Economic Impact Analysis of a “Competitive Bid” Scenario for the … · 2019-10-22 · Economic...

Economic Impact Analysis of a “Competitive Bid” Scenario for

the IGT Lottery Contract

Rhode Island Office of Revenue Analysis

October 22, 2019

Disclaimer

• The analysis contained in this presentation was conducted at the request of the Senate Finance Committee.

• The information provided in this presentation is based on data inputs that were not generated by the Office of Revenue Analysis and the Office of Revenue Analysis did not undertake any independent verification of the accuracy of these data inputs.

• Comments made by Office of Revenue Analysis staff during this presentation do not necessarily reflect the views or positions of the Division of Lottery, the Department of Revenue, or the Governor’s Office.

• Any errors or omissions in the presentation are solely the responsibility of the Chief of Revenue Analysis.

Rhode Island Office of Revenue Analysis 2October 22, 2019

Presentation Outline

1. About the Office of Revenue Analysis

2. Introduction

3. Economic Impact Analysis Models

4. Economic Impact Analyses of IGT

5. Summary of the Outcomes of ORA’s Analysis

6. ORA’s “Competitive Bid” Scenarioa. IGT Operations

b. Traditional Lottery

c. Central System

d. VLTs

e. Total Revenue Inputs


Presentation Outline

7. “Competitive Bid” Impactsa. Time Frameb. IGT Operationsc. IGT - Revenuesd. State Spendinge. With ↑ General Revenue Spending f. With ↑ General Revenue Spending - Revenues

8. Caveats of the Analysis

9. Concluding Remarks

10. Appendixa. The Appleseed Reportb. The Tebaldi Report


About the Office of Revenue Analysis

• Created by the General Assembly in 2006, the Office of Revenue Analysis:

o Analyzes, evaluates, and appraises the tax system of the state, and makes recommendations for its revision in the best interests of the state’s economy;

o Prepares the biennial Tax Expenditures Report, the annual Unified Economic Development Report, the periodic evaluation of economic development tax incentives, and fiscal notes for proposed revenue initiatives.

• ORA consists of five staff members, each of whom possess advanced degrees in economics.

• ORA has performed economic impact analyses at the request of the executive and legislative branches including assessments of the America’s Cup returning to Newport and the proposed Paw Sox stadium.


Introduction

• On June 27, 2019, S-1031 was introduced in the Senate by President Ruggerio and Majority Whip Goodwin on behalf of Governor Raimondo and referred to the Senate Finance Committee.

• On June 28, 2019, H-6266, the companion bill to S-1031, was introduced in the House of Representatives by Speaker Mattiello, Leader Shekarchi, et al. on behalf of Governor Raimondo and referred to the House Finance Committee.

• The bills enable the Division of Lottery (Lottery) to enter into an extension of the existing master contract that Lottery has with IGT Global Solutions Corporation (IGT).

• The existing master contract between GTECH and the Lottery was entered into on May 12, 2003 and became effective July 1, 2003.

• There have been a number of amendments made subsequently thereto.


Introduction

• The Senate Finance Committee scheduled hearings on S-1031 for September 19th, October 1st, 22nd, 24th, and 29th:o The Department of Revenue provided testimony to the Senate Finance

Committee at the September 19th and October 1st hearings;

o Governor Raimondo provided direct testimony to the Senate Finance Committee at the October 1st hearing with additional testimony provided by the Governor’s Deputy Chief of Staff and the Department of Revenue.

• The House Finance Committee scheduled hearings on H-6266 for September 24th and October 3rd:o Governor Raimondo provided direct testimony to the House Finance

Committee at the September 24th hearing with additional testimony provided by the Governor’s Deputy Chief of Staff and the Department of Revenue.


Economic Impact Analysis Models

• RIMS II Multipliers

o Maintained and distributed by the U.S. Bureau of Economic Analysis.

o Used to assess the economy-wide impacts of external changes in final demand for a good or service

Type I multipliers capture direct spending effects and the supply-chain impacts created of a change in final demand for a good or service;

Type II multipliers capture the direct, indirect and induced effects of a change in final demand.

o Static input-output model that is not suitable for forecasting.

o Limitations include no behavioral responses by businesses and consumers, not based

on a full Social Accounting Matrix so cannot capture fiscal impacts associated with

changing spending patterns, and assumes that the supply of inputs is perfectly elastic

with respect to changes in demand.



• IMpact Analysis for PLANning (IMPLAN) Model

o Developed by the U.S. Forest Service but now maintained by a private company.

o Incorporates a regional Social Accounting Matrix in its analyses.

o Estimates the direct, indirect (supply-chain) and induced (household) spending effects of a change in final demand for a good or service.

o Generates regional multipliers which capture the leakage of spending from the regional economy via regional purchasing coefficients (RPCs).

o Static input-output model that is not suitable for forecasting.

o Assumes structure of markets and consumer behavior patterns are unaffected by change in final demand.



• Regional Economic Models Inc. Policy Insights (REMI PI+) Modelo Widely used by government agencies and independent researchers.

o Includes a number of dynamic forecasting equations that capture product and factor market price changes, economic migration, and behavioral changes in household consumption.

o Rhode Island’s model includes inter-industry linkages among 70 sectors.

o Generates regional multipliers which capture the leakage of spending from the regional economy via externally estimated RPCs.

o Combines an integrated input-output model with a structural forecasting model.

o Does not impose equilibrium conditions as part of its formulation so capacity to account for market and behavioral responses to trade-offs is limited.


Economic Impact Analyses of IGT

• To date, two reports have been issued analyzing the impact of IGT’s operations on the Rhode Island economy.

o ORA’s summarization of the reports is contained in the Appendix.

• In general, these reports have considered the ramifications of IGT relocating its corporate headquarters from Rhode Island.

• These reports examine a “full loss” scenario as they analyze only the economic impacts of IGT exiting the state economy.

• Both reports only look at the impact of the “full loss” scenario over the course of a single year and do not incorporate any dynamic feedbacks in their analyses.


Summary of the Outcomes of ORA’s Analysis

• Alternatively, one could model:o A “competitive bid” scenario: IGT exits the state economy but the state retains more

revenues from the operation of the lottery; or

o A “replacement” scenario: where IGT’s economic presence is replaced by another entity and the state retains more revenues from lottery operations.

• ORA focused on modeling a “competitive bid” scenario in a multiyear dynamic framework.

o This approach required ORA to develop estimates of the potential revenues the state would receive from a “competitive bid” lottery contract.

• The “competitive bid” scenario analyzed by ORA is intended to illustrate a potential outcome that would be realized under the specific conditions outlined in this presentation.



• ORA assumed a “competitive bid” lottery contract would be for six years from 2019 through 2024.

• ORA modeled the shutdown of IGT’s operations as a shock to the economy, meaning that it would occur in a single year.

• ORA modeled the “competitive bid” lottery contract as beginning in the year IGT shuts down and continuing for the next five years.

• The increased general revenues the state receives from the “competitive bid” lottery contract occur in every year from 2019 through 2024.

October 22, 2019 Rhode Island Office of Revenue Analysis 13


(1,007)

(388)

(989)

(156)

(2,540)

(1,007)

(240)

(721)

465

(1,503)

(3,000)

(2,500)

(2,000)

(1,500)

(1,000)

(500)

0

500

1,000

Direct Jobs Indirect Jobs Induced Jobs Public Jobs Total Jobs

Impact on Jobs by Category, 2019 -2024

IGT Only With State Offset



$(104,043)

$(20,434)

$(48,443)

$(14,194)

$(187,113)

$(104,043)

$(10,688)$(33,400)

$44,196

$(103,935)

$(200,000)

$(150,000)

$(100,000)

$(50,000)

$-

$50,000

$100,000

Direct Earnings Indirect Earnings Induced Earnings Public Earnings Total Earnings

Impact on Earnings (000s) by Category, 2019 -2024




$(373,457)

$(23,614)

$(397,071)

$(239,842)

$(15,949)

$(255,791)

$(292,047)

$66,358

$(225,688)

$(187,572)

$44,824

$(142,747)

$(500,000)

$(400,000)

$(300,000)

$(200,000)

$(100,000)

$-

$100,000

Private Output Public Output Total Output Private Val Add Public Val Add Total Val Add

Impact on Output and Value Added (000s), 2019 -2024



ORA’s “Competitive Bid” Scenario

• ORA analyzed a “competitive bid” scenario with regard to the exit of IGT from the state’s economy.o Modeled the exit of IGT from the state’s economy but included additional

revenues to the state from paying less for the services provided by IGT.

• ORA used the REMI PI+ 70-sector economic impact model to conduct its analysis of the “competitive bid” scenario on the state’s economy.

• ORA used publicly available data as inputs for the analysis as well as calculated data inferred from public testimony and/or reports.

• ORA explicitly modeled how the inputs were used in the REMI PI+ 70-sector model.


ORA’s “Competitive Bid” Scenario

• Under a “competitive bid” scenario the provider of the lottery services is not relevant to the analysis, only that the lottery acquires the needed services at a lower cost than otherwise would occur.

• IGT provides services to the Lottery in three areas:

o The operation and maintenance of the traditional lottery system (i.e. Daily numbers, Powerball, MegaMillions, instant tickets, Keno, etc.);

o Deployment and maintenance of the central system for the operation of the state’s casino gaming facilities including sports wagering; and

o Participation as a technology provider of the video lottery terminals installed at Twin River Casino Hotel and Tiverton Casino Hotel.


“Competitive Bid” Scenario: IGT Operations

• In response to a request from Senate President Ruggerio and Speaker Mattiello, IGT provided information on the company’s “Head Count and Average Wage Data by Organization” which breaks down IGT’s operations into five intracompany organizations:

Rhode Island Office of Revenue Analysis 19

Organization Head Count Average Wage Total Wage Bill

Corporate 104 × $109,164 = $11,353,056

Finance & Legal 167 × $148,020 = $24,719,340

Technology 292 × $120,166 = $35,088,472

NA (North American) Lottery Support 144 × $128,612 = $18,520,128

Field Service & Call Center 300 × $ 47,875 = $14,362,500

Total * 1,007 × $103,320 $104,043,496

* There is a difference of $256 between the Total Head Count × Average Wage and the sum of the Total Wage Bill column due to the fact that the Average

Wage reported in the Total row is the average of the individual organization Average Wages weighted by Head Count.

October 22, 2019

“Competitive Bid” Scenario: Traditional

• IGT is currently paid as follows for its operation and maintenance of the traditional lottery system:

• In FY 2019, based on this formula, IGT received an estimated $13,110,446 on gross sales of $263,275,764 for these services.

• In FY 2003, prior to the effective date of the current master contract, GTECH received $8,214,600 for similar services on gross sales of $238,994,478 or 3.44%.


Gross Sales Percentage

Up to $275 million 5%

$275 million up to $400 million 1%

More than $400 million 5%

October 22, 2019


• Clearly, the breadth and depth of services provided today is not the same as in FY 2003.

• To estimate the potential impact of the Lottery receiving comparable services from a provider at a lower cost, ORA consulted the West Virginia Lottery’s financial statements for FY 2018 which reported gross sales of traditional lottery for Rhode Island of $258.4 million and for WV of $177.0 million.

• Prior testimony indicated that WV pays an effective rate of 5.77% of gross sales for traditional lottery services.

• ORA scaled this percentage by the ratio of WV’s FY 2018 gross sales to RI’s FY 2018 gross sales to arrive at a “competitive bid” rate of 3.95% to provide traditional lottery services.



• ORA applied the 3.95% rate to the FY 2019 traditional lottery gross sales figure to yield total payments of $10,406,833, a savings of approximately $2.7 million from current levels.

• ORA assumed that the $2.7 million would accrue to the state each and every year post the awarding of the contract to a competitive bidder.o Thus, for example, over a ten year period, the state would save $27 million

under the “competitive bid” scenario.

• At the same percentage rate of 3.44% that was in place in FY 2003, the comparable figure for FY 2019 is $9,049,184 resulting in $4.1 million in annual savings.


“Competitive Bid” Scenario: Central System

• IGT is currently paid as follows for its operation and maintenance of the central system for the video lottery terminals (VLT):

• In FY 2019, based on this formula, IGT received $12,727,546 or 2.43% of the $522,754,625 in NTI generated at Twin River and Newport Grand/Tiverton.

• Due to this revenue sharing structure the Lottery received an additional $341,319 in revenue from the VLTs in FY 2019.o In total, over the FY 2012 – FY 2019 period, the Lottery’s share of VLT revenues have been

enhanced by $1,412,160 as a result of this revenue structure.


Video Lottery Net Terminal Income (NTI) Percentage

Up to $500 million 2.5%

$500 million up to $1 billion 1.0%

More than $1 billion 2.5%

October 22, 2019

“Competitive Bid” Scenario: Central System

• In FY 2019, Delaware’s VLTs generated $361.8 million in NTI and 7.7% of NTI was distributed as “Vendor Fees” for “Central computer and terminal equipment.”

• Industry sources indicated to the Chief of Revenue Analysis that Delaware pays a 1.0% commission on NTI for the “central computer.”

• ORA took the ratio of Rhode Island FY 2019 NTI to Delaware FY 2019 NTI and multiplied it by 1.0% to arrive at a “competitive bid” rate of 1.45% to provide the central system for VLTs.

• ORA applied the 1.45% rate to the FY 2019 VLT NTI to yield total payments of $7,553,829, a savings of approximately $5.2 million from current levels, an amount that is assumed to accrue to the state each and every year post the awarding of the contract to a competitive bidder.


“Competitive Bid” Scenario: VLTs

• ORA used prior testimony that IGT provides 84% of casino VLTs, Bally provides 12% of casino VLTs and Everi provides 4% of casino VLTs to estimate the total number of casino VLTs by provider based on total casino VLTs of 5,107:

• ORA then calculated the amount of NTI each provider generated from their estimated number of VLTs using their 2019 efficiency ratios of 92.8% (IGT), 147.8% (Bally), and 111.8% (Multimedia).


Facility IGT Bally Everi Total VLTs

Twin River Casino Hotel 3,450 493 164 4,107

Tiverton Casino Hotel 840 120 40 1,000

Total 4,290 613 204 5,107

October 22, 2019


• ORA multiplied the percentage of total casino VLTs for each provider by its efficiency ratio to yield the percentage of total NTI for each provider.

• ORA then applied the “% of Total NTI” to the FY 2019 total NTI figure of $522,754,625 to yield total NTI per provider.


VLT Provider

% of Total VLTs

(a)

2019 Efficiency Results

(b)

% of Total NTI

(a) × (b)

IGT 84% 92.8% 78.0%

Bally 12% 147.8% 17.7%

Multimedia (Everi) 4% 111.1% 4.3%

Total 100% n/a 100%

October 22, 2019


• ORA then divided the total NTI per provider by the total number of VLTs per provider and then divided this quotient by 365 to yield NTI per VLT per day for each provider:

• As is shown in the table, IGT is the lowest performing of the three providers of casino VLTs, trailing Bally by $154.14 of NTI per VLT per day and lagging Multimedia (Everi) by $42.49 of NTI per VLT per day.


Provider Total NTI Total VLTs NTI per VLT per day

IGT $407,497,685 4,290 $260.24

Bally $92,715,760 613 $414.38

Multimedia (Everi) $22,541,179 204 $302.73

Total $522,754,625 5,107 $280.44

October 22, 2019


• Under the current Master Contract, IGT is guaranteed at least 50% of the total VLTs deployed on the gaming floors at Twin River and Tiverton.

• ORA assumed IGT retained its 50% share of total VLTs installed at Twin River and Tiverton in the “competitive bid” scenario and that VLTs above this percentage would be redistributed to other vendors (including but not limited to Bally and Everi).o This assumption means that IGT retains 2,554 VLTs and 1,736 VLTs currently

operated by IGT are reallocated to other technology providers.

• ORA then looked at the NTI per VLT per day performance of the slot machines at Foxwoods and found that, in FY 2019, Foxwoods equivalent of NTI per VLT per day was $291.89 based on an average slot machine count of 4,160.



• The difference between the performance of IGT’s VLTs on a per day basis and those of Foxwoods’ slot machines is $31.65.

• ORA assumed that the 1,736 reallocated VLTs would generate one-half of the revenue differential between Foxwoods’ slot machines and IGT’s VLTs, or a total of $10,030,521 in additional NTI.

• Based on the state’s share of NTI for FY 2019 of 60.8914%, this yields additional revenue to the state of approximately $6.1 million.

• At $260.24 of NTI per VLT per day, IGT forgoes $11,542,918 in revenue (i.e. 7.0% × $260.24 × 365 × 1,736).o This calculation is dependent on (1) the actual NTI per VLT per day of the VLTs that

are taken away from IGT and given to other vendors and (2) the amount NTI per VLT per day for IGT VLTs increases as better performing VLTs are left in place.


“Competitive Bid” Scenario: Revenue Inputs

• In summary, under the “competitive bid” scenario, the following occurs:

1. IGT shuts down its North American headquarters and Rhode Island loses 1,007 jobs and the associated payroll of $104.0 million.

2. The Lottery competitively bids the traditional lottery system and enters into an agreement with a vendor that charges 3.95% of gross sales rather than 5.0% yielding $2.7 million more in revenue to the state annually.

3. The Lottery competitively bids the central system and enters into an agreement with a vendor that charges 1.45% of system NTI rather than 2.5% resulting in $5.2 million more in revenue to the state annually.

4. The Lottery reallocates 1,736 VLTs to vendors such that NTI per VLT per day for these VLTs increases by $15.83 generating an additional $6.1 million in revenue to the state.

5. The lottery transfer to the general fund increases by $14.0 million annually.


“Competitive Bid” Impacts: Time Frame

• ORA examined the “competitive bid” scenario over a six-year period, 2019 – 2024, to provide some insight into how the economic impact of these changes would play out over time.

• In addition, this time period is one for which ORA has projected state revenue estimates based on the FY 2020 Enacted Budget.

• These revenue estimates provide the basis for the calculation of the revenue impacts associated with the “competitive bid” scenario.

• ORA generally categorized state general revenues as follows: personal income tax, sales and use tax, business corporation tax, and all other general revenues including the lottery transfer.


“Competitive Bid” Impacts: IGT Operations

• ORA mapped the IGT intracompany organizations to the industry sectors in the REMI model based on the reported average wage provided by IGT.

• The results of this mapping are as follows:


IGT Organization REMI Sector

Corporate Management of Companies/Enterprises

Finance & Legal Professional and Technical Services

Technology Professional and Technical Services

NA Lottery Support Professional and Technical Services

Field Service & Call Center Administrative and Support Services

October 22, 2019


• The impact of IGT’s operations in the state are already embedded in the current economic data so ORA modeled IGT’s exit from the state as a counterfactual.

• In each identified sector, ORA simultaneously reduced employment and total earnings as follows:

• For simplicity, ORA assumed that the shut down of IGT’s operations in the state would happen in 2019.


REMI Sector Employment Total Earnings

Management of Companies/Enterprises (104) $(11,353,056)

Professional and Technical Services (603) $(78,328,210)

Administrative and Support Services (300) $(14,362,500)

Total (1,007) $(104,043,496)

October 22, 2019


• The impact of IGT’s shutdown on direct (IGT), indirect (supply chain), and induced (tertiary) private non-farm jobs is shown below:


Year

Direct

Jobs

Indirect

Jobs

Induced

Jobs

Total

Jobs

2019 (1,007) (404) (1,027) (2,438)

2020 0 (13) (61) (75)

2021 0 (5) (32) (37)

2022 0 7 25 33

2023 0 13 50 63

2024 0 14 56 70

October 22, 2019


• The breakdown by industry sector of indirect private non-farm job impactsfrom the shutdown of IGT’s operations in the state are as follows:


Industry 2019 2020 2021 2022 2023 2024

Admin & Support Services (102) (1) (1) 1 2 3

Prof, Sci, & Tech Services (94) (2) 0 2 2 3

Food Services & Drinking Places (36) (1) (1) 0 0 1

Retail and Wholesale Trade (28) (4) (1) 1 2 2

Real Estate (25) 0 0 0 0 0

Construction (14) (1) (1) 0 0 0

Repair and Maintenance (11) 0 0 0 0 0

All Other Industries (95) (4) 0 3 4 5

Total (404) (13) (5) 7 13 14

October 22, 2019


• The breakdown by industry sector of induced private non-farm job impactsfrom the shutdown of IGT’s operations in the state are as follows:


Industry 2019 2020 2021 2022 2023 2024

Construction (257) (82) (20) 18 36 41

Retail and Wholesale Trade (195) 1 (5) (1) 1 2

Ambulatory Health Care Services (93) 5 0 1 1 1

Food Services & Drinking Places (83) (5) (9) (6) (4) (3)

Real Estate (61) (1) (5) 0 2 2

Personal & Laundry Services (45) 6 0 1 1 0

Social Assistance (44) 1 (1) 0 0 0

All Other Industries (759) (75) (39) 13 36 44

Total (1,027) (61) (32) 25 50 56

October 22, 2019


• The impact of IGT’s shutdown on direct (IGT), indirect (supply chain), and induced (tertiary) private earnings (000s) is shown below:


Year Direct

Earnings

Indirect

Earnings

Induced

Earnings

Total

Earnings

2019 $(104,043,496) $(21,887,410) $(53,642,597) $(179,573,247)

2020 $0 $(802,852) $(4,736,144) $(5,538,996)

201 $0 $(259,470) $(1,534,486) $(1,793,656)

2022 $0 $547,140 $2,378,839 $2,925,978

2023 $0 $927,098 $4,252,099 $5,179,917

2024 $0 $1,041,951 $4,838,928 $5,880,878

October 22, 2019


• The breakdown by industry sector of indirect private earnings impacts from the shutdown of IGT’s operations in the state are as follows:


Industry 2019 2020 2021 2022 2023 2024

Prof, Sci, & Tech Services $(7,181,992) $(172,046) $(29,252) $141,294 $220,651 $243,207

Admin & Support Services $(4,243,778) $(51,533) $(57,196) $60,416 $115,489 $133,901

Retail and Wholesale Trade $(1,941,785) $(242,169) $(58,316) $95,574 $171,693 $195,740

Food Services & Drinking Places $(981,948) $(25,574) $(17,661) $3,246 $13,612 $17,516

Construction $(967,398) $(76,659) $(81,835) $(13,489) $22,258 $38,739

Repair and Maintenance $(634,164) $(28,867) $(15,950) $6,098 $17,010 $20,987

Real Estate $(524,335) $(5,917) $(10,910) $3,443 $9,856 $11,861

All Other Industries $(5,412,012) $(200,088) $11,650 $250,557 $356,529 $379,999

Total $(21,887,410) $(802,852) $(259,470) $547,140 $927,098 $1,041,951

October 22, 2019


• The breakdown by industry sector of induced private earnings impacts from the shutdown of IGT’s operations in the state are as follows:


Industry 2019 2020 2021 2022 2023 2024

Construction $(18,344,240) $(6,082,652) $(1,515,381) $1,454,515 $3,013,177 $3,592,036

Retail and Wholesale Trade $(9,078,761) $109,649 $(210,281) $14,188 $106,671 $135,426

Ambulatory Health Care Services $(6,635,068) $403,038 $(537) $95,988 $110,268 $93,924

Food Services & Drinking Places $(2,252,530) $(129,306) $(251,932) $(177,132) $(130,156) $(96,810)

Non-Profits $(1,755,895) $86,420 $5,996 $35,488 $41,819 $38,430

Personal and Laundry Services $(1,528,598) $210,456 $10,066 $27,858 $25,531 $18,950

Social Assistance $(1,376,188) $33,003 $(21,549) $6,867 $16,572 $17,566

All Other Industries $(10,826,819) $695,403 $521,097 $940,497 $1,063,565 $1,026,652

Total $(53,642,597) $(4,736,144) $(1,534,186) $2,378,839 $4,252,099 $4,838,928

October 22, 2019


• The impact of IGT’s shutdown on economic output and value added (table only) is shown below:


Year Output Value Added

2019 $(340,336,230) $(217,747,040)

2020 $(58,481,402) $(37,505,255)

2021 $(18,112,862) $(11,743,421)

2022 $(1,426,989) $(1,332.371)

2023 $8,386,590 $4,833,581

2024 $12,899,991 $7,703,885

October 22, 2019


• The breakdown by industry sector of output impacts from the shutdown of IGT’s operations in the state are as follows:


Industry 2019 2020 2021 2022 2023 2024

Prof, Sci, & Tech Services $(88,788,874) $(2,656,303) $(980,748) $(287,926) $140,106 $356,228

Construction $(40,899,193) $(14,070,916) $(3,878,277) $2,487,504 $5,884,627 $7,205,209

Real Estate $(37,686,617) $(14,264,171) $(3,689,732) $(867,389) $930,520 $1,801,268

Admin & Support Services $(32,193,009) $(906,961) $(401,134) $(72,337) $118,948 $211,948

Retail and Wholesale Trade $(27,860,754) $(4,587,958) $(1,580,170) $(338,202) $399,579 $749,390

Management of Cos/Enterprises $(24,102,659) $(958,823) $(249,371) $(116,558) $(10,081) $55,835

Ambulatory Health Care $(12,118,926) $(722,214) $(421,619) $(105,217) $56,592 $123,371

All Other Industries $(86,417,429) $(22,294,936) $(7,388,980) $(2,070,466) $1,236,932 $2,906,319

Total $(340,336,230) $(58,481,402) $(18,112,862) $(1,426,989) $8,386,590 $12,899,911

October 22, 2019


• In addition to the private non-farm impacts on employment, earnings, output and value added, there are also impacts on public sector employment, earnings, and output as shown below:

• Although these impacts are not particularly large, they do need to be added to the private non-farm impacts to derive the total impacts from IGT exiting the state’s economy.


State and Local

Public Sector 2019 2020 2021 2022 2023 2024

Jobs (74) (39) (23) (12) (6) (2)

Earnings $(6,532,785) $(3,574,445) $(2,151,372) $(1,178,834) $(562,546) $(193,660)

Output $(10,811,813) $(5,928,124) $(3,599,121) $(1,990,200) $(955,009) $(330,106)

October 22, 2019


• Thus, the total final impacts from the shutdown of IGT’s operations in the state are:


Economic

Variable 2019 2020 2021 2022 2023 2024

Private Jobs (2,438) (75) (37) 32 63 70

Public Jobs (74) (39) (23) (12) (6) (2)

Total Jobs (2,512) (114) (60) 20 57 68

Private Earnings $(179,573,247) $(5,538,996) $(1,793,656) $2,925,978 $5,179,197 $5,880,878

Public Earnings $(6,532,785) $(3,574,445) $(2,151,372) $(1,178,834) $(562,546) $(193,660)

Total Earnings $(186,106,032) $(9,113,441) $(3,945,029) $1,747,175 $4,616,650 $5,687,218

Private Output $(329,524,417) $(52,553,278) $(14,513,741) $563,211 $9,341,599 $13,230,017

Public Output $(10,811,813) $(5,928,124) $(3,599,121) $(1,990,200) $(955,009) $(330,106)

Total Output $(340,336,230) $(58,481,402) $(18,112,862) $(1,426,989) $8,386,590 $12,899,911

October 22, 2019

“Competitive Bid” Impacts: IGT - Revenues

• ORA used Rhode Island Output from the REMI model and projected revenues based on the enacted FY 2020 Budget:


Metric FY 2020 FY 2021 FY 2022 FY 2023 FY 2024

RI Output* ($ billions) $104.888 $108.742 $112.627 $116.779 $121.194

Pers Inc Tax (000s) $1,426,800 $1,465,255 $1,525,801 $1,569,270 $1,615,189

Sales and Use Tax (000s) $1,180,434 $1,219,057 $1,243,657 $1,268,070 $1,294,099

Bus Corp Tax (000s) $ 164,000 $ 169,309 $ 175,467 $ 185,750 $ 188,868

All Other Gen Revs (000s) $1,407,495 $1,378,608 $1,386,956 $1,389,752 $1,406,499

Total Gen Revs (000s) $4,178,729 $4,232,228 $4,331,881 $4,412,842 $4,504,655

* Output is defined in REMI as the amount of production purchased, including all intermediate goods, as well

as compensation and profit (value added).

October 22, 2019


• ORA then calculated the ratio of each general revenue item to Rhode Island Output as defined by REMI to yield a measure of the percentage of RI Output that is received by the state as general revenues :

• The percentages indicate how a $1.00 change in output impacts the general revenue item.o For example, a $1.00 decrease in output would reduce total general revenues by $0.3984

in FY 2020, $0.3892 in FY 2021, etc.


Gen Rev as % of Output FY 2020 FY 2021 FY 2022 FY 2023 FY 2024

Personal Income Tax 1.3603% 1.3475% 1.3547% 1.3438% 1.3327%

Sales and Use Tax 0.1564% 0.1557% 0.1558% 0.1591% 0.1558%

Business Corporation Tax 1.1254% 1.1211% 1.1042% 1.0859% 1.0678%

All Other General Revenues 1.3419% 1.2678% 1.2315% 1.1901% 1.1605%

Total General Revenues 3.9840% 3.8920% 3.8462% 3.7788% 3.7169%

October 22, 2019


• ORA’s estimated revenue impacts from the shutdown of IGT’s operations are as follows:


General Revenue Category FY 2020 FY 2021 FY 2022 FY 2023 FY 2024

Personal Income Tax $(4,629,621) $(788,011) $(245,382) $(19,176) $111,771

Sales and Use Tax $(3,830,222) $(655,606) $(200,007) $(15,495) $89,551

Business Corporation Tax $(532,140) $(91,054) $(28,219) $(2,270) $13,070

Other General Business Taxes $(959,454) $(163,948) $(49,935) $(3,864) $22,239

Excise and Other Taxes $(687,889) $(114,182) $(33,529) $(2,550) $14,374

Departmental Receipts $(1,464,851) $(225,079) $(68,215) $(5,121) $29,598

Other General Revenues $(1,454,787) $(238,204) $(71,375) $(5,448) $31,119

Total General Revenues $(13,558,964) $(2,276,083) $(696,662) $(53,923) $311,720

October 22, 2019

“Competitive Bid” Impacts: State Spending

• ORA used preliminary FY 2019 data to develop a profile of general revenue spending by the state.

• A general revenue spending profile was developed since transfers from the lottery are recorded as general revenues.


REMI Sector % of Gen Rev Exp REMI Sector % of Gen Rev Exp

Ambulatory Health Care 31.4% Social Assistance 2.4%

Public El & Sec Education 30.4% Prof, Sci, & Tech Services 1.5%

State EE Compensation 21.8% Admin & Support Services 1.4%

Investment 3.7% Repair & Maintenance 1.2%

Local Gov’t Transfers 3.4% All Other Sectors (19 total) 2.7%

October 22, 2019


• ORA developed a custom State Government General Revenues sector that allocated the additional $14.0 million of state general revenues from the “competitive bid” process to the identified sectors based on the given percentages.o For example, spending in the Ambulatory Health Care sector was increased by

$4,399,966, spending in the Public Elementary and Secondary Education sector was increased by $4,252,960, spending on State Employee Compensation was increased by $3,052,589, etc.

• To model the impact of increased state spending on State Employee Compensation, ORA adjusted REMI’s average compensation for state government to reflect average annual state employee compensation based on the FY 2018 average annual compensation for all state employees of $113,654 and used this figure for FY 2019.



• IGT’s operations are still modeled as a counterfactual, but the impact of the increased state spending is modeled as an addition to the state’s economy in 2019 through 2024 to reflect the ongoing nature of the revenue stream from the “competitive bid” process.

• Since the basic results from modeling IGT’s exit from the state economy are unchanged when the State Government General Revenues sector is added, ORA focused on the changes to the IGT shutdown scenario that result from the increase in state spending.

• It is important to note that the revenue impacts realized from increasing state general revenue spending by $14 million annually are in addition to this base revenue increase – that is, the total general revenue increase is the sum of these two changes in general revenues.


“Competitive Bid” Impacts: With ↑ Gen Revs

• The net impact on direct, indirect, and induced private non-farm jobs of IGT’s shutdown and higher State general revenue spending is below:


Year ∆ in Indirect Jobs ∆ in Induced Jobs ∆ in Total Jobs

2019 27 48 75

2020 26 47 74

2021 26 47 73

2022 24 45 70

2023 23 42 65

2024 22 38 60

October 22, 2019


• The net impact on indirect private non-farm jobs by industry sector from IGT’s shutdown and higher State general revenue spending are as follows:


Industry 2019 2020 2021 2022 2023 2024

Ambulatory Health Care Services 12 12 12 11 11 11

Admin & Support Services 3 3 3 3 3 3

Social Assistance 2 2 2 2 2 2

Prof, Sci, & Technical Services 2 2 2 2 2 1

Repair and Maintenance 1 1 1 1 1 1

Real Estate 1 1 1 1 1 1

Food Services & Drinking Places 1 1 1 1 1 1

All Other Industries 4 4 4 4 3 3

Total 27 26 26 24 23 22

October 22, 2019


• The net impact on induced private non-farm jobs by industry sector from IGT’s shutdown and higher State general revenue spending are as follows:


Industry 2019 2020 2021 2022 2023 2024

Construction 12 14 15 13 11 9

Retail and Wholesale Trade 9 9 9 9 8 8

Food Services & Drinking Places 4 5 5 6 6 6

Ambulatory Health Care Services 4 4 3 3 3 3

Real Estate 3 3 3 3 3 3

Personal and Laundry Services 2 2 1 1 1 1

Social Assistance 2 2 2 2 2 2

All Other Industries 12 11 10 9 8 7

Total 48 47 47 45 42 38

October 22, 2019


• The net impact on direct, indirect, and induced private earnings of IGT’s shutdown and higher State general revenue spending is below:


Year ∆ in Indirect

Earnings

∆ in Induced

Earnings

∆ in Total

Earnings

2019 $1,605,997 $2,501,056 $4,107,053

2020 $1,630,628 $2,598,785 $4,229,412

201 $1,657,680 $2,677,464 $4,335,145

2022 $1,646,861 $2,592,457 $4,239,358

2023 $1,618,846 $2,430,401 $4,049,248

2024 $1,585,267 $2,243,318 $3,828,586

October 22, 2019


• The net impact on indirect private earnings impacts by industry sector from IGT’s shutdown and higher State general revenue spending are as follows:


Industry 2019 2020 2021 2022 2023 2024

Ambulatory Health Care $875,755 $885,047 $892,394 $898,011 $902,730 $907,219

Prof, Sci, and Technical Services $154,540 $157,742 $159,611 $154,170 $145,348 $135,557

Admin and Support Services $140,797 $140,129 $145,715 $145,756 $143,388 $139,994

Retail and Wholesale Trade $81,866 $90,018 $93,364 $89,924 $82,785 $73,971

Social Assistance $74,824 $75,776 $76,526 $77,055 $77,467 $77,786

Repair and Maintenance $57,865 $58,858 $60,023 $60,168 $59,747 $59,246

Construction $25,612 $28,247 $34,685 $37,560 $38,552 $38,390

All Other Industries $216,585 $221,001 $223,251 $210,817 $192,542 $173,036

Total $1,605,997 $1,630,628 $1,657,680 $1,646,681 $1,618,846 $1,585,267

October 22, 2019


• The net impact on induced private earnings impacts by industry sector from IGT’s shutdown and higher State general revenue spending are as follows:


Industry 2019 2020 2021 2022 2023 2024

Construction $852,038 $1,066,994 $1,128,193 $1,067,765 $939,019 $781,420

Retail and Wholesale Trade $431,447 $424,840 $447,943 $460,344 $469,226 $477,504

Ambulatory Health Care Services $294,645 $257,838 $255,178 $249,377 $245,170 $243,500

Food Services & Drinking Places $117,568 $129,841 $152,106 $169,578 $183,975 $195,984

Hospitals (Private) $90,345 $94,549 $100,421 $103,775 $105,996 $108,146

Non-Profits $78,259 $71,712 $71,609 $69,962 $68,140 $66,424

Personal and Laundry Services $69,557 $53,616 $53,464 $52,424 $51,814 $51,856

All Other Industries $567,198 $499,395 $468,549 $419,292 $367,061 $318,484

Total $2,501,056 $2,598,785 $2,677,464 $2,592,497 $2,430,401 $2,243,318

October 22, 2019


• The net impact of IGT’s shutdown and higher State general revenue spending on economic output and value added (table only) is below:


Year ∆ in Output ∆ in Value Added

2019 $25,324,096 $16,721,047

2020 $28,528,845 $18,790,810

2021 $29,457,619 $19,392,301

2022 $29,669,064 $19,548,745

2023 $29,431,663 $19,425,932

2024 $28,971,199 $19,164,464

October 22, 2019


• The net impact on output by industry sector from IGT’s shutdown and higher State general revenue spending are as follows :


Industry 2019 2020 2021 2022 2023 2024

State and Local Government $14,539,756 $14,827,054 $15,020,242 $15,138,425 $15,205,946 $15,241,204

Ambulatory Health Care $2,022,586 $2,059,117 $2,081,485 $2,091,459 $2,095,830 $2,099,334

Construction $1,871,117 $2,390,568 $2,545,166 $2,439,471 $2,184,681 $1,862,790

Real Estate $1,755,481 $2,661,164 $2,877,881 $2,972,236 $2,979,599 $2,909,157

Retail and Wholesale Trade $1,320,041 $1,601,461 $1,696,605 $1,738,108 $1,746,393 $1,737,831

Prof, Sci, & Tech Services $404,109 $540,628 $577,858 $584,367 $571,656 $550,051

Food Services & Drinking Places $362,597 $473,958 $540,421 $589,078 $624,466 $650,333

All Other Industries $3,048,409 $3,974,895 $4,117,961 $4,116,320 $4,023,092 $3,890,499

Total $25,324,096 $28,528,845 $29,457,619 $29,669,064 $29,431,663 $28,971,199

October 22, 2019


• In addition to the private non-farm impacts on employment and earnings, and output there are also net changes in public sector employment, earnings, and output as shown below:

• These impacts are not insignificant, however, they are also not large enough to generally offset the initial negative impacts that result from IGT exiting the state’s economy.

• The increase in state general revenue spending does speed up the economy’s recovery from the loss of IGT’s operations.


State and Local

Public Sector 2019 2020 2021 2022 2023 2024

Jobs 108 107 105 103 100 97

Earnings $9,600,405 $9,753,565 $9,784,789 $9,765,762 $9,751,255 $9,733,787

Output $25,324,096 $28,528,845 $29,457,619 $29,669,064 $29,431,663 $28,971,199

October 22, 2019


• Thus, the total final impacts from from IGT’s shutdown and higher State general revenue spending are:


Economic

Variable 2019 2020 2021 2022 2023 2024

Private Jobs (2,363) (1) 36 102 128 131

Public Jobs 35 68 82 90 94 95

Total Jobs (2,329) 67 118 192 222 226

Private Earnings $(175,466,494) $(1,309,583) $2,541,489 $7,165,337 $9,228,444 $9,709,464

Public Earnings $3,067,620 $6,179,120 $7,633,417 $8,586,918 $9,188,709 $9,540,126

Total Earnings $(172,398,574) $4,869,536 $10,174,905 $15,752,255 $18,417,153 $19,249,590

Private Output $(318,740,077) $(38,851,487) $(76,364) $15,093,850 $23,567,316 $26,960,012

Public Output $3,727,943 $8,898,930 $11,421,121 $13,148,225 $14,250,937 $14,911,098

Total Output $(315,012,134) $(29,952,557) $11,344,757 $28,242,075 $37,818,253 $41,871,110

October 22, 2019

“Competitive Bid” Impacts: ↑GR - Revenues

• The change in revenues from IGT’s shutdown and higher State general revenue spending are:


General Revenue Category FY 2020 FY 2021 FY 2022 FY 2023 FY 2024

Personal Income Tax $344,486 $384,413 $399,075 $398,693 $392,244

Sales and Use Tax $285,003 $319,823 $325,280 $322,169 $314,268

Business Corporation Tax $39,596 $44,419 $45,894 $47,192 $45,866

Other General Business Taxes $71,392 $79,978 $81,211 $80,340 $78,044

Excise and Other Taxes $51,185 $55,701 $54,529 $53,015 $50,443

Departmental Receipts $108,998 $109,800 $110,940 $106,468 $103,870

Other General Revenues $108,249 $116,202 $116,079 $113,261 $109,207

Total General Revenues $1,008,910 $1,110,336 $1,133,007 $1,121,139 $1,093,943

October 22, 2019

Caveats of the Analysis

• The modeling of the economic impact of IGT’s operations was limited to the employment and payroll numbers publicly provided by IGT.o The lack of data on the distribution of payroll across job categories makes it difficult to

know which sectors should be used to model IGT’s operations.o Additional data on where IGT spends its resources could substantively change the

economic impacts shown in this presentation.

• Using a REMI model that has more sectors could allow for a more precise modeling of the economic impact of IGT’s operations and change the results of the analysis.

• The estimated revenue impact of the “competitive bid” scenario for VLTs may be less as a result of the transfer of 360 VLTs between the lottery’s current technology providers.

• The impact of IGT exiting the state’s economy on other economic measures, such as the unemployment rate, are not accounted for in this analysis.


Caveats of the Analysis

• The impact of the increase in state general revenue spending is directional with a lesser/greater impact being realized at lower/higher levels of state general revenue spending.

• The impact of IGT exiting the state’s economy on other non-general revenue sources, such as the motor fuel tax, unemployment insurance taxes, local real estate and other taxes, etc. is not considered in the analysis.

• The analysis looks at the shutdown of IGT’s operations as a one-time shock to the state’s economy rather than as an orderly wind down of existing operations over a specific period.o An orderly diminishment of IGT’s operations in the state would likely have a less

pronounced impact on the state’s economy but could also drag out the time it takes for the state’s economy to recover.


Concluding Remarks

• The loss of an employer the size of IGT with large average wages paid to its employees will have a negative impact on the state’s economic output that is likely to last multiple years.

• The increased state general revenues that result from a “competitive bid” lottery contract will help to offset some of the aggregate losses from IGT exiting the state’s economy, but the sector distribution of these offsets will not exactly match the sector distribution of the original losses.

• It is difficult, if not impossible, to fathom a realistic scenario in which increased state general revenues, in and of themselves, from a “competitive bid” lottery contract would completely mitigate the negative consequences from IGT transferring its Rhode Island operations over the period analyzed.

• Absent a replacement of IGT’s operations in the state that are similar in scope and increased state general revenues, the likelihood that the state’s economy would not be negatively impacted over a six year period is remote.


Thank You for Your Attention.

Questions?

Paul L. Dion, Ph.D. Madiha Zaffou, Ph.D.

Chief of Revenue Analysis Principal Economic and Policy Analyst

[email protected] [email protected]


mailto:[email protected]

Appendix

Economic Impact Analyses

of IGT’s Operations in the State


The Appleseed Report

• On July 25, 2019, Appleseed released an undated report titled “Losing a technology company employing 1,100 people”: o Commissioned by the Rhode Island Commerce Corporation.

• Appleseed models the loss of a “technology firm currently employing 1,100 people” in Rhode Island.

• The technology firm’s operations are assumed to consist of a “mix of headquarters, systems development, custom software development, and computer facilities management and maintenance.”

• Appleseed assumed that even though the technology firm would generally exit the state, 50 of the 1,100 employees would remain in the state.



• Appleseed estimates the following economic losses from the exit of the technology company from Rhode Island:

1 Value Added is the difference between the value of the technology company’s output minus the cost of its inputs

2 Output is the total sales of all goods and services by Rhode Island businesses and households generated by the technology company’s operations

• Appleseed also analyzed the winding down of the technology company’s operations over a five year period, the impact of the technology company investing “$150 million in capital in its facilities in the state,” and the addition of 100 and 30 jobs above the 1,100 base jobs the technology company “currently” has in the state.

2020 Employment Earnings Value Added 1 Output 2

Direct Effect 1,050 $111.2 million $127.5 million $198.5 million

Indirect Effect 484 $27.8 million $143.0 million $68.2 million

Total Effect 1,534 $139.0 million $170.5 million $266.7 million



• The Appleseed Report estimates revenue losses from IGT exiting the state economy as follows:

• Appleseed indicates that the loss in personal income taxes is generated from jobs that are directly or indirectly dependent on the [technology] company’s RI operations.

• The effective personal income tax rate used by Appleseed, based on the earnings figures provided, is the lowest marginal Rhode Island personal income tax rate.

• Every $1.00 increase in value added increases sales taxes by $0.1905.


2020 Amount Revenue Metric

Personal Income Taxes $5.212 million Effective Tax Rate: 3.75%

Sales Taxes $2.274 million Taxable Sales/Value Added: 19.05%

Business Taxes $0.658 million Percent of Value Added: 0.38%

Total $8.145 million

October 22, 2019

The Tebaldi Report

• On July 29, 2019, Edi Tebaldi, Professor of Economics at Bryant University released a report dated July 2019 titled “IGT Master Contract for Gaming and Lottery Services to Rhode Island: Economic Impact Assessment”: o Commissioned by IGT Global Solutions Corporation (IGT).

• Professor Tebaldi explicitly states that he used the IMPLAN model to assess the “economic impact and tax incidence implications of the 2019 IGT Master Contract for Gaming and Lottery Services to Rhode Island in return for IGT’s commitment to maintain 1,100 jobs in the state.”

• Professor Tebaldi states that he used “employment, earnings, and income tax withholding data from IGT” to perform his analysis and he estimated how “the 1,100 direct jobs at IGT contribute to the local economy.”


The Tebaldi Report

• The results of Professor Tebaldi’s analysis are:

• Professor Tebaldi found that “[M]ost of the direct (sic) and induced jobs supported by IGT are in real estate, legal services, restaurant and accommodation, artists and performers, accounting, retail, healthcare, education and marketing industries.”


2019 Employment Earnings Average Earnings Value Added

Direct Effect 1,100 $111.3 million $101,182 Not Reported

Indirect Effect 535 $25.2 million $47,103 Not Reported

Induced Effect 810 $39.6 million $48,889 Not Reported

Total Effect 2,445 $176.1 million $72,025 $329.5 million

October 22, 2019

The Tebaldi Report

• Professor Tebaldi used the IMPLAN model to estimate the “tax incidence” from “IGT’s commitment to maintain 1,100 jobs in Rhode Island”:

• As one can see, over 40% of the tax revenue generated is attributable to sales taxes, which implies $160.0 million of sales of taxable goods and services. o In other words, every $1.00 of value added generates $0.49 in sales of taxable goods and services.


2019 Amount Revenue Metric

Personal Income Taxes $5.4 million Effective Tax Rate: 3.07%

Sales Taxes $11.2 million Taxable Sales/Value Added: 48.56%

Corporate Taxes $0.8 million Percent of Value Added: 0.24%

Property Taxes $6.8 million

Other Taxes and Fees $1.7 million

Total $25.9 million

October 22, 2019

The Tebaldi Report

• It should be noted that at the House Finance Committee hearing on October 3, 2019, Professor Tebaldi reported results of his analysis using the REMI PI+ model.

o These results were similar to those he found using the IMPLAN model, but generally the economic impacts were less using the REMI PI+ model.

The impact of IGT having 1,100 jobs in the state resulted in 106 fewer indirect and induced jobs using the REMI PI+ model rather than IMPLAN.

The amount of indirect and induced earnings from IGT having 1,100 jobs in the state were $4.1 million less with the REMI PI+ model vs. IMPLAN.

• The questions outlined in the previous slide apply equally to Professor Tebaldi’s analysis using the REMI PI+ model.


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