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The V.I. Budget Crisis: Part 7, What About Horse Racing and Casino Gambling?

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Horses race at St. Croix's Randall 'Doc' James Racetrack. (File photo)
Horses race at St. Croix's Randall 'Doc' James Racetrack. (File photo)

Everyone in the Virgin Islands knows the V.I. government is at a crossroads, facing budget deficits, growing debt and an inability to borrow. This series has looked at how and why this came to be and is looking at possible solutions.

Trying to grow the V.I. economy and encourage hotel development on St. Croix, in recent years the V.I. government has changed the laws to expand slot machine gambling, first to try to build hotels in the 1990s, then to help an existing hotel in Christiansted and in hopes of revitalizing horse racing.

Could gambling tourism help fill the government’s deflated money sacks?

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Casino and slot machines generate a small amount of direct employment and help subsidize employment at two medium sized hotels on St. Croix. The V.I. Casino Control Act was put in place in 1995 to encourage hotel development on St. Croix. Divi Carina Bay Resort on St. Croix is subsidized by Divi Carina Bay Casino.

No other hotels have been built as a result of casino gambling incentives. The pre-existing Caravelle Hotel in Christiansted now has a slot machine parlor that helped subsidize ongoing renovations and are supposed to subsidize an expansion of the hotel that has been delayed.

Casino Gambling Revenue vs. Other Revenue Sources in V.I. Budget 2016. (Click on image for larger view.)
Casino Gambling Revenue vs. Other Revenue Sources in V.I. Budget 2016. (Click on image for larger view.)

For the V.I. government’s budget, the territory’s slot machines and casino gambling generated $1.79 million toward the budget for 2016, according to 2017 budget data. Compared to other sources of revenue, casino tax revenue is barely visible as a hair-thin line. V.I. Casino Control officials and representatives of Southland Gaming have testified in Senate hearings that gambling revenues are relatively constant and simply shift location rather than increasing with new gambling outlets.

The V.I. Lottery brings about $4.5 million per year for government programs each year. The V.I. Lottery itself loses money and is heavily subsidized by “video lottery terminals” all over St. Thomas and St. John. The VLTs actually contribute about $9 million per year, covering V.I. Lottery’s losses. After a court fight they now pay gross receipts taxes of five percent on about $28 million in gross revenue, based on the known VLT contributions to Lottery and the percentages of revenue allocated by contract with Southland Gaming.

The Internal Revenue Bureau will not release information on an individual taxpayer, but that would amount to about $1.4 million in Gross Receipts Tax revenue, if gross revenues are $28 million or so.

Lottery directly employs 59 people and indirectly employees lottery sales agents, who work on commission.

If you add in the lottery funding to the casino and slot machine revenues, the level of gambling funding to the budget that can help with the deficit is still considerably less than $10 million per year and less than any major source of revenue in the budget. It does exceed revenues from taxes on car rentals.

It is unusual that VLT revenues subsidize the lottery because lotteries are usually highly profitable. And there is a long, well-documented history of poor oversight over the VLTs

A 2007 U.S. Department of the Interior audit report said federal officials were “troubled to find that the Lottery has virtually no control over lottery operations, a condition that raises serious concerns about whether your Government is receiving all the VLT-related revenues and taxes to which it is entitled” and that “unrealized revenues may be in the millions,” but they cannot know for sure because the lottery “failed to obtain and maintain the financial documents necessary to make such a determination.”

Apparently little had changed by 2016. A review for V.I. Lottery by the Bert Smith & Co. accounting firm in 2016 said in part that Lottery does not have any procedures in place for auditing or reviewing the contractor’s accounting records.

Under V.I. law, casino gambling is only permitted on St. Croix, as a means to encourage hotel development. The Legislature approved a contract with Southland Gaming to operate what were then called “video lottery terminals,” in 2003.

At the time, Southland and the V.I. government contended the machines were not slot machines but a form of lottery and therefore legal outside of St. Croix. As Southland Gaming Vice President Shaine Gaspard testified during hearings on expanding racetrack slot machines in the fall of 2016, “a slot machine and VLT are virtually the same machines, certified by the same labs against the same standards.”

And V.I. law does not show a clear reason why these video games with cash payouts are not covered by the V.I. Casino Control Act. The act defines the types of games controlled by the act as “(a)ny banking or percentage game located within the casino or simulcasting facility played with cards, dice or any electronic, electrical, or mechanical device or machine for money, property, or any representative of value;” “gambling” as “the dealing, operating, carrying on, conducting, maintaining or exposing for pay of any game,” and gaming equipment as “any electronic, electrical, or mechanical contrivance or machine used in connection with gaming or any game.” (emphasis added.)

Nonetheless, since 2003, the Legislature, courts, successive governors and Casino Control Commission have all treated VLTs as devices that are neither slot machines nor covered by the Casino Control Act.

Yet despite a decade of audits finding a lack of financial oversight and despite their cloudy legal status, VLTs nonetheless generate most of the gambling revenues that contribute to the V.I. government’s budget revenues.

Last fall, the government changed the Casino Control Act to allow slot machines at the St. Thomas horse racing track and giving the VIGL slot machine company a long-term contract to run both V.I. horse tracks and slot machine parlors.

Will this help the budgetary situation? Probably not. There is a lot of evidence that the total amount of gambling is limited and changes to V.I. gambling facilities mostly just move the gambling from one spot to another. After slots opened at the Randall “Doc” James track on St. Croix, Casino Control Commission members and officials with Treasure Bay V.I., the parent company for both St. Croix’s Divi Carina Bay Casino and TRAXCO, the “racino” slot machine operation, told senators during budget and oversight hearings that total revenue remained basically the same, but the casino saw a reduction as traffic moved to the racino. In July of 2016, after the Caravelle Hotel opened up its slot machines and the St. Croix racino closed, CCC Executive Director Malcolm McGregor and Chair Violet Ann Golden both told senators the closing of the racino was offset by the opening of slots at Caravelle.

“It is almost the same; with the closing of the racino, it shifted to downtown,” McGregor said.

Horses race at St. Croix's Randall 'Doc' James Racetrack. (File photo)
Horses race at St. Croix’s Randall ‘Doc’ James Racetrack. (File photo)

The plan may still benefit horse racing, or at least lead to capital improvements to the racetracks.

People in the V.I. horse racing industry, the company proposing to run the slots and tracks and other proponents of the plan argued at those hearings that there could be a big expansion in race track attendance or in horse racing tourism with larger purses subsidized by the slot machines and with improvements to the tracks.

During the hearing on the plan, expert testimony brought in by Southland Gaming, which opposes the plan, suggested the territory is too small and racing of too limited tourist appeal to become a self-supporting industry and would need permanent subsidies. Slot machine revenues, which mostly come from regular patrons who already live in the Virgin Islands, may funnel some money to those in the horse racing industry.

If proponents are right and horse racing starts bringing in tens of thousands of new visitors to the territory, it could generate revenue. But if outside experts are right, the new slot machines appear likely to be mostly neutral for the budget or have a slight negative impact as residents spend money on slots they would have spent on VLTs that give a greater return to merchants and the government.

Gambling and a new tech sector as economic development engines have not panned out so far but have helped two St. Croix hotels stay afloat and renovate. Some bars are dependent on VLT revenue. There is nothing to suggest they are likely to bring in enough revenues to make a serious dent in the territory’s budget crisis. But in an upcoming segment in this series we will look at how consolidating regulatory oversight over gambling may provide better accountability and save a small amount of money.

Next: Part 8: What Else Can the USVI Do To Help? Cut Bloat and Overtime

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