Nov. 21–An Atlantic City casino industry stifled by lower gambling revenues and a plummeting tax base of casino properties led Moody’s Investor Service to downgrade the resort’s debt rating this week.
The downgrade of $219 million of outstanding debt obligation and city-guaranteed bonds to Baa2 from Baa1 could make it more difficult and expensive for Atlantic City to borrow money in the future.
A second report, this one by Standard & Poor’s Rating Services, gave a more optimistic view of the city’s financial future.
Also released this week, it assigned an A- long term rating and stable outlook to Atlantic City’s tax appeal refunding bonds and general obligation bonds.
One common theme of both is the role casino tax appeals may play in Atlantic City’s future.
Michael Stinson, Atlantic City’s director of revenue and finance, said he hopes the Standard & Poor’s rating carries more weight with investors.
“Obviously I’m very disappointed with Moody’s decision to downgrade the city. I don’t think they’ve taken everything into consideration. And I believe they should have maintained their rating rather than downgrade,” Stinson said.
In its report, Moody’s cited Atlantic City’s casino revenue declines brought about by increasing casino competition in neighboring states.
There is also is also the city’s significantly reduced tax base as more casinos are successfully arguing their properties are worth less–and should be taxed less–than several years ago.
This downgrade has been foreseen, particularly in the past month after Borgata Hotel Casino & Spa in October successfully argued in tax court it was over assessed at more than 2 1/2 times its value in 2009 and 2010.
In a ruling released Oct. 21, a tax court said Atlantic City assessed the Borgata’s properties at $2.26 billion in 2009, when their true value was only about $880 million. In 2010, the assessment was more than 2 1/2 times higher–from $2.26 billion to $870 million, the tax court said.
Atlantic City could owe the Borgata more than $48 million as a result.
The city has said it will appeal that decision.
Moody’s expects this trend of casino tax appeals to continue, and to continue to eat into the city’s ratable base. As part of the rating, Moody’s said its outlook remains negative.
“The negative outlook incorporates our expectations that declining casino revenues and ongoing tax appeals will continue to reduce the city’s taxable base and further strain the city’s weak financial position and increase its debt burden to above-average levels,” the report says.
Meanwhile, Standard & Poor’s said its stable outlook reflects its view of Atlantic City improving its financial and liquidity position.
There are still major issues lingering in Atlantic City, the region’s weak economy, and the city’s tax base.
“We believe that the expiration of tax settlement agreements with several of the city’s major casino taxpayers in the next one-to-two years could lead to future revenue volatility if a
medium-term solution is not reached, or if the property revaluation under consideration does not have the intended effect of improving tax base stability,” the S&P report said.
Atlantic City’s $16.6 billion tax base in 2012–nearly 70 percent of which comes from the city’s 13 casinos–faces the continued pressure of gambling in Pennsylvania, New York, Maryland and Connecticut, Moody’s said.
The report said five casinos still have unsettled tax appeals pending.
These casino property values are based on not only real estate and construction costs but also gaming revenues.
Borgata’s tax victory could lead the way for more property value reductions–including the Borgata itself, which has outstanding appeals for the past three years as well, Moody’s said.
Should Atlantic City’s appeal of the tax court decision fail, the city would likely need to take on more debt to fund the payout, Moody’s said.
The Moody’s report does point out steps Atlantic City and New Jersey are making to try to diversify the gambling industry into a tourist destination not as reliant on gaming as it is now.
There will also online gaming revenues for the first time, a measure that may have mixed results.
“The approval of online gaming in February 2013 will help Atlantic City casinos increase their revenues, but at least a portion of online gaming revenues is expected to cannibalize from the existing brick and mortar casinos,” Moody’s said. “Plans to diversify away from increasingly competitive casino revenues will ultimately alleviate some of the pressures facing Atlantic City; however, Moody’s believes that the benefits to the city will require a multi-year period to materialize and the city will continue to be challenged by sizable tax appeals over the near-term.”
