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RURAL BOOMTOWNS: THE RELATIONSHIP BETWEEN ECONOMIC DEVELOPMENT (c) Housing Assistance Council, 2000 Deadwood, South Dakota
While Deadwood, South Dakota´s history sprang from the boom-and-bust cycles of the gold-mining industry, its most recent gold-mine was in the form of legalized gambling. Even though the growth brought on by the gaming industry was titanic and compacted into a very short amount of time, the city´s status as a National Historic Landmark District enabled it to capture a significant amount of gaming revenues and channel them into housing, as well as place very strict regulations on land use and architecture. However, gambling also brought with it a bottom-heavy service economy that made both rental and single-family housing unaffordable, even when the city went into a housing glut. History Deadwood, S.D., the seat of Lawrence County, has had more than its fair share of fame during the past century, starting with the Black Hills Expedition of 1874. Led by Lt. Col. George Custer, the expedition verified rumors of gold in the region, sparking the Black Hills gold rush. As in many other episodes of U.S. history, fortune seekers arrived in large numbers, violating the terms of U.S. treaties with local Native Americans. In response to these incursions on their territory, the Sioux began a war which, despite the defeat of General Custer and his troops at Little Big Horn in 1876, ended in their defeat. The new treaty, signed in 1877, ceded the Black Hills to the U.S. and confined the Sioux to smaller reservations. Gold was first discovered in Deadwood Gulch in 1875. In one year Deadwood grew from a muddy gulch of tent-dwelling miners to a frontier town with stores, entertainment, an elected mayor, and a population of around 5,000. This "Wild West" period ensured Deadwood´s place in history and popular imagination as the site of big gold finds, lawlessness, gambling, prostitution, whiskey-drinking, and colorful personalities such as Calamity Jane and Wild Bill Hickok. Since its beginning, Deadwood´s economy has been extremely vulnerable to booms and busts due to changes in the price of gold and the costs of mining. Timber and agriculture (mainly cattle ranching) became important parts of the economy, but never provided protection against slumps in the gold industry. Soon Deadwood´s surface gold deposits were exhausted, and Deadwood became the center of supplies, services, financing, transportation, and ore processing for the surrounding country´s mines and residents. Fires and floods destroyed much of the town several times, but residents determinedly rebuilt. The development of new gold extraction techniques enabled miners to access previously hidden deposits, ensuring that the region´s economy would remain viable. In 1890, the arrival of the railroad in Deadwood and the development of a new, cyanide-based process for extracting gold from low-grade ores combined to create a new expansion of Deadwood´s economy. The availability of raw materials and transport led many companies to build ore processing plants. Government demand for industrial supplies and labor during World War I caused a decline in gold mining, and many local mines closed down because they were unable to bear the high costs during this period. The large Homestake mine, founded in 1875, remained open and supported a great deal of the region´s economy. After the war, lower costs of production and higher gold prices led to the expansion of mining, but it declined again during World War II when all gold mines were abruptly closed by a 1942 federal order. During the 1920s and 30s Deadwood remained a regional destination for gambling, prostitution and alcohol consumption (especially during Prohibition). During these years increased car ownership across the country and improvements in South Dakota´s roads allowed tourism to become a significant part of the Black Hills economy. After World War II, two factors contributed significantly to a decline in Deadwood´s economy and population. One was the increasing automation of mining, which led to job losses and out-migration as people left to find work. The other was the growing ascendancy of the car over the railroad, which created declines in two of Deadwood´s other economic sectors, also leading to job losses and migration. By the 1950s, Rapid City had displaced Deadwood as the region´s transport and wholesale distribution center. By 1961, Deadwood´s population was down to 3,045, even though the entire town had been designated a National Historic Landmark. During the 1960s the construction of Interstate 90 eight miles to the north led to Deadwood´s demise as a retail center. Its stores lost customers to national chain stores that opened in Spearfish and to a new mall in Rapid City (I-90 runs through both these locations). Many people say that "Deadwood was dying" in the 1990s. Deadwood´s population had declined to 1,830 by the 1990 Census. Mining and summer tourism remained the major industries in the area. The honor of being listed on the National Register of Historic Places was not attended by any funding other than tax incentives. The dearth of public and private resources for historic preservation meant that an estimated $20-$60 million worth of restoration was needed. Deadwood´s housing stock was in poor condition: most homes were about 100 years old, and had numerous physical problems related to owners. inability to afford sufficient maintenance and to changes in construction standards. The gulch was barely wide enough to accommodate two parallel streets, and most housing was terraced into the hillsides. A significant amount of nearby land was unavailable because it was part of the Black Hills National Forest. The dearth of flat land meant that sites (if they could be found) and construction would both be expensive. The Boom: Gambling In 1986, a group of young local business owners conceived the idea of legalizing gambling in Deadwood to create economic development and formed the "Deadwood You Bet Committee." The idea came from tourists who would sometimes expect more decadence, particularly gambling, of Deadwood than it had to offer. At that time, Atlantic City and Nevada were the only locations in the U.S. with legal gambling, although by some accounts gambling had never completely died out in Deadwood and continued underground. To appeal to a broad range of people, the proposal for "You Bet" included not only predictions of economic development from gaming, but a plan for fees and taxes on gaming to be used for historic preservation. South Dakota had no personal or corporate income tax, so special fees and taxes would be necessary for the state to capture any portion of profits from gaming. You Bet lobbied the 1987 South Dakota legislature to pass their proposal, but without success. They refused to be discouraged, and immediately began collecting signatures for a statewide ballot initiative on legalizing gaming in Deadwood. At the same time Deadwood´s City Commission established a Historic Preservation Commission to oversee the National Historic Landmark District. Later that year, Deadwood became a Certified Local Government, qualifying to receive federal funds for historic preservation, and promising to use federal standards for alterations in the Historic District. When several historic buildings burned to the ground later that year, You Bet used the news footage of the collapsing buildings to garner support for their initiative. They collected over 30,000 signatures to get the initiative on the 1988 ballot, and it passed with 64 percent of the vote. Before gambling could begin in Deadwood, the state legislature had to write and pass legislation based on the ballot initiative, Deadwood residents had to hold a local referendum on legalizing gambling, and a state gaming commission had to be assembled and write detailed regulations to implement the new law. Accomplishing these took over a year, during which time Deadwood established a Local Historic District -- a smaller area within the National Historic Landmark District encompassing the downtown commercial center. State law empowers a Local Historic District to establish strict guidelines for any new construction or rehabilitation and to withhold building permits if the guidelines are not followed. Gaming was authorized to begin on November 1, 1989, and 14 casinos were ready to open their doors that day. Gambling in Deadwood was limited to slot machines, blackjack and poker, with a maximum bet of $5. One location also offered simulcast dog and horse race betting. Gambling was legal only on sites zoned for commercial use within the city limits. There was an 8 percent tax on all gaming revenues, of which 40 percent went to the state, 10 percent to Lawrence County, and 50 percent to the Deadwood Historic Preservation Commission (minus the expenses of the state gaming commission and approximately $100,000 for the statewide historic preservation grant program). There was also a $2,000 annual licensing fee for each gaming device, the entirety of which went to the Historic Preservation Commission. The impact of gaming on Deadwood was stronger than the community had expected. Outside companies came in either to start up casinos or to speculate on commercial property. Downtown property owners were able to sell their buildings for as much as 200 times their previously assessed value, and rents increased in tandem. The average assessed value of commercial property in the city increased 527 percent between 1990 and 1994. As property values rose, so did property tax assessments. Most owners of commercial property could not afford to pay the taxes with either the income or the rent from retail businesses, and converted stores into casinos. In the first nine months of legal gambling over 70 buildings changed from retail or wholesale businesses to gaming operations. The total loss of businesses was estimated at only 35, which can be attributed to the large number of pre-existing vacancies and to businesses that used more than one building. Some of these businesses had been expected to move or close down anyway because they were not viable in Deadwood´s depressed economy. However, more and bigger casinos opened than had been expected: a consultant had estimated that 150 to 200 machines would be licensed, but the number turned out to be 2,200. In the first eight months, $145.5 million was wagered -- more than 72 times the amount the state Commission on Gaming had estimated -- and at one point more than 85 casinos were operating. The immediate effects of gaming were bound to cause some distress. Apart from the natural sadness people felt over changes in the character of their community, Deadwood did not have the money or the time for much planning, and in any case there was no previous example from which to learn. In addition, according to historic preservation consultants, the boom "compressed into less than one year the equivalent of 20 years of construction in a similar community with normal growth." The city´s staff (which did not increase 20-fold) lacked the capacity to respond to all the new demands placed upon it. Predictable problems were the strains on already deficient infrastructure systems, the increase in traffic and parking congestion, and the issuance of some building permits that later were determined to be historically inappropriate. The town also changed for the tackier, with bright slot machines visible in almost every Main Street storefront, a proliferation of garish signs, and loudspeakers and barkers outside many casinos. In the year following gaming legalization, Deadwood´ s city government moved to control the frenzy of casino development. Fortunately, some higher tax revenues related to gambling were already available to pay for new city expenditures. Deadwood applied for and received a grant from the National Trust for Historic Preservation for part of the costs of hiring planning consultants to develop a Comprehensive Historic Preservation Plan. The city created new staff positions: city planner, historic preservation officer, zoning administrator, and building inspector. They also approved and began to implement the Comprehensive Historic Preservation Plan once it had been created, established a sign ordinance, and amended zoning and subdivision ordinances. After the historic preservation officer was hired, Deadwood´s economic activity increasingly revolved around the Historic Preservation Commission. The preservation officer administered the commission´s budget and reviewed all design plans for appropriateness according to the design guidelines. Plans were required for any change in the Local Historic District or in the rest of the city (the National Historic Landmark District) that involved state or federal funds or required a building permit. Thanks to far-sighted provisions in the legislation authorizing gaming, Deadwood´s historic preservation budget was not limited to paying for rehabilitation of buildings. Expenditures for infrastructure, tourism, and expanded government services were authorized expenses on the grounds that they were all necessary for effective historic preservation. The budget also funded restoration of historic city properties, a revolving loan fund for safety repairs, grants for retaining walls (a necessity on any hillside property), and a Chamber of Commerce program to promote tourism. The historic preservation officer also supervised the visitor center, and provided guidance for real estate agents, buyers, and new businesses. Betting (and Losing) on Better Jobs From 1989 to 1998, gaming led to significant improvements in Deadwood´s economy, infrastructure and municipal services. Total gaming tax revenues up to May 1998 were $3.6 billion, more than half of which were allocated to Deadwood´s use, and 4 percent of which went to the Lawrence County Commission. Property and sales tax revenues also increased 145 percent in the first six years of gaming, and tourism also increased, as indicated by the growth in hotel and motel facilities, in sales tax revenues, and in attendance figures at various attractions. Between 1990 and 1994 the government spent $29.3 million on building and infrastructure restoration, and the private sector spent between $34.8 and $53.6 million. The city´s budget increased 595 percent between 1989 and 1995, more than twice as much as the demand for municipal services did. A "trolley" bus service was even put into place to move visitors around the downtown district. Gaming was not an unmitigated good to Deadwood´s economy, however. Most casinos had no profits until 1992, and 38 percent still had none between 1992 and 1994. Many casinos went out of business, and by 1998 there were only 15 owners compared with a one-time high of 75. The Homestake gold mine remained the biggest local employer, and therefore the community remained vulnerable to fluctuations in the gold market. Deadwood´s retail sector was pushed out by the high property assessments on the basis of commercial sites. potential value as gaming establishments. As retail establishments could not produce the profits to pay such high taxes, many stores either went out of business or moved to the city of Spearfish -- the new retail magnet. In addition, gaming did not provide the kind of stable, well-paid jobs that many had hoped it would. The new casino jobs had highly variable hours and frequent turnover, with hours changing between the summer peak tourism season and the rest of the year. The unemployment rate for Lawrence County remained around 3.5 percent from 1994 to 1998, but many casino workers could not work as many hours as they wanted or needed. Even for full time work, wages were not high enough to keep a family much above poverty. In 1998, wages started at about $6 per hour, and a 1994 survey found an average annual wage of $13,494 (not including tips) among gaming employees. Not surprisingly, there were problems with employee theft, and employees who handled gaming money became subject to criminal background checks. A 1992 study estimated that 1,800 jobs in Deadwood were generated by gaming legalization. Since Deadwood´s own population was 1,830, the arrival of commuters and migrants to fill the new jobs was inevitable. The first outside job-seekers arrived from Las Vegas and other South Dakota cities, as well as states in the surrounding area. A different 1994 survey found that 33 percent of casino workers lived in Deadwood, 28 percent in the nearby city of Lead, and 19 percent slightly farther away in Spearfish, with the remaining 20 percent living elsewhere. As gaming gained a foothold in Deadwood, fewer outsiders move to the area for jobs than in the beginning. Gaming improved jobs in one sector, though -- higher property tax revenues enabled the Lead-Deadwood School District to increase spending per pupil from $3,340 in 1989 to $4,230 in 1995; most of this money was spent on increased pay and benefits for employees. Housing Affordability Deadwood residents expected the legalization of gaming to create a housing shortage, as there was little money to build any housing beforehand. Residential and commercial properties were affected as outsiders arrived to set up and run gaming businesses. At the same time that the demand for housing shot up, speculators began buying houses, driving prices even higher. Average house prices in Deadwood went from $30,000 in October 1989 to $50,000 in November 1990. Many local homeowners could not resist selling their property. This situation lasted about a year or two, while many out-of-state construction contractors were living in town. Most low-income residents (including casino employees) could not afford to live in Deadwood, and were doubling up in rented houses or moving to other towns. The impact on homeowners was less severe due to the fact that higher taxes were largely offset by grants and loans for repairs from the Historic Preservation Commission. In 1990, a local private developer built a 30-unit project called McKinley Apartments with Rural Development funding and rental assistance, but there was still an obvious need for additional affordable rental housing. At about the same time, a for-profit developer from St. Paul, Minnesota called MetroPlains followed suit by converting a historic hotel into a 14-unit project called the Gillmore Apartments.1 At the end of 1992, the nonprofit Deadwood Community Housing Organization was formed with the goal of creating a sufficient supply of affordable housing. Given Deadwood´s topography, locating a large enough site near downtown was a difficult challenge. The next step, putting together a financing package, took two years.2 In order to receive funding from the Neighborhood Reinvestment Corporation, the Deadwood Community Housing Organization became one of its affiliates, changing its name to Neighborhood Housing Services (NHS) of the Black Hills. After concluding that they lacked the skills to start construction of the housing, NHS of the Black Hills asked the advice of MetroPlains, who had become their limited partner for tax credit purposes, and ultimately turned project implementation over to them entirely. The housing development posed a number of unusual challenges. A historic house, built by General Custer´s secretary, sat on the site, requiring detailed compliance with Deadwood´s historic preservation guidelines. The steeply sloping site required special grading, drainage, a strong foundation, and a retaining wall to prevent the hillside from collapsing under the weight of the 24 other apartments built behind the historic house. A creek ran through one half of the property, so in order for the apartments to have a parking lot, MetroPlains had to divert it underground. All of these considerations together cost MetroPlains $107,000 and added an extra year to the project time line. The project, named the Hills Apartments, was completed in 1997. It offered one-, two-, and three-bedroom units: half the units to households at 50 percent or less of area median income (AMI), 40 percent of the units to households from 50 to 60 percent of AMI, and the remaining units to households from 60 to 80 percent of AMI. After about a year of gaming, it became apparent that Deadwood was not attracting a substantial number of new residents with disposable incomes, other than a few casino managers. Speculators were unable to sell off houses at the prices they had hoped for, and most decided to recoup their losses by becoming absentee landlords. The construction of the new apartments coincided with the tapering off of much of the commercial construction and restoration in Deadwood. Departing contractors and recently laid-off mine workers freed up rental housing which, in addition to the new housing, cut down on rental demand until Deadwood´s housing shortage actually disappeared. Rents subsequently decreased, but property assessments did not: Between 1990 and 1994, the assessed value of residential property in Deadwood actually rose 166.2 percent. As of 1998, physical quality and cost burden remained significant housing problems. Deadwood residents maintained that the new money available from gaming incomes and taxes did not make a significant change in local housing quality. Cost burden still affected any single person working full-time at $6.50 or less per hour paying fair market rents, increasing for larger households at the same income level and for single people who could not get full-time work at that wage. Demand for Section 8 rental assistance increased since 1989: as of 1998, the program served approximately 50 more households, and the time they spent on the waiting list grew longer. The local Section 8 administrator attributed the increase partly to stagnant wages and to households' loss of income from welfare reform policies that were instituted in December 1996. Faced with this situation, the Neighborhood Housing Services of the Black Hills decided not to develop any additional housing, but to concentrate on their other programs, focusing on homeownership and expanding their services to other counties. The Deadwood block club program began in 1996, organizing groups of residents who received a small amount of city funds to plan and implement neighborhood improvements. Activities were usually a mixture of socializing and upgrading the physical appearance of the neighborhood. NHS homeownership programs also offered:
Lessons Learned As of 1994, a majority of Deadwood residents supported gambling in their town, despite some serious reservations. However, 76 percent believed the gambling industry had more influence over the city commission than individual citizens, only 50 percent expressed satisfaction with life in Deadwood, and 29 percent desired to move away. In spite of these reservations, when approval of gambling went to the ballot box, residents came out to vote "yes." Almost everyone would agree that the atmosphere of Deadwood as a community changed in the wake of the gambling boom. The new people, new money and new rules and regulations swept away the old informal ways and created deliberate planning processes for community activities and institutions, such as the new recreation center. One benefit of gaming was that Deadwood´s history became better known through the increase in tourism and marketing. Deadwood´s status as the sole gambling venue in the center of the country has since been eroded by gaming on Native American tribal lands. As of 1998, nine South Dakota reservations instituted gaming, and many other states legalized gaming in limited locations and instituted state lotteries. However, considering the huge impact of gaming on Deadwood, perhaps the competition from other places was a check on even more overwhelming effects. No other economic development efforts in Lawrence County have been nearly as successful as the institution of gambling. The local hospital is expanding, a computer chip manufacturer was persuaded by free land to relocate its factory there, and retirees are moving to the area in greater numbers. Nonetheless, as in the rest of the rural Great Plains, the economy has been declining gradually throughout the 1990s. Around Deadwood, the timber industry is gradually fading because of stricter environmental protections, and the economy remains vulnerable to any change in the gold industry. In January 1998 the Homestake mine laid off a significant proportion of its workers, approximately 500 people who had been employed at wages of $20-$25 per hour. Those laid off left the area for other states, as there are no other jobs for them in the Black Hills. Deadwood´s experience has shown that gaming, if carefully regulated, can benefit communities. The city did not have to offer any incentives such as land or tax preferences to attract gambling businesses. On the contrary, they were able to impose very strict construction regulations and high taxes without discouraging business relocation. This ability does not accompany most economic development schemes -- only those that involve an industry with few other optimal locations available. The legislation legalizing gaming also specified the uses of gaming tax revenues. These limitations, in addition to Deadwood´s comprehensive planning process, protected Deadwood from pressure to use the new tax money in ways other than as originally intended. The gaming industry benefitted Deadwood by preserving its historic resources, improving its infrastructure, and increasing tourism. Other towns that have legalized gambling have not necessarily had the same success at regulating the industry, and the more common legalized gambling becomes, the less leverage they will have to do so. However, historical preservation did not guarantee the preservation of affordable housing. Housing became a source of profit speculation, rather than a long-term investment in the area´s livability. The community has also generally been disappointed by the quality of jobs generated by gaming and the income for most positions has not been enough to keep a family out of poverty -- much less bring them into homeownership. Changes in Deadwood´s community character would have accompanied any kind of economic development. While Deadwood was hit all at once by the glittering tidal wave of gambling, Fremont County, Colorado had to deal with the effects of a different kind of monolith -- a new federal prison.
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