CASINOS IN LOUISIANA GOLDEN PROMISES, ROCKY RESULTS

When Louie Roussel III held opening festivities for his Star riverboat casino a decade ago this month at South Shore Harbor Marina, expectations ran high.

The opening heralded a new era: legal casino gambling in Louisiana. Supporters hoped gambling would rescue the state’s economy from the doldrums of the oil bust.

But almost immediately, there were signs that Louisiana’s experiment with gambling wouldn’t glitter as brightly as the lights at the Star’s opening party.

Within a month, the eastern New Orleans riverboat began laying off workers and tangling with authorities over cruising requirements. Roussel reduced his 70 percent ownership stake in the venture, and a few months later he sold the business to his partner, Showboat Inc.

In March 1995, Showboat, which has since been bought by Harrah’s Entertainment Inc., moved the operation to more bountiful waters of Lake Charles, where the casino would be closer to the big-fish gamblers of Texas.

The plight of the state’s first casino is emblematic of the first decade of legalized gambling in the Crescent City, where the industry has failed to live up to expectations.

“I think that folks expected a whole lot more out of downtown New Orleans,” said Steve Rittvo, a casino industry consultant based in New Orleans.

Several experts say it would be wrong to conclude that Louisiana’s 10-year experience with casino gambling has been a failure. A disappointment, maybe, but not a failure.

“I’d say it’s a qualified success,” said Wade Duty, executive director of the Casino Association of Louisiana, a riverboat industry lobbying group that represents nine of the state’s 14 riverboats.

After all, Shreveport and nearby Bossier City made up a sizable $823 million gambling market last year, according to the Louisiana Gaming Control Board. The Lake Charles casinos won about $442 million from gamblers. Much of that business came from Texans who drove across the border, bringing new money into the state.

But New Orleans has been a clear disappointment, industry people and political figures say. What was expected to be a thriving market with a massive land casino and several downtown riverboat casinos now consists of a smaller land casino and no downtown riverboat casinos. The only riverboats that remain are in the suburbs, and they’re patronized mainly by locals.

Some predicted that New Orleans’ land-based casino alone would win close to $1 billion a year from gamblers. But last year, all New Orleans area casinos — the land-based casino and the three riverboats — got $555 million total from gamblers.

Casinos were projected to employ 10,500 in New Orleans, but only 6,200 work there now.

And, of course, the land-based casino, Harrah’s New Orleans Casino, has been through bankruptcy court twice.

So what happened to all the projected casino business? A big chunk of it went to Louisiana’s chief competitor in the race to bring casino gambling to the South: Mississippi.

The small county of Tunica in northwest Mississippi and the Mississippi Gulf Coast developed the biggest casino markets. Each of those locales was about a $1.2 billion market last year, according to the Mississippi Gaming Commission, far bigger than any in Louisiana.

All told, Mississippi casinos last year won $2.72 billion from gamblers — 36 percent more than the casinos in Louisiana.

In fact, Mississippi gambling has been so successful that many Louisianians drive past a Louisiana casino to get action in Mississippi. According to the Mississippi Gaming Commission, 16 percent of Gulf Coast gamblers come from Louisiana. Some casino operators in the New Orleans area report that business dips on weekends when New Orleanians head for the casinos on the coast.

“We cannot market as effectively as Mississippi can market,” Duty said.

Freedom reigns

Looking back, several said, it’s clear why casino gambling took off in Mississippi but sputtered in Louisiana.

Louisiana and New Orleans embraced complicated policies and regulations meant to protect New Orleans’ powerful hotel and restaurant industries, preserve the city’s historic character and limit casino development. Mississippi adopted a much simpler approach: Casinos there pretty much could do whatever they wanted.

Mississippi’s state casino tax rate of 8 percent, for example, is considerably lower than the 21.5 percent in Louisiana. Louisiana also required that its casinos be riverboats and that they be built in-state. And unlike Louisiana, Mississippi did not limit the number of casino licenses it issued; among other results, this allowed the free market in Mississippi, not regulators in Baton Rouge, to determine how casino owners could make their investments. And it meant licenses would not become commodities that could be dealt and traded by corrupt politicians.

Mississippi allowed big barge casinos to be permanently moored, which meant they could be surrounded by sumptuous hotels, golf courses and elaborate live-act theaters with Las Vegas-style shows — what people in the industry call “amenities.” By contrast, riverboat casinos in New Orleans were required by law to sail at regular intervals. Even though ship captains routinely disregarded this rule, casino managers said it kept some people off the boats. It also inhibited development of amenities.

For Louisiana’s only land-based property, Harrah’s New Orleans Casino, the burdens were greater. Although most restrictions and taxes recently were rolled back, at first the property was not allowed to operate a hotel. Food service was limited to a relatively small buffet, not the impressive and inexpensive fare gamblers often enjoy.

“I always said that (Louisiana) would not stem the flow of gamblers to the Mississippi casinos,” said Roussel, the former owner of the doomed Star riverboat. “It’s because of the amenities. (At Mississippi casinos), you have the large hotel rooms, the large suites. They opened before us. They had barges. They didn’t have to sail. (Louisiana) could have done a lot of things differently.”

For casino operators, the amenities are not trifles. About 55 percent of a casino operator’s revenues come from non-casino amenities. Hotels allow casinos to lure their most profitable customers — high rollers — and put them up for free. Restaurants and big shows allow casinos to keep their patrons bottled up and spending money.

“The real difficulties there are still statutory,” said Bill Eadington, an economics professor at University of Nevada-Reno and director of the Institute for the Study of Gambling. “It’s very hard for a law to be all things to all people. In Louisiana, the law essentially became no things to all people. It created a situation where no one benefited except for some of the lawyers.”

But that wasn’t all. There was Louisiana’s business culture. Incoming casinos discovered they had to take on local “partners,” who often paid a few bucks to become a part owner of a casino but could sell out for millions. Former Louisiana Gov. Edwin Edwards is in prison now, having been convicted of taking gambling-related payoffs.

For a casino operator, the choice was pretty clear: Louisiana was restrictive, difficult, expensive and often corrupt, while Mississippi was simple, cheap and profitable.

A trade-off

To be sure, the casino industry played a part in the debacle, some say. Early on, the industry made wildly optimistic projections that, if anything, encouraged legislators to tamp down, not encourage, casino development.

“If, in fact, you believed Harrah’s own projections, I can see why the state did what it did,” said Paul Debban, an investment banker in Los Angeles who represented a major casino bondholder group and for a while served as president of the company that owned Harrah’s New Orleans Casino.

And there were strong constituencies who believed that limiting growth was the paramount concern. Many did not want casinos to get too big and change the fundamental character of New Orleans and the state.

“I have strenuous objection to people who say Mississippi has done it better than us,” Lt. Gov.-elect Mitch Landrieu said. “We don’t want to be the Gulf Coast. The fact that we’re New Orleans makes it different. We did not want New Orleans to become a casino destination in and of itself.”

Still, the upshot is clear: Louisiana’s strategy allowed Mississippi to attract the bigger share of the industry, said David Anders, a gaming industry analyst for Merrill Lynch who has followed the Harrah’s situation for years.

“In Louisiana, (gambling’s) been more restricted and concentrated in different areas, which makes it more palatable for people,” Anders said. “But at the same time, you trade off the size and scope of the projects and job creation.”

“The political corruption and infighting held everything up while Mississippi developed,” said Ron Rychlak, who teaches gaming law at the University of Mississippi School of Law and is an author of a newly released legal textbook on the subject. “I think it’ll take Louisiana awhile to catch up.”

A bit of Monte Carlo

If there is a symbol of the industry’s failed promise in New Orleans, it is Harrah’s New Orleans Casino. The story of its development is a case study in bad public policy and inflated estimates by developers.

Back in the 1980s, French Quarter business and tourism leaders envisioned what they called a “Monte Carlo-style” casino in the stately marble Fisheries & Wildlife building on Royal Street. It would be small and upscale, it would only feature table games, and it wouldn’t have hotels or restaurants to compete with those already in the Quarter.

“We didn’t want to give them the business; we wanted them to bring business to us,” said Harry Greenberger, a founding member of the French Quarter Business Association and manager of a now-defunct Royal Street art gallery. “It was strictly there to support other businesses.”

Elected officials liked the idea of the tax revenue, so Greenberger and others eventually got their posh casino without hotels and restaurants, only it was bigger and located at the foot of Canal Street, in a prime spot between the Ernest N. Morial Convention Center and the French Quarter.

When bidding for the license to operate the state’s only land-based casino, promoters offered wild claims about how much revenue the property would produce in order to win the only license. Amounts projected in bids ranged from $300 million to just shy of $1 billion.

From the outset, some people viewed such numbers with extreme skepticism.

Rittvo, the New Orleans casino industry consultant, said his company produced a set of financial projections for Christopher Hemmeter, who eventually won the city lease for the casino site. Hemmeter rejected them because they weren’t optimistic enough, Rittvo said.

“We just couldn’t get the numbers he was looking to show,” said Rittvo, president of the Innovation Group of New Orleans.

Hemmeter, who did not return telephone calls for this story, projected the casino could generate $941 million a year.

Based on such optimistic projections and other estimates put forth by casino promoters, the state created a $100 million minimum annual tax for the land-based casino. The state also mandated that the casino could not operate a hotel, and that its food service would be limited to a small buffet and some kiosks. That was to protect local hotels and restaurants from a wildly successful casino.

While the restrictions and the tax drove away some potential operators, Hemmeter had painted himself into a corner. In the context of his projection that the casino could generate as much as $941 million a year, a $100 million minimum annual tax would be entirely reasonable — less than 11 percent.

Dan Lee, former chief financial officer for Mirage Resorts, a Las Vegas casino company that wanted to partner with Harrah’s on the project, said his company forecast that the land-based casino would generate only $300 million to $400 million in revenue.

Mirage backed out because of the $100 million tax, Lee said; it would have been an onerous 33 percent tax on $300 million. But Hemmeter couldn’t argue, given his claims.

“There wasn’t much Hemmeter could do,” Lee said. An investor group led by Hemmeter eventually beat out three other bidders.

As it turned out, Harrah’s never has made as much as $300 million. It is expected to gross $285 million this year, its best year ever.

The Louisiana way

That wasn’t the end of it. Louisiana’s unique way of doing business surfaced during the state’s licensing process. Then-Gov. Edwards’ appointed state casino board awarded the state’s casino operating contract to Harrah’s Jazz Co., a partnership that included 10 politically connected plaintiffs lawyers and businessmen known as The Jazzville Group. Since Hemmeter had control of the building, the only site the casino could be located, Hemmeter and Harrah’s Jazz had to work together. Hemmeter was in a shotgun marriage.

The project went bankrupt twice, the first time in November 1995, then again in January 2001. Eventually, Harrah’s Entertainment emerged as the casino’s sole operator and major investor. The minimum tax eventually got chopped to $60 million, and Harrah’s won other concessions to help it succeed, such as the right to open a full-service restaurant, which Harrah’s has done, and open a 450-room hotel, which Harrah’s is trying to do.

Economics and business researchers say the troubles were no shock.

“It’s not surprising that they ended up with two bankruptcies,” said Eadington, the Nevada professor and gambling expert. “That original structure really just worked against the economic viability of the project from the beginning. When you put them (the requirements and taxes) all together, it was a pretty much an unworkable formula.”

The result, Greenberger said, was disappointment for those who hoped the casino would enhance the city.

“It did not work out the way we wanted it to,” he said.

“It’s the free-market system versus the limited number of licenses,” said Jim Brandt, president of the Public Affairs Research Council and former president the Bureau of Government Research, which had an active voice in the casino debates of the early 1990s. “We ended up paying for it.”

Downtown New Orleans’ riverboat casinos fared no better than the land-based casino.

When the Louisiana Riverboat Economic Development and Gaming Control Act was signed into law in July 1991, projections called for between four and six riverboats to open along the Mississippi River in downtown New Orleans. In reality, only three opened, and today, none remains.

The most lavish of the floating casinos, the $223 million River City casino complex, closed its two boats, the Grand Palais and the Crescent City Queen, in June 1995, nine weeks after opening.

Rather than open, Circus Circus Enterprises Inc. scrapped its partly built riverboat in Chalmette, wrote off $30 million of investment and returned the license to the gaming board.

First not always best

Beyond the regulatory restrictions, New Orleans posed unique aspects for a casino market. Most successful casinos developed in places with few distractions, such as the desert of Nevada, the urban decay of Atlantic City, N.J., or, lately, the cotton fields of Tunica, Miss.

New Orleans was different. It already had a thriving tourist scene, world-class restaurants, music clubs, a formidable convention center and professional football stadium, all downtown.

Harrah’s was a particularly strange creature: a downtown casino in a bustling tourist destination without the typical hotel and restaurant amenities.

“It was the first downtown, central city casino,” Rittvo said. “I think a lot of other urban casinos learned from New Orleans.

“Sometimes being first isn’t the best thing in the world,” he said.

With so much to do, visitors just didn’t spend much time in the casino. This problem was compounded by the lack of amenities to keep people on the property.

“That was the biggest error to the preliminary projections that were made in the early ’90s,” Debban said.

Anthony Sanfilippo, president of Harrah’s Western division, said his company never viewed the New Orleans property as an experiment.

“Back when we began this journey, we thought this would be a good opportunity for us to grow,” he said.

But the downtown casinos largely failed to attract suburbanites, a failure Rittvo attributes to another miscalculation.

Furthermore, Rittvo said, almost everyone failed to consider the relatively high price of hotel rooms in New Orleans. High room rates discouraged conventioneers and visitors from tacking an extra day onto their trips to devote to gambling.

Finally, casino operators miscalculated the nature of Texas gamblers, who have proven to favor casinos within driving distance.

Louisiana casino operators believed “people would fly in from Texas and stay in downtown New Orleans rather than drive in from Texas and stay in Lake Charles or Shreveport,” Rittvo said.

Meanwhile, Mississippi’s rapid development, along with the state’s encouragement of resort amenities, allowed it to capture much of the Southern market. In fact, 78 percent of Mississippi’s gamblers come from out of state, according to the Mississippi Gaming Commission.

Self-serving complaints?

To an extent, the casino companies’ complaints about Louisiana’s laws and regulations are self-serving, said Frank Catania, a former director of the New Jersey Division of Gaming Enforcement and now a casino industry consultant.

“You’re going to hear that from the operators no matter where you are,” Catania said. “If they’re doing business (in New Orleans), it can’t be hurting them.”

Indeed, several companies said Louisiana was worth operating in despite the high taxes and other restrictions because it’s a less competitive market than Mississippi and because of the ability to reach Texas residents.

Phil Satre, chairman of Harrah’s Entertainment, said his company has gone much more heavily into Louisiana than Mississippi because the freer market there led to oversupply. Harrah’s has five casinos in Louisiana and only two in Mississippi.

“We have about $1.35 billion invested in the state of Louisiana,” Satre said. “There aren’t very many states where we have so much invested.”

State Rep. John Alario, D-Westwego, who was House speaker when the riverboat and land-based gaming bills were passed, said he still thinks the state did the right thing by restricting the licenses and going for high taxes, because people were uncomfortable with gambling and the state needed money.

If there was anything he would change, it would be the restrictions on amenities, said Alario, who was a political ally of Edwards.

So how would he grade the industry?

“I wouldn’t say it’s been a big detriment, but I wouldn’t say it’s been a big cure-all,” Alario said. “I’d probably give it a C-plus.”

New Orleans tourism executives agree.

“It hasn’t hurt the industry, but I don’t see where it has helped us,” said Bill Langkopp, executive vice president of the Greater New Orleans Hotel Motel Association, which lobbied for the hotel restrictions. “Instead of them bringing business to us, it’s apparent that they’re feeding off of the convention business and locals. But that’s OK; they employ a couple thousand people, and they pay taxes.

“I guess it’s better than not having one at all,” he said.