Economic Cost Benefit Calculation for Pittsburgh’s

Casino Project

Prepared by Mike Mucha Elliot Schwartz Matt Voit

May 3, 2006Public Expenditure Analysis

Act 71

• Gambling Legislation was approved July 4, 2004

• 14 venues are expected to produce about $1 Billion in tax revenues from a 34% tax

• Plans for 61,000 slot machines in PA

• Pittsburgh was granted one “stand alone” casino

Source: Barnes, Tom. 1/2/2005, Pittsburgh Post Gazette, [online] www.post-gazette.com/pg/05002/435951.stm, 4/30/06.

Costs and Benefits of a Pittsburgh Casino

• Benefits – Government Revenues– Social Benefits

• Costs – Social Costs– Substitution Effects

• Synthesis

Benefits

PITTSBURGH

Pennsylvania

Benefits

• Tax Revenue– Local Tax– County Tax– Business Privilege Tax– Property– Earned Income– Payroll– EMS Fee– Hotel Tax– Development Fund

• Employment – Construction– Operation– Secondary (Related)

• Giveaways• Food and Beverage• METB

The Slots Law created 14 PA casinos

Source: PA Gaming Control Board

Benefits from Pittsburgh Casino

$-

$50,000,000

$100,000,000

$150,000,000

$200,000,000

$250,000,000

$300,000,000

$350,000,000

$400,000,000

1 2 3 4 5 6 7 8 9 10 11 12

Employment

Additional SpendingIncremental Taxes

Giveaways

METB

Calculations based on data contained in Economic Impact Study conducted by Christiansen Capital Advisors, LLC for Forest City Enterprises and numerous Pittsburgh Post Gazette articles

Total benefits total $3.4 Billion for the first 10 years of operation

Benefit Amount/YearEmployment Impacts 230,637,010$ New Food and Beverage Spending 22,950,300$ Incremental Tax Revenues 15,309,167$ METB 1,080,000$ Giveaways 10,000,000$

Calculations based on data contained in Economic Impact Study conducted by Christiansen Capital Advisors, LLC for Forest City Enterprises and numerous Pittsburgh Post Gazette articles

Tax paid by Allegheny County residents is not an incremental benefit

Tax Amount/YearCounty 560,640$ Local 1,000,000$ Priv. Biz 56,064$ Hotel Tax 229,473$ Property Tax 7,200,000$ City Income tax 4,738,000$ EMS Fee 222,040$ Payroll Tax 1,302,950$ Total Incremental Tax 15,309,167$

Calculations based on data contained in Economic Impact Study conducted by Christiansen Capital Advisors, LLC for Forest City Enterprises and numerous Pittsburgh Post Gazette articles

Costs

Indirect Costs

• Gambling Addiction

• Social Services– Pittsburgh Police– Pittsburgh Fire– Emergency Medical Services

• Pennsylvania Lottery

Substitution Effect

Gambling Addiction• The estimated population of Allegheny County in 2007 is 1,228,486

• Allegheny County Population % change per year = -.6%• Pathological Gamblers = .9%• Problem Gamblers = 2.00%

• Cost to Society per compulsive gambler– Low estimate $14,006– High estimate $ 22,077

• Increase in Gambling because of opening of Casino– Low estimate 1.5%– High estimate 2.5%

The first year the Casino opens, the increase in the cost to society is $199,158,787 - $523,207,737

Police

• The Casinos underestimates 3 key factors– The number of officers the City of Pittsburgh

needs to hire– The cost to hire them– The increase in Casino related crimes.

Fire

• The Fire Station in the Hill District that would service Isle of Capri CLOSED.

• The closest fire station would be in the Strip District, Mercy Hospital, or Upper Oakland.

• Underestimates the number of firefighters needed to service casino (2 firefighters).

“A fire station on the development site would be beneficial especially since the recent station closing in the nearby Hill District”

- Fire Chief Huss

Emergency Medical Services

• 60% of medical emergencies at a Casino require transportation to a hospital.

• The Casino will then need to call on the Pittsburgh EMS’s resources.

• Isle of Capri estimates that EMS resources will only be needed 322, which is a 1% increase

Pennsylvania Lottery“Benefits Older Pennsylvanians. Every Day”

Benefits Program gets less funding– Property Tax and Rent Rebates– Shared Ride/ Free Ride Programs– PACE (Pharmaceutical Assistance Contract for

the Elderly) – PACENET (Pharmaceutical Assistance for the

Elderly needs Enhancement Tier)  – Area Agencies On Aging

• Hot Meals Program

• With a Casino the Benefits Program for Allegheny County looses $7,467,919 in the first year

• By year 2018 the Benefits Program receives $135,125,206 LESS a year.

Grandma Becomes Unhappy

Synthesis

Do the costs and benefits add up?

• Assumptions: – Cash flows start one year from now– Budgetary cycle parallels costs and benefits– Multiplier Effects: 1.75– Discount Rate: 7%– Inflation: 3%– Revenue streams from the casino begin in

year 3.

Calculations based on data contained in Economic Impact Study conducted by Christiansen Capital Advisors, LLC for Forest City Enterprises and numerous Pittsburgh Post Gazette articles

Discounted cash flows suggest Pittsburgh and the casino “win”

PV of Cash Flows By Year

$(60,000,000.00)$(40,000,000.00)$(20,000,000.00)

$-$20,000,000.00$40,000,000.00$60,000,000.00$80,000,000.00

$100,000,000.00$120,000,000.00$140,000,000.00$160,000,000.00

1 2 3 4 5 6 7 8 9 10 11 12

Year of Project

PV

of

Ca

sh

Flo

w

• NPV Result: $143,013,456 over 12 years.– City of Pittsburgh looks like a winner…– Harrah’s estimate was $7.7 billion

Calculations based on data contained in Economic Impact Study conducted by Christiansen Capital Advisors, LLC for Forest City Enterprises and numerous Pittsburgh Post Gazette articles

Results are sensitive to discount rate and benefit multiplier

$(1,400)$(1,200)$(1,000)

$(800)$(600)$(400)$(200)

$-$200$400$600$800

NP

V (

$m

illio

ns

)

1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2

Multiplier Value

Harrah's Dream World - Benefit Multiplier Effects (7% discount rate)

Harrah's Dream World - Expected NPV

$-$20$40$60$80

$100$120$140$160$180$200

0% 2% 4% 6% 8% 10%

12%

14%

Discount Rate

NP

V (

$m

illio

ns

)• Analysis can be quite limited due to sensitivity of these two parameters.

• Multiplier Effects Range (r=7%) from $1.6 billion loss to $613 million net gain.

• Discount Rate (M = 1.75) = $52 to $173 million NPV

•No discount rate or multiplier effect used in Harrah’s (as far as we know)

Calculations based on data contained in Economic Impact Study conducted by Christiansen Capital Advisors, LLC for Forest City Enterprises and numerous Pittsburgh Post Gazette articles

Games of chance are uncertain

Worst Case

Base Case

Best Case

Social Cost Per Pathological Gambler Per Year

$22,077 $18,000 $14,006

Percentage of Pathological Gambler (as a percentage of adult population)

2% .9% .5%

Yearly Revenue Increase -3% 3% 6%

Revenue Per Day Per Machine $200 $256 $400

Visitors Per Year to in Initial Year Casino

4,000,000 4,000,000 4,800,000

Percentage of Population Outside of Pittsburgh

0% 10% 25%

Calculations based on data contained in Economic Impact Study conducted by Christiansen Capital Advisors, LLC for Forest City Enterprises, Pittsburgh Post Gazette articles and academic research regarding the social cost of gambling.

Pittsburgh: Do you feel lucky?

Monte Carlo Analysis argues that the casino is a risk worth taking

Worst Case Mean Best Case

-$628 Million $1.26 Billion $3.149 Billion

Results indicate that there is a 4.3% chance the casino will have a negative NPV!

Crystal Ball Student EditionNot for Commercial Use

Frequency Chart

$

.000

.008

.016

.024

.032

0

8

16

24

32

($628,205,184.41$316,096,551.37$1,260,398,287.1$2,204,700,022.9$3,149,001,758.7

1,000 Trials 989 Displayed

Forecast: Total NPV

Questions? Comments?