In what comes as a surprise to many people, Maryland's Board of Public Works voted on Wednesday to purchase 1,062 slot machines for Penn National Gaming's casino in Cecil County, at a cost of over $49 million.

795 of the machines were bought outright, and 267 will be leased for 4 years and 10 months. The contract also includes installation and support, but at an average cost of $46,542 per machine, many observers are expressing shock. According to the Baltimore Sun, Comptroller Peter Franchot, who voted against the contract, called the purchase a "windfall" for the slots manufacturers. An independent industry analyst was described as being "dumbfounded" at the cost, suggesting it should have been closer to $10,000 per machine. [http://articles.baltimoresun.com/2010-06-09/news/bs-md-cecil-slots-contract-20100609_1_slot-hollywood-casino-perryville-comptroller-peter-franchot]

State Lottery spokeswoman Carol Everett tried to explain the high average cost by suggesting that the figure was skewed by a number of complicated and expensive units, and said that the average cost of machines is around $20,000. But none of the six vendors specified in the contract were able to provide machines at this price. Even assuming that one-third of the price goes to installation and maintenance, only 12 machines approach Everett's average cost. [http://www.bpw.state.md.us/static_files/meetings/6-9-2010.pdf]

More machines are likely to be purchased in the near future; the casino in Cecil County will receive 438 more, and Ocean Downs in Worcester County is planning to open this fall with 600 machines. If the state can't get a better deal next time, these machines could end up costing an additional $48 million. If Maryland ends up purchasing the remainder of the 15,000 machines authorized at five locations around the state, the total bill could be anywhere from $300 million to nearly $700 million.

It's not clear why the state is purchasing the machines itself, rather than allowing each private casino operator to select and purchase its own machines, as is the practice in many other states. This would provide private operators with an incentive shop around to find the best deal on machines; the state has no such incentive. Each operator could purchase a variety of machines, perhaps attempting to appeal to different audiences, or to compete with nearby out-of-state slots operators. Concerns about oversight of the machines aren't a valid reason for the state to purchase them; many states have extremely strict and effective gaming commissions, yet allow slots operators to purchase their own machines.

It's hard even to construe this as an incentive to attract casino operators; while this means they won't have to pay for one of their primary capital costs, Maryland also requires multi-million dollar application fees, large annual per-unit fees, and comparatively low revenue distributions to operators. These factors have conspired to result in a less-than-competitive bidding process for the state's five approved locations.

In the meantime, we are banking on hundreds of millions of dollars of slots revenue in future years to help pay for primary and secondary education in the state. Legislators are slowly realizing that in order to make that a reality, they may need to offer casino operators a better deal: SB 882 / HB 1077, passed by the General Assembly this year, increased the operator's share of slots revenue at one location, but only on the condition that the operator also take over the troubled Rocky Gap Lodge and Golf Resort. It's ironic that while the state is seeking to unload Rocky Gap, a state-financed project that turned into a huge money drain, it has decided that state-financed slot machines are a good idea.