When Detroit’s casinos begin reopening on Wednesday, they will be running at a lower capacity than any other casinos currently operating in the United States.
According to an executive order Gov. Gretchen Whitmer signed last week, Detroit’s casinos may begin reopening at 15% capacity Wednesday at 10 a.m. The lowest reported operating capacity elsewhere in the country was 25%, for the reopening of Atlantic City casinos in New Jersey over the July 4 holiday weekend. Nevada has capped capacity at 50% as brick-and-mortar casinos across the country have reopened amid the nation’s ongoing struggle to contain the COVID-19 pandemic, enforcing occupancy restrictions and public health measures like social distancing and mandatory facial coverings to create the safest possible environment for returning gamblers.
In Detroit, all three of the city’s commercial casinos, which have been closed since March 16 due to the pandemic, will implement safety rules required by Whitmer’s order and the Michigan Gaming Control Board (MGCB). The MotorCity and Greektown casinos will reopen Wednesday, while the MGM Grand Detroit plans to begin welcoming guests back onto its property Friday morning.
But is Michigan’s initial benchmark of 15% operating capacity too onerous? The state’s tribal casinos, as well as casinos in neighboring states like Ohio and Indiana, have been open for months with less strict occupancy limits, and so far they’ve managed to do so without contributing to rampant spread of COVID-19.
Industry analysts believe it’s possible for Detroit’s casinos to turn a profit at just 15% capacity, and MGM Grand Detroit president and COO David Tsai told Crain’s Detroit Business that they could run profitably under the state guidelines, but fewer overall gamblers on Detroit’s casino floors means less much-needed tax revenue for the city and state governments.
“I respect the virus and I certainly am not one to call it a political hoax,” said Alex Calderone, managing director of the Birmingham-based Calderone Advisory Group. “It’s very, very serious. But that notwithstanding, a lot of these other jurisdictions across the nation have opened up with similar precautionary procedures, and they’ve experienced relatively safe operations in the context of the COVID-19 environment, and their operating capacities far exceed 15%.
“I’m not bashing anyone for putting people first or protecting patrons or the casino employees,” Calderone continued. “But the state might be playing it just a little too safe.”
How casinos can remain profitable at 15% capacity
While Tsai has said he believes the MGM Grand Detroit can run profitably under the state’s strict guidelines, Calderone expressed some doubt. “Whether they can actually be profitable or at least not lose money at 15% capacity, that’s a coin toss in my opinion,” said Calderone, who helped lead the Conway Mackenzie consulting firm’s work on the Greektown Casino bankruptcy from 2008 to 2010.
The casinos’ ability to stay out of the red is linked to a widescale reduction in operating costs. “I know for a fact that a significant amount of expenses have been cut,” Calderone said. “Just think, if you had a corporate suite at the Pistons or the Red Wings or the Tigers, you’re not paying for that right now. They’re probably not investing in mail campaigns the way they used to, they’re not comping people, and a whole host of other expenses that just frankly aren’t being incurred.
“Based on the cost cuts that the casinos either already had made or they anticipated they were going to make, it’s possible that revenue could drop substantially and either not impact the bottom line or impact it very little.”
Effect on city and state tax revenues
In March, a week after Detroit’s casinos shut down, Mayor Mike Duggan estimated that the city was losing $600,000 per day in tax revenues for each day the casinos were closed. Over the first 2½ months of 2020, Detroit’s casinos paid more than $24 million in taxes to the state government. Since the casinos were shuttered in March, their revenues — and their tax contributions — have been stuck at zero, with both the city and state facing budget shortfalls due to the economic havoc wrought by COVID-19.
Detroit is particularly reliant on casino-related finances. Wagering taxes are the city’s third-largest revenue source, and they account for roughly 16% of the city’s general fund revenue. When Detroit went through bankruptcy in 2013, Kevyn Orr, the city’s emergency manager, testified that “casino revenue is the single most stable source of revenue available to the city” during a court hearing. “Without it,” Orr said, “the city couldn’t operate.”
This week, when the casinos reopen, it’s possible that operating at 15% capacity will prevent them from generating the overall revenues and gambling taxes that could help shore up state and local budgets.
“If you have taxes that are assessed based on gross gaming revenues, then the capacity limitations are going to impact them,” Calderone said. “Because even if a casino can cut so many costs that their bottom-line income isn’t changed, the cut to the state and the city certainly is, because it’s based on revenue and not bottom-line profit.
“It’s simple math,” he added. “If you don’t get as many people in the door, the actual amount of gaming revenue is impacted because of that. Then, there’s a direct correlation between decreased gross gaming revenue and the gaming taxes that are generated by the city and the state.”
Calderone acknowledged that casinos often operate at well below maximum capacity, but stressed that the 15% cap would prevent Detroit’s casinos from taking advantage of peak weekend hours.
“On Monday morning at 11 o’clock, the casino probably wouldn’t be operating north of 15% anyway,” he said. “But on a Saturday night, when most of the income is generated, they’re probably operating at 50%, maybe closer to 75% capacity. And so the inability of the properties to operate like that on weekends, it’s going to hurt them.
“Where’s the right middle ground? If we’re looking at a balancing act here, it’d be my professional opinion that the capacity limitation does make sense. But there is a number at which costs and benefits and risks and opportunities are balanced. And I don’t think that number is 15%. I think it’s probably north of 25%, and maybe as high as 50%.”
Mobile gaming a potential — but overdue — solution
As essential as wagering taxes have been to Detroit’s municipal finances over the past decade, the city is preparing for a future in which its “single most stable” revenue source is no longer stable. According to the Detroit Free Press, the city plans to miss out on $112 million in gambling taxes and fees from the casinos between March 2020 and June 2021, and possible longer, depending on the course of the pandemic.
“We have assumed that those casinos are not operating at full capacity for over a year,” Detroit Chief Financial Officer David Massaron told the Free Press. “Ultimately, what will determine the success of the city, and the success of every city in America, will be how effectively and safely the reopening process is done.”
One way to shore up a portion of those anticipated losses would be through tax revenues generated by mobile sports betting and casino games. The state legislature voted to legalize online gambling last December, but the MGCB has yet to formulate its final regulatory oversight structure for mobile gaming. State approval was initially expected in early 2021, although it could come earlier, in late 2020, in response to the need for state and local governments to raise money for their pandemic-battered budgets.
“The thing that baffles me is, online gaming and sports gaming were both legalized last year,” Calderone said. “You’ve got this big budgetary hole and you have a mechanism to mitigate the damages. If you’re looking at this from the perspective of how do we backfill the tax hole, it would seem to me that rolling out the online gaming would be would be low hanging fruit.
“That would be the first thing I would be pursuing,” he went on. “You could mitigate a lot of damage by going live sooner rather than later.”
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