Understanding the Economic Impact
of Casinos in Missouri

A Review of the Leven-Phares Study

Prepared for the
by Robert Goodman and Edward Feser
October 14, 1998

Read the full report

Highlights of the Report

4. A conservative Estimate for the State-Wide Costs Resulting from Increased Problem Gambling Due to the Casinos. . .

Problem gamblers create economic costs for both the public and private sectors. The costs are related to increased bankruptcies, unpaid debts, check fraud, embezzlement and other forms of economic theft engaged in by problem gamblers. The prosecution and incarceration of those problem gamblers who commit crimes is also costly.

Based on recent empirical studies of problem gambling, each problem casino gambler adds approximately $10,113 in yearly costs to a state's economy.

5. There Appears to be a Bias Towards Overestimating Benefits in the Leven-Phares Study.

However, since almost all of the casinos are located within easy commuting distance of other states, it is highly probable that significantly more than 5 percent of casino workers reside in neighboring states.

6. The Leven-Phares Study's Conclusion That Casinos Contributed a Net Benefit of $543 Million to the Missouri Economy in 1996 is Not Supported by Their Research.

At a Minimum, the Net 1996 Benefit to Missouri Should be Reduced from the $543 Million Estimated by Leven-Phares to $361 Million, and the Introduction of Casinos Could Have Actually Resulted in a Net Loss to the State of $185 Million When Higher Plausible Estimates of Problem Gamblers are Considered. These Estimates Do Not Take Into Account Additional Losses Made Possible by Overestimates in Several Key Areas Noted Above.

Leven-Phares estimated the net 1996 benefit to the state from casino gambling as $543 million. However if the costs of problem gambling--which they have omitted--are taken into account, this alone would lower the net benefit level to a maximum of $361 million, if low-end estimates of problem gambling's cost impact are used, or to a net loss of $185 million, if higher plausible estimates of problem gambling's costs are considered.

Leven-Phares Provide Only Limited Access to Their Data

Assumptions that when altered slightly cause the greatest shifts in the impact estimates should be subjected to the highest degree of scrutiny to ensure they are both reasonable and valid.

To conduct such an assessment, however, we must have access to both the models and data used in the original study.

Unfortunately, our request to view these raw data was denied.

Estimation of Payments to Missouri Laborers.

The casinos reported that $131.1 million in total labor expenses in 1996. An important question is what share of those expenditures on salaries and wages accrues to workers that are Missouri residents.

Likewise, in the St. Louis MSA (Missouri Statistical Area) includes four Missouri and five Illinois counties. The four casinos within the St. Louis area would pull from this larger two-state labor market.

Estimation of Displacement Effect: Out-of-State Visitors.

Smaller gambling areas such as those on Indian reservations and in places like Illinois, Mississippi, Missouri tend to attract visitors locally and regionally.

Estimation of Displacement Effect: In-State Spending Offset.

As noted above, 45 percent of Missouri casinos' 1996 expenditures are considered displacement of other types of spending that would have been made within Missouri.

But there are several problems with their implementation that could have led to an underestimation of the displacement effect and therefore an overestimation of the overall impact of gambling houses on the Missouri economy.

Estimation of Construction Spending Impacts.

Since construction activity offers only short-term (12-18 months) economic benefits, standard practice in economic impact analysis is to report construction impacts for only the first year of a project horizon.

Casinos will not generate nearly $60 million in construction impacts over the next twenty years. Rather, they will generate a large construction impact in the first twelve to eighteen months, leading to a brief increase in output, income, and employment in the state. Once the construction is completed, those impacts disappear. Annualizing the construction numbers and including them in the operating impact figures only obscures the fundamental differences in the types of spending. It is too easy for this to lead to confused policy discussion.

Can Problem Gambling Costs Be Omitted?

In hearings before the Commission (National Gambling Impact Study Commission) on May 20, 1998, Don Phares was asked the following by Commissioner Leo McCarthy, a member of the Commission’s research committee:

[M]y question to you is if you had broad latitude in designing the study and you knew the social cost data were lacking, and indeed they are because we've been searching for it continuously, why weren't questions on social costs included in your study to give a balanced picture of the costs to government, the cost to the private sector employers for pathological gamblers?. . .it’s a reasonable assumption that lots of different kinds of costs come out of that [problem gamblers]. My question is why weren't any social costs, factors, questions included in your study? [our emphasis]

In fact, there are no questions at all in their survey that ask about problem gambling.

Research Indicates Problem Gambling Costs are Significant.

Even if it were true, as the Leven-Phares study states, that "only a small fraction of gaming patrons" are problem gamblers, this can still represent an enormous economic burden on the rest of the people in a state.

Similarly, the social costs of each individual problem gambler are high, and even small increases in the proportion of problem gamblers in a state can be extremely costly to that state's citizens.

This Harvard Medical School Study found a clear connection between the availability of legalized gambling opportunities and the rise in problem gambling.
According to the study: "Newly exposed to the gambling experience, adults in the general population are having difficulty adjusting and, unlike the other population segments who are already evidencing gambling problems, are beginning to report increasingly higher rates of gambling disorder."

Secondly, the available research also indicates that increases in problem gambling result in significant increases in economic costs to society. For example, research from Louisiana shows that pathological gamblers spend an average of 45 percent of their monthly income on gambling expenditures. (9)

This (other research) includes the inability of problem gamblers to pay off debts they have contracted as a result of their gambling, as well as their failure to pay their taxes, utility bills and other monies they owe. Those who do pay their debts often get the money through criminal activities which include writing bad checks, engaging in fraud, embezzling money, dealing drugs and simply stealing.

The unpaid debts and bankruptcies of problem gamblers are not economic losses simply to the gamblers themselves, but also to those to whom the money is owed. Similarly, the criminal activities of problem gamblers translate into economic losses to those victimized and to increased costs to the taxpayers for police, courts, probation officers, and other aspects of the criminal justice system. The public also picks up the costs of keeping convicted offenders in jail. These incarceration costs can range from $20,000 to $50,000 a year, depending on the age and health of the prisoner.

Problem gamblers are also costly to their employers, since they are frequently inattentive and unproductive at work. According to Dr. B. Kenneth Nelson, assistant director of psychiatry at Valley Forge Medical Center and Hospital, "Even where outright crimes have not been committed and/or detected, frequent absenteeism, tardiness, and squandering of company time and resources can add up to sizable financial losses for business." (11)

The Cost of Unpaid Debts to a State’s Economy

A University of South Dakota study reported in 1991 that state-wide, "Chapter Seven bankruptcy filings and small claims filings have experienced significant increases in the two fiscal years since gaming began in South Dakota."(12)

In 1995, four years after the introduction of riverboat casinos in Iowa, for example, Tom Coates, executive director of the Consumers Credit Counseling Service of Des Moines, stated, "We’re seeing 15 to 20 percent of our counseling today has gambling as an important factor in reaching financial problems. Ten years ago, it was 2 to 3 percent." (13)

According to the SMR study, "The bankruptcy rate was 18 percent higher in counties with one gambling facility and it was 35 percent higher in counties with five or more gambling establishments. "The authors noted that these figures actually understated the problem since many counties with gambling facilities had small populations and the players came from elsewhere. "[W]hen we look only at counties with more sizable populations and gambling facilities, we see even greater evidence of the problem."(14)

Clark County, Nevada, where Las Vegas is located, had the state's highest bankruptcy rate; the two California counties just across the border from Las Vegas had the highest bankruptcy rates in California. Atlantic City, NJ, home to the Atlantic City casinos, had a bankruptcy rate more than 70 percent higher than the state average, and most of the counties closest to Atlantic City had higher bankruptcy rates than those further away.

The Economic Costs of Increased Crime

Cities that have introduced casinos have witnessed dramatic increases in crime and social problems. In Gulfport and Biloxi, Mississippi, every category of crime increased the year following the opening of casinos. Murders, rapes, robberies and car thefts more than doubled. (16) Domestic violence rose almost 70 percent on the Mississippi Gulf coast after casinos opened there, and child abuse and neglect case filings increased by 15 percent in the first year of casino operation in Deadwood, South Dakota. (17) A 1989 crime impact study of the Atlantic City casinos found that crime spilled over into the communities surrounding Atlantic City. (18)

Many ordinary people, without either criminal backgrounds or criminal inclinations, may engage in criminal activities when casino gambling is available. (19)

Increased Problem Gamblers in MO Since Riverboats X Cost/per Problem Gambler/per Year = Total Cost of Problem Gamblers in MO/per year.

(The 1995 prevalence study commissioned by the Iowa Department of Human Services and produced by Rachel Volberg.) This study, based on before and after surveys, determined that the rate of pathological or severe problem gambling increased after the introduction of riverboats in that state in the early 1990's from 0.10 percent of the adult population to 1.9 percent of the adult population--an increase of 1.80 percent. (This study also determined that the combined rate of both problem and pathological gambling in Iowa more than tripled from 1.7 percent of the adult population before casinos to 5.4 percent of the adult population in 1995).(21)

The average serious casino problem gambler was estimated to cost the public and private sectors $10,113 per year. Using the Thompson, Gazel, Rickman figure means that each additional 100 serious casino problem gamblers in a state cost that state’s economy more than one million dollars per year.