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Gambling firms drove flawed e-pulltab plan

The botched projections showing that electronic pulltab sales would explode and start paying for a new Vikings stadium were based largely on estimates made by gambling businesses.

Article by: Jean Hopfensperger , Star Tribune

Updated: March 24, 2013 - 11:11 AM

 

The botched projections showing that electronic pulltab sales would explode in Minnesota and immediately start paying for a new Minnesota Vikings stadium were based largely on estimates made by gambling businesses with a vested interest in the new but untested form of charitable gaming, the Star Tribune has found.

Sales estimates were based on different kinds of gambling devices played in other states, made by national gambling equipment managers and vendors, according to e-mails obtained by the Star Tribune. Express Games MN, the first e-game vendor approved by the Minnesota Gambling Control Board, reviewed and analyzed the sales estimates that were part of the final stadium legislation.

Charities selling the games had little input into the projections, according to e-mails and interviews with key players in the stadium debate. The e-mails also reveal the fine line walked by the board between being a regulator and an advocate for the new games, despite no track record with consumers.

Nearly a year later, those sales estimates turned out to be so wildly inflated that they’ve undermined the funding formula for the state’s $348 million share of the Vikings stadium, putting unprecedented pressure on charities to sell the games. State officials have acknowledged they may have to come up with an alternative funding source for the stadium.

Tom Barrett, executive director of the state’s Gambling Control Board, defended turning to gambling industry executives for sales estimates because Minnesota’s games didn’t exist anywhere in the country and they had sales expertise with similar games. In retrospect, however, Barrett said he would have consulted further with local charities and other Minnesota players.

“We would have looked to the industry, including charities, bars, manufacturers and distributors,” Barrett said.

The sales estimates were developed in the rush to find a funding formula for a new football stadium, and records show they were not challenged by the Department of Revenue or other fiscal analysts.

The Vikings lease at the Metrodome had expired, the team was threatening to move, and Gov. Mark Dayton and many legislators were committed to keeping the team in Minnesota.

Those estimates became the foundation for the state Department of Revenue’s projection that the new games would rake in $35 million for stadium funding by the end of this year.

In November, that figure was sliced to $17 million. In February, it was slashed to $1.7 million.

“There was a willful blindness ... driven by pressure politics,” charged David Schultz, a Hamline University political analyst and a professor of nonprofit law.

‘How do I build a model?’

While flawed, the gambling board’s sales estimates were extremely detailed, including the number of bars and restaurants that would adopt e-gambling, the number of devices in play, what hours they would be played and how much money would be wagered.

It projected 2,500 sites would be selling electronic pulltab within six months, or nearly 14 bars and restaurants joining in per day. Each site would have an average of 6.16 devices. Average daily gross receipts per device would be $225. Average gross receipts per bar or restaurant per day would be $1,386.

This model for estimating expected sales was recommended by Eric Casey, sales director at the California-based Planet Bingo, which manufactures electronic bingo games, Barrett said. Barrett said he called Casey, who has worked in the gambling industry for decades, and asked, “How do I build a [revenue] model? What are the factors that need to come in?”

Barrett said he also consulted Capital Bingo Inc., a California pulltab and electronic equipment manufacturer, which compared future Minnesota sales to its “electronic instant bingo” in Florida. Kevin Freels, president of Capital Bingo, later wrote a letter endorsing the board’s projections, calling them “reasonable and perhaps even a little conservative.”

Meanwhile, Jon Weaver, now president of Express Games MN, was in frequent contact with Barrett from March through May 2012, when the funding formula was approved. Weaver at times contacted Warren White at Acres 4.0, the first manufacturer approved in Minnesota.

Weaver told Barrett that the estimates he’d developed were “conservative,” based on sales from video lottery terminals in Montana, South Dakota and Oregon.

On March 9, 2012, Barrett sent Weaver the following e-mail: “As we discussed, here is the revenue model I am using to project potential revenue from the electronic games. … Interested in your thoughts on using this model.”

Weaver responded: “One of the biggest issues that jumps out at me is the number of tickets sold per hour. … Our games run between 4 and 6 wagers per minute ... The assumption that a player will play one ticket per minute is not realistic.”

That same day, Barrett informed Weaver of the state’s plans to release its Vikings funding proposal.

“Hot button issues for insight from you,” Barrett wrote. “As a percentage of net receipts, what do you see as a ‘fair’ percent to allocate for equipment/vendor expenses which would include the distributors that handle the product from the manufacturer?”

Weaver responded, ending with: “I will send your spreadsheet to our folks in Las Vegas and I’m sure that they will have some thoughts.”

Conflict of interest?

Likewise, Acres 4.0, the first company approved to manufacture the e-games, was consulted on testing standards for the games. On May 23, 2012, Weaver wrote that White at Acres 4.0 “is working up his thoughts on testing standards.”

Barrett said it made sense to contact Weaver and Acres 4.0 because they were slated to be early and major players in the Minnesota market, and they had intimate knowledge of the games that would be introduced in Minnesota.

“They were ready to invest millions in some games,” Barrett said.

He said the communications posed no conflict of interest, as they did not interfere with any licensing or regulatory action by the board.

The e-mails suggest a beneficial relationship between the two.

On March 30, 2012, Barrett asked Weaver to endorse his sales projections, as he was meeting with Vikings officials. “It would be helpful if I received your letter of support in regards to the base model we used to project revenue,” Barrett wrote.

Meanwhile, charities that have run charitable gaming in Minnesota for decades were not asked to help with projections, said King Wilson, executive director of Allied Charities of Minnesota at the time.

Wilson, now retired, said Allied Charities “was involved in some initial negotiations, but were certainly not involved in the development of any formal projections and were not part of the give-and-take that occurs during the creation of valid economic forecasts.

“After the bill was introduced we were asked to support the bill, which we declined,” he said.

Minnesotans already were spending $1 billion a year on charitable gambling, mainly paper pulltabs. The projections claimed they would quickly shell out another $1 billion for the electronic games.

“That kind of revenue stream takes a long time to build,” Schultz said, “especially in Minnesota where you already have one of the nation’s most well-developed charitable gambling markets.”

The Department of Revenue, which worked with the Gambling Control Board to create the stadium funding projections, believed the estimates “seemed reasonable at the time,” Assistant Revenue Commissioner Matt Massman said.

Massman reiterated that estimates were hampered by the lack of comparable games, but he believed his department’s researchers “used the best available estimates at the time.”

The sales estimates were also used by House and Senate researchers in their fiscal reports.

‘Nobody paid attention’

Nearly a year after those projections were made, about 200 Minnesota bars and restaurants offer electronic pulltabs, not the 2,500 that had been predicted. Electronic bingo games have just been introduced.

Average daily gross sales for electronic pulltabs have increased to about $69,000, but sales per gambling device have declined.

Such numbers, in the past, would have had limited public interest. But now they hold a key to the Vikings stadium.

“Charitable gambling has been around since 1985,” Barrett said. “Charities have been paying taxes to the state since then. Nobody paid attention. They are now.”

Schultz believes the sales estimates went unchallenged because of their high stakes.

“This was a deal that was going to happen no matter what,” Schultz said. “The governor wanted a stadium. The money couldn’t come from the general fund. The charities had been asking for electronic games.”

With funding projections for the Vikings stadium now slashed by $33 million for this year alone, future estimates will be more accurate, Barrett and Massman said.

“Now they’re starting to be based on actual activity,” said Massman.

 

Jean Hopfensperger • 612-673-4511

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