Never happened!
Massachusetts is NO different!
Opinion: Atlantic City could face bankruptcy from casino property tax appeals after Borgata success
View of the Borgata hotel and casino in Atlantic City in a file photo. (Tony Kurdzuk/The Star-Ledger)
By on November 19, 2013
By Michael Busler
Atlantic City’s situation could be very serious. Rising costs continue to push up municipal spending, while a declining tax base is reducing the city’s revenue. In the short term, the city borrows in the bond market to pay for shortfalls and for unexpected declines in revenue, primarily from tax appeals. In the long term, this cannot last.
This is a problem not just for Atlantic City but for all of New Jersey, since the state may be required to take over the management of the city. In that case, it could become very costly for New Jersey taxpayers.
How did this problem develop?
Cities and other municipalities receive up to 90 percent of their revenue from property taxes. In the planning process, the city determines the amount of spending that it will budget for the upcoming year. Then, to raise an equal amount of revenue, the city adds up the total assessed value of all property and simply determines what the rate of taxation will be. It selects a rate that, when multiplied by the tax base, yields the desired level of revenue.
This system has worked very well in the past. Property values rise slightly faster than the overall rate of inflation. So, as long as cities keep the assessed values current, additional funds can be raised with little or no increase in the tax rate. The problem in Atlantic City is that property values there have drastically declined, especially the casinos.
Historically, casinos contributed up to 80 percent of total property-tax revenue collected by Atlantic City. Because of recent tax appeals, that figure is now under 70 percent and likely will fall further in the coming year as more casinos try to duplicate Borgata’s recent tax appeal success. Borgata not only reduced its current assessment, but said that it was over-assessed starting in 2009. The court awarded it a $48 million refund, which Atlantic City will have to raise by selling bonds.
New Jersey law states that virtually all real estate must be assessed at current market value. The difficulty is trying to determine exactly the fair market value. A number of figures are considered, but basically the value can be determined by 1) looking at comparable sales, 2) using the replacement cost approach or 3) considering the income approach.
The comparable sales approach is usually used for residential real estate. The appraiser simply looks for similar house sales in similar locations and makes some adjustments for any unique features. The cost approach could be used if a new home is built — the value of the land and value of the improvements (the house) are considered. Since residential real estate doesn’t produce income, the income approach is not relevant.
How about with casinos?
Casinos are income-producing properties, so the income approach makes the most sense. The problem is that casino revenues are, on average, down more than 40 percent from their peak in 2006. Since the income approach values a property as a multiple of its income (called the capitalization rate), the value of the casinos’ property will decline by 40 percent and the tax bill will similarly fall by 40 percent. Atlantic City simply cannot afford to see a 40 percent drop in casino taxes it is paid.
If the city appeals the recent Borgata ruling, it cannot successfully argue that the casino has a higher assessed value based on comparable sales: The casinos that have recently sold, such as Resorts and Trump Marina, as well as The Atlantic Club and Trump Plaza, which may soon sell, all carry a price as much as 80 percent below their current assessment. And the replacement cost approach will not work, because that cost is so high that no new casinos can be profitably built. The bottom line is that Atlantic City will have a difficult time appealing the Borgata ruling and future rulings that are likely to come as more casinos try to duplicate the Borgata tax appeal.
This means some serious problems for Atlantic City. Issuing new debt in the form of bonds will work only for a short time. Eventually, the city budget will have to be cut significantly. This is very painful, because city workers will either have to face pay cuts or layoffs. This will be very difficult for a city operating with minimal resources.
The only other possible solution is to increase the tax revenue — but not by increasing tax rates. Attracting new stores such as Bass Pro Shop and others will help to increase the tax base. The hitch is that new projects that come to Atlantic City often receive tax breaks as an inducement.
Better marketing of the city to reverse the decline in casino revenue and to bring new revenue sources will help. While there is currently a campaign to do that, the competition from surrounding states is making that difficult. The addition of a major airline flying from Atlantic City’s airport will also help, but probably not significantly.
Unless something is done that dramatically changes the numbers, Atlantic City could be the next city bankruptcy.
Michael Busler is an associate professor of finance at Richard Stockton College.
http://www.nj.com/times-opinion/index.ssf/2013/11/opinion_atlantic_city_could_fa.html
Atlantic City’s situation could be very serious. Rising costs continue to push up municipal spending, while a declining tax base is reducing the city’s revenue. In the short term, the city borrows in the bond market to pay for shortfalls and for unexpected declines in revenue, primarily from tax appeals. In the long term, this cannot last.
This is a problem not just for Atlantic City but for all of New Jersey, since the state may be required to take over the management of the city. In that case, it could become very costly for New Jersey taxpayers.
How did this problem develop?
Cities and other municipalities receive up to 90 percent of their revenue from property taxes. In the planning process, the city determines the amount of spending that it will budget for the upcoming year. Then, to raise an equal amount of revenue, the city adds up the total assessed value of all property and simply determines what the rate of taxation will be. It selects a rate that, when multiplied by the tax base, yields the desired level of revenue.
This system has worked very well in the past. Property values rise slightly faster than the overall rate of inflation. So, as long as cities keep the assessed values current, additional funds can be raised with little or no increase in the tax rate. The problem in Atlantic City is that property values there have drastically declined, especially the casinos.
Historically, casinos contributed up to 80 percent of total property-tax revenue collected by Atlantic City. Because of recent tax appeals, that figure is now under 70 percent and likely will fall further in the coming year as more casinos try to duplicate Borgata’s recent tax appeal success. Borgata not only reduced its current assessment, but said that it was over-assessed starting in 2009. The court awarded it a $48 million refund, which Atlantic City will have to raise by selling bonds.
New Jersey law states that virtually all real estate must be assessed at current market value. The difficulty is trying to determine exactly the fair market value. A number of figures are considered, but basically the value can be determined by 1) looking at comparable sales, 2) using the replacement cost approach or 3) considering the income approach.
The comparable sales approach is usually used for residential real estate. The appraiser simply looks for similar house sales in similar locations and makes some adjustments for any unique features. The cost approach could be used if a new home is built — the value of the land and value of the improvements (the house) are considered. Since residential real estate doesn’t produce income, the income approach is not relevant.
How about with casinos?
Casinos are income-producing properties, so the income approach makes the most sense. The problem is that casino revenues are, on average, down more than 40 percent from their peak in 2006. Since the income approach values a property as a multiple of its income (called the capitalization rate), the value of the casinos’ property will decline by 40 percent and the tax bill will similarly fall by 40 percent. Atlantic City simply cannot afford to see a 40 percent drop in casino taxes it is paid.
If the city appeals the recent Borgata ruling, it cannot successfully argue that the casino has a higher assessed value based on comparable sales: The casinos that have recently sold, such as Resorts and Trump Marina, as well as The Atlantic Club and Trump Plaza, which may soon sell, all carry a price as much as 80 percent below their current assessment. And the replacement cost approach will not work, because that cost is so high that no new casinos can be profitably built. The bottom line is that Atlantic City will have a difficult time appealing the Borgata ruling and future rulings that are likely to come as more casinos try to duplicate the Borgata tax appeal.
This means some serious problems for Atlantic City. Issuing new debt in the form of bonds will work only for a short time. Eventually, the city budget will have to be cut significantly. This is very painful, because city workers will either have to face pay cuts or layoffs. This will be very difficult for a city operating with minimal resources.
The only other possible solution is to increase the tax revenue — but not by increasing tax rates. Attracting new stores such as Bass Pro Shop and others will help to increase the tax base. The hitch is that new projects that come to Atlantic City often receive tax breaks as an inducement.
Better marketing of the city to reverse the decline in casino revenue and to bring new revenue sources will help. While there is currently a campaign to do that, the competition from surrounding states is making that difficult. The addition of a major airline flying from Atlantic City’s airport will also help, but probably not significantly.
Unless something is done that dramatically changes the numbers, Atlantic City could be the next city bankruptcy.
Michael Busler is an associate professor of finance at Richard Stockton College.
http://www.nj.com/times-opinion/index.ssf/2013/11/opinion_atlantic_city_could_fa.html
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