Nov. 28 (Bloomberg) -- Davenport, Iowa, 7 miles down the Mississippi from the nation’s first riverboat casino, plans to borrow $48 million so it can purchase its own.
The municipality of 100,000 wants to sell general-obligation bonds to buy the Rhythm City riverboat on its waterfront from Isle of Capri Casinos Inc., owner of 16 venues across the nation. Mayor Bill Gluba said the revenue would reduce reliance on property taxes and help cover rising costs. Kansas may currently be the only U.S. municipal casino owner, according to the American Gaming Association.
“Why would anyone want to allow huge profits to flow out from citizens and tourists to the city to investors in Las Vegas, New Jersey and New York?” Gluba, 70, said by telephone. “Why not keep the money in the community for the benefit of the people who live in the community?”
Cities from Glendale, Arizona, to Harrison, New Jersey, have seen their taxpayers tapped and credit ratings cut because of failed investments in sports and projects intended to spur growth.
It’s unusual for local governments to pledge taxing power for a project, unlike schools or roads, that must be profitable, said Matt Fabian, managing director at Municipal Market Advisors, a Concord, Massachusetts-based research firm.
“The city is putting taxpayers 100 percent on the hook in case this casino doesn’t perform as expected,” he said. “It’s hard to believe that taxpayers fully understand the risk they are taking in this transaction.”
Gluba said Davenport, which has about $238 million in debt, will get the cheapest borrowing rates by selling general-obligation bonds to pay for the casino assets, including 931 slot machines, 14 table games, and a 209-seat buffet restaurant.
The city, about 175 miles (282 kilometers) west of Chicago, is planning the venture as municipal yields are at generational lows. A Bond Buyer index of 20-year yields fell to 3.37 percent last week, the lowest since 1965.
Ten-year Davenport general-obligation bonds exempt from federal taxes sold in February to yield 2.05 percent, or about 0.20 percentage point over a benchmark index. The debt, which is subject to Iowa taxes, traded Oct. 2 at 2.1 percent. The city is rated Aa2 by Moody’s and AA by Standard & Poor’s, the third-highest for both.
Davenport spent about 21 percent of operating expenditures on debt service in fiscal 2011, which S&P analysts called “elevated.” Property taxes accounted for 85 percent of general-fund revenue, and the city has drawn on reserves -- $577,000 in 2011 -- to cope with rising costs, they wrote. Expenses have risen 9 percent since 2008, bond documents show.
“The needs are there and you can’t continually rely on property taxes because that’s an unfair tax,” Gluba said.
Holly Wetzel, a spokeswoman at the gaming association in Washington, and David Schwartz, director of the Center for Gaming Research at the University of Nevada, Las Vegas, could name only Kansas as having a similar enterprise. The state owns two facilities, which private operators run, Schwartz said.
Davenport plans to contract out the operation of its venue.
Brian Ohorilko, the Iowa Racing & Gaming Commission’s administrator, said none of Iowa’s 18 casinos, riverboats and racetracks is owned by municipalities.
Gaming entrepreneur Bernard Goldstein opened the nation’s first riverboat casino on April 1, 1991, in Bettendorf, Iowa, 7 miles away, according to the Rhythm City website. A venue in Davenport started up later that day.
Buying a casino is the first step for Davenport.
The City Council last month voted for a term sheet with Isle of Capri, which is based in St. Louis and will continue to run a larger casino in Bettendorf.
Jill Alexander, a spokeswoman for Isle of Capri, said the company is negotiating with Davenport and declined to say why it is selling the casino.
Davenport plans to sell bonds in the first quarter to finance the purchase, Gluba said. The city also issued a request for proposals, due Dec. 20, for developers to build a land-based casino of at least 1,000 slot machines and 20 table games. The request doesn’t say how much the city would contribute to construction.
The riverboat would close once the new facility is done, which could take two years, Gluba said.
Gluba said he expects the riverboat casino will generate enough revenue to cover the cost, and that a bigger facility on land will draw even more dollars.
Rhythm City had $8.3 million of operating income in the year through April 29, from net revenue of $44.4 million, Isle of Capri filings show. The debt service would likely be about $3.5 million a year, Gluba said.
“It’s not rocket science to see the spread there,” he said. “It’s what we keep in the community.”
For investors, Davenport’s venture would be a concern because it could become “a money pit,” said Howard Cure, director of muni research at New York-based Evercore Wealth Management LLC, which oversees about $3.8 billion.
Pennsylvania’s capital, for example, tried to overhaul and expand its incinerator and suffered from cost overruns, he said. Harrisburg is now under a state receiver who plans to sell the plant and other assets because of more than $300 million in debt from the project.
“In an era when budgets from cities and states and the federal government are being scrutinized more as how best they serve their population, this strikes me as going counter to that,” Cure said of Davenport.
Following are pending sales:
NEW JERSEY TRANSPORTATION TRUST FUND AUTHORITY plans to sell $1.25 billion of revenue debt as soon as next week, data compiled by Bloomberg show. The bonds are backed by gas-tax revenue the legislature appropriates annually. Proceeds help finance highways, bridges and mass-transit. (Added Nov. 28)
TEXAS is set to offer $939 million in general-obligation bonds, including $100 million of taxable debt, as soon as next week to finance roads, according to data compiled by Bloomberg. The debt will be issued through the Texas Transportation Commission. (Added Nov. 28)
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