Win, Win Win Situation

Casinos win again
Gaming halls bounce back after costly state shutdown
By DONALD WITTKOWSKI Staff Writer, (609) 272-7258
Press of Atlantic City
Published: Monday, July 17, 2006
Updated: Monday, July 17, 2006

ATLANTIC CITY — Despite millions of dollars in lost revenue and tons of negative publicity caused by their unprecedented shutdown, the casinos showed once again that, ultimately, the house usually wins.

Casinos rebounded quickly after the three-day closing ended July 8, and Wall Street laughed off predictions of a meltdown in Atlantic City's sizzling gambling market. The gaming industry also benefited from the expiration of a tax on casino net profits in the new state budget.

“Much ado about nothing,” Jane Pedreira, gaming analyst for Lehman Brothers, scoffed of the shutdown. “I find it hard to believe that anything that happens over three days, midweek, will be crippling. I think people were dramatizing it because they were eager to get open again. They wanted to put pressure on the politicians.”

Casinos already are capitalizing on public disgust with the state Legislature by pushing a bill that would shield them from future government shutdowns. Gambling was brought to a halt because New Jersey's budget crisis forced state gaming inspectors off the job. New legislation making the rounds at the Statehouse would allow gaming inspectors to continue to work during any other budget-induced shutdowns.

“Clearly, the law needs to be changed. That's the first thing,” said John Payne, regional president of Atlantic City operations for Harrah's Entertainment Inc., owner of four New Jersey casinos. “From the governor to the Assembly to the Senate to the casino industry, we must get this out of the way. A shutdown can never happen again.”

Although the shutdown began July 5, the impending crisis overshadowed the Fourth of July weekend, one of the most lucrative holidays for the casinos. Gaming executives argue that future budget battles can never, ever threaten the holiday again.

“Absent this (new) legislation, every future budget session, which of course leads up to our critical Fourth of July weekend, may cause our customers to think twice about making plans to visit our casinos, given the uncertainty created by this year's closure,” said Joseph A. Corbo Jr., president of the Casino Association of New Jersey, a trade group representing the city's 12 gaming halls.

While gaming officials say it is premature to predict any long-term effects of the shutdown, the immediate damage is clear. The casinos lost an estimated $54 million in revenue and the state forfeited $1.3 million a day in casino taxes.

“It is lost forever. I can't think of any way to reclaim this money,” Atlantic City gaming attorney Nicholas Casiello Jr. said.

Casiello thought of the possibility of legal action against state government to help the casinos recover their lost revenue, but soon realized the litigation would fail. States have been protected for many years from lawsuits by “sovereign immunity,” so it would have been pointless to sue New Jersey for gaming losses, he noted.

Pedreira, however, argued that the casinos shouldn't worry about the loss of $54 million in revenue, a relatively minuscule amount for the $5 billion-per-year gaming industry.

“There's nobody there that is at death's door. No one has liquidity problems that will push them over the brink,” she said of the deep-pocketed casinos.

Pedreira also downplayed any negative impacts in the investment world. Wall Street simply will dismiss the shutdown as an aberration and will continue to pour money into Atlantic City, she maintained

“There are a lot of other states that are worse,” she said. “I think Atlantic City still has a pretty stable operating environment.”

Unlike Pedreira, Casiello isn't so sure that the shutdown didn't harm Atlantic City in the investment community. He said underwriters are likely to view the city as a riskier investment, making it more expensive for casinos and other developers to borrow money to finance their projects.

“No one in the investment community was expecting the casinos to be shut down for three days,” Casiello said. “Now, it will make them a little bit leery about investing in Atlantic City. They will wonder what will happen next year.”

Billions of dollars are at stake. Harrah's, Borgata Hotel Casino & Spa and Trump Taj Mahal Casino Resort are already building new hotel towers and other amenities costing $1.1 billion. Caesars, Bally's and Showboat Casino Hotel are expected to announce major expansion projects in coming months. In addition, two separate investment groups are planning to build new casinos at the northern and southern tips of the Boardwalk.

Corbo said casinos are attracted to states that have a stable tax base, political environment and regulatory structure. New Jersey was considered a model of political and financial stability until the budget crisis shook the gaming industry and caused investors to look at Atlantic City more cautiously, he said.

“Obviously ... the casino shutdown was an episode of significant instability that will be factored into future investment considerations,” Corbo said.

Three years ago, New Jersey's investment climate was also called into question when then-Gov. James E. McGreevey unsuccessfully tried to raise the state tax rate on casino gross revenue from 8 percent to 10 percent. In a compromise with the casinos, the 8 percent rate was left untouched, but a series of other fees and taxes were imposed on the industry for a three-year period.

One of those taxes, a 7.5 percent levy on adjusted annual net income, has cost the casinos millions of dollars since 2003. But in a move little noticed by the public, the tax on net income expired in the new state budget. Legislation was considered to extend the tax, but it died, giving the casinos another win.