State’s gambling jackpot may have reached its limit

Hoosiers’ long ride on the gambling gravy train finally may be coming to an end.

Casinos have swelled into a $2.7 billion industry here—one that paid $838 million in state and local taxes last year
and ranked
as the third-largest revenue source in the Indiana budget. That tax take has risen 126 percent over the past decade.

But state lawmakers and industry experts see strong indications that Indiana’s gambling market has become saturated, and they
say the days of ever-expanding jackpots are over.

Revenue at the state’s 11 full-blown casinos fell last year for the first time since the industry’s launch here 13 years ago,
and the recession and heavy leverage have combined to put operators under financial strain.

Major credit rating agencies are concerned that several casinos—including the state’s two new horse track "racinos"
on the
outskirts of Indianapolis—may go bust before the year is finished.

And even if all 13 Indiana casinos remain afloat, they face the daunting prospect of additional competition across the state’s
borders.

"We have reached the point that we need to put a hold on any additional gaming in the state. We need to let what we have
now
settle in, compete against one another, and, more importantly, prepare for future expansion in neighboring states," said
State
Rep. Trent Van Haaften, D-Mount Vernon. "The discussion needs to be how we prepare our current operators for the inevitable
gaming in Kentucky and Ohio."

"Within five to 10 years, if not sooner, you will see gaming in both those states," he added. "[Indiana] will
lose revenue.
No doubt about that."

Boom years

It was good while it lasted. Indiana introduced the Hoosier Lottery in 1989. Casino gambling followed in 1995 when Evansville
opened the state’s first riverboat. Back then, there were warnings not to become reliant on the easy money. But as the gambling
industry grew, the warnings went largely unheeded.

Both sources of gambling have pumped huge sums into state coffers. In 2001, the Hoosier Lottery had $548 million in revenue
and contributed $157 million back to the state. By last year, the lottery had grown to $823 million in revenue and contributed
$217 million to the state.

Indiana measures casino performance by adjusted gross receipts—total gambling revenue minus payouts to players. In 2008,
Indiana’s
13 casinos eked out a modest 1.65 percent increase in AGR. But that’s only because Anderson’s Hoosier Park and Shelbyville’s
Indiana Live opened casinos midyear. The state’s 11 existing casinos saw AGR drop 6.15 percent.

In other words, the racinos drew most of their business away from the riverboats.

"You’re at the point where the ability to continue to exploit legalization is fairly diminishing," said Bill Eadington,
director
of the University of Nevada Reno’s Institute for the Study of Gambling and Commercial Gaming. "The ability to use it
as a
new revenue source is diminished, if not expired."

Most under strain so far are the racinos-which feature slot machines and electronic games, but not the table games found at
traditional casinos.

The owners of Hoosier Park and Indiana Live each paid $250 million license fees to the state and spent hundreds of millions
of dollars more to upgrade their facilities.

Just three quarters later, all signs point to bust. On Jan. 16, New York-based Moody’s Investors Service downgraded Hoosier
Park’s credit rating to a lowly Caa3 with a negative outlook. Indiana Live is just one notch higher. On March 5, Moody’s downgraded
it to Caa2, also with a negative outlook.

Over the last 12 months, one of every five issuers Moody’s rated Caa3 has failed to pay its debt obligations. During the next
12, Moody’s expects half of issuers in the category to default.

New York-based Standard and Poor’s has similar concerns. It has a negative outlook for both racinos and rates each CCC, which
means they’re not likely to meet their financial commitments without an uptick in the economy.

Craig Parmelee, a Standard and Poor’s managing director who follows casinos in Indiana, expects little or no growth in the
gambling sector this year—here or anywhere.

"Flat is the new up, these days," Parmelee said. "This is not a downturn we expect will end quickly, then go
back to business
as usual. The bubble is being deflated at the moment. It will be a long road back to where we were."

The good news is that most of the tumult is likely to be confined to the gambling companies themselves. The state has the
right to transfer casino licenses if operators go belly-up.

"We put in provisions to protect the state in the event of a bankruptcy proceeding or something of that nature,"
said state
Sen. Luke Kenley, R-Noblesville. "Although I wouldn’t wish that on any operating entity, I think we’re probably protected
as a state in that regard."

Kenley pointed out that while the racinos may be performing below their owners’ expectations, their AGR has been close to
what the state’s Legislative Services Agency projected two years ago.

Hoosier Park is owned by Indianapolis-based Centaur Inc., and Indiana Live is owned by South Bend-based Oliver Racing. Messages
left with both firms were not returned.

Indiana Live officials are hoping to get a big boost from the racino’s move this month from a temporary tent to a permanent
facility. So many people flocked to the March 13 opening that cars backed up on Interstate 74.

Indiana Gaming Commission Executive Director Ernie Yelton said it’s too early to tell whether Indiana Live can sustain that
success.

"Whenever you open anything new like this, there’s a lot of tire kickers," he said. "Some come back, some do
not. You really
don’t get a good feel for how well a venue will do for at least six months into the operation."

Industry-wide woes

If it’s any consolation, Eadington said, many of the firms that operate huge casinos in Las Vegas and Atlantic City are faring
even worse. They’re heavily dependent on vacation traffic from around the globe. Regional casinos, like Indiana’s, draw their
players locally.

But the problem is the same everywhere. It’s a question of scale.

"The world has changed very dramatically for gaming companies since 2007. All the major Las Vegas companies are on the
verge
of bankruptcy or there. And everybody has the same story. They’re too overleveraged and can’t sustain reductions in cash flow,"
he said. "The whole sector is caught in the same quandary."

Parmelee said Las Vegas-based Majestic Star LLC, which holds two riverboat licenses in Gary, already defaulted on some of
its obligations and a bankruptcy may be on the horizon.

Meanwhile, Las Vegas-based Harrah’s Entertainment Inc., which owns the Horseshoe casino in Hammond, is trying to reorganize
without bankruptcy by buying back debt from its lenders at a discount. Las Vegas-based Tropicana Entertainment LLC, owner
of Evansville’s Casino Aztar, already is going through bankruptcy.

Rating agencies say the French Lick Hotel and Casino also is at risk of defaulting on its debt. That rural venue, the only
full-blown casino that isn’t along the Ohio River or Lake Michigan, opened in 2006.

Tax breaks

There’s talk that introduction of a 14th Indiana casino to Indianapolis could shore up the city’s financial problems, particularly
the huge operating shortfalls for its professional sports stadiums. But those in the industry say adding yet another casino
in the state would only make matters worse for the existing venues.

Things are so bad, in fact, that the racinos have turned to the Indiana General Assembly for relief. On Feb. 25, a bill providing
them four-year tax breaks worth $75 million passed the House 58-39. It’s now under consideration in the Senate’s Committee
on Appropriations.

But some lawmakers balk at subsidizing gambling when so many other industries are suffering in the recession. Observers say
final passage is a long shot—unless the provision is inserted into a broader measure as part of the horse trading in
the final
days of the session.

Van Haaften, for one, would instead prefer new incentives encouraging Indiana’s casinos to grow their non-gambling facilities,
such as hotels, golf courses and concert arenas.

He said that’s the best way to fight market encroachment from bordering states—and further deterioration of Indiana’s
gambling
tax revenue.

"That goes toward what I call infrastructure investment, as opposed to gaming investment," he said. "You make
sure the product
here in Indiana is an attractive product so that even if something were built in Kentucky, the gaming consumer says Indiana
is a nicer place to go."

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