Steve Arntzen expected bad news, but the actual numbers were even more discouraging.

Arntzen is the chief operating officer for Century Gaming, a Billings-based company that owns and/or services more than 4,400 video gaming machines across Montana. Before the state’s smoking ban took full effect Oct. 1, he had projected a 10 percent decline in gaming revenues within the ban’s first 90 days. He thought things would be back to pre-ban levels with half a year.

Now he’s not so sure. Six weeks after the smoke cleared, the company reported that gaming revenues are off by 15 percent.

 “It surprised them (casinos and bars) as much as it did us,” Arntzen said.

While the ban has left its mark on restaurants and bars, Montana’s casinos seem particularly hard hit. Casino attendants say smoking and gambling seem to go hand in hand, with many establishments reporting that up to 90 percent of their clients smoke. And for many of those smokers, the gambling venues represented their last refuge. Though they’re still free to gamble, some smokers have boycotted the hangouts that didn’t lobby hard enough to protect their habit. Others are put off by having to abandon their machine and step out into the cold. Many still stop by their old haunts, but attendants say they’re not staying nearly as long.

“There’s a traditional group that played games while they smoked instead of the other way around,” Arntzen said. “When they can’t smoke, they just stopped coming.”

When and if those smokers return, gaming revenues — reported to the state on a weekly basis — will no doubt reflect their return. In the meantime, those same revenues offer the easiest measure of the ban’s bite into business.

During the first week of November, Arntzen and Heidi Schmalz, Century Gaming’s general manager and director of finance, scoured their computer spreadsheets to quantify the ban’s impact on the 340 businesses that are part of Century’s video gaming machine route. All told, the company reports for roughly 25 percent of the state’s gaming machines.

According to Arntzen, only three of their key accounts have bucked the downward trend, and those were places that were smoke-free long before the ban was enacted. Of the hundreds of businesses that lost gaming dollars, he estimates that a quarter of them suffered a 30 percent drop.

“Some of the little bars did well,” he said. “But some of them, there was absolutely no one coming in.”

The Waterhole Saloon in Reed Point fit the latter description. Diana and Chris Hahn, who built the restaurant-bar in 1975, said revenues plummeted nearly 60 percent. On the first day of November, a Sunday, the business took in only $84.

“The nonsmokers are not coming to my bar,” Diana said. “And now I’ve lost what I had. Before I had like 30 regulars. Now I’m down to four or five people.”

In an attempt to lure people in, the Waterhole has offered free munchies and happy-hour specials. So far, it’s made no difference. Diana, a nonsmoker, thinks the ban has unfairly affected small-town establishments. They have such a limited pool of patrons to begin with, she said.

At most, Diana said, only half of the town’s 135 people ever step into the Waterhole, where the bar’s two remaining poker machines are corralled in a corner by a lacquered-log “fence.” Of the 60 or so people who do step into the bar, she estimates at least 90 percent are smokers.

As it looks now, she fears the ban will be the death knell for the Waterhole. But with a couple hundred thousand tied up in the liquour license and property, the Hahns can’t just walk away. And selling is out of the question — only because there’s no one interested in buying, Diana said. 

“There’s no market for a bar like this,” she said. “I know. Believe me, I’ve tried.”

By mid November, with revenues continuing to drop, Hahn made the decision to dramatically cut the hours of her two employees — both single mothers. Their tips had already dropped off the charts.

“I don’t know what they’re going to do,” she said. “The state has to figure out something different.”

Four years to prepare

Four years ago, the first phase of Montana’s Clean Indoor Air Act took effect, restricting smoking  in all public places open to anyone under age 18. This fall, when all casinos and bars were required to comply, it was anyone’s guess how it would shake out.

Supporters of smoking bans, like Americans for Nonsmokers Rights, cite studies indicating that smoke-free laws have no adverse effect on gambling or bar revenues. But others, like economist Jonathan Tomlin, who covered the controversy in his Oct. 15 commentary for Forbes, say the studies are skewed by statistical shortcomings.

For a preview of what was to come, Arntzen and Schmalz first looked to Nevada, where smoking was restricted in 2007. According to the state’s gaming control board, revenue plummeted there by 18.1 percent between February 2008 and February 2009.

“But in Nevada, in all the big, major casinos, you could still smoke and gamble,” Arntzen said.

Colorado, too, enacted a clean-air act in 2006. By 2008, revenues had fallen off by 12.3 percent, dropping another 4.5 percent over the first half of 2009.

South Dakota was set to implement its 100 percent smoke-free law on July 1, when the legislation was suspended by referendum. Next November, voters will get to decide its fate.

Arntzen said Oregon, where the ban was extended to bars at the beginning of the year, seemed the closest match to Montana. Chuck Baumann, spokesman for the Oregon Lottery, says gambling-related revenue tanked by 20 percent in the past year. Yet the Oregon model, too, was like comparing apples and oranges.

“The number of games they can have is much smaller,” Arntzen said. In Oregon, establishments are limited to six video gaming terminals; Montana sets its cap at 20. “The other thing is, Montana had four years to prepare.”

Blurred by recession

Measuring cash is relatively straightforward, but quantifying the factors that shape the bottom line is not. According to Baumann, Oregon’s shrunken jackpot was blurred by the recession.

“The problem is, the economy started to slide just prior to the smoking ban,” Baumann said. “It was kind of a 1-2 punch for us.”

As Cole Boehler points out in his Montana Tavern Times, the Big Sky State was the target of a 1-2-3-4 punch. October, being a shoulder season, is typically slow, he wrote. Then there was the unseasonable cold snap and the flu epidemic.

And, of course, the recession.

Rick Ask, administrator of gambling control for Montana’s Department of Justice, reported that gaming revenues for fiscal year 2009 had dropped to $62 million, down $1.4 million from the previous year. That marked the first decline in the 20 years of the tax. 

 “In other economic hard times, we still continued to see some growth, from 2 percent to 6 percent maybe, but it was still growing,” he said.

And the trend has only worsened. From July through the end of September, revenues were off 5.7 percent compared with the same quarter last year.

Official figures for the quarter spanning Oct. 1 won’t be available until late January 2010. However, an early spot check at a handful of businesses indicated that revenues had fallen another 7.5 percent between September and October.

“It’s so wide-ranging, I’m not sure how valid it is,” Ask said. “It’s not a real good picture.”

He wasn’t, however, surprised by Century Gaming’s reported 16 percent drop.

“That’s what we were told would happen initially,” he said. “They will trend back up, but I’ve never had anyone tell me they’ll come back all the way to where they were.”

A piece of the pie

In the big picture, gaming taxes represent about 3.4 percent of the state’s general fund revenue. And any drop in income translates into a shortage somewhere. Unfortunately, the glum news for gaming comes on the heels of a recent report estimating a statewide revenue shortfall of 22 percent.  

Montana receives a 15 percent tax on the reported gross income from each and every video gaming machine in the state. Of the $60 million or so that comes in annually, all goes into the state general fund. From there, a complex formula is used to filter about two thirds of the take back to local governments.

Though revenues appear to be down, Ask said he’s not yet been given a directive for making ends meet.

“Other than the general directive, that if revenues are depressed, then you have to start tightening your belt,” he said.

In Oregon, the state is shaving its losses through state-mandated furlough days. In Montana, some businesses are complaining out loud. Sen. Jeff Essman of Billings said there’s probably no chance that the ban would be reversed — at least not any time soon. The next legislative session is 14 months off, and he doesn’t foresee a special session for that one issue. In the meantime, he’s trying to get a better handle on the ban’s far-reaching impacts.

And the savings?

As one department counts lost revenues, another department cites potential for savings. Information provided by the Montana Department of Health and Human Services points out that businesses may now see significant reductions in fire insurance, cleaning costs and health insurance premiums. Besides a range of health benefits, studies also show that employees who work in a smokefree environment typically miss fewer work shifts due to illness.

Montana has yet to put a price tag on such benefits, but a Minnesota study has done just that. The report, published in April 2009 in the American Journal of Public Health, concludes that the bill for health problems traced to secondhand smoke ranges between $152 million and $330 million each year. Using $228 million as the state’s target figure, the price tag of compromised health averages out to nearly $45 per resident.

No turning back

As Arntzen and Schmalz ponder the numbers, they’re urging the industry to move forward.

“It’s inevitable,” Arntzen said. “We’ve encouraged them not to go down that (reversal) road.”

Instead, they’re brainstorming ways to bring people back and to entice new customers in. Promotions are good, but customer service is paramount, they say. Smokers need more than a bench outside in the dark. They need to feel a part of the action. Smoker shacks need to be comfortable, with privacy, heat and lights, Schmalz said.

“Some places have put coffee and hot chocolate out,” she said. “There’s even talk of putting in sound.”

Above all, anyone stepping into a casino for the first time should be given red carpet treatment. Arntzen likens the experience to eating in an unfamiliar, exotic restaurant. Suggestions and guidance help customers enjoy the experience and make them want to come back, he said.  

Meanwhile, Arntzen and Schmalz continue to monitor weekly revenues, eager for signs that the worst is over.

“There are a lot of good reasons 10 (percent) seemed like a good number,” Arntzen said. “And maybe 10 will be the number. But it’s the sixth week into it. It won’t happen quickly.”

Contact Linda Halstead-Acharya at LHalstead-Acharya@billingsgazette.com or 657-1241.

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