Gambling matures and declines

By Fester:

Nothing is recession proof if a recession is harsh enough.  The gambling industry has long contended that it is close to recession proof, but the Wall Street Journal is reporting on some of its problems (h/t to Johny G in Null Space comments)

Rising gasoline prices, the housing crisis and other economic troubles are prompting consumers not just to gamble less, but to spend less at the luxury boutiques and restaurants where casinos draw most of their profits. Struggling airlines are cutting service to Las Vegas. And pressures are building on casinos that cater to local residents, who have been hard hit by economic troubles.

"This is the toughest environment we've faced," says Gary Loveman, chief executive of global gambling giant Harrah's Entertainment Inc., referring to the economic challenges roiling the entire industry....

The public-debt market, spooked by four casino bankruptcies this year, reflects the concerns. Bond prices for a half-dozen casino companies, from Harrah's to small, Las Vegas-based Herbst Gaming, are trading at distressed levels, frequently below 60 cents on the dollar, on debt totaling about $5.3 billion....Credit-rating agencies have been hitting casinos hard. Moody's Investors Service, which rates $79 billion in debt at casino companies, has downgraded 17 casino companies this year. Eleven more are on review for possible downgrade,...

These debt market issues are having significant impact in Pennsylvania and Pittsburgh as the PITG group, which owns the slots parlor license for Pittsburgh, has not paid its construction crews for two months and has yet to present a final financing plan to the Pennsylvania Gaming Control Board.  PITG has taken on a new partner and is stopping construction on its casino for a short time period. 

A representative from PITG Gaming says the group has a new major investor in the Majestic Star Casino, and construction at the site will temporarily stop in the coming weeks.

Bob Oltmanns, of PITG Gaming, announced that the group had secured Walton Capitol out of Chicago as a major investor.

State and local governments, including Pennsylvania, have long counted on gambling revenues to be acyclical.  They 'never' go down as people will gamble in good times with their bonus money and in bad times with their core budget money.  Even as times worsen, the hope of a $50,000 jackpot to bail out troubles is a tangible and real dream for most people, and it could be worth the twenty bucks into the one arm bandit. 

However if gambling as a mature industry  turns out to be cyclical in that its revenues increase when the economy grows and revenues decrease when the economy stagnates or shrinks, then state and local budgets are in more trouble than previously thought. State and local governments are cycle matching financial entities.  Primary sources of government income are various income and sales/use taxes that track income and employment changes and property taxes.  Property taxes are counted to provide a slowly changing and increasing base while the more variable income and sales tax revenues are counted on to provide the marginal cash flow that determine whether a taxing body is seeing income gains or declines. 

With the real estate bubble bursting, property tax collections are stagnant or declining in most locales.  The decline in jobs, and stagnation in wages combined with higher fixed cost expenditures on fuel, energy, medical care and education, all of which have some tax advantages in most locales means that sales tax revenues are not growing.  Gambling revenues were expected to provide another source of stable to growing revenue but as the industry has matured, it is responding to the business cycle as most mature industries will.  It is declining when everything else is declining, and it is stagnant when everything else is stagnant.