The Rivers Casino Profitability Disadvantage

The Rivers Casino Profitability Disadvantage

As we have documented in past Policy Briefs, the Rivers Casino has gotten off to a rocky start-first with ownership problems and then with weak gross terminal revenues from slots operations.  At the completion of its first full year (August 2009-2010) we noted that the $222.3 million earned in gross terminal revenues fell woefully short of its own projections of $428 million as well as the $362 million projected from the Pennsylvania Gaming Control Board (PGCB).  It did not even compare favorably to its southern competitor, the Meadows Casino in nearby Washington County, which had earned $252 million during the same time frame-above both its’ own projections and that of the PGCB. 

 

 

Of course, gross terminal revenues are just that, gross, and do not take into account the payments that must be made out of those revenues such as taxes, costs of operations, debt service, or community obligations the owners have made.  Their community obligations certainly made for a trying first year for the Rivers.  So much so they asked for, and received, additional time to complete the first $7.5 million payment to the Sports and Exhibition Authority for the hockey arena. 

 

Which leads to an interesting question:  does the Meadows Casino have an advantage over the Rivers in terms of government mandates, payments, or commitments made to obtain a gaming license?  That is to say; does the Rivers Casino have greater government and self imposed payment burdens beyond normal operating expenses than the Meadows Casino, thereby giving the Meadows an advantage in earning profits?

 

According to the state law authorizing slot parlors, all casinos are required to pay a combined 55 percent of revenues right off the top in taxes to the Commonwealth for property tax relief, the Racehorse Development Fund, the Tourism and Development fund and assessments to the host county and municipality. All casinos pay this rate on their gross terminal revenues. Host counties are entitled to 2 percent of gross terminal revenues.  The casinos place the money into an account at the Department of Community and Economic Development (DCED) who then distributes it to the host county. 

 

For municipalities, the law specifies that the casino owes its host municipality, other than a city of the first class (Philadelphia), an amount equal to 2 percent of gross terminal revenues or $10 million, whichever is larger.  Since the Rivers’ gross revenue has not reached $500 million they owe Pittsburgh the minimum $10 million payment. The rule for smaller municipalities is a bit more complicated.  For townships of the second class (and lower), such as North Strabane Township where the Meadows is located, the local share payment cannot exceed 50 percent of the township’s total budget (for fiscal 2003-04, then adjusted for inflation after that).  However, if that 50 percent figure is less than 2 percent of gross revenues or $10 million (whichever is the greater amount) then the difference is sent to the county’s restricted fund at DCED, who will then distribute the excess as grants to projects in municipalities throughout the county.  Thus, the Meadows and the Rivers Casino are on a level playing field as far as gaming tax requirements are concerned.

 

The difference in non-business operation obligations between the Rivers and the Meadows lies in the local taxes paid and the commitments to the community.  For example, Pittsburgh levies a payroll preparation tax. North Strabane does not.  Considering the amount of labor it takes to run a casino, especially now that table games have been added, this can be a significant expense for the Rivers that the Meadows does not face. Furthermore the property tax burdens are very different. The Meadows’ property assessment was set at $19.9 million for 2010 (25 percent of market value in 1981). The millage rate for the host county (24.9 mills), municipality (11.46), and school district (105.41) add up to 141.77 mills or 14.2 percent of assessed value.  Thus, the Meadows will owe about $2.8 million annually in combined property taxes to the three taxing bodies.

 

The property assessment for the Rivers Casino was set at $199 million for 2010.   Allegheny County’s millage rate (4.69) coupled with that of Pittsburgh City (10.8) and School District (13.92) total 29.41 or roughly 3 percent of the assessed value resulting in a property tax bill of around $6 million or double that faced by the Meadows.  In view of the nearly equal gross revenues, the difference in property tax payments has a significant impact on the respective bottom lines.

 

Another area of discrepancy between the two casinos relates to community obligations.  As a category one slots license (racetrack), the Meadows was all but assured of receiving one of the licenses.  Therefore they did not engage in any type of bidding war as was seen with the category 2 licenses (stand alone facilities).  The Meadows made no commitments to any specific local entities. 

 

Because there were three competitors for the lone category 2 casino license in Pittsburgh, a bidding war did erupt and the winner, the Rivers, agreed to provide a $1 million annual contribution (for three years) to both the redevelopment of the Hill District and the Northside Leadership Conference.  And perhaps most famously, the owners of the Rivers agreed to pay $7.5 million per year for the next 30 years to pay for part of the new hockey arena.  So, in total for the first three years they are obligated to pay $9.5 million in self imposed community obligations and then $7.5 million for the following 27 years.

 

Taken together the higher property tax and the community commitments create a $12.5 million greater reduction in profits for the Rivers as compared to the Meadows Casino. And that does not take into account the payroll preparation tax that must be paid to the City. The amount paid in wages and salaries is unknown so the exact tax liability cannot be calculated. However, at a tax rate of 0.5 percent of dollar value of payrolls, its bite is definitely being felt.

 

Other casinos across the state that were caught up in bidding wars face similar problems as the Rivers, Some worse, some better. For example, a bidding war did erupt in Philadelphia where two category 2 licenses were up for grabs.  However, only one of the casinos has been built and is operational-the Sugar House Casino.  Sugar House pledged to fund a charitable organization (Sugar House Foundation) with 2.5 percent annual pre-tax income which will be capped at $3 million per year-clearly, a better outcome than the Rivers. The Foundation will award grants to the community and the immediate neighborhoods. 

 

The other license winner, Foxwoods, is currently in negotiations to transfer their license and has not begun construction.  But the community obligation they have pledged is much steeper than the Rivers; $30 million per year over ten years to charitable causes primarily to assist education and disadvantaged children, a far higher obligation than the Rivers undertook-at least for the first ten years.    

 

For much of 2010, the Rivers and Meadows casinos have been earning average weekly gross terminal revenues that are fairly similar ($4.65 million and $4.82 million respectively).  But while their earnings from slots machines are close, their tax and community obligations are not.  As this analysis shows, the Rivers Casino finds itself at a distinct disadvantage in terms of profitability because of the arena payments and higher taxes that come with being in the City of Pittsburgh.