Gambling Dip Worsens Detroit’s Woes

The decline of gaming revenue among Detroit’s three casinos, Motor City, MGM Grand Detroit (l.) and the Greektown Casino is complicating the Motor City’s bankruptcy plan, which is based in part on taxes derived from those casinos.

Gambling is both a cause of and one possible remedy to Detroit’s bankruptcy problems.

Gaming tax revenue from the Motor City’s three downtown casinos, the MGM Grand Detroit, MotorCity Casino and Greektown Casino, is built into the bankruptcy plan that the city’s emergency manager, Kevyn Orr, has submitted to the bankruptcy court.

However, the court rejected the proposal two weeks ago.

At the same time, a dip in gaming profits means that the city will have less casino money to rely on. Casinos currently supply 14 percent of the city’s budget, not helped by the third year of declining casino revenues.

The city is waiting for $300 million that has been promised by a consortium of non-profit philanthropies that include the Ford Foundation and Kresge Foundation, but cannot tap it until it exits bankruptcy.

Michigan voters approved gambling in Detroit 18 years ago and when they opened they contributed over $180 million a year in taxes to the city. But the money has been unavailable for five years because Detroit first attempted to cut what it owed the city’s pension fund by selling $1.45 billion in municipal bonds in 2005–2006 and then used so-called swap derivatives as a hedge. Unfortunately, interest rates dropped into the tank along with the city’s credit rating. The next domino fell, giving banks the option to demand $500 million. In desperation the city pledged its casino revenue to creditors UBS AG and Bank of America Corp.

That threat hanging over the city pushed it to declare Chapter 9 bankruptcy, making history. Now Detroit would like the constraint on casino tax revenue removed, but the court isn’t buying it.

It has rejected Orr’s deal in which the banks agreed to reduce what they are owed by 43 percent. The judge said the banks should take even less.

 In Orr’s deposition, filed shortly after the city filed for bankruptcy he wrote, “Every day that we don’t have access to casino revenue, we cannot make the necessary investment in this city to provide for the health, safety and welfare of the citizens.” Orr calls the casino taxes the city’s most reliable funding source.

However the bankruptcy judge said it is doubtful that the city has the right to pledge the money as collateral. He said it’s possible that the derivative swaps based on casino revenue might be declared invalid because the city didn’t have the right to pledge the money.

Experts agree that the bankruptcy plan won’t work without casino money. However they add that its possible that the judge’s position could benefit the city by forcing creditors to realize that they will have to settle for much less on the dollar than they were expecting.

The judge’s position also places into doubt Orr’s plan to use casino money as collateral for a $285 million loan from Barclays.

Complicating this already complex problem is the fact that the gaming revenue could decline by $10 million a year due to competition in neighboring Ohio. Michigan casino revenue dropped 4.7 percent last year to $1.35 billion, the largest drop since the casinos went into operation in 2001. The city collected $171 million. Casino revenue has declined overall 15 percent since 2001.

The 4.7 percent is expected to worsen as Ohio’s casinos reach their full potential. Another factor is that one of those casinos, Hollywood Casino Toledo, is smoke free, which may further lure Michigan’s non-smokers across the border. It may also keep Ohio’s gamblers who live in the northern part of the state at home.