When Maryland voted to legalize slot machines, officials opted to acquire the games of chance themselves so that the state would be responsible for the integrity of the gambling.
It’s not looking like a winning bet.
Maryland, one of only a few states where slot machines are not purchased by casino owners, is facing tens of millions of dollars in unanticipated costs that are expected to eat into state proceeds for years to come.
The state is paying an average of about $10,000 a slot machine per year to fill Maryland’s first three casinos, according to a Washington Post analysis. That’s more than double what officials estimated would be spent per machine in the coming year when lawmakers launched Maryland’s slots program in 2007.
At the current rate, the state could spend $50 million a year more than projected by the time all five privately owned casinos are open with nearly 12,000 machines.
With Maryland projecting budget shortfalls into the future, a less profitable slots program is certain to contribute to more difficult decisions on tax increases and spending cuts. Maryland’s experience highlights the difficulties in calculating the start-up costs of government-sanctioned gaming and forecasting the promised payoff.
As Maryland’s third — and largest — casino prepares to debut in June in Anne Arundel County, some lawmakers are pushing to expand the program. The House of Delegates will hold a hearing Friday on whether to authorize a sixth casino, in a swath of western Prince George’s County, and to allow Las Vegas-style table games.
Critics of the program say the higher machine price tag is just the latest in a string of broken promises about how much money slots would yield. Program officials acknowledge the added cost but say Maryland’s budget will still be considerably bolstered by the state’s embrace of casino-style gambling.
Gov. Martin O’Malley (D) and other proponents have acknowledged that the program has yet to generate as much revenue as advertised, in large part because of the economic downturn.
According to legislative staff, the five planned casinos are now expected to generate about $150 million a year less for education than the $660 million originally promoted — and to take at least a year longer than expected to reach that point.
But lost in that accounting is what’s happening on the other side of the ledger: how much more the machines are costing — and will continue to cost.
To entice customers with the latest games, casinos typically swap out machines every few years, creating a recurring expense for the life of the facility.
According to the Maryland State Lottery Agency, $71.5 million a year, including some maintenance costs, is being spent to provide machines for the three casinos in Cecil, Worcester and Anne Arundel counties. That’s $10 million more than the original projected leasing costs to fill all five casinos in the coming year.
The difference is being made up by increasingly larger appropriations to the budget of the lottery agency, which administers Maryland’s slots program.
Stephen Martino, director of the lottery agency, said the 2007 cost estimate for procuring machines was based solely on the experience of Delaware.
Of the 22 states with casinos, Delaware is one of only three besides Maryland that take responsibility for procuring slot machines. At the time, Delaware had a deal with manufacturers that was very favorable, Martino said, and Maryland has not been able to replicate it.
Martino called the higher-than-expected expense “a cost of doing business,” noting that Maryland still expects to generate hundreds of millions of dollars a year.
“The machines are creating jobs and generating revenue for education in the state of Maryland, which was the point of the legislation,” he said.
Martino, who arrived in 2010, offered a less robust defense of the state’s 2007 decision on ownership of machines, which he said lawmakers made to bring “greater integrity and transparency” to the program.
Martino said that he respects their reasoning but that the added precaution probably wasn’t needed. That’s because slot machines in all Maryland casinos are connected to and monitored by a central computer system maintained by the state.
“I don’t think it’s necessary that the state own or lease the machines for the state to achieve that high level of integrity or transparency,” Martino said.
Maryland Comptroller Peter Franchot (D), among the more vocal critics of Maryland's slots program, put it less charitably, calling the 2007 decision “a well-intentioned but boneheaded mistake.”
Although officials have highlighted the revenue generated by slots, “a lot more money than people realize is going the other way, out the door,” he said.
By Franchot’s accounting, Maryland has yet to break even on slots, a program that voters ratified in 2008.
The state Board of Public Works, on which Franchot sits, has approved a series of purchases and multi-year lease agreements on slot machines for Maryland’s first three casinos totaling $266.6 million.
The money generated for state education programs and other priorities at Maryland’s first two casinos — both of which opened more than a year ago — is about $140 million, according to Franchot.
The state’s balance sheet should start to look more favorable once Maryland Live!, the state’s third and by far largest casino, opens at Arundel Mills mall, not far from Baltimore-Washington International Marshall Airport.
The first of 4,750 slot machines started arriving this week on the floor of the massive casino, which stretches the length of three football fields.
Once the facility is fully operational, legislative analysts project it will generate more than $450 million a year in revenue, about half of which will be earmarked for education programs.
Joe Weinberg, president of Cordish, the project’s developer, said there were some initial “misgivings” about the state procurement of slot machines, given the variety and mix of offerings casinos like to present customers.
“The arrangement is unusual, but the state has actually done a great job with it,” Weinberg said. “I can’t recall a machine we wanted and we couldn’t get from a dealer through the state.”
The variety of offerings was evident during recent a walk through the floor of Hollywood Casino Perryville, Maryland’s first casino, which opened in the northeastern corner of the state in September 2010.
The 1,500 machines there include many with pop culture themes, such as the movie “Jaws” and the Monkees. The casino also offers the more racy Playboy Hot Zone machines, on which players are rewarded for “big wins” with images of Playboy bunnies.
A spokeswoman for Penn National Gaming, the facility’s owner, said it is the only one of 19 casinos the company operates across the United States and Canada where the state plays a similar role in procuring machines.
Maryland has opted more recently to lease rather than buy machines, which gives operators more flexibility to swap out games that prove unpopular.
But Maryland taxpayers own at least several hundred slot machines that casinos will be eager to discard in a few years. That raises another question for state officials: What to do with them when that time comes?
“We haven’t crossed that bridge yet,” Martino said.