Arthur W. Wright

English

Research Papers in Economics

ARTHUR W. WRIGHT*
I’ll  give  you  short  odds  that 
Massachusetts  Governor  Deval 
Patrick  will  eventually  persuade  his 
state’s  legislature  to  legalize  high-
end,  high-stakes  casinos—something 
no other New England governor since 
Connecticut’s  Lowell  Weicker  has 
done.    It  has  been  more  a  matter 
of  when,  not  if,  Massachusetts  and 
Rhode  Island  would  seek  their  own 
pieces of the action, given the spec-
tacular growth of Connecticut’s casi-
nos since 1992, and the eager patron-
age of Foxwoods and Mohegan Sun by 
citizens of those two states.  In Rhode 
Island,  international  casino  develop-
ers are betting $655 million that they 
can  dress  up  the  old  Lincoln  Park 
dog  track  into  a  flashy  destination 
“racino” (re-dubbed Twin River).  And 
the Great and General Court (that is, 
legislature) of Massachusetts is per-
forming its usual kabuki ritual before 
taking up the governor’s proposal to 
put  out  bids  for  three  large  casinos 
spread  strategically  around  the  Bay 
State.
	 If	and	when	Governor	Patrick	suc-
ceeds,	it	will	signal	a	new	era	in	the	
New	 England	 market	 for	 high-stakes	
casino	gaming.		Till	now,	Connecticut	
has	reaped	most	of	the	net	benefits—
jobs	and	tax	revenues	on	the	upside,	
perhaps	congestion	and	problem	gam-
bling	on	the	down—from	its	monop-
oly	 in	 the	 southern	 New	 England	
market.		Three	Massachusetts	casinos,	
added	to	Twin	River	and	New	York’s	
new	casino	in	the	Catskills,	would	pro-
foundly	change	that	market.		What	if	
anything	can,	or	should,	Connecticut	
do	in	response?
	 Steady	habits	are	not	the	only	pos-
sible	 course.	 	 Passively	 accepting	 the	
inevitable	 could	 tip	 the	 region’s	 casi-
no	market	against	Connecticut.		But	
revamping	our	state’s	policies	towards	
high-stakes	gaming—in	essence,	fight-
ing	fire	with	fire—could,	well,	backfire	
unless	 the	 revenues	 from	 new	 casino	
development	more	than	replaced	those	
the	State	now	realizes	from	its	crown-
monopoly	 deal	 with	 Mohegan	 Sun	
and	Foxwoods	on	the	slots	“win”	(total	
“handle”	less	payments).
A DISTINCTION WITh A 
DIFFERENCE
	 A	key	point	for	Connecticut	read-
ers	to	note	is	that,	unlike	Foxwoods	and	
Mohegan	Sun,	none	of	the	proposed	
Massachusetts	casinos	would	be	owned	
and	operated	by	Indian	tribes,	on	tribal	
lands,	 under	 the	 aegis	 of	 the	 Indian	
Gaming	 and	 Regulatory	 Act	 (IGRA)	
of	 1988.	 	 True,	 Governor	 Patrick’s	
proposed	 law	 would	 give	 preference	
to	joint	bids	involving	Massachusetts	
Indian	tribes.		And	the	Narragansetts	
were	 expressly	 named	 as	 casino	 par-
ticipants	 in	 the	 failed	 Rhode	 Island	
constitutional	amendment	on	gaming	
in	November	2006.		But	in	both	cases	
any	tribal	role	would	be	simply	that	of	
a	business	partner.
	 History	records	that	Connecticut	
was	 different.	 	 In	 the	 early	 1990s,	
the	State	lost	a	court	battle	to	block	
the	construction	of	Foxwoods	by	the	
Mashantucket	 Pequots	 on	 their	 res-
ervation	land,	under	IGRA.		But	the	
original	casino	buildings	had	no	areas	
for	 lucrative	 slot	 machines,	 because	
Connecticut	 did	 not	 permit	 anyone	
to	run	them	in	the	state.		Had	things	
ended	 there,	 Foxwoods	 would	 likely	
have	been	a	far	smaller,	less	notewor-
thy	attraction	than	it	has	become,	and	
Mohegan	Sun	might	never	have	been	
built,	at	least	not	in	all	its	current	and	
4  THE CONNECTICUT ECONOMY  WINTER 2008
It has been a matter of 
when, not if, Massachusetts 
and Rhode Island would 
seek their pieces of 
the casino action.
The State of Play in New 
England Casino GamingWINTER 2008  THE CONNECTICUT ECONOMY  5 
growing	 splendor.	 	 And	 the	 State	 of	
Connecticut	would	have	received	little	
additional	 revenue,	 along	 with	 mod-
est	amounts	of	added	congestion	and	
problem	gambling.
	 The	tribe	and	Governor	Weicker,	
however,	not	wanting	to	leave	money	
on	 the	 table,	 struck	 a	 deal	 permit-
ting	Foxwoods—alone—to	install	slot	
machines;	in	return,	the	State	would	
get	a	quarter	of	the	slots’	win.		In	1996,	
Foxwoods	 allowed	 Mohegan	 Sun	 to	
run	 slots,	 too,	 but	 under	 the	 same	
terms	with	the	State.		With	the	addi-
tion	 of	 slot	 machines,	 Connecticut’s	
casino	industry	took	off,	and	with	it	
the	State’s	special	revenues	from	its	25	
percent	 skim,	 which	 rose	 from	 $30	
million	in	fiscal	1993	to	$435	million	
in	fiscal	2007.
	 The	 Foxwoods-Weicker	 deal	
has	 proved	 to	 be	 a	 classic	 barrier	 to	
entry.	 	 In	 the	 mid-1990s,	 it	 effec-
tively	deterred	Las	Vegas	interests	from	
opening	 so-called	 commercial	 (non-
Indian)	casinos	in	Bridgeport,	Hartford	
and	 Waterbury,	 because	 the	 State	 of	
Connecticut	demanded	a	large	sum	up	
front	to	compensate	for	the	loss	of	its	
share	of	the	slots	win	at	Foxwoods	and	
Mohegan	 Sun	 if	 slot	 machines	 were	
permitted	elsewhere	in	the	state.
	 The	threatened	competition	from	
Massachusetts,	 Rhode	 Island	 and	
New	 York	 again	 poses	 a	 choice	 for	
Connecticut,	one	that	may	be	framed	
by	the	answers	to	two	questions:		How	
much	 will	 the	 new	 entrants	 erode	
slots	 revenues	 (hence	 also	 the	 State’s	
share	 of	 the	 slots	 win)	 at	 Mohegan	
Sun	and	Foxwoods?		And	how	much	
could	Connecticut	reap	in	replacement	
revenues	if	it	reneged	on	the	deal	with	
the	two	tribes	and	allowed	its	own	new	
commercial	casinos?		Also	at	stake,	of	
course,	 are	 state	 jobs,	 incomes,	 and	
regulatory	costs.
	 The	 answers	 to	 those	 questions	
turn	on	the	quality	of	the	new	entrants’	
products	and	whether	the	region’s	mar-
ket	for	high-stakes	gaming	can	absorb	
all	 the	 new	 capacity	 without	 cutting	
into	profitability.	
MEDIEVAL CASTLES REVISITED
	 Once	upon	a	time,	in	the	Grand	
Duchy	 of	 Connecticut,	 there	 were	
two	fairy-tale	castles	that	for	15	years	
enjoyed	security	conferred	by	the	duke	
and	 enabled	 by	 the	 timorousness	 of	
the	adjacent	Nearly-As-Grand	Duchies	
of	 Rhode	 Island,	 Massachusetts,	 and	
New	York.		Bit	by	bit,	though,	envy	of	
the	two	Connecticut	castles’	prosperity	
overcame	the	other	dukes’	trepidations,	
and	 so	 they	 decided	 to	 build	 their	
own	 castles	 from	 which	 they	 could	
mount	 raids	 on	 the	 fairy-tale	 castles	
and	 assert	 control	 over	 the	 flow	 of	
custom	 between	 their	 fiefdoms	 and	
Connecticut.
	 At	 the	 end	 of	 the	 13th	 century,	
England’s	 Edward	 I	 (“Longshanks”),	
having	conquered	Wales,	built	a	ring	
of	 coastal	 castles	 to	 secure	 his	 gains.	 	
(At	one	of	them,	he	christened	his	son	
the	first	Prince	of	Wales.)		Taking	a	leaf	
from	 Longshanks’	 notebook,	 Rhode	
Island	 and	 Massachusetts	 appear	 to	
be	constructing	their	own	ring	of	cas-
tles…,	 er,	 casinos,	 around	 those	 of	
Connecticut.	 	 (See	 map,	 next	 page.)	 	
New	York	has	built	its	own	mid-level	
casino	 in	 the	 Catskill	 Mountains,	 to	
tempt	residents	to	stay	home,	but	it	may	
be	too	far	from	Connecticut	to	pose	
much	of	an	offensive	threat.		As	one	
proceeds	northwest	from	an	imaginary	
line	 connecting	 Newark,	 New	 Jersey,	
and	 Manchester,	 New	 Hampshire,	
Everything turns on 
the quality of the new 
entrants’ products and 
whether the market can 
absorb the new capacity.6  THE CONNECTICUT ECONOMY  WINTER 2008
population	 density	 declines	 rather	
sharply.		(Put	differently,	some	27	mil-
lion	people	live	within	a	2.5-hour	drive	
of	 Connecticut’s	 casinos.)	 	Thus,	 the	
Rhode	Island	and	Massachusetts	casi-
nos	sit	athwart	many	of	the	main	travel	
arteries	that	underlie	the	prosperity	of	
the	 Connecticut	 casinos.	 	 Interstate	
95,	the	artery	from	the	west,	of	course,	
suffers	from	appalling	congestion	over	
much	of	its	length.
	 Fairy	 tales	 can	 come	 true.	 	 As	
noted	earlier,	investors	headed	by	Len	
Wolman	 and	 Sol	 Kerzner,	 who	 col-
laborated	with	the	Mohegans	on	their	
Connecticut	 casino	 and	 still	 retain	 a	
5%	royalty	interest,	have	bought	the	
old	Lincoln	Park	racino	(an	aging	dog-
track	with	a	slots	parlor)	in	Lincoln,	
RI,	and	are	glitzing	it	up	to	the	tune	of	
$220	million	and	1,000	additional	slot	
machines.		They’re	hoping	to	change	
the	 composition	 as	 well	 as	 increase	
the	size	of	the	customer	draw,	though	
the	lack	of	table	games	(still	illegal	in	
Rhode	Island)	may	dull	the	luster	for	
the	younger	male	gamblers	driving	the	
current	 boom	 in	 professional	 poker.	 	
MGM	 Mirage	 bid	 unsuccessfully	
against	the	Wolman-Kerzner	group	for	
Lincoln	Park.
	 Massachusetts	 Governor	 Patrick’s	
proposed	 casino	 bill	 would	 authorize	
bids	 to	 license	 up	 to	 three	 “destina-
tion	 resort”	 casinos,	 one	 each	 in	 the	
Boston	area	and	the	southeastern	and	
western	parts	of	the	state;	no	investor	
could	 participate	 in	 more	 than	 one	
casino.		The	bill	would	give	preference	
(among	other	things)	to	projects	having	
Massachusetts	 Indian	 tribe	 partners,	
and	require	bidders	to	own	the	land	for	
the	casinos.		It	also	stipulates	a	mini-
mum	facilities	investment	of	$1	billion	
each,	an	initial	fee	of	$200	million,	and	
yearly	license	fees	of	27%	of	gross	gam-
ing	 revenues	 (GGR)—another	 term	
for	the	“win”—but	not	less	than	$100	
million	a	year.		The	licenses	would	be	
for	10	years,	renewable	under	proce-
dures	TBA;	presumably	option	terms	
would	be	included	in	any	bid.		Finally,	
the	Patrick	bill	spells	out	a	host	of	state	
trust	 funds	 into	 which	 the	 proceeds	
would	be	deposited,	and	provides	for	
extra	fees	to	cover	administrative	and	
regulatory	costs.
	 For	 perspective,	 Foxwoods	 and	
Mohegan	 Sun	 are	 currently	 finishing	
up	major	expansions,	adding	2	million	
and	 1.4	 million	 square	 feet,	 respec-
tively,	 and	 costing	 a	 combined	 $1.4	
billion.	 	 (Foxwoods	 bills	 its	 expan-
sion,	 with	 partner	 MGM	 Grand,	 as	
“Connecticut’s	third	casino”.)		The	min-
imum	target	job	creation	in	the	Patrick	
bill	is	5,000	jobs	at	each	casino;	current	
employment	 at	 the	 two	 Connecticut	
casinos	exceeds	20,000.		And	while	the	
implied	minimum	yearly	GGR	at	each	
Massachusetts	casino	is	$370	million;	
the	 comparable	 figure	 for	 Mohegan	
Sun	and	Foxwoods	combined	in	2006	
was	some	$2.5	billion.		It	is	expected,	
of	course,	that	the	Boston-area	casino	
would	be	the	largest,	and	the	one	in	
western	Massachusetts	the	smallest.
SIGNS OF INTELLIGENT LIFE IN 
FINANCIAL MARkETS
	 Every	 proposal	 for	 a	 new	 casino	
outside	 Las	 Vegas	 or	 Atlantic	 City	
seems	 to	 elicit	 the	 charge	 that	 the	
market	is	“saturated”,	raising	the	spec-
tre	that	building	the	new	facility	will	
leave	 behind	 a	 wasteland	 of	 once-
glitzy	gaming	parlors	haunted	by	the	
ghosts	of	problem	gamblers.		Sooner	
or	later	such	warnings	may	prove	right.	 	
But	 the	 astonishing	 thing	 about	 the	
development	 of	 legalized	 gaming	 in	
the	U.S.	over	the	last	two	decades	is	
how	few	of	the	ventures,	new	or	old,	
have	failed.		Hardly	less	astonishing	is	
how	eager	the	smart	money	(like	the	
CARvING UP THE CASINO kINGDOM
Catskills
S.E. Mass. 
(New Bedford)
S.E. Mass. 
(Middleboroough)
Boston Area 
(Suffolk Downs)
W. Mass. (Palmer)
Mohegan Sun and Foxwoods
VT NH
MA
CT RI
NY
If  you  were  Connecticut, 
would  you  stick  with  the 
hand you’ve been dealt, or 
ask for more cards?national	firms	based	in	Las	Vegas,	or	
the	Wolman-Kerzner	consortium)	is	to	
queue	up	whenever	someone	so	much	
as	hints	that	another	casino	might	be	
approved.
	 Economists	 are	 in	 the	 habit	 of	
looking	to	financial	markets	to	get	a	
handle	on	whether	markets	are	“satu-
rated”—in	 effect,	 whether	 there	 are	
still	 so-called	 super-normal	 profits	 to	
be	made	from	adding	capacity.		Not	
that	financial	markets	are	prescient	or	
infallible	 (think	 sub-prime	 mortgage	
debacle).		But	market	participants	do	
try	to	gather	and	make	sense	of	market	
information	in	order	to	reduce	invest-
ment	risks	to	tolerable	levels.
	 In	 the	 early	 1990s,	 conventional	
financial	markets	knew	very	little	about	
the	prospects	for	a	high-stakes	casino	
on	 a	 remote	 Indian	 reservation	 in	
the	backwoods	of	eastern	Connecticut.	 	
Thus,	 when	 it	 came	 time	 for	 the	
Mashantucket	 Pequots	 to	 renovate	
their	 former	 bingo	 hall,	 under	 the	
terms	of	IGRA,	they	had	to	turn	to	a	
Malaysian	financier	(with	prior	experi-
ence	in	developing	high-stakes	casinos)	
for	funds.		Once	Foxwoods	took	off,	
though,	 the	 Mohegans	 were	 able	 to	
arrange	 for	 initial	 financing	 in	 more	
traditional	 circles.	 	 Today,	 financial	
markets	 have	 grown	 used	 to	 dealing	
with	 large	 business	 entities	 operating	
casinos	 and	 are	 on	 the	 lookout	 for	
plausible	proposals.
	 Before	 Massachusetts	 has	 even	
begun	moving	its	casino-authorization	
bill	 through	 the	 legislative	 process,	
interested	parties	have	begun	announc-
ing	 casino	 plans	 for	 one	 or	 another	
of	 the	 three	 bidding	 sites.	 	 Among	
the	parties	is	Mohegan	Sun,	which	is	
a	partner	in	a	proposal	to	invest	in	a	
casino	in	Palmer,	near	an	exit	on	the	
Mass	Pike	15	miles	east	of	I-91—and	
just	35	miles	up	Route	32	from	the	
University	of	Connecticut	campus	in	
Storrs.
	 And	all	the	early	interest	is	before	
the	State	of	Connecticut	has	said	any-
thing	about	Massachusetts’	plans	other	
than	 “we	 expect	 that	 the	 impact	 is	
years	 down	 the	 road”	 (an	 official	 in	
the	Office	of	Policy	and	Management,	
quoted	 in	 the	 New  York  Times	 on	
October	21,	2007).
FRAMING CONNECTICUT’S 
ChOICE
	 If	you	were	the	State	of	Connecticut,	
what	would	you	do?		Stick	with	the	
hand	 you’ve	 been	 dealt?	 	 Or	 ask	 for	
more	 cards—but	 at	 the	 risk	 of	 los-
ing	the	nearly	$450	million	you	now	
receive	in	slots	royalties?
	 What’s	 best	 for	 the	 entire	
state	 depends	 on	 the	 effect	 of	 the	
Massachusetts	 casinos	 on	 both	 State	
revenues	 and	 the	 profitability	 of	
Mohegan	 Sun	 and	 Foxwoods,	 which	
after	all	are	major	employers	and	gen-
erators	of	income.		Let’s	compare	the	
following	simplified	strategies.
	 As	 the	 base	 case,	 suppose	 that,	
if	no	Massachusetts	casino	was	built,	
the	two	casinos’	total	slots	win	would	
remain	 constant	 at	 $1.8	 million	 per	
year;	that	would	imply	constant	State	
slots	royalties	of	$450	million	a	year.	
	 (A)	Now	suppose	that	three	casi-
nos,	built	as	proposed	in	three	differ-
ent	 regions	 of	 Massachusetts,	 would	
cause	a	precipitous	initial	drop	in	the	
Connecticut	casinos’	slots	win,	but	that	
it	would	recover	after	the	novelty	wore	
off	to	one-half	the	no-casino	level,	or	
$900	million	per	year.		Our	State	slots	
royalties	would	then	drop,	in	the	long	
run,	to	$225	million	a	year—a	perma-
nent	loss,	if	Connecticut	did	nothing,	
of	 half	 the	 current	 slots	 royalties,	 or	
about	1	percent	of	total	State	revenue.
	 (B)	Now	suppose	that,	instead	of	
doing	 nothing,	 Connecticut	 instead	
authorized	two	new	commercial	casi-
nos,	 and	 by	 so	 doing	 deterred	 the	
two	non-Boston	Massachusetts	casinos	
from	 being	 built.	 	 (I	 strongly	 doubt	
that	any	move	by	Connecticut	could	
deter	a	Boston-area	casino.)		Under	the	
current	deal,	Connecticut	would	lose	
all	of	its	(reduced)	slots	royalties,	but	
start	earning	a	share	of	the	win	at	the	
new	 commercial	 casinos.	 	 Thus,	 the	
State’s	loss	of	gaming	royalties	would	
not	be	permanent.		This	strategy	would	
dominate	(A)	if	the	new	Connecticut	
casinos	had	about	the	same	effect	on	
Foxwoods	 and	 Mohegan	 Sun	 as	 the	
two	deterred	Massachusetts	casinos.		It	
could	even	be	worthwhile	for	the	tribal	
casinos	 to	 seek	 a	 new	 deal	 with	 the	
State	of	Connecticut	over	the	terms	of	
the	new	casinos,	in	exchange	for	not	
cutting	off	the	entire	current	slots	roy-
alty	payments	under	the	current	deal.			
	 The	 above	 simple	 calculations	
omit	 a	 lot	 of	 the	 nitty-gritty	 details	
that	matter	a	lot	in	most	political	deci-
sions.		Nonetheless,	they	give	a	pretty	
fair	sense	of	what	may	be	in	store	for	
the	State	of	Connecticut	if	Governor	
Patrick	 persuades	 the	 Massachusetts	
legislature	 to	 adopt	 his	 proposal.	 	
Would	it	be	“the	end	of	easy	money”,	
as	 the	 Hartford  Courant	 editorialized	
on	September	23	last?		Not	necessar-
ily,	though	adopting	a	new	high-stakes	
gaming	policy	for	Connecticut	would	
be	anything	but	easy.	
WINTER 2008  THE CONNECTICUT ECONOMY  7 
Disclaimer: Mohegan Sun is, and Foxwoods was 
formerly, a Sustaining Partner of The Connecticut 
Economy.    The  author  was  a  consultant  to 
Foxwoods in 1993 and to Mohegan Sun in 1995.   
Neither  business  had  any  role  in  the  writing  of 
this piece.

The State of Play in New England Casino Gaming

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The State of Play in New England Casino Gaming

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