June 13, 2008

Gambling Revenue Counteroffer?

Carroll Andrew Morse

Robert Walsh's controversial proposal to permanently dedicate a portion of Rhode Island's gambling system to the state pension fund makes the lede of the Katherine Gregg/Paul Grimaldi article in today's Projo even more eye-catching than it would normally be…

The owners of Twin River are offering the state upward of $500 million up front in return for slicing by more than half the percentage of money the state gets from the slot parlor.

The offer is part of Twin River’s plan to solve its own “dire” financial crisis. Twin River has missed loan payments to its bank and is in danger of falling into bankruptcy. “The situation is dire. We are standing on the edge of a precipice,” Twin River spokeswoman Patti Doyle said yesterday.

But based on the raw numbers presented in the article, it's difficult to see the Twin River proposal as a good deal for the state…
Meeting with House Speaker William J. Murphy earlier this week, the Twin River delegation offered the $500 million if the state would reduce its cut of the slot revenue from 61.45 percent to 25 percent....

The state anticipates $261.4 million from Twin River alone in the fiscal year beginning July 1, and that does not include any of the additional money that newly approved 24-hour gambling on weekends and holidays is expected to generate.

Let's see, 25 is roughly 40% of 61-and-change. That means the state would collect, again in rough terms, about $104 million per year under the new rate, approximately $155-$160 million less than it collects now, meaning that after just 3 1/4 years (500-divided-by-155) the state ends up with less money than it otherwise would have taken in.

Trading a reduction in revenue in-perpetuity for a short-term boost that evaporates after three years doesn't seem like sound fiscal policy to me, unless you believe for some reason that gambling is on the verge of dying here in Rhode Island, which I don't think anyone is forecasting.

Later on in the article, Gregg and Grimaldi ask the first question that I know occurred to me -- and I suspect occurred to others -- immediately upon viewing the headline…

Asked how Twin River’s owners could afford to offer the state a $500-million upfront payment when they can’t afford to pay off their outstanding loans, Doyle said: “If we are able to reduce our tax rate overall, the lending community will look more favorably on our relationship with the state” and presumably be “willing to advance the upfront payment.”
Do you buy this answer? Or do you perhaps take a more cynical view, that this is an attempt to head-off the recent proposal made by Mr. Walsh and protect the full value of a lucrative revenue stream?

If you don't take the cynical view, does the Walsh proposal still make sense, if Twin Rivers is going bankrupt? Or do you take a doubly-cynical view that this is a ploy by Twin Rivers to make them seem less fiscally sound than they may actually be, reducing any potential enthusiasm on Smith Hill for the Walsh plan? Or is that just too many layers of cynicism heaped upon one another?


If commenter "ChuckR" doesn't mind, I'm going to mark him down in the "cynical but accurate" column...

If it was a good deal for the state, it wouldn't have been offered.

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I think they are separate issues. As the article also mentions, the revenue at Twin Rivers is pretty much in line with projections. The current debt service problem was caused by BLB spending more than it expected to upgrade and expand the facility. This is certainly not a new story in the business world, or even hospitality (there is an old saw that the best way to make money on a Ritz Carlton is by being the second group to own it, after it has gone bust because of overspending by the original developers).

On the other hand, Walsh's proposal was just a predictable part of the end game underway as the true dimensions of RI's fiscal crisis -- and its underlying structural causes -- become better understood by more and more Rhode Islanders (and credit rating agencies). Bob and every other public sector union leader is desperately trying to find a way to reduce the size of the unfunded pension liability before the GA is forced to legislate cuts in benefits. However, he has to do this is a way that doesn't appear to be throwing his poverty industry/progressive ideologue allies under the bus (though the scales may have fallen from their eyes once they read the House's proposed budget).

Sometimes, a duck is just a duck.

Posted by: John at June 13, 2008 10:49 AM


The Walsh proposal aside, a deal where Twin River permanently increases its percentage of the take for a one-time payment that's gone after 3 years shouldn't be viewed as a good deal for the state, should it?

Posted by: Andrew at June 13, 2008 11:03 AM

If it was a good deal for the state, it wouldn't have been offered.

But I could see our boys going for it or perhaps a little more, just like a bum goes for a can of sterno when the good stuff runs out.

Posted by: chuckr at June 13, 2008 11:25 AM


BLB is trying to work its way out of the problems it faces, and obviously, they are trying to do this on the best possible terms for them. Given the fiscal crisis facing the state, it looks like they put in a low ball offer to see if they GA would bite. Nothing illogical about that.

Of course, the fact that BLB saw a non-zero probability that the Democratic leadership of the GA would go for such a low ball deal is just another indication of the high regard in which the latter are held.

Posted by: John at June 13, 2008 12:35 PM

Too bad we didn't have a governor or General Assembly that could view this as the opportunity it is: I say let the place go bankrupt. Screw the bondholders and owners. The state buys it out of bankruptcy and we get 100% of the slot revenue.

Posted by: Mike Cappelli at June 13, 2008 1:48 PM

You just don't give up solid revenue streams for a one-time cheap fix. Thank God Bill Murphy doesn't seem sold on this modern equivalent of the island of Manhattan for $24.
If this outfit does go bankrupt, hey, it's an attractive operation for another company. I don't buy Mike's proposal because I don't trust the State House crew running the place.

Posted by: rhody at June 13, 2008 2:58 PM

BLB pressed the state hard to be able to expand and add machines. They were given that ability.

Now BLB comes back to the state asking it to essentially bail them out for their own over-spending related to the expansion?

But it's the timely that truly makes the proposal laughable.

Does anyone think it is a coincidence that the offer of a $500 million one-time payment was made just as the House issued its budget?

If Twin Rivers is really in trouble, let its creditors and investors demand a change of management.

Posted by: Anthony at June 13, 2008 3:00 PM

"a deal where Twin River permanently increases its percentage of the take for a one-time payment that's gone after 3 years shouldn't be viewed as a good deal for the state, should it?"

No. In fact, it is such an ungood deal that one of two possibilities suggest themselves. Either Twin River is in really serious trouble or they plan to come around again with a better deal - "let us cut the state back to 40%" - which would look "good" by comparison.

P.S. It is also hard to argue with Anthony on timing. "H'mm, isn't this about the time the state goes looking for one time fixes?" Fortunately, Smith Hill leadership is wisely not jumping at it.

Posted by: Monique at June 13, 2008 9:18 PM

There is no debate on whether or not Twin Rivers' offer is a good deal for the State. Clearly, it is not, for the reasons Andrew and others noted (primarily the less than 4 year payback).

So let's focus on Bob Walsh's nutty proposal. That too is a bad deal and a bad idea.

It is a shell game, nothing more. A typical cosmetic quick "fix" that kicks the can down the road, brought to us by the same folks that got us into our horrific financial situation in the first place.

We are NOT selling an Asset. We are simply Borrowing against projected cash flows, reclassifying debt on the balance sheet.

Currently, Lottery revenue flows into the General Fund. The General Fund then puts money into the Pension Fund.

What Bob Walsh is doing is simply refinancing the obligation. It is NO different than if the State went to the local bank and Borrowed $225m with the promise to repay that loan, plus interest, with Lottery Revenues.

The General Fund would receive $225m in loan proceeds from the Bank and then those proceeds would in turn be handed over to the Pension Fund.

The net result is that the Pension Fund would now have the money in their pocket so they are happy, but the Taxpayer's still owe somebody $225m plus interest.

Instead of owing the Pension Fund, the Taxpayer's now owe the Bank that provided the loan against future Lottery proceeds.

The Taxpayers are in exactly the same place ...before Bob Walsh's plan they had a $225m obligation (to the Pension Fund) and after the Bob Walsh's plan, they STILL have a $225m obligation (to the Bank instead of the Pension Plan).

But under Bob Walsh's plan, the situation is actually far worse, because due to his smoke, mirrors & rhetoric, the Spending continues unabated.

He borrows the money from the Bank to fund the Pension Plan, but he continues to Spend as if the Lottery revenues are still available for such spending, when in reality, they have been promised to the bank to repay a loan.

Bob Walsh is a master at painting a rosy picture coupled with misdirection.

For example, in his letter in the Projo, he tells us that "The only good news that came out of this year’s revenue estimating process is that in a few years, our economy is expected to rebound."

Oh really, how does he know that?

Interestingly, in the same paragraph he notes that "After updated revenue estimates, the projected deficit in fiscal 2009 is now $434 million. This is $50 million higher than the amount upon which Governor Carcieri based his original balanced budget proposal."

So, on the one hand he tells us that the projections for the current year (i.e. short term fcst which is the easiest to forecast) were missed by $50m, yet on the other hand, he confidently tells us the longer term forecast (which is much harder to forecast) is going to "rebound".

He must be using the same crystal ball that he used when he gave us the Walshian Assumptions of a "conservative 8.5%" return in the Pension Fund. Yet, the reality is that the Pension Fund earned far less at 7.37% over the past 10 years (which included a whopping 18.2% return in 2007, all of which has since been lost).

But no problem. Regardless of the of the inaccuracy of the Walshian Assumptions, his flock still gets their Guaranteed return.

Sorry, but it is time for people to say "enough is enough, Bob". There is a reason we are in the position we find ourselves in. It is because rather than living within our means, controlling our spending and not giving away unsustainable benefits, we instead listened to too many snake oil salesman and gave away the store based on bad assumptions, rosy pictures, smoke & mirrors.

Look no further than Wall Street for a bunch of smart people like Bob who gave us the Sub-prime mess. That too was a really good "idea".

Posted by: George Elbow at June 13, 2008 11:04 PM

"snake oil salesman"

Yeah, Crowley and Walsh would have been right at home selling "patent medicines" a century ago.

Posted by: Mike at June 14, 2008 7:58 AM

There is a saying on Wall Street - bulls make money, bears make money - pigs get slaughtered.
Bob Walsh and his slimy public union friends have been absolute pigs. They get what they deserve.

Posted by: Mike Cappelli at June 14, 2008 12:03 PM

This is a horrible deal for the state. Based on the figures quoted, the state gives up about $155 M per year in perpetuity in return for a lump sum
payment of $500 M today.

The state currently paying between 5% and 6% on long-term bonds. If the state were to commit that $155 M revenue stream as collateral for 20 year
bonds (I'm not advocating this mind you, I'm just showing HOW BAD the deal is) at a 6% rate, they could raise something in excess of $1.75 BILLION (if they issued thirty year bonds they could raise about $2.1 B).

Based on current interest rates, and assuming NO GROWTH in the state's portion of the revenue stream, the value of the reduction in the state's take is about $2.58 B, NOT $500 M.

Posted by: drdave at June 14, 2008 9:17 PM

This deal is a joke - the whole thing smacks of a PR campaign to negotiate a sweeter deal with the state. It worked with their appeal for 24 hour gambling.

Posted by: Coop at June 15, 2008 11:46 PM

I give Bob Walsh credit. As Engaged Citizen mentions he is doing his job.

When I read the proposed solution, I immediately thought that Bob and Pat should take positions with the House of Saud.

Their "generous proposal" to the state is geared more towards perpetuating the long-term surival of the current system.

It reminds me of the "generous" decision of the Saudis to increase oil production because they don't want the price of oil to stay too high for too long.

It's not because they're concerned about the high price of oil, but because they are concerned that long-term high prices will lead to large decreases in demand over the long haul, threatening the perpetuation of the current system.

Just as I suspect we'll all be better off in the long run by using less crude oil rather than accepting the notion of lower prices through increased oil production, I suspect we'll also be better off addressing the pension system's underlying problems rather than jumping to accept a short-term fix.

Posted by: Anthony at June 16, 2008 10:56 AM
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