Story first appeared on freep.com.
The City of Detroit’s financial lifeline for its bankruptcy restructuring — tens of millions in annual taxes from casino gambling — has been faltering as downtown gaming revenue is on pace for its largest annual decline since the first casinos opened in 1999.
Continued creep downward and loss of the tax revenue could mean less money for restructuring Detroit’s city services. Bill Nowling, spokesman for emergency manager Kevyn Orr, said the EM’s office is closely monitoring Detroit’s casino situation.
“If we need to make an adjustment in our (financial) assumptions as a result, we will.”
The fall in business could indicate a shrinking of the casino business market in Detroit and herald fiercer battles for market share of what’s left among the Detroit three — MGM Grand Detroit, MotorCity Casino Hotel and Greektown Casino-Hotel.
Gambling revenue this year through November is down 4.3% to $1.2 billion. The state and city split up taxes from the three casinos. Roughly speaking, the state takes about 8% and the city from 10% to 12%, depending on the year and adjusted gross gaming revenue for each casino. The lower the revenue, the lower the tax receipts.
Orr this week called Detroit’s cut — $171 million in 2012 — one of the city’s most important revenue streams, representing about 14% of the total money coming in each year. But it has been sliding, down from $177 million in 2011.
“Without it, the city couldn’t operate,” Orr said Wednesday in bankruptcy court testimony.
Non-gaming revenue from hotel rooms, food sales and other sources at the three casino sites are not part of the equation.
Detroit’s lawyers are hoping to set aside a large portion of the taxes for improving dismal city services, if a federal bankruptcy judge allows a deal to go through that would release the casino tax revenue back to the city. The tax stream was pledged as collateral in 2009 for a massive city debt that came due.
To be sure, with $1.4 billion in total gambling revenues last year, the three casinos are still serious cash-generators and in no danger of closing. Still, their significant drop in revenue could have direct effects on the quality of Detroit’s amenities and resident services as the city aims to emerge from bankruptcy with sustainable finances.
Gambling industry experts and casino operators blame most of the decrease on the four new Ohio casinos, particularly Hollywood Casino Toledo, which let northwest Ohio residents gamble closer to home.
Another factor was the January expiration of the Social Security payroll tax cut, which was worth about $1,000 to a worker making $50,000 a year. The growing proliferation of casino gambling nationwide has also cut into gaming revenues for many regional-draw casinos nationwide such as Detroit’s.
Greater competition
It has been a down year for all three casinos.
Gambling revenues through November were 5.3% lower at MGM Grand than a year ago and 6.7% lower at Greektown, according to the Michigan Gaming Control Board.
MotorCity Casino had the smallest decline at about one-half of 1%. But it also paid for promotions and giveaways: Overall net revenues, which include food and beverage and hotel stays, were down 8% as of June 30, while the casino’s promotional expenses grew, according to figures compiled by BofA Merrill Lynch Global Research.
MotorCity also spent money this year on hundreds of new slot machines and to update the design of its gaming floors to draw in more gaming dollars.
“It’s definitely become more expensive to operate in the Detroit market, which happens whenever competition heats up, as it did with Toledo,” said Jenny Holaday, MotorCity’s senior vice president of operations.
Industry experts say revenues are down in regional-draw casino markets across the country, and especially so in areas such as Michigan and Indiana, where local properties have new competitors.
More casinos on way
There are now nearly 1,000 casinos within 41 states (including tribal lands) with more soon to open when Massachusetts becomes the 42nd state. The Kentucky state Legislature is debating whether to put legalized casinos on the ballot next fall.
Michigan has 22 tribal casinos within its boundaries, with FireKeepers Casino near Battle Creek the closest to Detroit.
New casinos lead to more new casinos. Just as the Windsor casino spurred efforts for Detroit’s casinos, officials often contend that their city or state must build its own casinos in response to neighboring casinos to recapture the gambling dollars (and potential tax revenues) that are flowing across their borders.
But each new property means less potential business for the others.
From an economics standpoint, communities hosting casinos want visitors from as far away as possible so that gambling proceeds are “new” money and not local dollars that would otherwise be spent elsewhere in the community.
“There are many markets where saturation has been reached or is close to being reached,” said Joseph Weinert, executive vice president of New Jersey-based Spectrum Gaming Group. “All things being equal, customers will chose to gamble at the casino closest to their home.”
The shine may already be wearing off Toledo’s new casino, which opened in spring 2012.
The casino’s third-quarter revenue was down 15% from a year earlier to $48.9 million, according to corporate filings by its owner, Penn National Gaming.
Caesars Entertainment does not give financials for Caesars Windsor in its filings, although the gaming company itself reported a $761-million third-quarter loss.
Hotels hurt profits
Insiders say Detroit’s casinos were most profitable in their early years when they operated in temporary facilities and before they took on debt to build large and expensive permanent digs.
Politics played a role in the grandeur and size of the properties, as each one was mandated to have conference space and no fewer than 400 hotel rooms to provide amenities thought to be lacking in the city at the time.
A deal negotiated by former Mayor Kwame Kilpatrick got the casinos out of an 800-room requirement in exchange for, among other things, $102 million cash to help balance Detroit’s budget.
“All of them were making a big profit before the permanent facilities, and all of them were in trouble when they went to the large, fancy facilities,” said Jacob Miklojcik, a Lansing-based gaming consultant.
Although none of the casinos discloses hotel occupancy rates, Miklojcik suspects that the 400-room hotel mandate was still too big and wouldn’t have happened if the casinos had a choice. “Some of those are pretty massive costs per key,” he said.
Both MGM Grand and MotorCity opened their temporary locations in 1999 and full properties in 2007 — just in time for the recession.
“The bottom fell out right when everyone’s permanent facilities came online,” said Holaday, the MotorCity executive.
Greektown was the last casino to open, in 2000, and did not transition to its full facility until 2009. It is the smallest property of the three.
Despite shedding $500 million in debt during bankruptcy, Greektown’s finances are still somewhat precarious, and the casino hasn’t reported an operating profit since emerging from Chapter 11 in 2010.
Quicken Loans founder Dan Gilbert bought Greektown this spring through his casino business, Rock Gaming, which has made management changes and plans “significant” renovations next year to the casino property. Rock Gaming owns two of the four Ohio casinos, in Cleveland and Cincinnati.
In an interview, Rock Gaming CEO Matt Cullen said he doesn’t believe Detroit’s casino market will continue shrinking.
“I don’t think we agree that the size of the pie has gotten smaller and will stay smaller,” Cullen said. “There are a lot of people still that are rediscovering the city of Detroit and who are coming down here that haven’t come down here for a long time. And there’s still people that don’t come down here.”
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