Is It Time to Question the Fiscal Wisdom of the Atlantic City Bailout?
With gaming industry in crisis, should the state reassess the return on investment it's likely to see on the millions it's funneling into New Jersey's gambling hub?
New Jersey is in the process of pouring tens of millions of dollars into Atlantic City in an effort to save the city and the substantial tax revenues generated by its casinos, shops, and tourist attractions. Yet with the gambling industry in a sharp decline, the governor and Legislature must consider whether the potential benefits are worth the continued investment of state funds.
The state has spent at least $1.75 billion on hundreds of infrastructure, hotel expansion, retail, entertainment, housing, and community-development projects in the city since gambling began in the late 1970s. It has additionally granted millions in low-interest loans and tax credits and reimbursements to various businesses, and paid out regular municipal and school aid. The investment has been seen as justified given that, during the same period, casinos and other businesses paid out $9 billion in taxes and other fees, according to Atlantic City Mayor Don Guardian.
That level of tax revenue appears unlikely to recur over the next three decades. Four of the city’s 12 casinos shut down this year and a fifth, the Trump Taj Mahal, could close on Saturday. The casinos paid less than $215 million in state taxes and fees last year, the lowest amount since the late 1980s and less than half the $500 million they contributed at their peak in 2006.
They have also succeeded in slashing their property tax assessments in recent years, winning local tax refunds that have forced Atlantic City to jack up tax rates and take on $345 million in debt over four years. The city’s troubles are so dire that a gaming advisory commission reporting to Gov. Chris Christie is recommending that the state impose an emergency manager to slash spending and accelerate nongaming commercial development.
The crisis occurred despite a generation of state efforts to draw more visitors to the seaside resort and improve the city generally. The bulk of the investment has actually come indirectly from the casinos themselves, through annual reinvestment payments and parking fees and sales taxes that go to the state Casino Redevelopment Development Authority.
Another important source of funding in recent years has been the state Economic Development Authority. Its $261 million tax-reimbursement deal for the Revel casino in 2011 helped the project secure the private financing it needed to be built, though the now-shuttered casino never made a profit and has not received any of that money. Another $119 million in financing went to Revel’s power plant, the Inlet District Energy Center.
Not counting Revel, the EDA has financed $210 million worth of projects in Atlantic City since 2006, including power plants, sewer repairs, casino expansions, and a housing development. As a state agency, the EDA can issue tax-exempt bonds that allow it to lend money to businesses at below-market interest rates, and it administers tax-incentive programs for companies that promise to employ New Jersey workers. Through those programs, the state agrees to sacrifice certain tax revenues to boost employment and potentially other kinds of taxes.
The agencies sometimes work together to make projects happen. The CRDA put $46 million into a conference center at Harrah’s casino, which is slated to open next year, while the EDA provided $24 million in financing.
“If you put CRDA together with EDA, I think it's fair to characterize the state's attitude toward Atlantic City as being a generous one,” said Gordon MacInnes, president of New Jersey Policy Perspective and a former state legislator.
Direct Aid and Hidden Subsidies
The CRDA has invested casino contributions in a wide variety of projects over the last 30 years, most of them in and around Atlantic City. They range from a few megaprojects, like a highway connector to Brigantine and two casinos that received $120 million from the agency in 1999, to several casino hotel expansions that received $3 million to $36 million apiece, to micro-grants like the $59,000 spent last year on repairs to a historic park fountain.
Though the CRDA stands to see its budget shrink, it continues to commit to projects. The agency’s data shows it plans to spend $450,000 on a proposed retail development in the city’s Gardner’s Basin neighborhood, and last month [November] it reportedly agreed to cover the $9.3 million cost of aat the Resorts Casino Hotel.
Casinos contributed 1.25 percent of their gaming revenues to the CRDA, but with fewer casinos and less revenue, the funds going to the agency have been declining. In addition, the Legislature is considering redirecting some $30 million from the CRDA to Atlantic City to help reduce the city’s debt load. However, Senate Majority Leader and President Stephen Sweeney said he expects the agency will be able to continue funding projects even if the measure is approved.
Not counted in the CRDA’s spending figures are the additional benefits provided by the agency’s Urban Revitalization Program, which offers incentives to builders of new entertainment-retail districts. Each project’s developers receives rebates of sales and hotel taxes over periods of up to 20 years.
For example, the developer of a Bass Pro shop under construction as part of The Walk, a Tanger Outlets shopping center, will receive $11 million in rebates over 11 years in addition to a separate loan, according to a CRDA newsletter. When the Tropicana casino opened the first such shopping district, The Quarter, in 2004, parent company Aztar said it was receiving not only the CRDA’s $23 million contribution but also as much as additional $37 million in other credits and subsidies.
The total cost of the entertainment-retail program is not clear, but the law calls for developers to get back up to $2.5 million a year in sales tax rebates and $650,000 to $1 million a year in grants funded by hotel taxes, according to an Associated Press report. With eight such projects approved, that could add up to at least $63 million over the life of the deals. The CRDA was not able to immediately provide rebate amounts and has not yet responded to an Open Public Records Act request.
In addition to reinvestment dollars, New Jersey has arguably provided a huge hidden subsidy to development in Atlantic City since gambling began in 1978. The state set the basic casino tax rate at 8 percent, higher than Nevada’s 6.8 percent but far below the rates that would be set years later in Delaware (57 percent), New York (65 percent), Pennsylvania (55 percent), and every other state with gambling.
“The biggest state investment was enacting a Casino Control Act with a very surprisingly low corporate business tax on casinos, at a time when we had a monopoly on everything east of the Rockies,” MacInnes said. “It's like the casinos, or potential casino beneficiaries, wrote the bill themselves, to have a such a low tax rate.”
“That's been tens of billions of dollars that has gone to them in the form of profit, or you'd hope they'd reinvest much of it. That is the biggest gift of all,” he said.
While gambling has yielded some $9 billion in tax revenues and fees since it was legalized, a higher tax rate would have provided the state with even greater benefits and perhaps given the CRDA more money to improve Atlantic City, he argued.
New Jersey Policy Perspective has frequently criticized business-incentive programs managed by the EDA, saying they rob the treasury of badly needed funds, improperly enrich companies, and provide insufficient benefits to the state. MacInnes has criticized Christie for the recent expansion of the Economic Opportunity Act to allow assistance to non-gaming projects in Atlantic City, calling the program’s incentives “lucrative and poorly measured.”
State Aid Set to Increase
In addition to the hundreds of millions the state has spent to boost tourism, Atlantic City has received smaller amounts of direct aid of the type available to municipalities generally. Because the city and its school district collect property taxes from casinos, until recently they have not been targeted for large amounts of state aid, though that is beginning to change.
Over the 11 years from 2004 to 2014 the city of 40,000 residents has received $91 million in municipal aid. In additional to annual infusions of regular aid, for the first time this year the city is getting an additional $13 million in transitional aid, a special form of assistance for financially struggling municipalities that subjects them to extra state oversight. Annual aid has totaled $6 million to $8 million a year, jumping to $19 million in 2014.
The state has given the school district $216 million over the 11-year period, counting both standard aid categories and preschool aid. The district expects to receive $21.7 million this year, roughly the same amount given to similarly sized towns but far less than the aid given to other poor communities.
Despite the city’s high poverty rate of about 30 percent, casino tax revenues have prevented the district from being declared an Abbott district and receiving additional aid. By comparison, in Irvington, an Essex County city of 54,000, the school district received $133 million in regular and preschool aid in 2013, including $81 million in Abbott-district equalization aid.
However, Atlantic City’s tax base has plummeted from $21 billion in 2010 to $11 billion in 2014 as casinos have argued their assessments are too high and won large tax refunds. With additional tax appeals and casino closures continuing to shrink the tax base, Mayor Don Guardian has said the city’s total assessment could fall to $9 billion next year, while the gaming advisory commission suggested it may have already fallen to as little as $6.5 billion.
The commission and Sen. Sweeney (D-Gloucester) said the city’s budget difficulties should make its schools eligible for Abbott-type aid, and the Legislature is considering creating a new category of aid specifically for the Atlantic City school district. To avoid further tax appeals, another proposed law would base casinos’ local tax payments on gaming revenues rather than fluctuating property values.
In addition to municipal and school aid, the city has benefited from a variety of state-funded projects worth tens of millions of dollars over the years. The Department of Environmental Protection has paid for brownfield remediation and beach replenishment, the Department of Transportation for bridge and road repairs, and the Department of Labor for casino employee training, among other projects.