Casino gambling was supposed to save Atlantic City.

Decline of Atlantic City Casinos Squeezes City

BY Robert Slavin
MAR 28, 2014

Casino gambling was supposed to save Atlantic City.

But with casinos sprouting throughout the northeast, to attract visitors the city is looking to its past for ideas, such as conventions and the lure of the seashore.

In the near-term however, the city's finances, closely linked to the fortunes of its casinos, look grim.

"There's a lot more competition for Atlantic City and it's not abating," said Howard Cure, director of municipal research at Evercore.

In 1976 New Jersey voters approved casino gambling in Atlantic City, spurring the opening of multiple casinos there starting in 1978. For many years, Atlantic City had the only casinos east of the Mississippi, drawing potential gamblers from throughout the eastern United States.

The city, on the ropes before the casinos came, became a one-industry town.

But starting in the late seventies Indian tribes started to gain approval to open gambling on their reservations. By the nineties states a few states including Delaware and West Virginia were approving casinos next to horse racing tracks.

In the 1990s, the small Mashantucket Pequot tribe opened what developed into one of the world's largest casino resorts in eastern Connecticut; the river of revenue that followed helped inspire an increase in both tribal and non-tribal gambling throughout the northeast.

Nearby states like Pennsylvania, Maryland, and New York have followed suit in recent years and potential gamblers feel less and less reason to travel substantial distances to Atlantic City.

Atlantic City has no population to its east because of the Atlantic Ocean and little population within 60 miles to its west, said Michael Meczka, president of Meczka Marketing Research Consulting.

Slot machines account for 85% to 90% of most casino revenues, and the same slot machines found in Atlantic City are now available in casinos in Maryland, Delaware, and Pennsylvania.

So there's no real reason for slot machine gamblers to drive long distances, Meczka said.

Gross casino revenues in the city declined 41% to fiscal 2012 from fiscal 2006, said Moody's Investors Service analyst Vito Galluccio. The revenues were down an additional 6.1% in 2013.

While Atlantic City government does not directly receive gambling revenues, the decline of these revenues is nevertheless hammering the government's finances.

Property values throughout southern New Jersey are declining, Galluccio said. But due to declining patronage for Atlantic City's casinos, the decline is particularly acute in Atlantic City.

The casinos constitute 70% of the city's property tax base. One way of determining commercial property values is by the amount of profit that can be made on the site, Galluccio said. Now that the casinos are bringing in less revenues and profits, they can argue that their properties are not as valuable.

They have been making that argument, filing legal cases and succeeding through either court orders or settlements in forcing the city to lower the valuation of their properties, Galluccio said.

One of the largest casinos in Atlantic City, the Borgata, won a major tax appeal judgment for 2009 and 2010 in October 2013. It is still appealing taxes in 2011, 2012 and 2013. Five of the city's 13 casinos have pending property tax appeals.

Property values in Atlantic City have declined from more than $20 billion in 2010, to $14 billion in 2013, to about $11 billion in this year, said Atlantic City's director of revenue and finance, Michael Stinson.

Moody's downgraded Atlantic City to Baa2 from Baa1 in November and gave the city a negative outlook, which was due to its belief that "declining casino revenues and ongoing tax appeals will continue to reduce the city's taxable base and further strain the city's weak financial position and increase its debt burden to above-average levels," Galluccio said.

Standard and Poor's rates the city A-minus.

As of Dec. 31, the city had $261 million in debt, Stinson said.

The decline in property tax base has weakened the city government's finances, according to several observers.

As of Dec. 31, 2012, the city had a narrow $2.3 million current fund balance, Galluccio said. This was 0.9% of revenues. Due to property tax appeal losses, the city had a financial statement loss of $10 million to $11 million in 2013, Stinson said.

The city has been selling bonds to cover major property tax refunds. As of November Moody's projected that the city would have direct debt burden of 2% of full property valuation by the end of the first half of 2014. This would be double the United States median. The city's unfunded pension liability is also an above average 1.9 times operating revenue.

City residents elected a new mayor in November 2013. Mayor Don Guardian is applying to New Jersey for $10 million in Transitional Aid and $12.5 million in an Essential Services Grant.

The city has not yet adopted a 2014 budget and is operating on a continuing resolution extending 2013 funding levels. In his proposed budget, Guardian is not assuming the city will receive the aid and has proposed a 45% jump in the property tax rate, Stinson said. The goal is to increase the total property taxes received to $229 million from $199 million.

The New Jersey Local Finance Board now has approval rights over Atlantic City government's budget. While the city council will vote on it, the board has ultimate authority, Stinson said. The board is expected to vote on the budget in May or June, Stinson said.

Guardian told The Bond Buyer that he was optimistic that the state would approve the two grants for the city, reducing pressure on it. This would allow the city to not increase its tax rate as steeply.

While the city acknowledges its fiscal distress, it sees the future of the city's casino gambling differently than many outsiders. Cure, Galluccio, and Meczka are all pessimistic about the city's gambling future.

Stinson said he expects the Atlantic City casinos' total gambling revenues should stabilize in the next three years.

The recent introduction of online gambling in New Jersey, which is flowing through Atlantic City's casinos, has been less popular than most observers expected. Yet this may grow, helping the casinos and the online gambling is expected to lead to onsite gambling competitions of participants, Stinson said.

Guardian said he is also working diligently to expand the city's economy beyond gambling.

For several decades starting in the 1930s many conventions were held in Atlantic City, the mayor said. For a period at the end of the 20th century and in the past decade, hotel rooms were too booked for conventions to be held in the city. This is no longer the case during weekdays outside the summer season, he said.

Atlantic City's Casino Reinvestment Development Authority is creating a nonprofit organization to promote conventions in the city, Guardian said. The organization should be operating by early 2015.

While the city has some facilities for conventions, it lacks facilities with many smaller meeting areas, which some conventions prefer, Guardian said. Harrah's Casino is building a 200,000 square foot facility to serve this sort of convention.

The city is also trying to offer venues and events that are not found elsewhere, Guardian said. It recently drew many people to the city for an air show and a Miss America pageant. The city will host a major triathlon in June.

The authority has a five-year plan for the city, Galluccio said.

The authority is trying to capitalize on the city's golf courses and presence on the ocean and is trying to come up with other ideas to keep the city a popular destination.


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