Pittsburgh’s Casino on Thin Ice

Pittsburgh’s Rivers Casino is on thin ice. Their gross terminal revenues have been woefully under projections and as a result they are having difficulty making their obligated $7.5 million payment for the new hockey arena. This payment was due September 15th. They have been in negotiations with the arena’s owner, the Sports and Exhibition Authority, to alter this obligation. They have recently come under fire from the State’s Gaming Control Board for being delinquent on the payment of nearly one month.

The Gaming Control Board’s Bureau of Investigation has filed a complaint stating the Rivers has violated a condition of its gaming license by not making the payment by October 1st. The Gaming Board will look at the complaint and decide whether a fine or other action is warranted. Negotiations with the SEA continue with the possibility of splitting the payment into smaller amounts, but no agreement has yet been reached.

Furthermore the Casino’s problems will only get worse when Allegheny County performs a property assessment on the facility. Once completed the slots parlor could end up paying property taxes of about $12 million. If they are struggling to make a $7.5 million bond payment, coming up with an additional $12 million may plunge them through the ice, unless something dramatic or unexpected happens to enhance their revenue.

Taxpayers Take Their First Shift for the Penguins Arena

When the new hockey arena’s financing deal was announced, politicians were pleased to declare that no direct taxpayer money would be used to fund the facility. They noted the financing would come from the new casino, a state fund supplied by casino taxes, and the team. However, through a lease and sub-lease arrangement, the bonds issued to fund the arena were Commonwealth Lease Revenue Bonds. However, bond underwriters were not confident in the Pittsburgh casino’s ability to pay, so to secure lower interest rates, the Commonwealth-i.e. the taxpayers -would be called upon to backstop the lease. This detail was not very well known until months later. Even when it came to light officials claimed that taxpayers having to ante up was a remote possibility. Well, remote possibility just became reality.

Taxpayers were sent a bill for $5 million to satisfy an unexpected increase in bond interest payments as a result of a rise in the variable interest rate secured on the debt for the new arena. The interest increase happened last fall and was made known to the Governor in December whereupon he inserted the payment into his 2009-10 budget proposal. Unfortunately, it went unnoticed until discovered by the Tribune Review even though the state is scrambling to fill a budget shortfall and still hasn’t agreed to a budget three months after it was due.

The money still has to be appropriated by the Legislature, but a Budget Office spokesman noted that failure to do so "could have long-term negative repercussions…" He also rationalized the lease-sub-lease deal as "a sound financial arrangement in 2007 that was caught up in the crash that affected businesses worldwide."

And that is exactly what is wrong with Pennsylvania policy and one reason it is such a slow growth state. Using taxpayer funds to support a largely private venture should not be considered sound finance. This is the first shift taxpayers will take in paying for the arena. And unless the Rivers Casino comes up with $7.5 million soon, taxpayers may take another big hit quite soon.

The question is; "will the General Assembly appropriate funds to cover bond payments made necessary by the Governor’s ill-advised agreement to put the state on the hook without consulting the legislature and will they demand spending reductions to offset the millions needed to fund the bond payments?"

Is the Casino Being a Good Citizen?

When Pittsburgh’s casino license passed from Don Barden to Neil Bluhm, the latter agreed, as a condition to the transfer, to honor all obligations associated with that license-which includes an annual $7.5 million payment for the new hockey arena. The original agreement called for the first payment to be made October 2009. Mr. Bluhm first balked at making this payment earlier in the summer and while negotiations with the Sports and Exhibition Authority continue, this deadline looms closer. If his casino doesn’t honor this obligation, state taxpayers will be on the hook.

Through an arrangement of leases and subleases, the Commonwealth of Pennsylvania-i.e. the taxpayer-is responsible for paying the debt for building the new Penguins’ palace if the casino is unable. But here’s the catch: the money has to be appropriated by the Legislature. This is an interesting situation considering the State doesn’t have a full budget and is lamenting falling revenues. It’s highly unlikely the Legislature will approve the gubernatorial request to cover the casino’s first payment.

The main reason for the casino’s objection is that they just opened in August and hasn’t had time to earn the money to make the payment. Since its initial opening the casino has earned gross terminal revenues of $20.1 million-well below their projections-of which 55 percent must be paid in taxes. That leaves roughly $9 million to pay expenses such as personnel, maintenance and operations, and debt service.

But the payment is coming due and the taxpayers should not be saddled with his problem. The Rivers Casino could more easily find the money by perhaps borrowing against future revenues. When he took over the slots license Mr. Bluhm promised to be a good citizen. Stepping up and making the payment would be a great first step in keeping that promise.

Bluhm on the Hook but Squirming: Taxpayers May Get Tab

With less than a month until the Rivers Casino opens in Pittsburgh the slots parlor is facing a $7.5 million payment due this October for its share of the hockey arena debt service. Predictably, casino owner Neil Bluhm is balking at making his first payment so quickly. Instead he insists that his first installment is not due until 2010 at the earliest and possibly not until 2012. Will this be settled amicably or through the courts?

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