January 18, 2011

Maryland uses creative financing to buy $41M in slot machines

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Opening day at Ocean Downs casino.

Opening day at Ocean Downs casino.

By Megan Poinski

Megan@MarylandReporter.com

Opening day at Ocean Downs casino.

The state of Maryland is on its way to becoming the proud owner of $41.5 million worth of video slot machines for the Ocean Downs and Perryville slots casinos through the sale last week of taxable certificate of participation bonds.

The bonds sold quickly last week at a coupon rate of 5%, raising the funds the state needs to purchase 1,825 of the slots at the two casinos, said Patti Konrad, director of debt management in the State Treasurer’s Office, and Deputy Treasurer for External Affairs Howard Freedlander.

Konrad said the state decided that it wanted to own most of the slot machines in its casinos. However, financing the purchase – especially in the current fiscal climate – took some creativity. The final solution was the sale of certificates of participation, which are bonds, like loans from investors to the state. The certificates mature in five years.

Unlike general obligation bonds, the interest on certificates of participation is taxable.

Konrad said that certificates of participation are a low-cost way of raising capital, and were the best solution to purchase the slot machines.

“This is just a way for us to go ahead and finance the purchase,” Konrad said.

Certificates of participation count toward the state’s total debt. Konrad said that these certificates were included in the most recent debt projections by the Capital Affordability Committee in September.

Konrad said that the state has also used certificates of participation to finance parking garages.

The certificates have a AA rating – just a step below the state’s bond rating.

Yet they sold quickly and were seen as a solid investment. Konrad and Freedlander said that most of the certificates were sold to other municipalities. Harris County, Tex., and the Pennsylvania Turnpike Commission each bought quite a few of them, Konrad said.

The sale was unanimously approved at the Board of Public Works meeting earlier this month. Comptroller Peter Franchot, often a vocal opponent of slots, said he was glad to vote to approve the financing.

“I think this financing plan is well-presented and works for us,” he said.

The sale will pay for many of the machines that are already in the two casinos. Konrad and Freedlander said that the state has 90 days to “accept” the machines – meaning the bill for them isn’t due until they’ve been in use for three months. Konrad said that the bill for Perryville is due on Jan. 26, and the Ocean Downs bill is due in a few months.

The other machines – 158 at Ocean Downs and 267 at Perryville – are being leased by the state, Freedlander said.

Konrad said that the certificate sale was successful and effective, and the same method may be used to purchase slot machines for the planned Baltimore City and Rocky Gap casinos. However, when it is time to buy those machines, the economic conditions could be different.

“We will make a decision on those at that time,” she said.