A trial to approve Detroit's plan to exit its $18 billion
bankruptcy, the largest municipal crash in U.S. history, begins in
late July. Flawed revenue projections may undermine its feasibility,
creating a key legal hurdle to win approval by the court. On a
practical level, a revenue shortfall could knock the city down just
as it is getting back on its feet.
Detroit Emergency Manager Kevyn Orr projects that wagering tax
revenue from three local casinos, the city's third largest source of
cash, will remain essentially steady as far ahead as 2023.
Orr has described the gambling taxes as Detroit's most stable source
of money. But casino revenue has declined of late in Detroit itself
and in recent years traditional gambling hubs like Nevada and New
Jersey as well as relative newcomers to the wagering scene, such as
neighboring Ohio, have seen swoons.
"Projecting casino revenue is notoriously difficult," Moody's
Investors Service casino analyst Keith Foley said. "But nobody is
saying it is going to get better."
For instance, casino revenue from Atlantic City has roughly halved
since 2007, a drop no one saw coming, Foley said. Total U.S. casino
revenue in 2012 was still just shy of a 10-year peak of $37.5
billion set in 2007, according to the American Gaming Association.
A litany of factors stack up against Orr's forecast, industry
analysts and experts say: younger people show little interest in
gambling, the casino market is saturated, and thousands of local
residents are likely to see their wages drop due to the bankruptcy
Bill Nowling, a spokesman for Orr, says the casino tax projection is
conservative and was calculated by Detroit's financial restructuring
advisors, Ernst & Young. He said the calculations were also based on
anticipated Michigan unemployment rates "continuing to improve and
inflation to hold at or below 1 percent annually."
He declined to elaborate on projections but said if they were too
high, Detroit "will live within its means and will match spending
with available revenue."
The casino revenue has already been the subject of legal wrangling
in the bankruptcy. In April, the bankruptcy judge approved a deal
brokered by Orr that kept the casino revenue from being diverted to
two creditor banks.
THE RISK OF A DROP
In fiscal year 2013, casino taxes brought in $174.6 million, down
3.7 percent from $181.4 million the year before, according to Orr's
latest plan of adjustment filed in May. That was nearly 17 percent
of Detroit's general fund revenues, with only income taxes and state
funds larger revenue sources.
Orr's plan predicts it will continue to drop to just over $168
million in 2015, then recover to its 2012 level by 2023, at a growth
rate of 1 percent a year from 2016 until 2023.
But just a 1 percent annual downturn in wagering taxes after 2016
would lead to a more than $25 million shortfall in 2023 alone,
according to calculations by Reuters.
Overall, revenue at the three casinos fell 4.75 percent in 2013. The
decline has continued so far this year, with revenue over the first
four months falling more than 6 percent from a year earlier.
"Obviously they are going to have to justify this projection at
trial," said Richard Larkin, director of credit analysis at
investment bank HJ Sims. "Casino revenue is not a traditional,
long-term revenue source."
A flaw in projecting casino revenue "could signal far deeper
problems with city's plan of adjustment and the city's intended
plans for recovery," said Peter Hammer, a law professor at Detroit's
Wayne State University.
"It decreases substantially the confidence you have about the
viability of the rest of the plan, which involves much more
complicated issues," Hammer said.
Moody's Foley has a similar concern about the casinos: "What if
Detroit has another 5 percent decline next year? Then their budget
is already way off track."
After all, Detroit is not alone in seeing a fall off in casino
revenue. It is down in Illinois, Indiana, Iowa, Nevada,
Pennsylvania, Missouri, Connecticut, Atlantic City and Ohio in the
past two years, according to figures from each state.
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TEMPORARY OR LONG-TERM DECLINE?
Analysts and backers of Orr's projections say there are factors that
might mitigate a slide in Detroit's casino revenue, compared to
other areas. State law allows only three gambling houses in the
city, a cushion against more competition. The city is the most
convenient gambling center for southeast Michigan, northeastern
Indiana and northwest Ohio.
Jennifer Kulczycki, a spokeswoman for the company that owns one of
the city's casinos, Greektown, said that while revenue had softened,
"we are optimistic for things to return to previous levels - and
then some. The Detroit market is 14 years old and it has been very
A central issue is whether these declines are
temporary or permanent.
In an April report, Moody's Foley warned that Detroit's bankruptcy
threatens a reduction in gambling spending because city employees
face lower pensions and retiree health benefits under Orr's
restructuring plan. The city is Detroit's second biggest employer,
according to Crain's Detroit Business.
Demographics are also a worry, said Alex Calderone, a business
turnaround specialist based in Michigan, who was part of the team
that took the city's Greektown Casino-Hotel through bankruptcy
between 2008 and 2010. Greektown is up and running under a new owner
- Dan Gilbert, the founder and CEO of Quicken Loans, who is
investing heavily in downtown Detroit.
Standing in the casino, surrounded by the cacophony of slot machines
and clouds of cigarette smoke, Calderone asked: "Where are the young
people?" There is no replacement for the predominately older age
group who gamble, he said.
"Young people have little inclination to play slot machines,"
according to a recent analysis by Deutsche Bank. It cited research
by the Meczka consulting group, which said only 18 percent of people
aged between 21 and 35 visit casinos.
IN AN URBAN DESERT
Experts also look to Las Vegas as a leading indicator in gambling
behavior. According to the Center for Business and Economic Research
at the University of Nevada, more people now visit the Vegas strip
to eat and go night clubbing than gamble.
But Detroit is not Vegas. Casino-hotels on the Vegas strip such as
Caesar's Palace and Wynn Las Vegas have spectacular nightly shows,
and high-end bars, restaurants and shops. Moreover, Detroit's casino
tax is based on gambling revenue alone.
While Detroit's biggest casino, MGM Grand Detroit, part of MGM
Resorts International<MGM.N>, would not look out of place among the
glass and marble casinos of the Vegas strip, it and the nearby
MotorCity sit in a virtual urban desert. Their surroundings are
bleak - a far cry from glitzy - and perpetually warm - Las Vegas.
Last year revenues fell 6.3 percent at the MGM and 1.2 percent at
MotorCity, and have continued to drop this year. Greektown's revenue
fell more: from $352.1 million to $328.3 million, or 6.8 percent.
In contrast to its larger two rivals, Greektown is in need of a
makeover. Its carpets are old, its facilities drab.
But plans for a full face lift have been scaled back. According to a
February filing with the Securities and Exchange Commission,
Gilbert's company that owns Greektown, Athens Acquisitions LLC, said
a planned $150 million renovation had been cut back to a $25 million
to $50 million refurbishment.
"In a casino that's basically just changing the carpet," said Ken
Adams, a gaming consultant.
(Reporting by Tim Reid; Editing by Dan Burns and Peter Henderson)
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