Casino gamble lures Iowa city to borrow

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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 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.

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