by guest contributor Shelley Michelson

As casino gaming goes in the State of Connecticut, so go the State’s finances.

Since the formal opening of Foxwoods in 1992 and Mohegan Sun in 1996, pursuant to Memoranda of Understanding between the respective native American tribes and the State, the casinos must contribute 25% of the gross operating revenues of the “video facsimile games,” more commonly known as slots. As far back as 2007, Foxwoods Resorts Casino (“Foxwoods”) and the Mohegan Sun (“Mohegan”) contributed a collective total of $430 million to the State’s coffers, according to the Connecticut Post.

In the State’s 2014 fiscal year, revenue from tribal slots totaled $279 million, a 35% decline from pre-recessionary levels. Recent slot figures for Foxwoods posted online by The Day show a 5.6% decline in October 2014 from the same period in 2013. Mohegan Sun’s slot decline during the same cycle was lower at .2%. The better performance of Mohegan Sun may be attributable to the variety of its other amenities.

The conundrum facing the industry and the hosting states is a well-publicized decline in preference for gaming as a leisure activity. The irrational response by both the industry and the states is an increase in licensing new casinos in an attempt to augment revenues for both the operators and the states, despite the predicted cannibalization.

MGM Resorts International is investing $800 million to open a casino in Springfield, Massachusetts in 2017 and is expecting to draw one third of its customers from Connecticut. Two other casinos have been approved, including one in the Boston area. New York State may license four casinos in the Albany, Catskill and Hudson Valley areas. Despite having campaigned for nearly 10 years in the Bay State, Mohegan Sun lost bids to enter the Massachusetts gaming market. Now, the tribe is looking for another Connecticut site near the Massachusetts border, possibly in partnership with Foxwoods, to counter the anticipated loss of revenue. But some Connecticut lawmakers believe that the state is close to the saturation point and recently rejected licensing Keno gambling.

The conundrum facing the industry and the hosting states is a well-publicized decline in preference for gaming as a leisure activity.

Competition in the gaming market has increased markedly since Foxwood’s opening when there were a total of 10 other casinos, all in New Jersey, which became an over-built market suffering from multiple bankruptcies and closures. As of September of this year, the number of Northeast area casinos had increased to 57, with 20 more under consideration. Competition from Rhode Island’s Twin River Casino and the slots at Aqueduct and Yonkers Racetracks in New York have cut into revenues at Foxwoods and Mohegan Sun as well as those of New Jersey casinos. Moody’s warned that the financial performance of Mohegan Sun could suffer as a result of this increased competition.

In fact, Moody’s has placed a Negative Outlook for the gaming industry nationwide; its Senior Vice President, Keith Foley, wrote in a report dated June 30, 2014, “We now estimate that the total U.S. gaming revenues reported by state gaming authorities will decrease between 3.0% and 5.0% during the next 12 to 18 months, causing overall industry (earnings before interest and tax) to decline between 4.5% and 7.5%.”

In August of this year, Foxwoods was reported to be in talks with senior lenders after having violated a debt covenant. The rating agency community believes that the gaming operator could face a second debt restructuring in just over a year. The first restructuring of $2.3 billion eliminated $550 million in debt and extended repayment. Although the partnership (which included the operator of Foxwoods and 13 local investors) backing the failed South Philadelphia Foxwoods Casino filed for bankruptcy protection in April of this year, it is unclear whether a Native American tribe itself would be eligible to file for Chapter 11 bankruptcy since the U.S. Bankruptcy Code provides for filings by persons and corporations, but not governmental entities. The Mashantucket Pequot Tribal Nation, as the operator of Foxwoods, is classified as a sovereign nation.

The decline in slot revenue, tobacco-related revenue, and capital gains and other tax revenues – along with projected decreases in federal grants – opened a gaping hole in Connecticut’s budget which was revealed only weeks after the re-election of Governor Dannel Malloy.

Foxwoods and Mohegan Sun have responded to the decline in gaming interest by providing non-gaming destination attractions. In addition to its well-publicized concert schedule, Mohegan Sun is trying to convert itself into a family destination, planning an indoor water park, a summer snow skiing park, an indoor sports complex, new retail stores and restaurants and perhaps a second hotel.

The decline in slot revenue, tobacco-related revenue, and capital gains and other tax revenues – along with projected decreases in federal grants – opened a gaping hole in Connecticut’s budget which was revealed only weeks after the re-election of Governor Dannel Malloy. The Connecticut Mirror reported that a nonpartisan analysis projected that revenues would come in at close to $60 million less than budgeted and that the spending side of the budget contained projects resulting in over $80 million of cost overruns, particularly in the social service area. The projected red ink likely means a hiring freeze, the scrapping of $260 million of proposed tax cuts and increased tuition at the state’s higher education institutions.

On November 10, the State of Connecticut published a Preliminary Official Statement for a $550 million G.O. offering, $300 million of which was for new money projects. A supplement was issued out of necessity just a week later on November 17, which updated the General Fund Operating Surplus/Deficit Projections.

The original and subsequent General Fund Operating Surplus (Deficit) Projections are depicted below in millions (reflecting balances):

Fiscal Year

2015

2016

2017

2018

Office of Policy & Management – original

$35.1

$(612.4)

$(432.5)

$(376.3)

Office Of Policy & Management – revised

$(99.5)

$(1,095.5)

$(1,032.9)

$(1,190.3)

Difference (more negative)

$134.6

$483.1

$600.4

$814.0

Office of Fiscal Analysis – original

$8.4

$(1,103.4)

$(1,226.8)

$(1,436.5)

Office of Fiscal Analysis – revised

 

$(89.1)

$(1,321.4)

$(1,439.1)

$(1,728.3)

Difference (more negative)

$97.5

$218.0

$212.3

$291.8

It is interesting to note that, with the exception of the 2015 revised analysis, the more optimistic estimates are generated by the Office of Policy and Management, the Governor’s cabinet-level agency, than those of The Office of Fiscal Analysis, the Connecticut General Assembly. In recent years, expenditures have been moved outside of the General Fund to reduce expenditures artificially and $45 million has been diverted from the Transportation Fund to help balance the budget over the past four years.

This past summer, Fitch Rating Agency upheld its negative outlook for the state, citing “onetime measures to achieve forecast surpluses in the 2014 budget year and next year.” Another revenue projection will be issued on January 15, 2015 before the Governor submits his two-year budget proposal to the General Assembly on February 4. Any such budget must address the shortfall in the State Employees’ Retirement Fund, which, the POS reported had a funded ratio of 38.6% in 2013, based on asset market value to actuarial accrued liabilities.

As casino gaming goes in the State of Connecticut, so go the State’s finances.

Shelley Michelson is a municipal finance professional and Principal at Healthcare Analytics, LLC, a consulting firm specializing in health care finance.

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