In New Orleans, the house loses -- big time

NEW ORLEANS -- Back in the early 1990s, when the Louisiana Legislature legalized casino gambling, it seemed to many New Orleanians that their city was the odds-on favorite to become the next Las Vegas or Atlantic City.

This is, after all, the "Big Easy," the city whose unofficial motto is "let the good times roll," the vacation destination every year of close to 10 million people.

What better way to sweeten the allure, and the take, than to add slot machines and gaming tables to the indulgent mix of crawfish etouffe, hot jazz down on the levee and boozy arm-in-arm strolls through streets that could be in Paris? Alas, for all the high hopes and sure-thing conviction, the city rolled snake eyes. Over the past three years, all three downtown riverboat casinos have foundered on economic, regulatory and legal difficulties, the last one shutting down early in October. Worse, the city's only land- based casino has folded, too, and a gambling pleasure dome that was to replace it, a block-square structure designed to compete with just about anything in Las Vegas or Atlantic City, sits half completed on the edge of the French Quarter, mired in bankruptcy, its developers desperately searching for a way to head off liquidation and salvage their $830 million investment. Unless owners of the newly beached riverboat and the all-but- liquidated land project come up with new operating plans within the next few weeks, particularly a new financing plan for the land project, gambling in downtown New Orleans in the foreseeable future likely will be limited to a few electronic poker machines and betting parlors. The Flamingo, the shut-down riverboat, could become just another faux paddle-wheeler hauling camera-toting day-trippers on the Mississippi. The empty shell of the French Quarter pleasure dome could be abandoned to the stray cats and foraging rats that already have taken up residence there, or it might fall to the wrecker's ball. What happened? What put an end to the heady hit-me-one-more-time talk of five years back, when the newly legalized casinos were just opening their doors and the promoters were projecting an annual economic infusion of $3 billion in gamblers' cash, with $300 million of that thrown off in taxes? What happened to the 50,000 new jobs promised on the bumper stickers plastered about by the promoters when the city was still staggering from the last national economic recession? "Mistakes were made -- economic, political, sociological, legal, some just dumb," said Mayor Marc Morial. "I still believe casino gambling can be a viable business in New Orleans, though not our economic be all and end all as some predicted. The big question is: Can those mistakes be undone? I wouldn't hazard a guess on the odds." Other cities and other casino operators have also made mistakes and experienced failure with gambling enterprises. What sets New Orleans apart is that the odds for success seemed all but unbeatable. Both critics and proponents of casinos generally agree that the major blunders here were an overly optimistic promotion of the city's potential as a gambling center, a faulty structuring of licensing and operating requirements for casino owners and the imposition of unrealistically high taxes on casino receipts. The most striking mistake was overestimating of the city's potential as a gambler's mecca. Though some local residents have shown a penchant for playing the slots and tables, as have some tourists, New Orleans has yet to be viewed as a gambling center by anybody other than gambling promoters. The number of players on any given day and the amount they gamble have never reached the levels needed to cover casino operating cost here, the highest in the nation, and still leave a healthy profit. Most disturbing of all, surveys of tourists arriving in New Orleans have found two of every three have little or no interest in spending their limited time here bent over a craps table or transfixed before a slot machine when there is so much else to see and do. "Ten million visitors coming to New Orleans every year doesn't work out to 10 million gamblers," said C.B. Forgotston, a lawyer who opposes efforts to turn the city into a major gaming center. "Proof of that is that we've had four casinos fold here while casinos over in Mississippi and up the river and over on the lake (Pontchartrain) are doing just fine -- because gambling is all that they've got, all they do. That's where you go if gambling is what you want." Jason Ader, a Wall Street analyst who follows gambling stocks for Bear Stearns, said that with the right regulatory and tax climate in the city, the flow of local and out-of-town gamblers into casinos, while still not a flood, would nevertheless be sufficient to keep gambling operations in the black. "If they ran things in New Orleans like they do elsewhere, without all those high taxes and fees, you could do all right with a casino," Ader said. But Louisiana legislators were so confident that casinos would rake in earnings by the millions upon millions that they rushed to enact taxes two and three times higher than other states impose on such earnings. And prospective casino operators were so certain of the big earnings that they readily agreed to pay the taxes and then - - this being Louisiana, where money often talks -- some even boldly offered, publicly, to pay premium fees in order to win licenses to operate. Further, the cocksure prospective operators also went along with another potentially crippling regulation. Prodded by the powerful New Orleans restaurant and hotel lobby, the state ordered casinos not to lavish as many free rooms, meals and drinks on gamblers as do casinos in other states. "The cost of running a casino in Louisiana is higher than just about anywhere else," said Timothy Ryan, the dean of the economics department at the University of New Orleans and a close student of gambling economics. "Most states put about a 7 percent tax on a casino's gross. Louisiana taxes at 18.5 percent. Some Louisiana casinos also impose a head tax on gamblers, whereas everywhere else gamblers are welcomed with open arms. I figure the riverboat that just shut down was paying about a 35 percent tax overall at the end. Who can stand that very long?" The boat's operators, Hilton and some Louisiana partners, are torn about whether to try to reopen in New Orleans and again risk not only the onerous tax but also cutthroat competition should the land-based casino somehow eventually open. Alternatively, Hilton and its partners wonder whether they should try to move to some other, possibly more lucrative, river site in Louisiana. In the meantime, as talks about what to do with the boat have dragged on, the boat's license to operate within the city has expired, which the operators said doomed the boat, whatever else might have happened. The boat also faces another problem: The city treasurer contends its owners owe some back taxes and other fees, a contention the owners strongly dispute. "Gambling is a business and if it makes economic sense, we'll go anywhere to operate," said Tom Gallagher, the executive vice president and general counsel of Hilton. "From the early days, we've been concerned about the New Orleans operation because our numbers never were as good as we wanted and we worried about land competition down the road. I'm not sure what's next." The operators of the half-completed land casino, Harrah's Entertainment Inc. and some local partners, have even more serious problems. Not only are they being squeezed by cost overruns and huge debt- service payments, but as they seek new financing for the project, they are encountering resistance because of a promise they made earlier when they won their operating license. They agreed to guarantee the state a minimum $100 million tax payment each year of operation, even if receipts fell short and did not justify a payment that large. "That promise is a big hurdle in finding new financing and time is running out," said Billy Patrick, the casino operators' chief lawyer. "The bankruptcy court wants some action by early November -- or else." Might the state lighten up the terms of the tax payment guarantee? Or is that precluded by a growing frustration among Louisiana voters with the economic confusion, back-room dealing and rancorous wrangling that thus far has been the hallmark of gambling in the state? "A guarantee is a guarantee," said Hillary Crain, chairman of the State Gaming Control Board. "When you face something like that, your best bet is to come up with some creative financing. It's up to them."

Copyright 1997
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