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Accountabilityby Mark Reutter9:44 amApr 13, 20150

It’s now official: sagging casino revenues mean no property tax cut this year

ANALYSIS: The mayor, who promised tax breaks for homeowners from casino revenues, now calls for a “pause” as Horseshoe lease payments tank

During her 2011 election campaign, Mayor Stephanie Rawlings-Blake promised that ground-lease revenues from a proposed casino would bankroll property tax reductions for Baltimore homeowners for years to come.

Calling it her “Fiscal [sic] Responsible Plan,” she pledged to dedicate 90% of the casino’s lease payments to property tax relief.

Back then, the casino site was a remediated hazardous waste zone long occupied by a chemical company.

The city had purchased the property on a desolate stretch of Russell Street. Shortly before Caesars Entertainment submitted its winning bid to state authorities, the mayor’s campaign committee received a $4,000 contribution, the maximum allowed by law, from the Las Vegas gambling giant.

Counting Your Chickens

Now four years later, Caesar’s debt-ridden parent company is in bankruptcy court, and homeowners won’t get a property rate reduction because the pot of gold the administration had anticipated from the casino hasn’t materialized.

That’s right: City Hall had wagered that the casino would bring $14.8 million in ground-lease payments in the current (2015) fiscal year, which would in turn bankroll “a 5-cent property tax reduction on the Baltimore City tax rate in year one,” according to the agreement Mayor Rawlings-Blake signed with Caesars on October 31, 2012.

Trouble is that the casino has grossly underperformed since it opened last August.

The facility is producing a third less revenues than expected. Not only has this shortfall undercut “local impact grants” slated for South Baltimore communities to mitigate the negative effects of the casino (crime, prostitution, traffic congestion, etc.), but it has turned the mayor’s “20 cents by 2020” property tax relief plan for homeowners on its head.

Casino revenues are coming in so low, in fact, that they have triggered a clause in the ground lease that requires a “minimum payment” of $8 million in “year one” if the city’s 2.99% share of total gambling revenues doesn’t reach that threshold.

Digging a $10 Million Hole

A year ago, the Baltimore Development Corporation, which structured the casino deal, pooh-poohed the very thought that lease revenues would come in below the $8 million minimum. But they have and – worse from the standpoint of taxpayers – the casino has been allowed by the city’s finance department to delay part of this minimum payment.

Here is the explanation by Budget Director Andrew Kleine for why Horseshoe Casino will only pay $4 million of the $8 million minimum due in the current fiscal year:

Because Horseshoe didn’t open its doors until August 26, 2014 – or seven weeks after the start of the current fiscal year – the casino’s second installment of $4 million for “year one” isn’t expected until fiscal 2016.

So, already, the casino is slipping behind in its minimum tax payments – compare that to your tax bill that must be paid in advance to avoid penalties – leaving a $10 million hole in the current city budget.

Pausing the Tax Cut

Rather than fess up to this shortfall, Mayor Rawlings-Blake is attempting to finesse the matter.

Last week she wrote in The Baltimore Sun that because her “20 cents by year 2020” tax reduction plan is ahead of schedule, “my finance department. . . recommends a one-year pause” in homeowner tax cuts in 2016.

A more accurate description of what is going on comes from Kleine. He told reporters this: “We’re half way through the eight years of the 20 cents by 2020, and we’re at about 60% of the goal of getting to that 20 cent reduction. The casino revenue has not been that strong. . . So more of the cost of tax relief is having to be absorbed elsewhere.” [our emphasis]

The bottom line is that Baltimore’s notoriously high taxes will remain at their current $2.130 per $100 of assessed value in 2016 for homeowners – and $2.248 for all others.

That’s more than twice the rate of Baltimore County, Anne Arundel County and other surrounding jurisdictions.

The mayor (who has praised the casino as one of Baltimore’s “anchor institutions,” along with universities and hospitals) says the one-year “pause” won’t be permanent.

But there are several factors that make it hard to conceive how the casino will play a significant role in lowering the tax rate in future years.

More Competition Coming

For one thing, the casino has gained little or no traction against its nearest competitor. Maryland Live at Arundel Mills has consistently earned higher revenues than Horseshoe. (Last month, Maryland Live grossed $52 million vs. $24.7 million at Horseshoe.)

For another, a $1.2 billion gaming resort is looming at National Harbor in Prince George’s County.

Scheduled to open late next year, the MGM casino-hotel-mall-spa is undoubtedly going to peel away customers in the D.C.-Virginia market who now are coming to gamble in Baltimore. The only question is how many patrons, and how much their absence will take revenues, and possibly jobs, away from Horseshoe.

So far, Horseshoe’s effort to  grow its revenues incrementally by adding table games has not produced solid gains based on the monthly statistics compiled by the Maryland Gaming Board. In fact, slots are holding their own, while table games have yet to catch fire (here and here).

As warm weather approaches, the casino is expected to attract more customers and, over time, Caesars’ Total Awards customer loyalty program might squeeze more casino dollars from gamblers.

But will there be enough dollars to meet the lease agreement? According to its terms, Horseshoe is expected to pay Baltimore a guaranteed minimum of $10 million in “year two” of operations – or $2 million more than this year.

Then $12 million in year three (fiscal 2017), $13 million in year four (fiscal 2018), and $14 million in year five (2019) and thereafter.

The final scheduled amount is almost double what the casino is now struggling to pay – and it represents the jackpot the Rawlings-Blake administration was counting on to underwrite homeowner property tax reductions through 2020.

Grand Prix Redux?

So the real question is whether these future escalating minimum payments are realistic.

Will the Caesars group – which includes such politically-wired local investors as Caves Valley Partners, developer Theo Rodgers, money manager Eddie Brown, and the Stronach family of Pimlico Race Course – have the cash?

Or will they come back to City Hall and renegotiate the terms of the lease?

And what about the $4.7 million the group owes Baltimore for the land on Warner Street used for Horseshoe’s parking garage? That lump-sum payment is due on October 31, 2017 – or five years after the city sold the land to Caesars with just 20% down.

In the context of other city-initiated ventures that have been permanently “paused” (the Grand Prix) or are springing financial leaks (the Hilton Hotel), taxpayers may well rue the day when those smooth-talking suits from Vegas were welcomed to town.

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