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Fading casino revenue has Indiana city selling debt

October 21, 2014

After decades of declining population and shifting economic fortunes, the city of Hammond in northwest Indiana is betting that water from Lake Michigan will refresh its finances.

Hammond, about 30 miles southeast of Chicago on the lake’s southern shore, faces falling property-tax collections and fading revenue from a casino that opened in 1996. Caesars Entertainment Corp.’s Horseshoe Hammond casino, with almost 3,000 slot machines, became Hammond’s largest private employer as the region’s steel mills shut down and the population dwindled 29 percent from 1960, to about 79,000.

The city is banking on its ability to sell water to other towns at cheaper rates than Chicago offers. Officials plan to fill this year’s budget deficit by selling about $30 million of debt backed by water payments from nearby Chicago Heights, Illinois. While credit-rating service Standard & Poor’s cited the one-time fiscal fix when it cut the municipality to three steps above junk last month, Hammond sees water as the way to balance its books.

“This is a windfall for us,” said third-term Mayor Tom McDermott, who’s running for re-election next year. “Water is getting more expensive. Hammond is positioned very well in that case. Times may be tough right now, but the future is very bright.”

Lost luster

Water may cushion the blow as the city’s reliance on casinos means it’s again dealing with an industry that’s losing its luster.

Incorporated in 1884 and named after George Hammond, who started a slaughterhouse, Hammond developed into a rail and manufacturing hub, prospering as steel mills came to the area in the late 19th century, said Richard Lytle, a historian at the city library. As the steel business shrank, local manufacturing jobs plunged 90 percent from 1970 to 2010, said Micah Pollak, assistant economics professor at Indiana University Northwest in Gary.

Now the city projects that revenue from taxes and profit-sharing connected to Horseshoe Hammond will tally about $34.5 million this year, down from a 2009 peak of about $41.2 million, according to city Controller Heather Garay.

Mismatch challenge

Officials are also contending with a state-implemented property-tax cap that reduced city revenue by $9 million last year. The combination left the city with a $3.8 million hole in its 2014 budget as of Oct. 20, Garay said. S&P, in a Sept. 18 report, cut Hammond to BBB+.

“There’s a mismatch between revenues and expenditures,” said Steffanie Dyer, an S&P analyst in Chicago.

Horseshoe had 2,094 employees as of March, according to the city’s website. A hospital was the second-biggest employer.

About a fifth of residents live in poverty, and the median household income of $38,677 is 20 percent below the state average, Census data show.

The city’s take from gaming has ebbed as people gamble less while competition intensifies in the industry, said McDermott, the mayor.

Clennisteen Bush, a 62-year-old hospital clerk from Chicago, shows why. Five years ago, she’d come to the Hammond venue a couple times a month. These days, her visits are about half as frequent.

‘No payout’

“These machines, they take your money,” Bush said one evening this month, seated at a slot machine and occasionally pressing a button that sent the five columns of letters and pictures of wolves, eagles and other beasts whizzing on her screen. “I know it’s no payout for me.”

Gary Thompson, spokesman at Las Vegas-based Caesars, declined to comment on the Hammond business.

“The cash cow, the casino is drying up,” Councilman Homero Hinojosa, who’s running against McDermott, said.

Monetizing water revenue through the city’s first sale of water bonds is going to clean up Hammond’s finances, McDermott said. Taxpayers don’t need to worry about the debt because it’s backed by water payments, he said.

Hammond is taking advantage of water rates that are lower than Chicago’s, McDermott said, after that city raised water and sewer rates for its residents starting in 2012.

Water rights

Hammond’s customers include five localities in Indiana and seven in Illinois, including Chicago Heights, according to the water department’s website.

Its waterworks is one of three public facilities, along with East Chicago and the Indiana-American Water Co., that are allowed to draw water directly from Lake Michigan, said Mark Basch, head of water rights and use at Indiana’s Department of Natural Resources.

Selling water won’t solve Hammond’s woes, said Michael Hicks, an economist at Ball State University in Muncie.

“Water is not a long-term solution,” he said. “[Hammond] has so many other problems -- performance of schools, quality of neighborhoods and other things, which after five decades of neglect do not tell a very attractive story.”

The proposed bonds would be backed by money from a 20-year contract with Chicago Heights, which buys on average about 2.7 billion gallons of water a year from Hammond, said Edward Krusa, chief executive operator of the Hammond Water Works Department.

The city is working on a private placement and looking to close the deal Dec. 16, Garay said.

Chicago Heights’s accord with Hammond Water Works almost quadrupled its rate to $2.20 per thousand gallons, and went into effect in January 2013, Krusa said. The previous contract was for 30 years.

Net revenue from the deal is about $5.6 million a year, with about $1.2 million going to the water department and about $4.4 million to the city, Krusa said.

“Water is our most valuable asset,” said Dave Ryan, executive director of Lakeshore Chamber of Commerce in Hammond. “It’s nice to have gaming dollars, but they’re not something that can be counted forever.”

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