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Gaming Health in Big Decline; Study Warns

NEVADA -- The performance of the Nevada gaming industry in recent years has been grim by almost any measure, and few signs exist of a turnaround any time soon, a new University of Nevada, Reno study has found.

"Despite the success of the Las Vegas Strip over the decade of the 1990s, its economic health has eroded notably since 1998," according to the study, which was prepared for the Nevada Resort Association and released Monday.

And with total gaming revenues nearly flat, profits down dramatically and returns on investments tumbling, the report concludes that Nevada no longer can rely on its gaming industry to be the major contributor of tax dollars.

The resort association commissioned the report from the university's Institute for the Study of Gambling and Commercial Gaming to reinforce its arguments that the state needs to broaden its tax base.

The new study validates previous findings that Nevada has the narrowest tax base in the country, said Mandalay Resort Group Senior Vice President Mike Sloan, a member of the Governor's Task Force Study on Tax Policy, which is supporting a 0.25 percent increase in gaming taxes and other broad-based business tax increases.

A solution to state's fiscal crisis "can't be based on one segment that is an increasingly narrow segment of the economy," Sloan said.

Since 1996, the ratio of net income to total revenue has fallen nearly 9 percentage points, from 10.6 percent to 1.8 percent in 2002.

"This ratio is a key indicator for potential sources of financial capital to Nevada's gaming industry," the report said.

The trend of tumbling profits and falling return on investment is likely to continue through the decade, the study said.

"In general, investors are reluctant to provide new financial capital to gaming companies when expected ROIC falls below some 'hurdle rate' around, say, 15 percent. This is particularly the case on the Las Vegas Strip, where the entrance price for a new competitive mega-casino now exceeds $1 billion, and the last mega-casino built (the Aladdin) declared bankruptcy 14 months after its opening in October 2001," the study said.

"Furthermore, because of a slowdown in growth and profit margins since 1998, as well as increasing external competitive threats, it is increasingly less likely that the rapid growth rates experienced in the 1990s will be repeated again," said gaming expert and economic professor Bill Eadington, who directs the institute and prepared the report.

Eadington said the industry's problems were born out of its previous successes.

The first two waves of modern expansion in 1989 and 1993-94 were tremendously successful, he said, leading to a third wave in 1998, which saw the opening of Mandalay Bay, Paris Las Vegas, the Bellagio and The Venetian.

"By the time they came on line, the public was spooked, (and leisure travel was softening)," Eadington said.

Since then, the slowdown of the economy has acted as a drag on the industry, and the Sept. 11, 2001, terrorist attacks have had a harmful effect on tourism.

Further, no significant openings, except the Aladdin, have occurred in nearly four years, and in Las Vegas, newness is a big factor in drawing new people. "The absence of new developments has tended to dampen revenue growth," Eadington said.

He said also that the development of new towers at Mandalay, The Venetian, Bellagio and, possibly, Caesars Palace, without developments to attract new visitors, may put downward pressure on room rates, further hurting the industry's performance.

Because of such factors, a fourth wave of development is unlikely in this decade, and the industry can be expected to be relatively stagnant, Eadington concludes.

"Furthermore, the gaming industry likely will have much more significant economic difficulties (in years to come) and there may not even be a fourth wave of investment and expansion," Eadington said.

Not all industry analysts shared the study's pessimism.

Gaming expert and University of Nevada, Las Vegas professor Bill Thompson said Nevada has done much better than other states in recovering from the recession in leisure travel after the Sept. 11, 2001, terrorist attacks.

"The past few years just show we are no longer an isolated economy unaffected by national problems," he said.

Others said to draw conclusions from data collected during the worst years in the industry's history is impossible.

But industry insiders argue the report shows that Nevada no longer can rely on the gaming industry as the main source of tax revenues and that more broad-based taxes are necessary.

They argue diversification of Nevada's economy over the past 10 years makes increasing tax revenues from nongaming sources essential.

"There has been a decoupling of growth and the gaming industry," Eadington said.

In 1978, the industry accounted for 29 percent of the jobs in the state, but today it accounts for 21.8 percent of the jobs.

"Gaming and tourism have been our most important export sector. But now population growth is driven by other stimuli. People are moving into Las Vegas because they want to leave California, not because of jobs in gaming," he said.

"But we have a tax structure still dependent on gaming. Herein lies our (current) dilemma," Eadington said.

The study found an increasing likelihood of growing fiscal dislocation, meaning Nevada tax collections will have difficulty keeping up with demands for public sector services linked to the state's population growth.

"Though this point is clear in the Governor's Task Force Study on Tax Policy, it is also highlighted by the fact Nevada faces the fifth most severe fiscal crisis in the country in terms of the relative size of the state's budget gap."

Comparing the projected tax shortfalls with total revenues, the study said only Alaska, 37.8 percent; California, 23.4 percent to 33.8 percent; New York, 24.3 percent to 29.1 percent; and Oregon, 20.4 percent to 27.2 percent; outrank Nevada, 19 percent.

"The suggestion and implication is that Nevada's existing tax structure has already come under unrelenting stress, and without fundamental structural changes, will only get worse in the years ahead," the Eadington study found.

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