Chicago’s long-standing effort to host and profit from a casino will require a legislative makeover to attract financing, an independent consultant’s report concluded.
“The gaming expansion legislation that allows for a casino in the city of Chicago is very onerous from a tax and fee perspective,” the study concluded. “Our analyses suggest that, at best, the highest earning of the five sites would operate on very thin profit margins of around 3%, which compares very unfavorably to the in-state and regional peers in the low-to-mid 20% range.”
City officials want the casino as a new source of revenue to offset some of the need for other tax increases as it plays catch-up on its massively underfunded pensions.
On top of the existing tax structure on adjusted gross receipts paid by all Illinois casinos, the Chicago casino as currently authorized would also pay an additional 33 1/3% privilege tax on the AGR, according to the independent financial
Shedding the special privilege tax “would receive a material boost.”
The location of the five sites — all outside the confines of downtown and in neighborhoods pushing for economic development investment — also hurt the bottom line but it’s the tax structure that is the biggest obstacle, the report said. Chicago was among a handful of new casino sites authorized in a gambling expansion package approved by lawmakers and signed into law by Gov. J. B. Pritzker earlier this year.
“The current regulatory construct, namely the highest effective gaming tax and fee structure in the U.S., makes any casino project — regardless of location — generally not financially feasible,” the report says.
Chicago would use casino revenue to help pay down the city’s public safety pension tab. The $30 billion of net liabilities for all four of the city’s funds weighs heavily on the city’s balance sheet and bond ratings and the city must come up with an additional $280 million in 2020 to cover an actuarial shift in contributions on the public safety funds.
The results of the study — requested by the city — confirmed warnings from Mayor Lori Lightfoot’s administration that the tax structure would scare off investors but she remains hopeful that lawmakers can fix the problem.
“The way this deal is structured it is not financeable,” Lightfoot said, adding that she will work toward “a bill that gets it right.”
While the report raised questions among some following the issue as to why the city didn’t offer a downtown location, Lightfoot cautioned that the five sites reviewed were put forward as “placeholders in order for the study to move forward," and the selection process is in the preliminary stages with public input being sought.
The snag won’t impact 2020 planning because the city wasn’t counting on any revenue from a casino until late 2020 or 2021.
“We weren’t counting on that money to balance the budget we will present to the city council this fall,” Lightfoot said.
Lightfoot, who took office May 20, will lay out on Aug. 29 in an evening speech the city’s fiscal picture, operating and structural gaps heading into 2020, and may lay out potential fixes. The city is facing roughly $700 million in additional costs that must be absorbed and last year’s annual financial analysis warned of a $250 million structural gap.
The city could face a tough slog in winning over lawmakers to support changes to the casino structure since many special interests have already been satisfied by other pieces of the gambling package. A viable structure will also require that others give up some fiscal reward to attract a casino operator and financing.
Lightfoot said she’s hopeful that lawmakers can be convinced given the state’s fiscal realities and its own struggles with pension funding and budget gaps. It would “be foolhardy” for the state to walk away, she said.
The report’s findings bolster that idea. “The developmental impact of high taxes and fees notwithstanding, we forecast that a casino in the city of Chicago has the potential to become the highest grossing casino in Illinois, significantly higher than the current market leading Rivers Casino in Des Plaines, which generated $441.8 million in AGR in calendar 2018,” the report says. Casino revenue will help repay borrowing that’s part of the state’s new six-year, $45 billion capital infrastructure program.
Pritzker’s administration issued a statement after the report’s release saying it looked forward “to working with stakeholders, including the mayor and General Assembly, to refine this approach and ensure that we maximize the opportunities for jobs for residents and revenue to address our financial obligations.”
