(Repeats Insight with no change to headline or text)
By Tim Reid and Michael Erman
DETROIT/NEW YORK June 8 Detroit's reliance on
casino cash to help fund a recovery from the city's historic
bankruptcy is a high-risk bet on what is an increasingly shaky
source of income.
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
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
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 plan.
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
"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.
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 resistant."
A central issue is whether these declines are temporary or
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
While Detroit's biggest casino, MGM Grand Detroit, part of
MGM Resorts International, 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