The proliferation of legalized casino gambling has resulted in the continuing growth of expansive mega-resorts such as the new $2.4 billion Venetian Macau. The property, located in Macau, China, will be the largest casino in the world. While new resorts get all the publicity, many older properties are not as fortunate and face closing doors. State gaming regulators have taken notice and are continuing to closely monitor impaired gaming properties. These agencies have a vested interest (i.e., gaming tax revenues) in ensuring that the casinos they license are financially viable business entities. They believe that it could cause major problems for the industry if casinos could not meet payments when customers hit major jackpots or win large sums of money. One of the requirements that casino regulators have implemented to monitor properties is a minimum casino bankroll. This article discusses the need for establishing a minimum casino bankroll and provides a model used by Nevada for determining the minimum casino bankroll.
Gaming executives could be facing the day when their property is one of the “financially impaired.” They should be aware of the financial tools used by the gaming regulators to evaluate the property and assess the property’s financial stability. Three common financial tools include: (1) minimum bankroll requirements, (2) financial liquidity, and (3) financial solvency. This article concentrates on defining a minimum casino bankroll.
Minimum Casino Bankroll
Various jurisdictions require gaming properties to maintain cash or cash equivalents in an amount sufficient to reasonably protect patrons against defaults in gaming debts owed by the operator. But how is “cash or cash equivalents” defined? Accounting or financial personnel typically go with the Generally Accepted Accounting Principles (Gaap) definition used for financial statements.
Footnote disclosures in corporate financial statements indicate that cash or cash equivalents can include a host of financial institution accounts, such as certificates of deposit, savings accounts, commercial paper, money-market securities, or even short-term investments with a maturity of three months or less. Casino regulators have taken a more restricted view of the Gaap definition. They are concerned about whether an individual property has the ability to meet its present wagering obligations. They do not want the parent company draining all the cash resources, rendering the property unable to meet its obligations.
The “minimum casino bankroll” is a more restricted representation of cash, with the key phrase being “cash maintained on casino property.” The minimum casino bankroll represents the cash that is maintained on the casino property to pay off all possible outstanding wagering liabilities for that specific property, but even this definition is changing as electronic banking evolves. Currently, there is no consensus on what should be included. Both Nevada and New Jersey regulators have led the way in requiring information to assess financial viability and the minimum casino bankroll.
Some gaming jurisdictions, such as New Jersey, allow properties to dictate the actual cash on hand based on the property’s experience. New Jersey regulations (N.J.A.C. 19:43-4.1) define the casino bankroll as daily average cash maintained in the casino, excluding any funds necessary for the normal operation of the casino, such as change banks, slot hopper fills, slot booths, cashier imprest funds and redemption area funds. Comparisons are made with the prior year’s monthly daily average. If there are any significant reductions in cash, the property is required to provide an explanation. Negative trends in cash alert gaming authorities to watch for possible cash-flow problems.
Nevada regulators have taken a more active role in defining the average cash that each property should maintain. The Nevada Regulation 6.150 Bankroll Requirement Formula, adopted in March 2006, compares the daily cash on hand with the potential bankroll requirements based on prior year gaming revenues and payouts for casino games.1 The cash requirements are presented as “on hand” and as available for the “next business day.” Casinos are expected to have cash exceeding the potential payment requirements for both the on-hand and next-business-day requirements. Table 1 shows the Nevada Bankroll Requirement Formula.
Cash On Hand
Cash on hand represents all currency available in the casino for immediate use. Nevada has restricted the definition of “cash on hand” to currency only (i.e., paper money issued by the United States Government). It does not include coin or foreign currency. The cash can be in the casino cage or vault, or on the casino floor in slot banks, booths, carousels and gaming kiosks. If the currency includes any kind of customer deposits for front money, safekeeping or wagering accounts, those amounts are subtracted from the cash on hand to get the net cash in bank.
The “cash in bank” is not normally included in the cash on hand because access is not available on the same day. However, the Nevada Gaming Control Board (NGCB) will grant a bank-balance waiver if the licensee pays a substantial portion of his jackpots with checks.
Cash Available Next Business Day
“Cash available next business day” refers to all funds that can be readily converted to cash within a 24-hour period. It starts with the cash available on hand and then includes all the coin, personal checks, payroll checks, cashier’s checks, traveler’s checks, foreign currency and chips.
The cash available next business day also includes the cash in all banks or financial institutions that can be converted to currency and be at the casino for the next business day. It can not include any funds that are restricted, such as CDs or bonds. If the individual property has a letter of credit, that line can be included, but corporate letters of credit are not allowed.
One of the questions asked of the NGCB was whether the currency in slot machine currency acceptor boxes scheduled to be dropped the next day could be included in the cash in cage for the next business day.2 The response was that until the currency was counted and accepted into cage accountability, it was not to be included.
Required Bankroll
“Required bankroll” represents the amount of cash that is expected to be used to make the payoffs of all wagering activities during the course of a business day. The required amount is dependent on the mix of games provided and the maximum potential payouts. It is also based on having a cash inventory to meet expected gross gaming revenues.
The essential element is a good estimate of the possible cash payouts for any given day, plus enough cash on hand to run the everyday cash exchanges associated with casino operations. Thus, casino regulators expect casino operators to effectively develop a good cash management program that provides assurances of financial viability.
The Nevada model for required bankroll requires properties to evaluate each gaming revenue stream to determine the potential liabilities that could occur. Also included is a basic need for operating cash based on total revenues. The model goes one step further by also considering other potential liabilities, such as promotional activities and player’s club payouts.
The Nevada model of required bankroll starts with cash requirements equal to 1 percent of the gaming property’s prior year reported gross gaming revenue. It then adds on a formula-driven amount for each slot machine, table game and other game.
The slot requirement is a function of the denomination, number of machines and total gross gaming revenues (see Table 2). There are six revenue categories; the lowest category is under $12 million, and the highest is over $130 million. For example, a property with 1,000 slot machines and gross gaming revenues under $12 million is required to have $250 per machine for the next-day requirement and 50 percent of that amount for the on-hand requirement. That is $175,000 for on-hand requirements and $250,000 for next-day requirements. The required cash on hand goes up substantially as a function of gross gaming revenues and the denomination of the machines. For example, if the property is in the top revenue category, with revenues exceeding $130 million, its minimum bankroll requirements just for slot machines would be $900,000 on hand and $1,800,000 for the next day (see Table 3).
This property would need $900,000 on hand and $1,800,000 for the next day calculations just for the cash needed to meet slot requirements. Similar calculations are also figured for all other types of gaming revenues. Table games bankroll requirements, for example, are based on the mix of table types and total gross gaming revenues generated. The table mix categories are 21 and Roulette; Craps; Baccarat; and other games. The look-up tables start at a minimum of $2,000 per table and go up to a high of $100,000 per table for Baccarat in the over $130 million revenue category.
The “other games” include the race book, pari-mutual wagering, sports pool, Keno and Bingo. The race book, pari-mutual and sports pool are flat dollar requirements based on gross gaming revenues. The Keno and Bingo minimal requirements are based on the highest in-house progressive or non-progressive payout offered.
“Variable amounts requirements” is a catch-all for a wide range of other special payouts, especially progressive payouts. Most properties currently have banks of slot machines with a base jackpot that increases on a unit basis for every dollar played. These type of progressive payouts are also now associated with table games (Caribbean Stud Poker), Keno, Bingo, and even race and sports books. When the property is required to make these progressive payouts (as opposed to a third party), cash requirements must include the highest payout, typically representing the highest in-house progressive displayed meter amount for each type of progressive game (slots, tables, Keno, etc.).
Other variable amounts requirements include contest and tournament payout liabilities and promotion payouts. Gaming properties frequently hold contests and tournaments for VIP players. If players pay a fee to enter a tournament, until that tournament is completed, those fees are considered a liability and must be included in the required amounts. After the tournament, all payout commitments must be included until they are entirely paid off. Many properties also have promotions as a way to get additional players into the casino. The casino may have a drawing for a car, or even a house, with the drawing taking place on a specified day. The highest promotional payout must be included in the other variables amount.
If properties have race and sports books, customer bets may be taken months in advance of the betting event. The variable amount required is expected to include an amount sufficient to cover any outstanding wagering liabilities, including unpaid winning tickets, future tickets and telephone account deposits.
Also included in the variable amounts required is the sum of all periodic payments resulting from wagering activities. For example, a patron wins an in-house progressive $1 million jackpot, which is to be paid out over 20 years. The present value of that jackpot must be calculated using the equivalent interest rate and be included as part of the required cash requirements.
Analysis of Casino Bankroll
Gaming jurisdictions have different terminology to define the minimum cash that a casino property should have on hand to meet its gaming short-term operating liabilities. The Nevada model was provided as examples of what could be required. The New Jersey model allows the property to define the necessary cash needed, whereas the Nevada model has a prescribed basis for defining the minimal basis.
In either case, regulators are looking for trends that provide signs of financial impairment. A regular analysis of casino bankroll is the first step to providing relevant data of possible financial impairment. Negative trends are the first indicator of financial difficulties. Good cash management should require a review of the weekly flows of cash and cash equivalents with analysis comparing increases or decreases of cash. [Note: Nevada’s minimum requirements call for monthly compliance tests.]
The Nevada model allows the creation of a “cash held to required bankroll” ratio. It clearly shows whether cash exceeds the requirements. Trend analysis of this ratio will also provide a good indicator of the safety net or cushion provided.
Remember that cash on hand or the minimum bankroll is only the first step in the determination that a gaming property is financially stable. Additional evaluation must also look at financial liquidity and financial solvency.
Footnotes
1 NGCB Regulation 6.150 Bankroll Requirement Formula
2 http://gaming.nv.gov/documents/pdf/07feb01_bankroll_faq.pdf
John Mills is currently a Professor of Accounting at the University of Nevada, Reno. He is also the Director of the Master of Accountancy Program at UNR. Comments and suggestions can be sent to jmills@unr.edu or by phone at (775) 784-6884.
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