Tumbling Dice

The gaming industry bet big on the 81st Legislature. But no jackpot yet.

Slot machines. Illustration by Mike Krone.

It’s not every day that one of the world’s richest men shows up to testify at an 8 a.m. committee hearing. But when the state is Texas, one of the country’s last untapped gambling gushers, it wasn’t all that surprising to find casino mogul Sheldon Adelson making a personal pitch on April 8 to the House Licensing and Administrative Procedures Committee. The 76-year-old came armed with a black mahogany cane, a stack of statistics, and an offer he hoped legislators couldn’t refuse: billion-dollar resort casinos employing thousands of Texans and fattening the state’s depleted coffers.

“Not all casinos are created equal,” Adelson told the packed hearing room. “A destination resort is the way to go.” Despite the deepening recession, Adelson assured legislators that a company like his, the Las Vegas Sands Corp., would be delighted to build a top-class resort casino in Texas as soon as the opportunity arose.

The only catch was that the Legislature needed to pass a bill first. In this case, House Bill 1724, a 146-page whopper referred to as the omnibus gambling bill. Authored by San Antonio Democrat José Menéndez, the bill would not only allow a Las Vegas-style casino in the 12 largest Texas cities, but also let racetracks become “racinos”-racetracks with slot machines.

Proponents promised that casinos and racinos would raise as much as $4 billion a year for the state. A goodly chunk of the money would go to crumbling public schools and unfunded road projects, they emphasized.

Legislators had heard it all before. Gambling interests have long spent freely on lobbyists and campaigns; in the 2008 election cycle, according to the nonprofit watchdog Texans for Public Justice, they doled out $7.6 million to legislative campaigns. The investment hasn’t paid off yet. Many legislators have strong religious constituencies who believe gambling encourages crime and other vices. The gambling-expansion lobbyists have had to grapple with lobbyists from casinos in neighboring states who don’t want to lose Texans’ deep pockets. And infighting among gambling interests, particularly between racetrack owners and casino companies, has kept the opposition in the game.

This session was supposed to be different. With a $9 billion budget deficit and a new House speaker, San Antonio Republican Joe Straus, whose family business is horse racing, the decks appeared to be stacked. Even so, with just a few weeks left in the session, the prospects for expanding gambling were looking slim.

What became of a sure thing? Menéndez cites one big factor: Federal stimulus money has plugged the state’s deficit for now. The funds derailed lobbyists’ argument that gambling revenue could keep the state solvent. “If we had had to cut programs and school funding like in 2003,” Menéndez says, “there would have been an impetus to pass something. The federal government cutting us a $16 billion check took away that need.”

Without the economic urgency, legislators with anti-gambling constituents had little motivation to vote for gambling. Knowing that Gov. Rick Perry had vowed to veto any gambling-expansion bill, members carrying gambling legislation didn’t want to ask colleagues to support any measure that didn’t have a veto-proof 100 votes in the House.

Still, the gambling lobby was thought to have an ace in the hole with Speaker Straus, who owns shares in four Texas racetrack licenses. If slots were approved for racetracks, Straus’ shares would be worth an estimated $50 million, according to Jeff Hooke, an expert on the economic impacts of gambling.

At the beginning of the session, Straus vowed that he would “recuse” himself from legislation involving gambling. Critics noted that he still would be appointing the chairs and members of the committees that will determine gambling’s future. Straus named a friendly bunch: Seven of the nine members of the Licensing and Administrative Procedures Committee, which oversees gambling legislation, have voted in the past to expand gambling. The committee’s chair, Republican Rep. Edmund Kuempel of Seguin, is a Straus ally and gambling proponent.

Menéndez and several other House members told the Observer that the speaker had neither broached the subject of gambling legislation with them nor, as far as they know, pressured any members to vote for racinos. “He’s done everything he can to publicly and privately remove himself from discussion around gambling,” Menéndez says. A floor vote on gambling expansion might be something Straus prefers to avoid. “Why bring something to the floor and have him criticized and then have members take a vote that will hurt them?” Menéndez asks.

Straus declined to speak with the Observer about his gambling interests. His office did respond to e-mail queries, confirming that the speaker is the beneficiary of the Straus 2003 Irrevocable Trust. Unlike blind trusts, which shield the beneficiary from any involvement in trust management-and are the choice of many politicians-irrevocable trusts can’t be modified or terminated without the permission of the beneficiary. The speaker’s father, Joe Straus Jr., is the trustee.

Straus’ trust has shares in the Tesoros racetrack in Hidalgo County, the Laredo Downs, and the Retama Park Racetrack in San Antonio. He also owns the Austin Jockey Club, despite having arranged to sell it five years ago; the transaction is still pending before the Texas Racing Commission.

Horse tracks have been losing popularity with gamblers since the 1970s. Owners like the Strauses have increasingly looked to slot machines to boost their declining profits. The value of the tracks, Hooke says, is now in their gambling licenses-not their racetracks. “There are only going to be a handful of licenses in Texas,” he says. “If you have one of these licenses, in two days it can be sold for $500 million.”

According to Straus’ office, the speaker has had no hand in the legislation. His communications director, Angela Hale, wrote that Straus had even “delegated the referral of gambling bills to his chief of staff who consults with the parliamentarian and the House rules.”

Racetrack owners expected a return on their legislative largesse this year-slot machines, at least. They spent $6 million on legislative campaigns in 2008. Now they’re scrambling to get something done during the Legislature’s last great rush of the session. How did gambling interests come up short from such promising odds?

Menéndez’s gambling bill died, for all practical purposes, at the April 8 hearing where Adelson made his pitch. Before the hearing, Menéndez and Chairman Kuempel had tried to mediate among the squabbling parties: casinos, racetracks, horse breeders, and Indian gaming interests, to name a few. It wasn’t working. From the start, it had been impossible to satisfy all the stakeholders. The racetracks wanted full-blown casinos, not just slot machines. The tribes wanted to open casinos off their reservations to compete with Adelson and other casino companies. Horse breeders wanted higher purse stakes to save their struggling industry. Casino operators wanted Texas to sell them gaming licenses for $100,000 apiece. (In other states, these licenses have sold for as much as $425 million.)

Horse breeders were among those convinced they were going to get the short end. Jimmy Eller of the Texas Horse Organizations for Racing, Showing and Eventing (HORSE) testified that breeders needed a fair share of the slot-machine money. He objected to the fact that the legislation to create “racinos” didn’t require any actual horse racing at the tracks. “We can hear that sucking sound,” Eller said, alluding to Ross Perot’s famous NAFTA quip. “It’s the horse industry heading to other states like Louisiana, Oklahoma and New Mexico, where they have gaming and huge purses for the industry.”

After the hearing, Eller said things had been ugly this session because casinos and racetracks both wanted to dominate Texas’ gambling industry. “It’s not brain science. We’re competing for entertainment dollars. We’d like to be the only game in town,” he said, “and so would the casino guys.”

The other problem, Eller said, was the outsize political sway of anti-gambling conservatives. “Legislators tell me they are scared to death to touch anything with the word ‘casino’ in it,” Eller said. “They can’t go up against anything in the Republican platform.”

The tensions between racetrack supporters and casino operators had peaked a day before the hearing. Gordon Johnson, a lobbyist and partial owner of a greyhound track in La Marque, had sent a letter to Chairman Kuempel accusing the casino industry of sinking the racing industry’s legislation. “It is apparent,” he wrote, “that the proposal by TGA”-the Texas Gaming Association, which represents casinos-“is structured to protect casino interests in adjoining states, not advance the interest in Texas.”

TGA President Jack Pratt, a former casino developer, fired off a response to Kuempel on the morning of the hearing, accusing Johnson and racetrack interests of being “unwilling to come to the table and work on an omnibus bill that is fair to all parties. … Absent being given a monopoly on gaming in the nation’s second most populous state, the racetrack industry appears unwilling to come to the table.”

Adelson further rankled racetrack owners by telling the committee that racetracks with slot machines siphon money from local bars and clubs, whereas destination resort casinos create thousands of jobs and billions in tax revenue. “I don’t doubt the slot parlors will make money,” Adelson said. “But they will only make money for a few people.”

Menéndez says he doesn’t blame either side. “There are a lot of stakeholders: the racetracks, casinos, the 8-liners,” he says, referring to another form of video gambling. “They all seem to think they’ve got the political edge.”

After the hearing, Rep. Chente Quintanilla, a Democrat from El Paso, said lobbyists had killed any chance for a gambling bill this session. “The big boys wanted more money,” he said, “and they didn’t want to share with the little guys.”

One stakeholder has largely been left out of the gambling debate: the Texas taxpayer. While lobbyists and billionaires bickered over who would walk away with Texas’ jackpot, regular Texans were looking at a raw deal.

In Menéndez’s bill, there would be competitive bidding for only nine of the 22 gambling licenses to be issued. Three of the 12 casino licenses would go for $100,000 apiece to three Texas racetracks: the Straus family’s Retama Park in San Antonio, the Lone Star Park in Grand Prairie, and the Sam Houston Race Park in Houston. The state’s three Indian reservations would get casinos. Ten horse and dog tracks would be given licenses to operate slot machines for $50,000 a license. They’d also be able to compete for full casino licenses.

Hooke, who’s advised lawmakers in several states on how to make money from gambling licenses, says the bill’s licenses are grossly undervalued. In a state as large as Texas, with a limited number of gaming licenses, casino operators can make billions. “One hundred thousand is a joke,” Hooke says. “Anything less than $200 million is unjustifiable and unfair to taxpayers.”

Equally unfair, he says, is the 15-percent gaming revenue tax Menéndez’s bill called for. Other states have a tax of up to 50 percent. “They’re going to make huge profits getting something for nothing,” Hooke says.

Andrew Wheat, research director at the nonprofit Texans for Public Justice and an Observer contributing writer, says legislators worry more about the gambling industry than about taxpayers. “If the whole rationale is to generate public revenue, then we should have some of the toughest terms in the country,” he says. “What we are doing instead is giving licenses out to print money.”

Rank-and-file Texans could end up having a say on gambling after all. With hopes for a gambling bill fading, supporters like Chairman Kuempel are trying another tack: Let the people decide. On May 2, Kuempel’s committee passed his Constitutional Amendment, HJR 137, to allow gambling in Texas. If it passes, a state referendum on gambling would be held next November. After that, the amendment gives counties authority to hold local elections on whether they want gambling.

The amendment will need two-thirds majorities in both chambers to avoid a veto. On May 5, Quintanilla said that supporters had 92 votes in the House, but needed 100. If it “doesn’t pass out of the House chamber by next week, it will get bogged down and won’t make it,” he said.

Legislators from conservative districts who favor gambling expansion hope that the “local control” provision in the constitutional amendment will give them enough cover to vote yes. Then, they hope, legislators can come back next session and write the rules.

Meanwhile, Quintanilla and other gambling proponents are already looking forward to next session-two years and several million campaign dollars later. Unless President Barack Obama is still signing stimulus checks in 2011, the state will again be looking for the quick cash gambling licenses and taxes can provide. “Gambling could pump $3 billion to $4 billion in revenue to the state, which would make it very appealing,” Quintanilla said.

Whatever happens in the Legislature’s final stretch, you can be sure of one thing: Austin hasn’t seen the last of the casino moguls and gaming lobbyists. “The gambling industry has plenty of time and plenty of money,” says Wheat. “They’ll be back.”

Melissa del Bosque is a staff writer and a 2015-16 Lannan Fellow at The Investigative Fund.

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