Socialist Casinos for the Land of Oz?
By William N. Thompson

Who woulda thunk it? Dorothy and Toto come back to Earth and find that Auntie Em and Uncle Henry have left the farm and trekked off to the local government-owned casino. The Land of Oz—Kansas, that is—is in the process of embarking upon a new American—United States, that is—experiment of "socialist" casinos. …or is it?

To be sure, we can find publicly owned and/or controlled casinos in some Canadian provinces (Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan) as well as on Native lands in both the United States and Canada. State government ownership would, however, be a new thing.

The motivation for legalizing casinos seems to be the same in Kansas as it has been in other venues. First, the state has a fiscal crisis: among other issues, a court mandate to put an extra $900 million into public education. Second, nearby venues have established casinos that draw customers from Kansas—most importantly, there are the Missouri riverboats in the heavily populated Kansas City area, but there are also new Native American casinos in Oklahoma.

Prior to the passage of the March 2007 legislation (signed by the governor on April 12, 2007) authorizing the "socialist" casinos, Kansas did have some casinos. Three tribes in the rural northeast part of the state had negotiated compacts to operate four facilities. A small Indian casino also recently opened in Kansas City itself as a result of a court order involving a land settlement claim.

The effort to pass the legislation took several years and encountered several hurdles. Commercial and Native interests in the state very much wanted a casino or casinos in the Kansas City, Kan., area in order to meet the competition from Missouri’s riverboats. However, the Kansas state constitution seemed to clearly state that private casinos would be illegal. Privately run lotteries were "forever prohibited," and the term "lottery" covered casino games. Proponents realized that it would be extremely difficult to win a statewide popular vote to change the constitution.

In 1986, 64 percent of the voters did amend the constitution to allow a "state owned and operated" lottery. In 1994 the state courts ruled that the vote permitted the lottery to operate casino games. On the basis of the ruling, and in accordance with the Indian Gaming Regulatory Act of 1988, the state negotiated compacts with three tribes to have Native casinos. Subsequently, the legislature entertained proposals to permit the establishment of new tribal lands in Kansas City, at a site near a horse and dog track and NASCAR racing facility, amusement center and shopping area. Competition among the three tribes, as well as federal hurdles regarding off-reservation casinos, made a winning political compromise impossible to achieve. Still, state forces wanted to attract gamers away from the Missouri boats.

The "magic bullet" for change flashed into the legislative chambers in 2007: have the state lottery "own and operate" casinos. Work toward a solution began in earnest. Proponents needed support; hence, they acquiesced in allowing all three racetracks (one near Kansas City, one in Frontenac at the southeast corner of the state, and one in Wichita) to have slot machine casinos. Each would be allowed up to 800 machines. They also responded to appeals for a second casino in Kansas City; one in the Pittsburg area, not far from Neosho and Springfield, Mo.; and a casino in the Wichita area, home of one of the leading proponents, Phil Ruffin, who was recently an owner of the Frontier Casino in Las Vegas. The "wild west" town of Dodge City, with some claim to being an attraction for tourists, was also authorized to have a lottery-run casino. The non-track casinos could have table games and slot machines. In total, the legislation granted permission for 10,600 gaming machines statewide.

Thus, the legislation permitted seven casinos—three at race tracks and four at designated cities. All would be under the "complete control" of the lottery, and hence, as the Kansas lawmakers interpreted the matter, "owned and operated" by the lottery. On paper, the interpretation seemed to be as much a fiction as Frank Baum’s Dorothy, Toto, Auntie Em and the Land of Oz. Therefore, the governor, who supported having the casinos, immediately asked the state attorney general to institute a "friendly" lawsuit challenging the law, inviting the courts to wave their wand of approval as if they were a "good witch from Topeka." In January 2008, the District Court in Shawnee County ruled that the new law was constitutional. The ruling has since been appealed to the state supreme court.

But before applications could be taken for casino licenses, the voters in each county to have a casino had to give their approval. Accordingly, voters of Wyandotte County (Kansas City area) said yes, as did the voters of the southeast counties (Cherokee and Crawford) and Ford County (Dodge City). The voters of Sedgewick County (Wichita) said no, and therefore there can be no casino at the Wichita race track. However, voters in adjacent Sumner County said yes, meaning the other Wichita-area casino will be in a county located 20 miles south of the city.

There have been several steps to the application process. The owners of the two race tracks were given the exclusive right to bid for licenses at their facilities. Those wanting the other four casinos submitted bids that first had to be approved by the local county governments, as well as endorsed by any city in which they might be located. They had to have at least three years of experience in casino gaming. With that endorsement in hand, they could then go to the state lottery commission and negotiate a contract for the casino. In the contract, the applicant had to commit to investing $225 million into the structure of a facility for three of the non-track casinos, and $50 million for the Dodge City casino. The track slot casinos had to agree to pay taxes of 40 percent on the machine wins, while the other casinos had to agree to state taxes of 22 percent on their gaming wins, and an additional 5 percent in local taxes.

After negotiating the contracts, the non-track casino bidders would then submit a fee of $25 million ($5.5 million for Dodge City) along with their contract to a newly appointed Lottery Gaming Facility Review Board. This board would make the final decision on which company would build a casino in each location. The rejected applicants would receive their fee back. The "winners" would have their contracts approved for 15 years. The state also promised not to allow any other new casinos in the state until the year 2032. However, before casino doors could open for business, all major parties had to survive background checks by the Kansas Racing and Gaming Commission.

Eleven parties stepped forth seeking to be licensed to run the non-track casinos. They included both big and smalltime operators in the industry. In Wyandotte County, applicants included Kansas Entertainment, the Sands, Legends Sun Casino Group, a Kickapoo and Sac and Fox Indian Partnership, and Pinnacle Entertainment, which submitted two applications. Four Sumner County applicants are Penn National, Harrah’s, an MGM-Foxwoods conglomerate, and a Binion Family Trust. Penn National also sought the Cherokee County facility, while the Butler National Service Corporation was the only applicant for Dodge City.

The casinos would be regulated by the lottery through its concept of "total control." While the private parties would be expected to run the casinos, they would be doing so for the lottery, and the lottery could intervene and control such operations in any manner it wished. Hence, the state advanced the idea that the casinos were "lottery owned and operated."

While the legislation called for lottery-owned casinos, the private investments in the casinos would result in private owners retaining complete ownership of the facilities. Moreover, the legislation prohibited public investment in the facilities in any way as well as the use of any public bond mechanisms for capital investments. The facilities would pay property taxes just like any other private business.

And so there had to be a court issue. One state Native American tribe wanted to lead the charge in court, but its attempts were preempted by the state attorney general. The major court issue was easy enough to advance: Was this arrangement really lottery ownership and operation? Also, the Kansas City recreational area encompassing the NASCAR race track as well as new casino site did have facilities that were constructed with public bonding, although the actual facilities where casino gaming would be located were not. Was this a legal problem? The district court in Shawnee Kansas agreed with the legislature that the casinos would, under all these circumstances, still be lottery owned and operated. The state has won by making the analogy that the government-owned lottery sells its tickets through private agents, and hence can do the same with its casino gaming products. As of this writing, the case is on appeal to the state Supreme Court.

Whatever the court decides, this writer finds the whole process to be one new fictional escapade fit for a Disney sequel in the Land of Oz. In each of the other 12 commercial casino venues in the U.S., the government exerts essentially the same control over casinos as would the Kansas Lottery. Several even impose higher tax burdens on the casinos. Like Kansas, some other states restrict the number of casinos. In other states—Nevada and Mississippi, for instance—the number is not restricted. Like in Kansas, all the locations have casino facilities that have been constructed with private money, all the private builders retain ownership in their facilities, and they all pay private property taxes.

In all the other venues, regulators retain a right to seize the properties and operate them directly whenever the regulators deem it appropriate to do so. Such has been done in Nevada, with the cases of the Stardust, Fremont and Sundance coming to mind. But those cases of government takeovers were rare, and it is expected that any such actions in Kansas, especially given its rule that the license applicants must have three years of casino experience, would be rare as well.

A further note suggesting that the Ozlanders are really not preparing to run the casinos: The lottery decided it did not have the expertise to judge the qualifications of applicants. Therefore, they hired an experienced Nevada gaming executive to be their exclusive consultant at $1,000 a day during the 90-day plus application process. If they are not competent to even select their own casino license holders, it is laughable—at Disney proportions—to think they will really be in total control. So much for owning and operating their casinos. Socialism? Thunk it over. Once again, capitalism triumphs in the gaming world.