COMMONWEALTH OF PENNSYLVANIA HOUSE OF REPRESENTATIVES

GAMING OVERSIGHT COMMITTEE PUBLIC HEARING

STATE CAPITOL HARRISBURG, PA

MAIN CAPITOL BUILDING ROOM 60 EAST WING

TUESDAY, MARCH 22, 2016 9:02 A.M.

PRESENTATION ON H.B. 1393 (WARNER)H.B. 1397 (NESBIT)

BEFORE:HONORABLE JOHN PAYNE, MAJORITY CHAIRMANHONORABLE RUSS DIAMONDHONORABLE GEORGE DUNBARHONORABLE SUE HELMHONORABLE KATE ANNE KLUNKHONORABLE RYAN MACKENZIEHONORABLE TEDD NESBITHONORABLE JASON ORTITAYHONORABLE DAVID PARKERHONORABLE JAMIE SANTORAHONORABLE RYAN WARNERHONORABLE NICK KOTIK, DEMOCRATIC CHAIRMANHONORABLE TINA DAVISHONORABLE MARTY FLYNNHONORABLE SID KAVULICHHONORABLE WILLIAM KORTZ, IIHONORABLE ED NEILSON

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Pennsylvania House of Representatives Commonwealth of Pennsylvania

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COMMITTEE STAFF PRESENT:JOSIAH SHELLY

MAJORITY EXECUTIVE DIRECTOR SHAWNE LEMASTER

MAJORITY LEGISLATIVE ADMINISTRATIVE ASSISTANT

CHARLES MILLERDEMOCRATIC EXECUTIVE DIRECTOR

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I N D E X

TESTIFIERS ~k k k

NAME PAGE

REPRESENTATIVE RYAN WARNERPRIME SPONSOR OF H.B. 1393.......................... 5

REPRESENTATIVE TEDD NESBITPRIME SPONSOR OF H.B. 1397 .......................... 5

ADRIAN R. KING, JR.GENERAL COUNSEL,PENN NATIONAL GAMING................................ 6

R. DOUGLAS SHERMAN CHIEF COUNSEL,PENNSYLVANIA GAMING CONTROL BOARD..................17

KEVIN O'TOOLEEXECUTIVE DIRECTOR,PENNSYLVANIA GAMING CONTROL BOARD..................31

SUBMITTED WRITTEN TESTIMONY ~k ~k ~k

(See submitted written testimony and handouts online.)

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P R O C E E D I N G S ~k ~k ~k

MAJORITY CHAIRMAN PAYNE: We’ll stand for Pledge

of Allegiance.

(The Pledge of Allegiance was recited.)

MAJORITY CHAIRMAN PAYNE: Can I have a roll call,

please?

(Roll was taken.)

MAJORITY CHAIRMAN PAYNE: Okay. I thank the

Members for their attendance today. This is a public

hearing only, we’re no votes, but informational hearing.

As I committed to the entire group earlier that we’ll have

Members, Republican or Democrat, who have bills before the

Committee, we’ll at least go through hearing process and

see if we can iron any of the difficulties out, see if

those bills are ready for prime time.

Chairman Kotik?

DEMOCRATIC CHAIRMAN KOTIK: Ready to go.

MAJORITY CHAIRMAN PAYNE: We’re ready to go. And

with that, we’ll start with Representative Warner, prime

sponsor of House Bill 1393.

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REPRESENTATIVE WARNER: Thank you, Mr. Chairman.

House Bill 1393 amends Title 4 of Amusements to

eliminate provisions prohibiting a slot machine licensee

from owning more than 33.3 percent of another slot machine

license. Instead of a 33.3 percent limitation, the bill

requires the Board the regulation to establish criteria to

determine whether the issuance of a slot machine license

would create undue economic concentration.

Undue economic concentration means that slot

machine licensees would have such actual or potential

domination of the gaming market in PA as to substantially

impede or suppress competition among slot machine licensees

or adversely impact the economic stability of the gaming

industry. The bill is modeled after current New Jersey

law.

MAJORITY CHAIRMAN PAYNE: Thank you.

Brief comments on the next piece of legislation

this morning, Representative Nesbit on House Bill 1397.

REPRESENTATIVE NESBIT: Thank you, Mr. Chairman.

House Bill 1397 would change the way that some of

the providers for nongaming goods and services would be

monitored. Instead of being registered or certified with

the Gaming Control Board, they would rather just have to

give a notification. And the idea behind that would be

that it would encourage some of the small vendors that

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don't want to go through the cumbersome process of

registration to do so.

I think it would be important that any company

that the Gaming Control Board decides should not be in the

casino could still be banned. And it would only apply to

companies that are not going to be in the actual gaming

arena. And the thought was so that we could get some more

small businesses into the casinos and to do some work

without the cumbersome process.

MAJORITY CHAIRMAN PAYNE: Thank you.

And let the record show Representative Diamond

has joined us.

And before I turn it over to the next presenter,

both those bills were at least in my mind a direct result

of the hearings we had last year where we've got that

feedback from customers that, you know, what could we do to

make life easier and business model more efficient, and

both those topics were brought up.

Representative Klunk has now joined us.

And with that, we'll turn it over to our first

presenter, Adrian King, General Counsel, Penn National

Gaming. Thank you, Mr. King.

MR. KING: Thank you, Chairman.

Chairman Payne, Chairman Kotik, Members of the

Committee, good morning. My name is Adrian King. I’m a

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partner at the Philadelphia law firm of Ballard Spahr LLP.

I serve as outside counsel to Penn National and have been

asked to appear before you today on the company’s behalf.

Before I address the specific issue at hand,

which is the possible elimination of the existing

prohibition on the ownership of multiple slot machine

licenses, I’d like to briefly offer some information about

Penn National which demonstrates both its commitment to

Pennsylvania and its unique ability to offer relevant

testimony today.

Penn National is a proud Pennsylvania company

that went public in 1994 on the strength of the nearby Penn

National Race Course in Grantville and its off-track

wagering facilities alone. And today, the company has

grown to become the Nation’s largest publicly traded

regional gaming operator with 27 facilities in 17

jurisdictions across North America, and that includes 16

States and one Canadian province.

Importantly, despite its growth, Penn National

has never forgotten its roots and remains headquartered

here in Pennsylvania an hour east of Harrisburg in the

Borough of Wyomissing in Berks County.

Between Hollywood Casino at Penn National Race

Course and the company’s corporate headquarters in

Wyomissing, Penn National has over 1,400 Pennsylvania-based

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employees, representing over $83 million annually in

payroll. Last year, Penn National contributed nearly $3

million to local community and charitable organizations.

And, since 2008, Penn National has generated approximately

$2 billion in gaming revenue for the Commonwealth and over

$1 billion in gaming taxes.

Finally, Penn National continues to be a strong

supporter of the State’s horseracing industry. Each year,

Hollywood Casino at Penn National Race Course proudly hosts

the Grade 3, $500,000 Penn Mile race for three-year-old

thoroughbreds. At last edition of this event in 2015, the

race card set a combined record handle of nearly $4

million.

I mentioned earlier that Penn National maintains

a unique ability to offer relevant testimony at today’s

hearing, and I base that statement on two factors that

shape and inform the company’s perspective. First, Penn

National has extensive experience operating multiple

properties in the same State. And specifically, the

company has three properties in Illinois, three in

Mississippi, two in Missouri, two in Nevada, and four in

Ohio. In none of these jurisdictions has Penn National

been found to possess monopoly power or other undue

economic influence.

Second, we are the only company to have been

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impacted by the Commonwealth’s current multiple slot

machine license prohibition, as contained in Section 1330

of the Gaming Act. For those of you in office when the

Gaming Act was passed in 2004, almost 12 years ago, you

will recall that passage of Section 1330 ultimately led to

Penn National divesting itself of the second racetrack that

it then owned, Pocono Downs, which is now Mohegan Sun

Pocono.

Now, getting into the current status of the law,

the ownership of multiple slot machine licenses in the

Commonwealth is presently governed by Section 1102(5) of

the Gaming Act in the Legislative Intents section; Section

1330 of the Gaming Act, which is the explicit 1 and 1/3

limitation; and Section 421a.5 of the Rules and Regulations

promulgated by the Pennsylvania Gaming Control Board.

Section 1102(5) of the Gaming Act contained

within the Legislative Intent provision states "The

authorization of limited gaming is intended to provide

broad economic opportunities to the citizens of the

Commonwealth and shall be implemented in such a manner as

to prevent possible monopolization by establishing

reasonable restrictions on the control of multiple licensed

gaming facilities in this Commonwealth."

Section 1330 of the Gaming Act contains the

express prohibition against the full ownership of multiple

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slot machine licenses. And the operative part of Section

1330 states, "No slot machine licensee, its affiliate,

intermediary, subsidiary, or holding company may possess an

ownership or financial interest that is greater than 33.3

percent of another slot machine licensee or person eligible

to apply for a Category I license, its affiliate,

intermediary, subsidiary, or holding company."

Finally, Section 421a.5 of the PGCB Rules and

Regulations, which is entitled "Undue Concentration of

Economic Opportunities and Control," effectively serves as

the PGCB’s failsafe with respect to preventing undue

economic concentration. Working in conjunction with the

multiple license ownership limitation contained in the

Gaming Act, Section 421a.5 provides the Gaming Control

Board with a framework to utilize when working to ensure

that no slots licensee maintains monopoly power. And

that’s generally now being exercised in connection with

sales of licenses, transfers of ownership, et cetera.

Notably, the provisions of Section 421a.5 are similar in

many respects to those contained in the proposed

legislation, House Bill 1393.

Now, let’s talk about legislative intent with

respect to Section 1330 of the Gaming Act. As set forth in

Section 1102 of the Gaming Act, some of the key objectives

of the General Assembly in 2004 when it voted to authorize

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gaming in the Commonwealth included providing "broad

economic opportunities" to Pennsylvania’s citizens,

enhancing the tourism market, and stimulating economic

development in all corners of State.

Section 1330 of the act arguably assisted in

achieving these goals since limiting the ownership of

multiple slots licenses demonstrably resulted in several of

the largest gaming companies in the country submitting

applications to secure a Pennsylvania slots license. And

in fact, currently, three of the top five gaming companies

in the United States ranked by 2014 revenue currently

operate facilities in the Commonwealth -- Las Vegas Sands,

Caesar’s Entertainment, and Penn National.

And several regional and local casino operators

have also invested in our State. Cannery Casino Resorts

has The Meadows; Eldorado Resorts, Presque Isle; Isle of

Capri is at Nemacolin; Mohegan Sun, up at Pocono; Parx and

Rush Street Gaming has its investments in SugarHouse and

Rivers.

That being said, with the economic development

objectives of the 2004 General Assembly having been

achieved, and Pennsylvania’s gaming industry now mature and

entering its 10th year, it is now time for the current

version of Section 1330 to be repealed and replaced with a

structure that allows the Gaming Control Board the ability

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to more effectively regulate and respond to both intrastate

and interstate competitive forces, and thereby facilitate

the success of Pennsylvania’s gaming industry for years to

come.

Penn National supports the repeal of 1330 of the

Gaming Act and the enactment of legislation such as House

Bill 1393, which would replace the existing rigid approach

to the ownership of multiple slot licenses with a more

flexible model, which recognizes that a significant amount

of industry consolidation has occurred since 2004 and will

continue. And the PGCB should be allowed the discretion to

determine if an operator owning more than one license might

in fact enhance the operational efficiency of the

Commonwealth’s casinos and/or, perhaps more importantly,

allow them to better compete with competitor casinos in

bordering States.

Importantly, if the current Section 1330

restriction were to be eliminated and replaced with the

language proposed in House Bill 1393, we note that the

Gaming Control Board would most certainly enhance its

ability to both maintain market competitiveness and enforce

an "undue economic concentration" rule pursuant to the new

statutory language.

And finally, we note that if Pennsylvania were to

adopt this more flexible model, it would merely be adopting

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a regulatory best practice that is already in effect in

leading gaming jurisdictions across the country, including

Nevada, New Jersey, Illinois, and Missouri. In fact, you

heard from the Representative who’s sponsoring the bill

that this bill is based on the New Jersey law.

On behalf of Penn National, I thank you for the

opportunity to testify today. And either now or later in

the hearing, I’d be happy to address any questions that you

may have.

MAJORITY CHAIRMAN PAYNE: Thank you.

Mr. King, are you prepared -- I don’t see any

written testimony on the other House Bill 1397 on your

position for or opposed. Or can you provide us some

written testimony in the future?

MR. KING: I can provide you with something in

the future. I apologize that I’m not prepared today to

address that point.

MAJORITY CHAIRMAN PAYNE: That’s all right, only

because we’re doing a hearing on both of them.

MR. KING: I understand.

MAJORITY CHAIRMAN PAYNE: And if you could

provide that in the future to the Chairs, I’d appreciate

it.

MR. KING: Happy to do so.

MAJORITY CHAIRMAN PAYNE: Thank you very much.

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Questions?

REPRESENTATIVE PARKER: Yes, Mr. Chairman.

MAJORITY CHAIRMAN PAYNE: Representative Parker.

REPRESENTATIVE PARKER: Good morning.

MR. KING: Good morning, sir.

REPRESENTATIVE PARKER: Thanks for your

testimony.

I notice you have casinos in Ohio, and I was

wondering what their laws are regarding this.

MR. KING: Actually, Ohio is a little unique in

it has -- I believe it has a hard cap of two and two, but

it has allowed us to have two racetrack racinos and then

two separate casinos, four in total.

REPRESENTATIVE PARKER: Okay. And that’s

preferable to what we have here in Pennsylvania?

MR. KING: No.

REPRESENTATIVE PARKER: Okay.

MR. KING: I think we prefer the model that is

set forth in 1393, which is -­

REPRESENTATIVE PARKER: Right.

MR. KING: -- instead of having hard numbers, it

really allows the Gaming Control Board to look at market

forces, market conditions, and look at it from that

perspective. But clearly, we’re never going to be Las

Vegas, but, you know, you have three major operators. I

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mean, certain operators have eight, nine, ten casinos right

on the strip. Again, we’re not suggesting that. That

would be arguably -- perhaps somebody would argue undue

economic concentration. But we think that hard caps are

not necessary. Rather, let’s let market forces dictate and

then let’s let the regulator make the determination as to

whether there’s undue economic influence, monopoly power,

et cetera.

REPRESENTATIVE PARKER: Okay. Thank you.

MR. KING: Yes.

MAJORITY CHAIRMAN PAYNE: Thank you.

Representative Neilson?

REPRESENTATIVE NEILSON: Thank you, Mr. Chairman.

Thank you, Mr. King, for your testimony here

today.

With the passage of this legislation, it allows

other casinos to go in and buy licenses, correct?

MR. KING: Sure. Yes. Yes.

REPRESENTATIVE NEILSON: Do you know of any

interested parties within the Commonwealth that are looking

to sell their license?

MR. KING: I can’t sit here today and tell you

that there’s anyone who is looking to sell their license.

I don’t know of that as I sit here today, no.

REPRESENTATIVE NEILSON: With your expertise, if

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there’s a sale of a particular license, does the

Commonwealth get any fees for that like we would if it’s a

new license? I mean, new licenses we can put out for bid

and, you know, might be able to capture, 50, 60, 70, 100

million. What happens here? You just buy it and you got

two now?

MR. KING: I believe that under the act there is

a transfer fee, which I know that Mr. Sherman can give us

the exact number, which is -- oh, that’s right -- $2.5

million.

REPRESENTATIVE NEILSON: Two point five million?

MR. KING: Yes.

REPRESENTATIVE NEILSON: Thank you. Thank you

very much for your testimony, Mr. King. It’s good to see

you.

MR. KING: Good to see you. Thank you.

REPRESENTATIVE NEILSON: Nothing further,

Mr. Chairman.

MAJORITY CHAIRMAN PAYNE: Thank you,

Representative.

Seeing no other testimony, we’ll move on to our

next presenter.

MR. KING: Great. Thank you.

MAJORITY CHAIRMAN PAYNE: Mr. O ’Toole and

Mr. Sherman from the Gaming Control Board, thank you for

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your attendance today, and we look forward to your

comments.

MR. O ’TOOLE: Good morning, Chairman Payne,

Chairman Kotik, Members of the House Gaming Oversight

Committee. I’m Kevin O ’Toole, Executive Director of the

Pennsylvania Gaming Control Board, and with me this morning

is Doug Sherman, our Chief Counsel. We’re pleased to

testify on these two proposed bills. And I will have Chief

Counsel Sherman give his presentation first since it

relates to the previous testimony.

MAJORITY CHAIRMAN PAYNE: Okay.

MR. SHERMAN: Yes, good morning, Chairman Payne,

Chairman Kotik, Members of this committee. I’m Doug

Sherman, the Chief Counsel of the Pennsylvania Gaming

Control Board.

We’re pleased to be with you today to discuss

House Bill 1393, which would delete Section 1330 of the

Pennsylvania Race Horse Development and Gaming Act, often

referred to as the 1 and 1/3 ownership rule, and replace it

with Section 1330.1, which removes that strict percentage

ownership limitation on casinos and grants greater

discretion to the Board when considering changes of

ownership of our casino licensees.

I’m going to deviate a little bit from my

prepared testimony so that we’re not too repetitive from

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the prior presentation.

MAJORITY CHAIRMAN PAYNE: Nobody on the Committee

objects to CliffsNotes instead of reading what's in front

of us, thanks.

MR. SHERMAN: I didn't think you would.

The multiple license prohibition of 1330 clearly

sought to implement the legislative intent expressed in

1102(5) of the Gaming Act, which was to provide broad

economic opportunities, to implement gaming in a manner

which prevented possible monopolization, and establishing

reasonable restrictions on the control of multiple

licenses.

In December of 2006 when the Board granted 11

Category 1 and Category 2 licenses, the objective of

achieving dispersion in ownership was largely achieved. No

person or business owned more than 1 and 1/3 interest in

multiple casinos, and the broad economic opportunities

obtained through ownership of a casino were implemented in

a manner which prevents monopolization.

The question now that this Committee is

considering is whether House Bill 1393 -- or the question

which is embodied in 1393 is whether the ownership

limitation provided for in 1330 is still required to

achieve the stated purpose of the Gaming Act. And to that

question we want to make it very clear that relaxing or

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eliminating the 1 and 1/3 ownership limitation will not in

any way impact the Board’s regulatory authority or

oversight of the casinos and will not undermine the

public’s protection, nor create challenges to maintaining

the integrity of gaming.

We stress that the Board’s regulations and the

Gaming Act’s provision provide that every casino owner and

operator has the duty and the burden to prove and maintain

financial, operational, and character suitability

regardless of whether the ownership has one casino or

multiple casinos. And as such, relaxing or removing this

strict 1 and 1/3 limitation will not have any impact on the

Board’s oversight of gambling in Pennsylvania.

With that recognition, I’ll turn to the reasons

why a shift away from the strict rule may be good for the

health of Pennsylvania’s casino industry. The 1 and 1/3

ownership that Pennsylvania has is relatively unique.

Maryland, New York, New Jersey, Ohio -- our bordering

competition -- do not have similar restrictions. On a

broader scale, the vast majority of gaming jurisdiction

simply allow the market to dictate which operator has the

capital, experience, and ability to deliver the best casino

projects for a particular location.

As we know, the mid-Atlantic gaming market has

become extremely competitive with every Pennsylvania border

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abutting another State with gambling products. In order to

compete and provide the employment and tax benefits to the

Commonwealth, our casinos need to be operationally

efficient and must be able to have an environment to retain

and grow their business. The Board itself does not and

should not be making business decisions for the casinos.

That’s their business. We regulate them within the

parameters given to us.

It may be that permitting multiple ownership of

slot machine licenses would create greater efficiencies for

some of Pennsylvania’s casinos, and that would really

manifest itself in purchasing of goods and professional

services. It could facilitate greater cross-marketing and

player development. And it, I think importantly, could

open up capital markets and sources of income to strengthen

the industry through reinvestment in Pennsylvania. These

are all items which we see on a larger macro scale in

talking to the casinos. The individual casinos could

probably be much better suited to tell you how it could

benefit their operation.

But eliminating the bright line 1 and 1/3 rule

and replacing it with 1330.1, which provides that no slot

machine licensee can have an interest in another casino,

which would result in an undue economic concentration in

the Commonwealth, provides the Board with greater

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flexibility to consider changes of ownership and control of

casinos.

House Bill 1393 borrows, as Mr. King had stated,

from the current Board regulation 421a.5 pertaining to

undue concentration of economic opportunities in control of

slot machine licenses and establishes a number of factors,

which the Board would examine in approving any change of

control.

The language provides the Board with discretion

to deny a slot machine license or change of control if an

issue of monopolization arises, thereby affirming the

mandate of the Gaming Act to provide broad economic

opportunities. It also permits the Board to approve a

change of ownership and allow one licensee to own more than

1/3 interest in another license if it would not create an

undue concentration of ownership and undermine the goals of

the Gaming Act.

From the Board’s perspective, the more tools the

Board as the regulator has, the better it can protect the

Commonwealth’s substantial interest in this industry.

Section 1330.1 provides such a tool and permits the Board

to approve changes of ownership and still stay true to the

goal of avoiding monopolization of ownership when we’re

looking at the strength of the casino industry as a whole.

In closing, the Board supports the amendment

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relating to multiple ownership for the reason that it

provides the Board greater flexibility in dealing with the

industry without impinging upon the Board’s ability to

effectively and efficiently regulate gaming.

If there are any questions, we’d be more than

happy to answer them now or at the conclusion of Kevin’s

testimony. Thank you.

MAJORITY CHAIRMAN PAYNE: Thank you, Chief

Counsel Sherman.

I’m going to let the Committee ask questions now

because we have a lot of various events this morning, and

so if somebody has a question, we’ll do it individually and

then we’ll let Kevin proceed.

MR. SHERMAN: Okay.

MAJORITY CHAIRMAN PAYNE: Just before I start

down the line because we have a couple people ready, being

right up front, I was totally supportive of trying to take

that 1/3, 1/3, 1/3 provision out because from my days at

Hershey Chocolate, I tried to envision how we own 1/3 of

the plant, Mars owns 1/3 of the plant, and Nestle owns 1/3

of the plant, and you think we can produce a product when

our two competitors own something within that plant? I

struggled with that idea and how that ever worked from the

beginning until now. But it did work.

I guess the flip side of that is how do we

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prevent a situation like in Atlantic City where somebody

owned three or four of the casinos and there was no enough

competition, and now Atlantic City is in financial

problems. So I think as we go forward I’m on board with

the one idea, but I want to make sure we guard against

having that monopoly that didn’t work like Atlantic City.

Did they not have the flexibility that we’re granting our

Board?

MR. SHERMAN: I’m not sure that Atlantic City

looked at back at the time the licenses were initially

issued, and I think you’re probably referring to, you know,

what is Harrah’s, Caesar’s -­

MAJORITY CHAIRMAN PAYNE: Yes. Yes.

MR. SHERMAN: -- for casinos. All I can say is

that when you look at our regulation, what the factors are

that our Board looks at in determining whether there’s an

undue concentration or monopolistic principles and those

same factors are carried over into this bill, you know, the

Board has to examine issues of the percentages of slot

machines, of overall business. We would look at geographic

areas to make sure that the transfer of a license to

another entity would not have a substantial impact on the

competition of our other licenses in the area. I think

it’s very well designed and set forth in our regulation as

the Board applies it.

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What the bill would allow would basically be to

allow a good operator that would provide strength to

Pennsylvania, maybe to come in and invest in a casino and

build our industry rather than maybe forcing a good

operator to sit on the sidelines, you know, and maybe not

get the return for our investment that we’d like.

MAJORITY CHAIRMAN PAYNE: I appreciate that

answer.

Representative Diamond?

REPRESENTATIVE DIAMOND: Thank you, Mr. Chairman.

Thank you, sir, for your testimony.

As I’m examining this situation, I mean, 12 years

ago I think the General Assembly was extremely careful and

hesitant to just go full-blown. They were very careful.

And I think the reports we’ve heard back from the industry

on the operations by the Gaming Control Board have been

fantastic.

So just to put this in simpler terms that a lot

of folks at home or, you know, are watching this hearing

might understand, would you -- and it occurs to me that

this is the equivalent of operating in a corporate world

where you’re taking -- you’re allowing -- the stockholders

would be giving some authority to the CEO, the COO, the CFO

to make day-to-day decisions rather than having to go back

to the stockholders to make those decisions in order to be

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able to respond to market forces. I mean, we all know how

long it takes something to get done here in the General

Assembly. And even if it’s something simple, it takes a

long time to get done.

So is it your opinion that what we’re doing with

this bill is simply giving more flexibility to those

managers, the Gaming Control Board, so that we don’t have

to come back to the stockholders or the General Assembly in

order to be able to continue to be competitive in the

market? Is that your opinion?

MR. SHERMAN: It absolutely gives a great deal of

flexibility to the Board to determine in any given

situation that comes up whether or not to transfer a

license.

I guess probably the basic example would be if a

Philadelphia-area operator was very well heeled

financially, they had the resources and there was a casino

on the western part of the State who was shopping for a

buyer, we may be able to say this would be a great deal,

they have the resources to invest in Pennsylvania, they can

do some good things. They’re on opposite corners of the

State. So, you know, it might not make sense to limit them

to only buy 1/3 and have that situation where you have

multiple ownership. It allows a good operator to invest in

Pennsylvania and build our industry rather than putting

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artificial constraints on it.

REPRESENTATIVE DIAMOND: Okay. Thank you. Thank

you, Mr. Chairman.

MAJORITY CHAIRMAN PAYNE: Thank you. Other

questions?

Representative Neilson?

REPRESENTATIVE NEILSON: Thank you, Mr. Chairman.

Thank you for your testimony today. You brought

something up, you just said it, about shopping for another

buyer. Are you aware or the Board aware of any operators

that may be shopping for a buyer at this time?

MR. SHERMAN: We have in the past obviously had

operators who have looked for buyers. There have been

several changes of ownership over the years with our

licensees. Notably, when we had Rush Street Gaming, I take

out Majestic Star in Pittsburg that was the Don Barden

project. There was a change of control there. We've had

contemplated changes of control years ago with The Meadows.

That was a deal that ended up falling through, but it got

partway there. We've had it with Presque Isle where that's

been -­

REPRESENTATIVE NEILSON: So this has been common

among the industry to trade off and just buy, sell, buy,

sell?

MR. SHERMAN: It's --

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REPRESENTATIVE NEILSON: I mean, it sounds like

it’s pretty -­

MR. SHERMAN: It’s the nature of business. You

build something up. Where you can get a premium, you look

to sell. There was a time it was reported in the press

that Sands was shopping the property, ultimately ended up

deciding, no, it was profitable; they wanted to keep it.

But it’s not uncommon, and I’m sure that over the years we

will see it more.

REPRESENTATIVE NEILSON: Have all our licensees

lived up to their commitment to the Commonwealth such as

like any of them operating out of temporary shelters or

anything like that?

MR. SHERMAN: No, they are all in fully built-out

casinos. Clearly, you know, some have invested more than

others. It’s the nature of the business and the markets

that they operate in. But I think overall all of our

operators have fulfilled all of our expectations.

REPRESENTATIVE NEILSON: Thank you. I have no

further questions.

MR. SHERMAN: Great.

REPRESENTATIVE NEILSON: Thank you, Mr. Chairman.

MAJORITY CHAIRMAN PAYNE: Thank you.

Representative Klunk?

REPRESENTATIVE KLUNK: Thank you, Mr. Chairman.

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And thank you for joining us today.

I have two questions. First is will changing

this regulatory structure for you to give you more

flexibility, will that allow licenses that are currently

not being used to come to market quicker so that the

Commonwealth can actually realize that money faster?

MR. SHERMAN: Well, right now, the last Category

2 license has been -- we have the decision to grant it to

the Stadium Casino group. And that’s still on appeal to

the Supreme Court. That one isn’t in play in terms of

being available to somebody else. The last Category 1

license, which is currently the Endeka group that has

applied for the license, is still on the background.

Theoretically, if that became available again wherein -­

again, that’s tied to a harness racing license, so if the

Harness Racing Commission would issue that license to a

company that already owned a casino, then the change could

allow that to occur.

REPRESENTATIVE KLUNK: Okay. Thank you.

And then my other follow-up question is I pulled

up the regulations that you were referring to, and I know

we’re changing the standard definition here in

Representative Warner’s bill. How will that impact the

regulatory structure that I’ve just been taking a look at

on your website? And will that require you to bring on

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more staff to take a little bit of a different look at how

the Board makes its decision? Are you going to be bringing

in outside consulting groups to take a different look at

this, in-house economists? How is this all going to play

out?

MR. SHERMAN: I don’t know that there’s really

anything substantially different in 1330.1 in terms of the

factors to determine undue economic concentration from what

we have in our regulation now.

REPRESENTATIVE KLUNK: Okay.

MR. SHERMAN: Wording may be slightly different,

but the substance is the same. We have our Financial

Investigation Unit, which would look at these factors.

Ultimately, you know, the burden is on the applicant to

prove to the Board’s satisfaction that there would not be

an undue concentration. Business being business and the

competitive nature of it, I would also presume that we

would have any other casinos that may oppose a change in

control may seek to intervene to show that there would be

some adverse effect on competition. So I don’t think we

have any concern that the Board would not be fully informed

from a variety of sources on this issue.

REPRESENTATIVE KLUNK: Okay. Thank you,

Mr. Chairman.

MAJORITY CHAIRMAN PAYNE: Thank you.

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Representative Davis has joined us.

And with that, no other questions -­

REPRESENTATIVE NEILSON: Mr. Chairman, if I could

follow-up -­

MAJORITY CHAIRMAN PAYNE: Yes.

REPRESENTATIVE NEILSON: I know you answered —

I’m sorry.

MAJORITY CHAIRMAN PAYNE: Would you like me to

recognize you?

REPRESENTATIVE NEILSON: Yes, please, sir.

MAJORITY CHAIRMAN PAYNE: Go ahead,

Representative Neilson.

REPRESENTATIVE NEILSON: I know you helped

Mr. King -­

MR. SHERMAN: Yes.

REPRESENTATIVE NEILSON: — with the $2.5 million

transfer fee.

MR. SHERMAN: Correct.

REPRESENTATIVE NEILSON: Do you feel that fee

sufficient enough or high enough or should it be more? I

mean, we’re looking at this may impact a lot. Do you think

that should be like $10 million or -­

MR. SHERMAN: If I can address the background of

how the $2.5 million -­

REPRESENTATIVE NEILSON: Just, you know, we don’t

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need the background. Just -­

MR. SHERMAN: The act provides that the Board may

reduce but not eliminate the license fee upon a change of

control in ownership. Generally, when one casino sells to

another, they factor into the purchase price that initial

$50 million fee.

The Board had looked at that, and this goes back

probably into the 2007 time frame, and decided that $2.5

million fee would be appropriate. That fee could increase,

it could decrease, but that’s a matter which the Board

looks at all of the factors, generally spend $2.5 million.

REPRESENTATIVE NEILSON: So the Board has the

ability to set that fee?

MR. SHERMAN: Yes.

REPRESENTATIVE NEILSON: It’s not set

legislatively?

MR. SHERMAN: Correct.

REPRESENTATIVE NEILSON: Thank you.

Thank you, Mr. Chairman.

MAJORITY CHAIRMAN PAYNE: No problem.

With that, we’ll move on to Executive Director

Mr. O ’Toole. And we thank Mr. Sherman for his comments.

MR. O ’TOOLE: Thank you. I’m here to discuss

Representative Nesbit’s bill, House Bill 1397. That bill

proposes to change the Gaming Control Board’s licensing

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classification system for companies that do business with

casinos. It would change the current definition of gaming

service provider, and it would narrow that definition. And

then it would establish a new designation for nongaming

service providers. The difference between those two

definitions relates to whether or not a company has

employees that would need to access the gaming floor or

restricted areas within the casino.

Now, in the Gaming Control Board’s current

licensing system for vendors, we considered two factors.

We consider the amount of business generated by that

company or expected to be generated by that company, along

with the location, do they have employees that traverse the

gaming floor or work on the gaming floor in a restricted

area.

So this change would take away that dollar

threshold criteria for nongaming service providers, which

would be anyone who is not a table game manufacturer, not a

slot machine manufacturer, not a supplier.

The effect of that would be that under the new

provision of 1317.3 the nongaming service provider would

not be subject to a background investigation or a

suitability determination by the Board. And it would be a

notification system, and that would apply regardless of how

much business is transacted by the nongaming service

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provider.

If you compare and contrast 1393 with 1397, what

I'm here to advocate today is that 1397 should retain a

sufficient amount of discretion for the Gaming Control

Board to exercise in determining who should be vetted and

who should have a determination of suitability.

Currently, it is important for small business to

have access to the casinos. We encourage that. We started

out in 2006 or '05 when the Gaming Control Board was

created, and we established a very low threshold for an

application. It was anything over $2,500 in business you'd

need to file an application.

In June of 2009 there were significant

modifications to our regulation, and that increased these

thresholds. So I do want the Committee to understand that

if a company does any business in $15,000 or less in a 12-

month period, there's no vetting, there's no application,

there's no fees. That company doesn't have to do anything

to engage in that business with the casino. And the casino

doesn't have to fill out a notification form.

And then secondly, for companies that are bigger

than that, if they service a casino with sales of $15,000

up to $100,000, again, there is no vetting, there's no fees

involved, and the casino, not the vendor, submits a

notification form. So we do have a component of a

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notification system presently; 1397 would expand that. And

a lot of companies would be put into the notification

criteria, and that gaming service provider criteria would

probably be much smaller than it currently is.

The Board also, through its regulatory oversight,

has waivers that they exercise broad discretion in creating

waivers. And that’s generally publicly traded companies

who are largely regulated by the Securities and Exchange

Commission but also includes governmental bodies such as

public utilities, as well as insurance companies, employee

benefit plans, providers of professional services,

including accountants, attorneys, engineers, and

architects, banks, and educational institutions. So

there’s a lot of flexibility in there to provide waivers to

those entities.

What I believe 1397 needs to be improved upon is

when it comes to certain companies that do not have any

need to be on a casino floor, to be in a restricted area,

but they have direct contact with gaming patrons, either

direct or indirect contact with gaming patrons. They would

fall in this nongaming category, but I believe that there

should be sufficient discretion to have the Board require

some degree of background investigation for those entities.

For instance, casinos retain and have contracts

with cash services companies. These companies provide

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check cashing and credit card cash advances for gaming

patrons, but it’s located off the gaming floor. Those

companies are currently either registered or certified

depending on the amount of business that they do with a

casino, and that should continue.

Also, contracted security services, some casinos

retain third-party security companies who provide security

to parking lots and garages where gaming patrons park to

patronize the casino. Contracted valet services,

individuals who park cars, they’re not on the casino or

restricted areas. Direct mail marketing services, we would

want to continue to vet them. They’re contracted third

parties that send promotional solicitation to rated

players. Sometimes, there are screw-ups in that and self­

excluded individuals get those promotional mailings.

And also bus companies, we believe it’s important

to vet bus companies. There have been accidents involving

casino buses, and it’s been determined that they either did

not have the appropriate safety certifications or they had

expired or they had failed safety inspections. We make

sure that all bus companies that service the casinos in

Pennsylvania comply with the Federal Motor Carrier Safety

Administration requirements. I believe, and I can speak

for myself, that that needs to continue.

So the Gaming Control Board does strive to

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improve its processes regarding the licensing of vendors,

including identifying companies that need not be licensed

in any category. I would recommend that, as 1397 moves

forward, the Committee specifically recognize in the

legislation the need for continued Board discretion to call

forward or require certain companies for vetting and

suitability determination based not just on whether they

have employees who need to be in the casino or in

restricted areas but also based upon the monetary value of

business transacted, the nature of that company, and its

relationship with the gaming public, or for any good cause.

It’s never been the intent of the Board to impede the

ability of business. Rather, it’s our goal and mission to

protect the public and to ensure the integrity of gaming

through our licensing system.

Thank you very much, and if there’s any

questions, I’d be glad to answer them.

MAJORITY CHAIRMAN PAYNE: Thank you very much.

Questions? Representative Neilson?

REPRESENTATIVE NEILSON: Thank you, Mr. Chairman.

How did you know?

MAJORITY CHAIRMAN PAYNE: A hint.

REPRESENTATIVE NEILSON: What kind of industry —

I mean, do you think the current law the way it’s written,

who’s being stopped from doing business with the casinos?

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Is there anybody that’s being prevented? Because I see the

threshold is in there now.

MR. O ’TOOLE: Nobody is being prevented, but in

the course of a background investigation, there may be

certain individuals with fairly current felony convictions,

and they will receive notification of an intent to deny

their individual application. And a company that wants to

continue to business with the casino may put that person

either in a unit that doesn’t deal with the casino or move

on, you know, without that employee.

REPRESENTATIVE NEILSON: They’d work in another

area of that company. I mean, they just wouldn’t be able

to -­

MR. O ’TOOLE: Correct.

REPRESENTATIVE NEILSON: — make the delivery to

the casino or -­

MR. O ’TOOLE: Correct. Correct.

REPRESENTATIVE NEILSON: — stuff like that?

MR. O ’TOOLE: Exactly.

REPRESENTATIVE NEILSON: The way it’s written

now, we’re not restricting any business from doing this?

MR. O ’TOOLE: No, sir. No, sir.

REPRESENTATIVE NEILSON: So how does —

MR. O ’TOOLE: We’re not restricted anybody.

REPRESENTATIVE NEILSON: — lifting these

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restrictions here, as this bill will, benefit the State of

Pennsylvania?

MR. O ’TOOLE: Well, this bill will benefit the

State of Pennsylvania in the sense that it will increase -­

MAJORITY CHAIRMAN PAYNE: Hold on a minute. That

may be a question you want to ask the maker of the bill

instead of the Gaming Control Board.

REPRESENTATIVE NEILSON: Well, I’d like to know

their opinion, Mr. Chairman. I understand because our

members want to do this and they have it, but I want -­

MAJORITY CHAIRMAN PAYNE: That’s a fair question.

REPRESENTATIVE NEILSON: I want to be on the

record here.

MAJORITY CHAIRMAN PAYNE: Go ahead. Go ahead

here.

MR. O ’TOOLE: Sure. Representative, we currently

have approximately 5,000 companies that the casino submits

notifications for. And we consider that to be a

substantial number of companies. I think that that figure

would increase. And I don’t have any opposition to

increasing that number.

As I indicated to you, the regulation that

established our current system was promulgated in June of

2009, so we’re at a stage where, yes, I think reevaluating

whether those thresholds are still the right thresholds is

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a good process. And, you know, we’re appreciative of the

Committee of bringing this bill and, you know, causing us

to, you know, think about what improvements could be made.

And we do that.

REPRESENTATIVE NEILSON: And lastly, I want to

make it clear, this does not affect anybody that has access

to the gaming floor. All those people will be vetted

properly, correct?

MR. O ’TOOLE: Yes, and they currently are,

Representative, and that would not change if they have

access to the gaming floor or restricted areas.

REPRESENTATIVE NEILSON: I have nothing further.

Thank you, Mr. Chairman. Thank you for your testimony,

gentlemen.

MAJORITY CHAIRMAN PAYNE: Thank you,

Representative.

Representative Nesbit.

REPRESENTATIVE NESBIT: Yes, thank you,

Mr. Chairman.

Just briefly, the bill was in response to

paraphrasing the previous testimony that a lot of the small

companies weren’t even bothering to apply. Do you think,

based on your testimony today, that they are doing that

perhaps out of not knowing what the current regulations are

or is there misunderstanding as to who it applies to?

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Because the previous testifier had said that some companies

simply aren't going through the process, which is the

intent of the bill to start with.

MR. O'TOOLE: Well, any company that wants to do

business with a single casino or multiple casinos can do

business up to $100,000 in the aggregate over a 12-month

consecutive period. I believe that's a pretty good

threshold amount that would cover bakeries or smaller

companies.

Those smaller companies don't necessarily contact

us and say how do we do business with Casino A, B, or C.

They send their sales representatives to the purchasing

departments of those casinos so the casino is the one that

should instruct those companies if they want to do business

with those companies. You don't have to do anything. I

just need -- the casino fills out that notification form,

name, address, type of goods or services to be provided.

So I guess the bottom line from my perspective is

I don't think there's any small or medium-size companies

that are deterred from doing business with the casino under

the current system, and 1397 would continue that.

REPRESENTATIVE NESBIT: Thank you, Mr. Chair.

MAJORITY CHAIRMAN PAYNE: Thank you. Any other

questions?

Representative Parker.

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REPRESENTATIVE PARKER: Thank you. Thank you,

Mr. Chairman. Thank you.

You kind of touched on my question a little bit.

I was just thinking on the notification example, in my area

we have Mount Airy Resort and Casino, and I have a business

there and we sell a lot of different things. But I’m

thinking of an example if we wanted to sell them a $15,000

mower and we’re bidding against other companies obviously,

how involved is that? I mean, I know the casino has to

fill out something if they buy from us, but if the other

companies are registered, then they don’t have to do

anything. So all things being equal, they would probably

rather not have to fill out paperwork. But how involved is

that process?

MR. O ’TOOLE: Well, I mean, the casinos, if

they’re buying a product at a $15,000 price, a mower, and

they want to competitively bid it, it’s going to be what

you put in your bid.

REPRESENTATIVE PARKER: Right.

MR. O ’TOOLE: And it’s not going to be whether

the casino has to fill out a single form.

REPRESENTATIVE PARKER: Well, I said all things

being equal -­

MR. O ’TOOLE: Yes.

REPRESENTATIVE PARKER: -- so, you know, we both

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had the same price. So if there’s a company that

specifically deals with casinos that sells mowers, they

would have an advantage obviously but -­

MR. O ’TOOLE: Well, no, I think you might have

the advantage there because you will not have to go into

the registration or the certification category if that’s

the only transaction you have with the casino.

REPRESENTATIVE PARKER: Yes. Okay. Yes. Thank

you.

MR. O ’TOOLE: You’re welcome.

MAJORITY CHAIRMAN PAYNE: Thank you. Let the

record show Representative Santora has joined the

Committee.

Any other questions?

I do want to thank Representative Warner and

Nesbit for their legislation. I also want to thank the

presenters Mr. O ’Toole, King, and Sherman for being here

today. Thank you very much.

The Chair really is appreciative of the input

that we get. That’s why we do a hearing prior to trying to

move legislation so we can get that back-and-forth and we

can make legislation better than originally written,

although I know when I first got elected I thought as it

was written it was always perfect. I found out through the

process that it was not perfect and input was important.

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So thanks very much.

With that, today’s hearing is adjourned, and I

appreciate your attendance.

(The hearing concluded at 9:55 a.m.)

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1 I hereby certify that the foregoing proceedings

are a true and accurate transcription produced from audio

on the said proceedings and that this is a correct

transcript of the same.

Christy Snyder

Transcriptionist

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