Set the way back machine for 2016. Atlantic City faced an abyss. Competition from Pennsylvania that began almost a decade earlier continued to hurt the resort’s gaming industry. The Taj Mahal folded, joining four other casino hotels that called it quits in 2014.
But what put the city on the precipice of a dark hole was the fate of property taxes. The casinos were—and still are—the largest taxpayers in town. The value of their properties was based on how much income they generated. As the fortunes of the industry went south, so did their property values. Gaming revenue hit a low point in 2015 at $2.6 billion, half of the high point in 2006.
“If income declines significantly, the value of the property declines significantly. Therefore, the property assessment declines significantly,” said Michael Busler, Professor of Finance at Stockton University.
Casinos filed tax appeals and won. Millions that the city was counting on in its budget was gone. The city’s financial stability wavered.
Instability was not a good look. The city didn’t like it. The casino industry didn’t like it. Lawmakers didn’t like it. Out of this situation came PILOT—payment in lieu of taxes. The legislature approved a plan in 2016 which laid out a 10-year program where the casinos would pay the city what amounted to a relatively fixed figure each year, so both the industry and the city knew what was coming in and budgeted accordingly.
And there would be no tax appeals.
When PILOT took effect in 2017, it consisted of fluctuating payments based on a formula that included gross gaming revenue, the number of hotel rooms and square footage. A second stream came from the investment alternative tax which used to go to the CRDA for investment purposes. IAT comprised a 1.25 percent tax on gross gaming revenue plus a 2.5 percent charge on internet gross gaming revenue.
In the five years since PILOT commenced, most of the seven casinos turned their fortunes around. Revenue grew 7.3 percent in 2017, 9.2 percent in 2018 and 19.5 percent in 2019. As the revenue grew, so did the taxes the casinos paid. Atlantic City’s financial picture improved.
Then came 2018. A pair of new casinos opened on the sites of two shuttered properties. Hard Rock Hotel & Casino Atlantic City opened at the former Taj Mahal and Ocean Casino Resort resurrected the former Revel.
The same year, a decision by the U.S. Supreme Court overturned the federal ban on sports betting in a case brought by New Jersey. While the ruling opened the door for sports wagering throughout the U.S., New Jersey jumped out first and reaped the rewards.
Then came 2020. The coronavirus pandemic swept through the world. In New Jersey the casinos shut down for almost four months and when they reopened, they faced capacity restrictions. Casino play tumbled 43.7 percent.
But an odd thing happened as the virus spread. From the safety of home, bettors wagered on a variety of sports using their cell phones. They also gambled in internet casinos which have been available since 2013 in the state. The impact was so strong that overall gaming revenue in 2020 fell less than 17 percent when compared to 2019. Even more telling, the mobile streams of income did not fall off when casinos re-opened.
In 2021, casinos rebounded. Casino win through October grew 75 percent compared to 2020. Internet win rose 43.2 percent while sports betting jumped 128 percent. Through October, casino win of $2.1 billion came close to besting the $2.2 billion in pre-Covid 2019.
Casinos were back baby.
The gaming halls had to be pleased about the turnaround. They are not happy that the PILOT program derives some of its revenue with sports betting and iGaming in the calculations. The casinos allow sports books like DraftKings, FanDuel and a dozen other different brands to operate as a “skin” under their gaming license. The get a very small percentage of the revenue from those skins, less than 10 percent. And they also have to pay technology partners to provide them with platforms, data, pay processing, geolocation and other services for their sportsbooks and online casinos. So not much of the overall revenue actually goes to the operators, but the casinos paid property taxes on the full amount. The industry wanted to amend PILOT to eliminate the two internet streams.
“Amendments to the program were always envisioned,” Hard Rock President Joe Lupo said when asked why this wasn’t envisioned when the casinos signed the PILOT program five years ago. Last year, the casinos began discussions to amend the legislation to remove online revenue from the mix. Covid put those discussions on ice. “The legislation was written a year ago. We knew there had to be some changes to the allocations,” Lupo said
The state Senate and Assembly put two identical bills up for a vote. The state Senate voted 21 to 14 to approve the legislation. All Republicans voted no, according to the Press of Atlantic City. The Assembly voted around midnight to approve 46-19. The bill awaits a signature by Governor Phil Murphy. Assemblyman John Armato voted no even though he sponsored the original version of the amendments.
Armato said he was unable to get enough information from casinos about the need for the bill, particularly the names of the four casinos State Senator President Steve Sweeney has said would close without the bill.
“When the sponsor of the legislation goes south, that’s got to tell you something,” said Atlantic County Executive Dennis Levinson. He said the county will sue if the bill passes both houses and is signed by the governor, but he still hopes the governor will not sign it.
“We continue to have very productive conversations with the administration, the industry and the county,” Senator Vince Polistina said. “I think we have the ability to continue to talk and make it fair and build consensus, so it does not result in litigation.”
The casinos paid approximately $150 million in 2021, and expect to pay some $165 million next year, Lupo said. That is made up of $110 million of basic distribution. The investment alternative tax makes up about $50 million and a third is a $5 million payment to the city from the casino industry.
“And let me clarify, it is $5 million in total, divided amongst the casinos, not $5 million from each casino,” Lupo said.
However, stability moving forward is still a priority, Lupo said.
“The city has never had more stability than the last five years,” he said.
The proposed changes have brought comments on both sides of the issue.
Following the reopening of brick-and-mortar casinos in July 2020, online gaming and sports betting has accounted for 46 percent of total gaming revenues in December 2020 and 33 percent in July 2021. “Eliminating these revenues from PILOT calculations would have an impact on the payment,” said Jane Bokunewicz, faculty director, the Lloyd D. Levenson Institute of Gaming, Hospitality & Tourism, School of Business at Stockton University. “The amendment could help some casinos and hurt others.”
For calendar years 2023, 2024, 2025 and 2026, the base amount of the PILOT payment would be determined without online gaming and mobile sports betting. For each of these calendar years, the total amount of the PILOT payments would increase by two percent per year provided that there is no upward adjustment in the base amount of the PILOT because of increased gaming revenue.
The IAT portion of the equation paid down the debt service carried by Atlantic City. Under the new amendment, any excess through 2026 would be reallocated to the Casino Reinvestment Development Authority; the Clean and Safe Fund; the Infrastructure Fund; and what is left would go to Atlantic City for general municipal purposes.
Under the proposed amendment, the current $5 million payment by the industry will be extended through the life of the PILOT to 2026.
Lame-duck Senate President, Steve Sweeney, sponsored the amendments. He spoke with officials from the Casino Association of New Jersey and “they painted a very clear picture” of the financial trouble they could face if the bill is not passed, according to the Press of Atlantic City. Some casinos could close. Sweeney argued that the bill would help the casinos recover from Covid-19 pandemic losses.
The full Senate should take up the amendments later this month. The Assembly expected to vote the week of Christmas.
Atlantic City Mayor Marty Small Sr. supports the change.
“We’re in a better financial position than we were five years ago. We’ll be better five years from now,” Small said in a press conference November 30.
He also cited the pockets of IAT money that would be allocated to specific funding, for infrastructure, for safety and cleaning.
“If this wasn’t good for the residents of Atlantic City, I’d have no problem articulating this,” Small said.
On the other hand, Atlantic County does take issue. County executive Dennis Levinson said the casinos save money at the county’s expense.
“The bottom line is, they don’t want to give us our fair share,” Levinson wrote. “A settlement was reached in good faith to make the Atlantic County taxpayers whole. What has changed except for the fact the casinos want more?”
The settlement gave the county about 13.5 percent of PILOT revenues, based upon brick-and-mortar, internet, and sports gaming revenues, according to the Press of Atlantic City.
Levinson is not averse to filing a lawsuit to stop the changes.
“I would prefer not to have to take that course of action again but am prepared to do whatever is necessary to protect the best interests of ALL Atlantic County taxpayers.”
The county will not get less, the county gets the same as last year plus 2 percent every year, Lupo said. “It is clearly stated in the PILOT legislation,”
Michael Busler has another take. End PILOT.
“It places a burden on residents and small businesses in Atlantic City. No new market-rate single-family homes are being built in the city, mostly because the taxes are so high, the numbers just don’t work. Eliminate PILOT so casinos pay a tax that more closely relates to their property value which has increased as their income has increased.”
As long as Murphy signs the legislation and the courts don’t overturn the law, PILOT will continue for five more years. In a statement following the votes, the Casino Association of New Jersey said, “Under the revised PILOT program, Atlantic City and Atlantic County will receive more tax revenue moving forward year over year from the casino industry, and the funding provided by the PILOT program will help improve Atlantic City’s infrastructure and create a safer community for visitors and residents. We look forward to Governor Murphy quickly signing this important legislation into law and we are committed to working to continue to revitalize our historic seaside destination resort.
