Doug Schmidt Blog & Writings

If you thought it was all about money for education, you’ve got another thing coming

Everybody has a family member who, to put it politely, doesn’t quite have both oars in the water and does the most inappropriate things while not knowing any better — like demanding a family photo at a funeral or calling a special session of the Maryland Legislature during vacation season. Members of the public are scratching their heads over this one, putting it in the category of one more lapse in good judgment from a political system that has a very low threshold for the absurd. But for those of you who would like to make sense of Maryland politics, here are the six essential things you need to know about gambling and the special session:

•The special session is all about money. Did you fall out of your chair? The governor and Prince George’s CountyExecutive Rushern Baker need money to cover their budgets. The legislature needs money to pay for government programs. State employees want to keep their jobs. Organized labor wants new construction jobs. Developers want projects. And the gambling industry wants the biggest prize of all — a monopoly license from the state along with better terms. This is not about improving the welfare of Maryland citizens or saving the Chesapeake Bay. Don’t confuse the term “special session” with a noble activity.

•There is no plan; there is only chaos. Should there be five or six casinos? What about Rosecroft Raceway? The government’s share of the take should be 67 percent. No, I mean 62 percent. We must have table games. Don’t forget Internet gambling. Here is a great idea — let’s have the state finance the purchase of slot machines for the gambling companies. Or maybe the other way around. Why don’t people want to drive to Perryville in order to arrive at Hollywood? Where are the casinos in Baltimore and Rocky Gap?

OK, we made a few mistakes, but National Harbor will turn the ship around completely — trust me. (National Harbor reminds me of a business saying that goes, “let’s tie two rocks together to see if they float.”)

If a CEO came into a major corporate boardroom with a plan so poorly designed, he would be fired on the spot for incompetence. Has anyone bothered to ask the basic question: Why is state government in the business of running a gambling enterprise? Can you think of a group of individuals any less qualified to plan, execute and manage such a complex business in a rapidly changing market?

•The gambling industry is currently in the process of purchasing Annapolis. Do not push “Stop” until the cycle is complete. The casinos (not health care, not technology, not education) are the largest lobbying force in Annapolis, keeping the capital’s streets awash in cash. The rationale is simple. A casino is a monopoly, the most sought after (and usually illegal) objective in business.

To run a casino you need a license, so you need to “influence” the people who control the monopoly. Gov.Martin O’Malley’s top contributors for both of his gubernatorial election cycles have been gambling interests. Since he almost got busted for taking hundreds of thousands of dollars from gambling interests in 2002, Senate President Thomas V. Mike Miller has been far more careful about how he directs and allocates funds from his gambling friends. But his loyalty to the industry is beyond question. When the bishops and pastors of Prince George’s County call on the governor to detail the evils that will be visited upon the poor and the addicted, the governor sympathizes and calls it a bad situation and promises to consider their concerns. After the gambling industry pays a visit, the governor calls a special session.

•The referendum is a formality. Do not listen to any politician who takes the pseudo-moral high ground about his “duty” to allow you to vote in a referendum on National Harbor. The issue will be settled in the special session. After a bill for a referendum was passed in the special session of 2007, the gambling industry raised a staggering $8 million dollars from its members and allies to guarantee an irresistible publicity campaign on TV, radio and print. The anti-slots lobby, consisting of church ladies and civic minded individuals, raised money in the hundreds of thousands of dollars.

After a television barrage of ads, doomsday scenarios described by politicians, and the governor robocalling voters, it was something of a miracle that four out of 10 Marylanders still voted to keep the state free from slots. Shortly afterward, Mr. Miller declared the vote a mandate for gambling.

•Facts are relative. What distinguishes the long debate on gambling in Maryland has been the absolute consistency of projections used in favor of gambling. They have never been correct or even close. All decisions have been made on financial projections that don’t materialize. The original projection from the Maryland Department of Legislative Services was for the state to net over $600 million per year by 2013 based on five locations using all of the allocated 15,000 machines, operating at an average take per machine equal to the best in the industry.

As we approach 2013, there are only three facilities up and running with Ocean Downs operating one-third of its allocated machines and Perryville operating with just over half of its allocation but trying to give some machines back to the owner. (That owner would be you, the taxpayer.) Projections have been revised steadily downward, until, like magic, Messrs. Miller, Baker and the gambling industry came up with the National Harbor idea. A Wayne Newton destination will save the day.

The fundamental problem with all this terrible guesswork is that gambling is a multi-variable equation where the inputs cannot be accurately defined. There are four nearby states that are constantly adjusting their offerings and economic models. The economy has gone from a protracted downturn to a slow recovery, making macro economic assumptions unreliable. People behave irrationally, so it is impossible to predict who and how many will gamble. And on and on.

Jack Welch, the renowned General Electric leader and guru to CEOs, had a philosophy that if you can’t be No. 1 or No. 2 in an industry, you should exit. At last count, Maryland was No. 5 in the highly competitive Mid-Atlantic gambling business.

•The only winner will be David Cordish. There is a reason why he is a billionaire. He is smart, ruthless and a master tactician. And he has his allies in Annapolis. Already, Mr. Cordish has made a fool of the governor and Mr. Miller by co-opting the “Anne Arundel” license and putting far from Laurel Park, where they wanted it, and way up I-95 at Arundel Mills Mall. What a stroke of genius — food, shopping and gambling all in one outing.

Of course, the site is only 13 miles from the proposed Baltimore casino, which is why the Baltimore casino has had so much trouble launching. No one in the industry is eager to take on the Cordish retail machine with only 20 minutes separating Baltimore from his palace of pleasure. You can make all the plans you want for a Las Vegas on the Potomac, but my money goes on Mr. Cordish. Heads he wins; tails the legislature loses.

Ten or 15 years from now, this Maryland foray into gambling will be seen as many multiples the folly that Rocky Gap became. It is entirely predictable. Our planning is poor to non-existent. We are a late entrant into a crowded market. We have made gross tactical mistakes such as the state financing of slot machines. Our whole strategy is conceived and executed by Maryland politicians, with few professionals in sight. The gambling industry will not lose. At some point, it will cut its losses and sell, ultimately leaving Marylanders with an expensive gambling infrastructure and not enough players. If Mr. Cordish owns Maryland Live Casino in 10 years after Internet gambling has taken the wind out of the sails of brick and mortar slots, then I will eat my Orioles cap.

Douglas M. Schmidt is an investment banker and writer who lives in Maryland. His email is doug@chessiecap.com.

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