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New Orleans casino a cautionary tale
Expectations for financial salvation were sky-high back in 1992 when Louisiana, still smarting from the oil bust, cleared the way for construction of a land-based casino in downtown New Orleans.
Today the winnings on that bet seem paltry compared with the pot of money, jobs and tourism that casino proponents had promised.
Full-time casino employment stood at only 2,123 in 2003. Counting ripple-effect jobs at other establishments, the total climbs to maybe 4,100--less than a quarter of the jobs projected by the most bullish forecasters at the inception. And annual gaming revenues, minus payouts to winners, are in the neighborhood of $300 million at the casino. That's $200 million to $900 million less than was projected by various bidders.
The New Orleans enterprise slipped into bankruptcy twice and has wrested significant tax and operating concessions from the state to get back on track.
The Big Easy's experience is a sobering one for any convention city considering a downtown casino, and is especially illuminating as Chicago business and union leaders plan to take a proposal for a downtown land-based casino to the Illinois General Assembly when it opens its veto session this week.
The coalition proposing a casino in downtown Chicago said it is important to study what has occurred in other cities, but also to realize Chicago is different from New Orleans in many respects, including the breadth of cultural offerings and the size of its exhibition hall.
"We have to craft what makes sense for our own situation," said Christopher Bowers, chief executive of the Chicago Convention and Tourism Bureau. "We compete directly with Las Vegas for the largest shows, when in many cases, New Orleans does not."
A casino "would be another arrow in our quiver, from a competitive standpoint," he said, noting the coalition is working with an outside firm to make sure economic projections are on target.Still, skeptics warn that casino operators will promise the world to gain a monopolistic franchise, and that promises are rarely met.
"It's to their advantage to promise anything, get established, and later change the rules back to what they wanted in the first place," said Nathan Chapman, president of Vieux Carre Property Owners, Residents and Associates, a French Quarter preservation group. "You're really playing with a tiger, and you might be happy with it, but at some point, the tiger is going to do what the tiger wants to do."
Indeed, a casino gains tremendous leverage because government officials become addicted to the revenue stream, some observers say.
"Once you have gambling, and it is less than promised, you can't get rid of it," said Tyler Bridges, author of the book "Bad Bet on the Bayou: The Rise of Gambling in Louisiana and the Fall of Governor Edwin Edwards." The former governor and his son Stephen are serving prison sentences for racketeering and fraud in relation to the awarding of riverboat casino licenses.
The establishment of a land-based casino in New Orleans, during Gov. Edwards' tenure, stands as something of a how-not-to lesson.
For starters, bidders for the casino vastly overestimated gaming revenues--projecting anywhere from $500 million to $1.2 billion.
Their mistake was failing to adequately take into account potential competition from riverboat casinos, from casino development on the Mississippi Gulf Coast and from the vibrant nightlife already in place in New Orleans, noted Steve Rittvo, a gaming consultant who was working for one of the bidders.
Next, to speed up the casino opening, government officials insisted a temporary casino be opened in an economically depressed, crime-ridden area until a downtown casino could be finished.
The temporary casino lasted seven months, opening in May 1995 and closing in November of that year, in tandem with a filing to reorganize under the federal bankruptcy code.
The permanent downtown casino opened in October 1999, after a series of delays and project changes caused projected start-up costs to more than double. Although the casino is only a short walk from the French Quarter, traffic did not come close to expectations, due to gaming competition, suburbanites' reluctance to come downtown, and a lack of restaurant and entertainment offerings, observers said.
Gaming revenues in 2000 totaled $254 million, of which $100 million, or 43 percent, went to pay the state casino tax.
By January 2001, the project was in bankruptcy reorganization again. But this time, it emerged from bankruptcy with a huge tax cut from the state.
"Louisiana placed an unreasonable and inappropriate and creatively derived tax burden on the casino when it opened, and ensured it couldn't survive," said J. Stephen Perry, formerly chief of staff for Gov. Murphy "Mike" Foster, who succeeded Edwards in 1996.
To try to ensure the casino's viability, the state casino tax was sliced virtually in half. The original minimum of $100 million was reduced to $50 million or 21.5 percentof gaming revenue, whichever was higher. The minimum then escalated to $60 million for the subsequent four years.
The casino also emerged from the bankruptcy with the right to build a 450-room hotel and to add restaurant and entertainment venues, a significant concession. Non-gaming ventures contribute about 55 percent of revenue at Las Vegas casinos, Rittvo noted.
Originally, the casino was prohibited from having a hotel or significant food offerings, an effort aimed at appeasing the clout-heavy hospitality industries.
Today the downtown casino, which has 2,000 slot machines and 100 table games, has steadied itself and woven itself into the economic fabric of the city and the state.
Harrah's Entertainment Inc. took full control of the casino in late 2002, finally ending an unwieldy, government-devised partnership structure of which it had been part.
In 2003, it paid $71.3 million, or 22.3 percent of its revenue, in taxes, including nearly $60 million in state gaming taxes.
It also paid the City of New Orleans $12.5 million in rent on the city-owned property it occupies. And the casino chipped in another $1.5 million toward city tourism marketing efforts.
The casino also buys up hotel rooms and restaurant meals that it provides on a complementary basis to its best customers. This year, it plans to buy 170,000 room nights, at a cost of $13 million to $15 million, and to spend $1.8 million on restaurant meals, said John Payne, general manager of Harrah's New Orleans Casino.
Winning over hotel industry
"We, the industry, and I feel fortunate to have someone bring additional entertainment to a city like New Orleans," said Paul D. Buckley, general manager of the Hilton New Orleans Riverside, located across the street from the casino, which resembles a giant, dressed-up civic auditorium. Harrah's buys about 37,000 room nights a year from the Hilton.
What's less clear is whether the casino brings additional conventions and tourists to town.
"On the convention side, it's hard to illustrate an impact, except in a general sense," said Perry, now president and chief executive of the New Orleans Metropolitan Convention & Visitors Bureau Inc.
"For conventions and meetings, the richness of cultural and entertainment activity is important ... and adding a high-end gaming experience adds destination value," he said.
On the leisure side, Harrah's use of its nationwide customer database to market the New Orleans casino amplifies the city's efforts to attract tourists, he said. Still, it remains difficult to measure impact.
Last year, Harrah's New Orleans had 6.2 million customers, with about 40 percent coming from out of town.
Surveys show about one in four city visitors go to the casino, spending an average of $115, said Janet Speyrer, associate dean for research at the University of New Orleans College of Business Administration. But less than 1 percent of surveyed visitors say that gambling was their primary reason for visiting the city.
"It hasn't been that mecca that's attracting lots and lots of additional visitors," she said.
That could change, she said, now that the casino is poised to add a $142 million hotel across the street, as well as restaurant/entertainment zones on the casino's second floor and on a neighboring block of Fulton Street.
Meanwhile, visitors such as salesman Bobby Bunch are stopping in at the casino while in town for a convention.
"It's just another attraction ... I also listen to music, go to Bourbon Street," said Bunch, as he prepared to dig into a fried-shrimp po' boy at a local oyster bar.
And he'd like to see a casino in downtown Chicago, for the times he's in town for conventions.
"You can only eat so much," he said. "And I didn't see that much entertainment. I didn't know where to find it."
The New Orleans casino expansion plans have angered, or worried, some local residents.
Historic preservationists were upset by the demolition of four historically significant townhouse/warehouse buildings to make way for the hotel.
French Quarter still wary
And French Quarter businesses are apprehensive that casino entertainment complexes may siphon off traffic from their historic neighborhood.
"I'd hate for people to go to New Orleans and only go to the Fulton Street development and never to experience the French Quarter," said restaurateur Steve Pettus, president of the French Quarter Business Association. This would be akin to visiting a Disney version of a real neighborhood, he said.
"The French Quarter is architecture, its residents--it's not just jazz and food," he said.
The $25 million a month customers spend gambling at the casino already represents money lost from the local economy, asserts attorney C.B. Forgotston, a longtime casino opponent.
Harrah's sees itself as a magnet that draws additional visitors to the city, not as a drain. Its revenue should rise 13 percent to 15 percent this year, with most of the growth coming from the national market, said Harrah's Payne.
"I look at it as the pie just getting bigger," he said, in reference to the planned expansions. "It will create more opportunity for people to come. And people will still go the French Quarter and Bourbon Street."