State Turns to Leasing Slot Machines for More Flexibility, Maximum Return

By Megan Poinski,

(January 25, 2012)—Flexibility and cost savings are behind the state’s move to start leasing video slots for Maryland’s five casinos, Lottery Director Stephen Martino told the House Ways and Means Committee on Tuesday.

Maryland has kept tight reins on regulating its developing slots program. The state lottery is responsible for procuring and providing the video lottery terminals, the technical name for the machines, for all five planned casinos. In late 2010, when the existing casinos at Perryville and Ocean Downs opened, the state spent $99 million to purchase 1,825 slot machines.

With the first phase of the Arundel Mills casino set to open in June, the state last month acquired 4,719 machines to fill its rooms. Instead of purchasing the machines, the state is leasing them. The five-year contract for these machines, approved last month by the Board of Public Works, is for about $168 million.

Martino said that after the state’s first year with casinos, some lessons about costs and financial returns have been learned. One is rather glaring: all slot machines are not created equal.

“Designing a slots floor is an art, not a science,” Martino said. “At Perryville and Ocean Downs, it’s a question of supply and demand. Some machines are not doing well, and some are always busy.”

Popularity of games changes

Martino said that what people like in games and what is developing in gaming technology is always changing. When the state buys a slot machine, it has already invested in it. Even if the machine is not popular, the state either has to use it in a casino anyway, or spend money to convert it to a different sort of game.

With leased machines, the investment responsibility shifts substantially. Martino said that it is now up to the machine manufacturer to make sure that machines that are in the casinos are making money. The lottery will be asking that any machine not making at least 85% of that casino’s average revenue be replaced, he said.

“All casinos found a rare area of agreement on leasing machines,” Martino said. “We are able to shift the risk of product ownership to manufacturers, at no debt to the state.”

The leasing contract is between the state and eight video slots manufacturers: AGS Partners, Aristocrat Technologies, Bally Gaming, Diamond Game, IGT, KGM Gaming, Shuffle Master, and Spielo Gaming.

The life of the casino

All of these newly leased machines will literally be the life inside the Maryland Live! casino, under construction near Arundel Mills Mall. When it is fully completed, Martino said that it will be one of the nation’s largest casinos. The average Las Vegas Strip casino has about 2,200 machines. Maryland Live! will have more than twice as many.

The machines at the Arundel Mills casino and the two operating casinos in Perryville and Ocean Downs are all controlled by a master computer system that is run by the state. Martino said that Maryland’s arrangement is unique because many other states are not in charge of slots procurement.

While the state has more than 6,000 machines at its disposal, it will be seeking more slot machines in the near future, when the slots commission approves two pending casino licenses in Baltimore City and at Rocky Gap State Park. Martino said that it is likely that machines for those casinos will come through lease agreements as well.

“I can’t imagine why we would not do it,” he said.

Franchot still opposed

Comptroller Peter Franchot was unhappy with the leasing agreement back when it came before the Board of Public Works on Dec. 21, casting the sole dissenting vote. His disapproval had nothing to do with the machines being leased versus purchased. Franchot said he wished taxpayer dollars were not spent on slot machines at all.

“I remain disgusted by the fact that we as a state are holding on to this notion that slots are a solution to our fiscal situation,” Franchot said. “I am appalled that our citizens are forced to pay for these machines that will further enrich gambling companies.”

The state gets the largest share of slots revenues, receiving about half of the money the machines make for the Maryland Education Trust Fund. The casino operators receive a third of the revenues.

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