Political fight in Salem focuses on Hayden Island delis

House Speaker Tina Kotek’s bid to clean up Hayden Island’s “Lottery Row” gambling complex is spotlighting a dirty little secret in Oregon: hundreds of bars and cafes survive via gambling profits — despite a state constitutional ban on non-tribal casinos.

At the behest of Kotek’s Hayden Island constituents, the North Portland Democrat is pushing a bill that would put some teeth into the Oregon State Lottery’s “casino prohibition rule.” The rule states that bars and cafes aren’t casinos if more than half their total sales come from food, drinks, cigarettes and other non-gambling items. Many bars and cafes comply by deeply discounting food, drinks and cigarettes to boost those sales.

House Bill 2007, introduced at the request of the Hayden Island Neighborhood Network, would instead require retailers to prove that more than half their profits stem from non-gambling activities. Hayden Island residents are frustrated by increasing crime and vice at Lottery Row, a strip center where all 12 shops host six electronic slot machines owned by the state lottery.

When a House committee held a hearing on the bill last week, one of the state’s largest lottery retailers, Dan Fischer, sent a letter to Kotek that acknowledges his reliance on gambling profits.

“If HB 2007 were enacted, many retailers would simply go out of business, and many Oregonians would lose their jobs and businesses,” wrote Fischer, the Nevada-based president of Oregon Restaurant Services Inc., which operates 40 lottery delis, including the popular Dotty’s chain. He estimates there are now more than 300 such establishments in Oregon, which he calls “Quick Serve Cafe-Style Restaurants.”

Fischer’s letter warned that Kotek’s bill could cost Oregon “millions of dollars in revenue that currently go to needed public services, with schools getting the largest share.”

On that Fischer may be right, says Bob Whelan, an economist at Portland’s ECONorthwest who has represented many gaming industry clients.

“If it wasn’t for the lottery, there would be no Dotty’s,” Whelan says.

And lottery delis aren’t the only ones that would be in jeopardy, he says. “Most of these places would go out of business, including many bars and restaurants. There’s no doubt in my mind.”

For years, Whelan has inspected the books of many lottery retailers.

“Effectively, they lose money on food and drink and they make it up on lottery,” Whelan says. “That’s been my experience looking at dozens of these businesses.”

‘A casino business’

Dotty’s pioneered the lottery deli format in Oregon, since copied by other companies. The delis usually are small, bare-bones cafes geared to gambling. The bulk of Dotty’s customers, Fischer’s letter notes, are older women who won’t frequent traditional bars and taverns.

Fischer’s letter admits that “alcohol service is not the primary focus” of Dotty’s delis. The typical Dotty’s sells only three alcoholic beverages before 3 p.m. each day, he says.

He also contends that Dotty’s offer a “larger and more complete menu offering than most neighborhood bars.

“Our expectation when you walk into a Dotty’s is that you feel like you’re in your grandma’s kitchen,” he wrote.

Hayden Island leader Ron Schmidt found that claim hard to swallow. “My what big teeth you have, grandma,” he said, in an allusion to Little Red Riding Hood.

“My grandma would take me to the woodshed if I took her to a kitchen like that,” said Schmidt, chairman of the Hayden Island Neighborhood Network.

Oregon Restaurant Services owns six of the 12 retailers at Lottery Row, and cloned some of its stores to open up new ones with different names, in a transparent bid to get around the state lottery’s limit of six slot machines per location.

At the Casa del Toro, one of the company’s Lottery Row outlets, a staff member once advised two lunchtime customers to eat elsewhere, as they were serving frozen burritos and the like.

If Dotty’s isn’t attracting customers with its alcohol or food, though, that points to gambling as its main line of business.

“Dotty’s is a casino business,” Whelan says flatly.

The 33 Dotty’s in Oregon earned $30.2 million in net revenue from electronic slot machines in 2012, according to data supplied by the Oregon State Lottery. Of that, Oregon Restaurant Services keeps $6.1 million for its share of commissions. On average, that’s more than $914,000 in net revenue per Dotty’s, and a $186,000 share for the retailer.

Fischer maintains that Kotek’s bill would be a burden for those lottery retailers that do survive, because it’s hard to allocate where profits come from. Whelan agrees, though he notes the actual cost of hosting video slot machines is minimal, mainly electricity, phone lines, and a portion of the space inside bars and restaurants, plus labor costs.

Schmidt says Hayden Island residents are hoping the bill would force gamblers into more “legitimate restaurants,” such as the Denny’s that just opened across the street from Lottery Row and got the OK to offer six video slot machines.

Kotek also is promoting a companion bill pushed by Hayden Island residents. House Bill 2008 would make it easier for cities, police and the Oregon State Liquor Control Commission to suspend alcohol sales at bars where there has been criminal activities.

“The speaker’s pretty serious about these bills,” says her spokesman Jared Mason-Gere. “Her intent is to pass them, and they’re very important to her constituents.”

But at a time when Democrats and Republicans alike are jockeying to boost state spending for public schools in Salem, it’s questionable whether there’d be the votes in the Legislature to crack down on lottery delis and risk losing millions of dollars that go to schools.

Speaker Kotek hasn’t asked for any fiscal impact statements for HB 2007, Mason-Gere says. “That’s a consideration for sure,” he acknowledges, noting Kotek isn’t “wedded” to particular terms in her bills.

Kotek hopes to meet with Fischer next week, Mason-Gere says.

In his letter, Fischer also offered a new concession long sought by Portland police. He says he recently signed a Good Neighbor Agreement that police prepared last summer, which sets voluntary restrictions at Lottery Row to limit negative impacts on neighbors.

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