Here’s Why The Tribes Should Reconsider Their Stance On MGM Bridgeport

[toc]On the surface, the premise of the project seems patently absurd. However, MGM is deadly serious when it comes to its proposed casino project in Bridgeport, Connecticut.

The idea is largely being dismissed out of hand because the state’s two gaming tribes, the Mashantucket Pequot Tribe and the Mohegan Tribe have exclusive rights to casino gambling written into their compacts with Connecticut.

Because of this, the building a commercial casino in Connecticut equires the approval of both tribes. If the tribes don’t sign off and the state goes ahead with the commercial casino, their compacts with the state would be null and void. Then, both tribes could immediately stop paying the state the 25 percent tax on slot revenue.

It shouldn’t come as a surprise that Connecticut’s two tribal casinos, Foxwoods and Mohegan Sun, oppose to the project.

But should they? The short answer is yes. Only if the state isn’t seriously considering MGM’s proposal though. If the state is taking the MGM proposal seriously, the tribes might want to reconsider their opposition.

A closer look at the gaming dynamics in the state and region paint the southern Connecticut casino in a different light. It’s arguable that a third casino could be beneficial to Foxwoods and Mohegan if they get out in front of things.

Who is my real casino competition?

It’s not a Southern Connecticut casino they should worry about. Rather, it’s the casinos in Massachusetts and the continued expansion of Twin River in Rhode Island.

Massachusetts casinos will be just as close as the proposed Bridgeport casino. More competition down the road is inevitable. Because of this, it might be better for the tribes to set the terms of where that competition goes. Particularly what they get from it within Connecticut’s borders.

Just because it’s in the same state, doesn’t mean the MGM Bridgeport casino will cannibalize the tribal casinos anymore than the Massachusetts casinos.

First, it will be smaller, at $650 million, leaving Foxwoods and Mohegan Sun the ability to draw visitors for their entertainment, dining, and shopping options.

Looking closely at casino geography

Second, even though it’s in the same state, Bridgeport is as far away as other casinos.

• The drive from Bridgeport to Foxwoods or Mohegan Sun is roughly an hour and a half.
• The drive from MGM Springfield to Foxwoods or Mohegan Sun is about 10 minutes shorter.
• It takes about two hours to get to Foxwoods or Mohegan Sun from the site of Wynn Boston Harbor.
• From Twin River in Lincoln, Rhode Island it takes an hour to get to Foxwood,s or Mohegan Sun.

Bridgeport might act as a chokepoint for the tribal casinos’ New York City customer base. However, it’s the patrons they will lose from the north that are the real problem. If Foxwoods and Mohegan Sun offer better non-gaming options, they can still draw visitors from New York City and beyond who are willing to drive the extra hour or so.

Tearing up the compact isn’t good for anyone

If Connecticut goes through with a commercial casino, the question for the two tribes is this: Is it better for the tribes to tear up their compacts or renegotiate in good faith with the state?

As noted above, the tribes would no longer have to pay 25 percent of their slot revenue if the state authorizes the Bridgeport casino without renegotiating a new compact with the tribes.

That seems like a crazy line for the state to take, and extremely beneficial for the tribes, but it’s not quite that simple.

MGM estimates it will send $320 million annually to the state. That is more than Foxwoods and Mohegan Sun combined. It’s also more than the projected tax revenue from Foxwoods, Mohegan Sun, and the joint satellite casino the two tribes are planning.

Setting aside the accuracy of the projection for the moment, there is the question about the interim years; the period of time when the state will receive zero revenue from casino gaming.

Revenue for Connecticut an important part of the equation

From the moment the state approves the commercial casino to the time it opens, zero gaming revenue will flow into the state’s coffers.

Assuming it will take a minimum of two years before the MGM casino is open for business, the state will lose about $530 million, based on 2016 tax revenue from Foxwoods and Mohegan Sun.

MGM will make up some of the loss through an upfront $50 million licensing fee. There are also local payments totaling about $12.5 million. But that only amounts to $37.5 million annually. That’s a far cry from the $265 million the tribal casinos paid the state last year.

It seems like a bad deal for the state. However, if the tribal compacts are torn up, there is nothing preventing the state from authorizing another commercial casino. And there’s no reason that casino couldn’t be located much closer to the two tribal casinos.

But doing so would completely saturate the market and hurt every casino.

Upshot #1

If the compacts are torn up, the tribes get an immediate revenue lift. Meanwhile, the state takes a multi-year hit.

However, the state would have the upper hand in any future negotiations. No to mention free reign to expand casino gambling in any way, shape, or form.

Renegotiating a better compact

If a commercial casino is inevitable, renegotiating the current compacts is the smart play.

First and foremost, the tribes could get a significantly reduced tax rate for giving up exclusivity. This would reduce the tribes’ payments from $265 million annually to just $50 -$100 million.

Even if MGM’s estimate is on the high end, if MGM’s tax liability matches the current amount paid by the tribes, and the tribes chip in another $50 million, the state does better in the long run.

It would also save the tribes the trouble of going through with the ancillary slot facility they plan to jointly build and operate near the Massachusetts border.

But why would the tribes agree to pay something when they could pay nothing?

First, it keeps the state vested in the success of Foxwoods and Mohegan Sun.

Second, they might be able to work in a few benefits. For example, using a percentage of the money collected by the state for tribal grants or a percentage of the revenue from commercial casinos set aside for redevelopment of the tribal casinos and the surrounding area.

Third, the tribes could continue to use the compact as leverage against new casinos. As stated earlier, if the compact is torn up, the state is free to do as it pleases. If the compacts are renegotiated, the tribes could insert new protectionist terms, such as a blackout zone around the tribal casinos.

There is still the problem of lost tax revenue until the MGM casino opens its doors too.

To offset this, the state could ask for a little more in the interim, perhaps keeping the current 25 percent tax on slot revenue in place until MGM Bridgeport is open. This is another issue the tribes could leverage to work out the best possible deal in a renegotiated compact.

Upshot #2

A renegotiated compact would cost the tribes a bit of revenue in exchange for some subsidy arrangements. It would also provide them with plenty of bargaining chips down the road.

Final thought

In the end, competition is coming, whether it’s in Connecticut or a nearby state, so it might be in Foxwoods’ and Mohegan Sun’s best interest to take what they can get now.