The Slots Game: Magna stumbles at the finish line

Sitting at a table with the eyes of former governors staring from portraits on the wall, Gov. Martin O'Malley, Senate President Thomas V. Mike Miller Jr. and House Speaker Michael E. Busch signed all of the legislation from a grueling 22-day special session - taxes, budget cuts, an expansion of health care and slot machines - into law to try and address a $1.5-billion deficit.

"We have achieved more than many of us thought possible," O'Malley said that day in Annapolis. "This was one of the toughest things you ever have to do in any sort of representative democracy."

Miller, D-Calvert, who has a well-known talent for political rhetoric, was even more effusive.

"This is the boldest action of any governor I have served with," he said, noting that he had been a legislator under seven different executives. "If (O'Malley) had failed he would have failed greatly. Instead he achieved and he achieved greatly."

Almost three years later, it still remains to be seen how much was achieved with the passage of the state's slots plan and whether the new law in 2007 and the subsequent referendum approving expanded gambling in 2008 will ever be more than partial victories.

Anne Arundel County voters now have to gird for yet another slots campaign in the fall, this time on whether to approve the zoning needed for a slots parlor at Arundel Mills mall in Hanover.

One source of this controversy is that many voters did not anticipate the mall ever becoming a slots location, even though they approved the placement of a slots venue within two miles of Baltimore-Washington Parkway - not specifically at Laurel Park racetrack.

The dissonance between these expectations and reality - and the realization of how much trouble the slots process was in- started on a Monday just three months after voters signed off on the ballot measure.

On Feb. 2, 2009, the state released the number of bidders for five slots locations and it quickly became apparent the process had failed to meet expectations.

There were only six bids for the five locations and they covered just two-thirds of the 15,000 authorized machines. Anne Arundel was the only place where there was competition between two companies.

"This is a very, very tough economy," O'Malley said that day. The low number of bids, he added, "wasn't for a lack of trying."

The major surprise was a bid from The Cordish Cos., a Baltimore development firm that announced plans to put 4,750 slots at Arundel Mills mall.

Up to that point, there had been few details about the possibility of Laurel Park getting competition in the bidding process, especially from an Arundel Mills site. Rumors about another site had been floating through insider circles, but they also pointed to potential in places such as BWI Thurgood Marshall Airport area and Blob's Park, a German beer and dance hall in Jessup.

"It's just been speculation," then-County Councilman Josh Cohen, D-Annapolis, said in October 2008. "I really think the only likely place would be Laurel racetrack."

Magna Entertainment Corp., Laurel Park's owner, announced in a news release in the early morning hours of Feb. 3 that it had not paid the state its required license fee of $28.5 million, throwing the legitimacy of its racetrack slots bid into question.

The company said it placed the money in an escrow account and would pay only if the state's Video Lottery Facility Location Commission agreed to refund the money in case the proper zoning and permits became unavailable in Anne Arundel County. Eventually, the commission rejected Magna's bid on the grounds it couldn't change when or how it collected fees.

Left waiting

Laurel Park's failure to get a bid - after the legislature had defined the possible Anne Arundel site so broadly - became the catalytic moment for much of the confusion and controversy that followed.

"Everybody was waiting (on Feb. 2, 2009) for Magna's proposal … including some of the representatives of Magna," said Robert Neall, a former county executive who was a member of the slots commission at the time. "That's where the train jumped track."

For years, voters had been told slots were going to be passed for the benefit of Maryland's beleaguered horse industry. If the legislators of the 1960s banned the machines over moral concerns, the legislators of this decade began to see them as necessary because of monetary ones.

In an age of more modern and consolidated gaming control, government officials stared wide-eyed as surrounding states such as Delaware and West Virginia began reeling in cash from Maryland residents and using it to prop up horse racing.

The real imperative behind O'Malley's slots proposal may have been a $1.5 billion deficit, but his administration consistently trotted out a report from August 2007 by Thomas Perez, the former secretary of the state Department of Labor, Licensing and Regulation, about how slots boosted the racing industry in neighboring states.

Marylanders traveling to West Virginia and Delaware to gamble on slots and horse racing gave those states $150 million in tax revenue in 2006, the report said, and those states had boosted thoroughbred purses.

Gambling revenue, Perez said, was funding education in those states. "We're doing a lot to ensure Delaware and West Virginia leave no children behind …This is not about Seabiscuit or sentimentality … This is about survival for the horse-racing industry and the thousands and thousands of jobs that rely on it. The slots horse is out of the barn in other states, and frankly it is galloping past Maryland."

Despite a referendum strategy of emphasizing money for education, Laurel Park accounted for more than 40 percent of the $7 million spent by the major-pro slots group in the 2008 campaign.

MI Developments Inc., the controlling shareholder of Magna, even authorized a loan of up to $75 million so the racetrack could get slots - $45 million for the application and $30 million for the construction of a temporary slots facility.

In the postmortem period after Magna's failure, plenty of people offered explanations but few had hard facts on why Laurel Park's application for slots was derailed.

Only silence came from Magna's headquarters in Canada, a silence that continued when company officials were contacted for this story. They were unavailable for comment.

Others in the horse-racing industry said problems resulted from a substantial profit-sharing deal with Joseph De Francis, the former owner of Laurel Park and the former president of the Maryland Jockey Club, making the proverbial juice not worth the squeeze.

But by February 2009, the economy had changed, and hallowed names like Bear Stearns and Lehman Brothers became synonymous with failure. Another Great Depression seemed possible at the same moment the state was asking for tens of millions of dollars in fees.

"It had to be the worst time in recent memory to go out with something like this," Neall said. "It was a terrible time to be asking people to do that."

De Francis said discussions about his deal had been ongoing but denied it had any defining role in Magna's decision not to put up the license fees.

When Magna first acquired an interest in the Maryland Jockey Club in 2002, De Francis and the minority-owner group were slated to receive 65 percent of Magna's slots profits in Maryland during the first five years of operation, 50 percent in the five years after that, and 40 percent in the following decade, according to filings with the Securities and Exchange Commission.

De Francis, however, said the refund issue had created a "genuine cloud of uncertainty" and was problematic within broader financial struggles.

"There was no way they could afford to risk (the fee)," he said. "The company was hanging on by a thread."

The thread snapped just weeks later, when Magna filed for bankruptcy.

No explanation

Neall said the reasons for the failure of Magna's bid matter less than the fact that it could not live up to the state's rules.

He said no explanation was shared with the commission beyond the concern over a refund, which Neall believes was clearly allowed under the law.

"The very company that wanted us to make special arrangements for them declared bankruptcy," he said. "Unlike Magna, Mr. Cordish cut the check … and the check cleared."

For House Speaker Busch, D-Annapolis, a strong advocate of having a competitive bid process and a broadly defined location in Anne Arundel County, Magna's failures showed the importance of not just handing a slots license over to racetracks.

"Why would you be partners with someone who doesn't have a good business record?" he said.

If the Great Recession's effects felt distant anywhere in the early months of 2009, it was at 601 E. Pratt St. in Baltimore's Inner Harbor.

Beyond those doors are the lavish Cordish headquarters, with exposed brick walls, designer furniture and high-definition televisions looping displays of planned or finished projects from San Francisco to Philadelphia.

"There are only a few companies capable of developing a project of this scale and we are one of them," Joe Weinberg, the president of development, said in a February 2009 interview with The Capital. "There are only a few companies that have the liquidity today."

Tuesday: The zoning war.

lfarrell@capitalgazette.com