Prop. 5 Worries Nevada Bond Investors

The decision by California voters to allow “Las Vegas style” casino gambling on Indian reservations has some municipal bond investors fretting that Nevada’s long winning streak may be nearing an end.

California residents spend $8 billion a year in Nevada’s casinos, and account for a third of their visitors, according to the Las Vegas Convention and Visitors Authority. After approval last week of California’s Proposition 5, a ballot measure that would permit roulette wheels and craps tables in casinos on the state’s Indian reservations, some investors are worried that Californians will choose to risk their money closer to home.

“For decades it’s been assumed that the Las Vegas gaming base was driven by California,” said Richard Ciccarone of Van Kampen Funds in Oakbrook Terrace, Ill., which has about $22 billion in municipal bonds. “This could really throw up a cloud of uncertainty.”

The California measure comes at a time when Nevada’s gaming industry is already seeing a decline in visitors from Asia, where many economies have fallen into recession, and when the U.S. economy may be poised to slow as well. At the same time, opulent new casinos are going up all along the Las Vegas strip.

“Are they going to be able to fill these huge new gaming hotels in Las Vegas?” Ciccarone said.

Whether the California measure will hurt the finances of Nevada, and of Clark County, home of Las Vegas, is open to question. “We don’t see Prop. 5 having an effect overnight, but maybe in the long term,” said Greg Zappin, an analyst at Standard & Poor’s Corp. “We are monitoring the casinos’ performance in the next year or so as it relates to all the new capacity coming in.”

The state is rated “AA” by S&P; and “AA2” by Moody’s Investors Service.

Nevada already has weathered a proliferation of gaming across much of the country, including legalized casino gambling in New Jersey, Indiana, Illinois, Iowa, Mississippi, Louisiana, Missouri, South Dakota and Colorado.

“They should have odds in Vegas for betting on its demise,” said John Hallacy, a managing director of research at Merrill Lynch & Co. “So far, you would have lost every time.”

Clark County is the fastest-growing county in the country, with about 6,000 new arrivals a month. Many come to work in the gambling and tourism industry. All that growth is putting a strain on municipal services, in particular schools.

“We look at the city as our own steel mill town,” said Walt Rulffes, assistant superintendent and chief finance officer for the Clark County School District.

The county has about $1 billion of debt outstanding.

Clark County’s school district is the ninth-largest in the country. District officials estimate the county will add 150,000 students by 2008 to the current enrollment of 200,000. To ease overcrowding, the district had its own $2.5-billion bond issue on the ballot. It won, authorizing $115 million for land purchases, $31 million for two regional bus yards and $884 million for renovating existing schools.

“The proposition was structured to be self-regulating,” Rulffes said. “If the county doesn’t grow or if casinos start closing, we don’t get the bonds.”

The passage of the construction measure also means that property taxes will remain at their current level of 55 cents per $100 of assessed value until June 30, 2008. For the average homeowner whose house has a $100,000 value, the tax amounts to about $193 a year. The money will be augmented with $1 billion from real estate transfer taxes and hotel room taxes to construct 50 elementary schools, 22 middle schools and 16 high schools.

Oversight and accountability will be done through an 11-member body appointed by the Clark County School Board of Trustees. The board will have the authority to review and approve or deny any request from the school district to issue general obligation bonds for construction.

To keep pace with growing competition, casinos in Nevada have diversified by providing more entertainment and retail outlets for tourists.

“The casinos have been very successful at converting the gaming industry into a tourism and entertainment industry,” said Dennis Porcaro, senior credit officer with Moody’s Investors Service. “Gaming revenue is now entertainment-driven. If revenue drops this year, it will be because of a global recession and the decline in foreign visitors to Las Vegas.”

Porcaro said there already has been a decline in high rollers from Asia.

According to the Las Vegas Convention and Visitors Authority, foreign visitors account for 19% of yearly tourism. The average stay is two to three days, and visitors on average spend $231.88 on food, shopping and entertainment, excluding gambling expenses.

“The Asian [economic] flu is affecting the gaming numbers, but that’s cyclical. Our revenue is still growing because of a diversified tourist base,” said Brian Krolicki, treasurer-elect of Nevada. He added that revenue from the sales tax now accounts for more of the state’s revenue than gaming does.

Krolicki pointed out that even with the downturn, the state’s tourism numbers continue to grow. He pointed to the Bellagio, which just opened. At $1.6 billion, the 3,000-room casino is the most costly ever.

Three other major hotels are slated to open next year: Mandalay Bay, a Circus Circus Enterprises Inc. casino; the Venetian, by Las Vegas Sands Inc.; and the Paris, a Hilton Hotels Corp. property.