OLG, the Ontario Lottery Corporation, announced a new hosting fee formula for casinos and slots in the province. Have they finally “come clean” with this formula? Are they getting cleaner with the May 17, 2013 press release? Or does OLG simply plan to “clean up”?

My Previous Business Case Study against Gambling on an OLG Casino

Back in January 2013, Decoded Science published my very basic “A Sample Business Case Study of Math for a Casino Proposal“. That explained how the OLG hosting fee formula would have paid Toronto about 20 million dollars ($20M) for their estimated gambling revenues of about $1.4 billion. At the marginal rate of 0.5% for additional revenues, punters would have had to gamble another $6 billion for the OLG casino to pay another $30 million to Toronto; that would meet the low end of the OLG’s offer of $50-100 million per year in hosting fees.

Obviously bringing the fee to the full $100M would mean $50M/0.05=$10 billion in gambling revenue. That would fund 5 years of MetroLinx work in one year of slot machine and table gaming.

There was no explanation for the extra hosting fee in the Ernst and Young report. One Toronto City Hall staff member told me privately, at a public information meeting, that a “partnership” was being discussed, rather than the simple hosting fee. Sharing the OLG’s target of 20% of gambling revenues would have made for a very different business case study, since 10% of $1.4 billion would account for Toronto City Hall’s hope of about $140 million a year in hosting fees.

It was impossible to square the hosting fee for Toronto with what other municipalities would receive, even given the small gambling revenues their slots or casinos manage to take from their clientele.

OLG Estimates the New Hosting Fee for Toronto

OLG’s estimate for Toronto’s hosting fee under the new formula is approximately $50 million per year. That adds some $30 million to the previous formula’s fee.

The New OLG Hosting Fee Formula

What is the new OLG hosting fee formula? It is exactly the same as the old, with regards to the slot machine revenue. It starts at 5% but the sliding scale descends to 0.5% as the revenue goes up.

The new feature is that gaming table revenue will earn a consistent 4% regardless of the dollar figure.

Was OLG Playing the Shell Game with Casino Hosting Fees?

In the shell game, the player bets that he or she can follow the pea hidden under one of three shells. In an honest shell game, the operator uses quick moves and verbal distraction to mislead the player.

In a dishonest game, the original pea may be dropped behind the table or hidden in some other way.

Was OLG playing the shell game with the host cities? Their original hosting fee statement did indeed discuss revenue from slots but not from gaming tables (such as poker, blackjack, craps or roulette). When I originally wrote “OLG Proposal and Links to Toronto Casino Consultation“, I remember thinking that OLG likely hadn’t mentioned gaming tables because they were not included at the racetracks where slots were installed.

Now I wonder whether the plan all along had been to pay Toronto, and other cities with casinos, only from slot machine revenues and not from gaming tables.

Suppose the estimated $1.4 billion in gaming revenues in the Toronto casino had included the gaming tables. If we change the final $900 million in revenue from earning a 0.5% hosting fee to 4%, that’s a net gain of 3.5%. Well, 3.5% of $900 million is $31,500,000. That just about makes up the difference from the original $20M to the new $50M.

But for all we know, OLG never planned to include gaming table revenue in the base for the hosting fee. At 4%, that would mean that OLG expected revenue of $30M/0.04= $750,000,000 from table gaming. That’s $750 million over the estimated $1.4 billion spent in a Toronto casino, that had never been included in the Ernst and Young study.

In the latter case, Toronto’s overall hosting fee would have been $20M/2.15B = 0.9%, or less than 1% of revenue; rather than $20M/1.4B = 1.4%. Let’s remember that the OLG had estimated that racetracks earned about 4% of slots revenues before last year’s modernization formula.

Conclusions about OLG Casino Fees

Unfortunately, my first conclusion is that there are more questions than answers. It’s impossible to write a favourable business case study about the Ontario Lottery Corporation’s proposed Toronto casino while these remain unresolved.

Did Ernst and Young ever ask OLG what they included as “revenue” in the hosting fee formula?

Did the OLG plan to avoid paying anything to any host city for gaming table revenue at a casino? Has that been the case in the past? Perhaps Windsor and Niagara Falls city councils should inquire.

Did the OLG truly believe it was applying the same formula to each host city for casino and gambling revenues, even after offering Toronto far more than the published formula could afford? If so, was that a failure of mathematics, or a failure to disclose the full nature of the formula?

My second conclusion remains what it was months ago. Then, it was based on the inconsistencies of host fee calculations and the shabby treatment of Ontario racetracks, who had been partners with OLG for many profitable years. Now it’s based on clearer evidence of a lack of complete disclosure. This second conclusion is that no city should trust OLG as a partner for a casino.

Perhaps OLG might not be playing the shell game with casinos in Ontario cities; but they make it hard to follow the hosting formula “pea” as OLG promises to “shell” out fees.

Other References

• “New OLG Hosting Fee Formula“, on the OLG site, on May 17, 2013.
• “OLG announced a new funding formula Friday for host municipalities“, by 680 News staff on May 17, 2013.

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Thank you for reading about how OLG revised their casino hosting fees in May 2013.

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