if the slots do not generate enough revenue to pay for $27 million in improvements?

The St. Croix race track slots generated $4.8 million in revenue in 2012, Golden told senators in 2013.

There are already similar machines, called VLTs, all over St. Thomas, that generate about $29 million per year in net revenue before taxes and payments to retailers and to V.I. Lottery. Southland Gaming, the company that runs those machines, estimated racetrack slots could siphon off 30 percent or more of that, when the Senate considered the agreement in November.

That could mean up to $9 million or so in net St. Thomas track slot machine revenues, after giving out winnings. Added to the St. Croix revenues, perhaps that could mean total revenues of about $14 million per year. After taking out the government’s 25 percent share, that leaves about 9 million per year to run both tracks, pay purses and pay for improvements.

In Senate hearings, TRAXCO has previously estimated it costs upward of $1.5 million per year to operate the St. Croix track, which could be double, or around $3 million for both tracks, leaving up to $6 million per year. If these estimates are high, even if revenues are lower, and they have three million per year in net take, that would seem to be plenty to pay for $27 million in improvements in less than 10 years.

Asked what happens if the slots do not generate as much as planned, Griffith said that risk was on the company.

"Even if the revenues aren’t there, we still build the facility, so that is a risk as a developer we are taking…. no matter what, the facilities will be there," he said.

Griffith urged Virgin Islanders to think of the projects as about more than just gambling.

Work on the tracks will not just improve horse racing, he said. "It cleans up important parts of both islands," he said.

On St. Croix, the Randall "Doc" James is right by the airport, so the improvements will make it so "the first thing tourists see will be very nice," he said.

They also want to have more than just racing and gambling, he said. They hope to have family areas, "with a splash park, a mini water park at the entrance." They are looking at hosting concerts and "maybe a rodeo or something," on both islands, he said.

When the CCC gave a license to VIGL for slots at the Caravelle Hotel in Christiansted on Feb. 5, 2016, it gave VIGL 30 months to complete the V.I. law’s requirement that the license holder build or renovate at least 75 hotel rooms.

A section of the Casino Control Act (Title 32 Section 434 (b)) says the CCC can issue a license to a facility that does not meet the required number of rooms built or renovated if "in the judgment of the Commission can become an approved hotel building within 30 months or within such additional time period as the commission may, upon a showing of good cause, therefore establish."

But in February 2016, the Legislature passed legislation, sponsored by Sen. Kenneth Gittens, giving CCC authority to issue waivers, but requiring the work be completed within 18 months. The legislation [Act 7844] also says waivers can only be issued if "the licensee posts a performance bond in an amount equal to 60 percent of the total projected cost of the development." The Legislature’s official copy of that Act indicates Mapp vetoed that section, but the Legislature enacted it over Mapp’s veto on March 30.

The CCC later approved an operating permit for VIGL at Caravelle in April and issued an extension to the casino license in October. As of October, CCC members continued to refer to a 30-month timeline for completion of the work. Construction has not begun on the new rooms, which are planned for the vacant lot adjacent to Angry Nates Restaurant and the Holger Danske hotel.

Asked whether VIGL had posted the bond specified in Act 7844, Griffith said, "We never asked for nor have we been given a waiver for anything on the Caravelle project." Since there was no waiver, the bond is not required, he said.

Asked how the 30-month time delay is different from a waiver, Griffith said to ask attorney Donovan Hamm for clarification. Hamm also said that no waiver was asked for, so the law did not apply. He said they expect all the renovations and new construction to be complete within the original 30-month window.

Work on the tracks will not just improve horse racing, Hamm said. "It cleans up important parts of both islands."

If all goes well, there will still be downsides.

The slot-machine funded improvements to the track and larger purses are unlikely to outweigh a global downward trend in horseracing and unlikely to result in a major increase in V.I. horse racing attendance.

Margaret Ray, an economics professor at Mary Washington College in Virginia, testified to the Senate on Nov. 30 that the industry has been in a long-term decline and only large population centers have been able to generate good attendance numbers at races. The territory has a small population, V.I. racing is almost entirely attended by local residents and improvements are unlikely to change those fundamentals.

Ray also said other areas’ efforts to use slot machine revenues to subsidize races have not turned around those areas’ racing industries. She said the industry would be better served by some other form of direct subsidies.

Ray was flown in by Southland Gaming, which has a financial interest in preventing slot machines on St. Thomas, but said she did not consult with Southland and was presenting her own analysis.

“Supply and demand in the market are such that investment in new racetracks will be

unprofitable and inefficient. It is not efficient to invest large sums for capital improvements at racetracks that will be used for only a few race days each year," Ray said.

Senators and V.I. horse racing representatives disagreed, arguing Ray had little data specific to the USVI to look at and did not take the local love of horse racing into account.

Ray responded that the industry was culturally important and should be subsidized but she said it would need other forms of permanent, ongoing subsidies to be viable.

“So while supporting live racing in order to maintain the historic and cultural role of the industry in the USVI is justified, large investments to expand the industry in an attempt to make it profitable are clearly not justified," she said.

Patricia Crane, an Illinois-based professional racehorse trainer, offered a more positive spin, saying, "If you build it, we will come."

“The most important factors to attract outside horsemen are a significant increase in the purse structure, and classy facility and incentives for your local horsemen," Crane said.

If slots provide steady revenue, it stands to reason that purses can increase as projected. Maybe that is enough. But no one presented actual data at the hearing that suggested substantially more people would attend races or that the racing would expand beyond an exclusively local audience filled from the USVI’s very small population base. And Ray presented voluminous data suggesting it will not.

Meanwhile, as Ray testified, spending to subsidize horse racing and horse race gambling means not spending on other needs.

When slot machines are placed at the St. Thomas track, there may be some loss of revenue to the government and to retailers, according to opponents of the plan.

Southland Gaming, the company that has a contract for slot machine-like "video lottery terminals" on St. Thomas and St. John, opposed the deal, as did some retailers who operate VLT parlors. At the Nov. 30 hearing, they said they were concerned allowing up to 200 slot machines at the track would cut into their revenues and cut into funding to the V.I. Lottery.

Southland Chief Operating Officer Shaine Gaspard said putting 200 slot machines at the St. Thomas track "theoretically could take 30 to 40 percent" of their revenue.

Video lottery terminals generate about $9.5 million for the V.I. Lottery every year, with about $4.6 million of that going to help fund an array of V.I. government programs. Retailers get about $6.3 million per year. A 30 percent reduction could mean around a $1.4 million per year loss to those subsidized programs and a $1.9 million per year loss to St. Thomas VLT operating retailers’ bottom lines. Some bars and restaurants may go under as a result of the loss of revenue.

Any government losses from gamblers betting slots at the track instead of at VLT parlors would be slightly offset by taxes on slot machine revenues.

About 33 percent of VLT revenue goes to the Lottery. Under the new law, racetrack slots are taxed at 25 percent. Mapp’s proposal called for half of that money to be used for purses and other things, leaving the other half, or 12.5 percent of race track slot revenue, for the government.

But during session on Nov. 30, senators removed the part of the law that automatically devotes a portion of racetrack slot machine revenues to purses, addressing concerns that St. Croix’s racetrack and horsemen would basically be penalized by taking away a portion of the existing slot machine revenue at the St. Croix track to subsidize St. Thomas. So until or unless that is changed with new legislation, all the revenue goes to the V.I. government.

Until there are slots on St. Thomas, the change to the law amounts to an increase in the tax rate on the St. Croix race track slots from the current 19.25 percent to 25 percent of gross revenues, which could partly offset the loss from Divi’s tax break.

Gambling drains the local economy.

According to testimony at every Senate oversight hearing concerning casino and VLT gambling, nearly all the gambling is done by local Virgin Islanders. A substantial portion of gambling revenue leaves the territory in the form of profits to the parent company. Just as every federal dollar brought in to pay for roads has an extra benefit – a multiplier effect – as it is spent on salaries, then spent on groceries or goods, then by the retailer, etc., every gambling dollar leaving the territory that would otherwise have been spent on goods within the territory is a drain to the local economy.

But that is happening currently. V.I. Casino Control officials and representatives of Southland Gaming have testified in Senate hearings that gambling revenues are relatively constant and simply shift location rather than increasing with new gambling outlets. Shifting the location of St. Thomas gambling should not change the degree to which it drains the overall economy.

There may be more abandoned and neglected "retired" horses.

Neither the proposed new laws nor the franchise agreement address what to do with retired horses. Most of the thoroughbreds used for racing are purchased stateside and brought to the territory. Increasing racing will result in an increase in "retired" horses. There is already a problem with stray horses on St. Croix. Some horses starve. Occasionally a horse wanders into traffic and causes an accident.

With 18 races a year, local horse owners would likely be bringing between 30 to 80 horses to the territory per year to train and race, according to Lynn Utech, an official with two nonprofits that move retired thoroughbred horses back to the U.S. for care and retirement: Caribbean Thoroughbred Aftercare Inc. and V.I. Horse Rescue and Retirement. Each horse comes in at age 5 or 6, then race for two to four years, Utech said. After that, they still live for another 20 years.

But systems and facilities to take care of the retired horses are already far too limited for the small number of races held now, much less a massive increase. And neither the legislation nor the proposed franchise agreement addresses the problem.

If there is more horse racing but no new measures to take care of retired horses, there will be more abandoned horses. And there are no new measures to take care of retired horses.

Overall, the impact of the changes to V.I. law and of the new franchise agreement may be less dramatic and less immediate than proponents advertised and opponents warned. The tracks will probably be nicer. Horse owners and jockeys will get some benefit from more races and enhanced purses. There will be more abandoned horses. Some bars and restaurants on St. Thomas may suffer. Some programs financed through the V.I. Lottery funds will suffer. Overall tax revenues will be changed slightly.

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