The Consequences of the Hurricane Katrina in Mississippi - Research Paper Example

The special analyzation of this paper is on the impact of the hurricane Katrina on the gaming revenues as well as on the taxes of Mississippi. The losses which took place by this hurricane an the magnitude of it, both are determined with ARIMA models. The estimation of both taxes loss on the local level and state are determined within the state. This finding has subsequently included an effect of substitution between those gaming regions in and around Mississippi after the attack by Katrina, which has closed the proximity in majority of the gulf coasts, and specially the casinos out there. This effect of substitution leads to such relocation of the local taxes in between the small regions that gave a negative impact on the state level. The overall recovery time and short falls are shown as in early estimates. This particular research started with analyzation and it ends with a hope that gaming laws shall be modified to save on greater losses. INTRODUCTION 29th August 2005 a third category storm known as Katrina was seen hitting the coast of Mississippi. This hurricane was devastating in nature and destroyed a large area of which included more of residence and business of the coastal area of Mississippi. Katrina is regarded as one amongst the few most devastating natural catastrophes in the history of U.S. This particular natural calamity has been held responsible for 231 fatalities and over $100 billions of damages in Mississippi. This paper focuses on one particular sphere which actually draws the economy of Mississippi which is casino gaming. These casinos are very important because the economy of Mississippi relies on this particular sector. The taxes, which are put on these gaming revenues, add up to more that $330 million to state annually and all the local coffers, which were prior to this place before Katrina. When Katrina roared in ashore most of the casinos in the gulf coast built mostly on the barges were destroyed or heavily damaged. This area had the total infrastructure of this casino games. These buildings were considered as the lifeblood of the place. In this research paper we go in for analyzing the the total amount lost in these gaming revenues, the huge amount of taxes lost and the duration of he recovery period of these casino games. The results of our findings were surprising as it gave a substituting effect and a beautiful example of the effectiveness of governmental intervention. The beginning of the paper is with this particular industry of the state, which is followed by methodology and data collection section respectively. At last, we present results and the conclusions. REVIEW OF EXISTING LITERATURES: A brief note about the Casino Industry of Mississippi The legislation of 1990 of Mississippi enacted and later allowed the gaming courses on these navigable waterways. The first ever casino to come up in this water way was in the midis of 1992. Most of the casino games were under the category of riverboat gambling (Roehl, 1994). During 1990’s we get to see casinos with huge facilities, restaurants, entertainment and supported with huge hotels. We see such features during this time. In United States, we have Mississippi ranked in the third place after obviously Las Vegas and the Atlanta city. There is also a Mississippi commission for games which estimates that every day they have more than 50 million people who visit the place. Further, amongst the 50million people, those who patronize the casinos of Mississippi annually out of them around 81% people are form the states of south eastern countries. Gulf Coast, South River, and North River, the gaming casino industry of Mississippi is based on on these three zones. The impact of Katrina fell on all these three zones respectively. North River section is based on a huge area of 594,000 square feet. It consisted of 10 casinos before Katrina struck the shore in 2005. This particular section is situated in the centre of Tunica, which is again located in the North West corner of state, southern part of Memphis. It is Tennessee. 74% of the patrons of this region come from Southeastern U.S. before Katrina the Mississippi residents were only 13% of the total patrons of North River. Vicksburg is the state where you will find the region South River and it is the smallest sector of the three. There were seven casinos before Katrina operating in an area of 188,000 square feet. Almost 55% of Mississippi residents were its client. The two zones namely the North River and the South River were kept for reporting. If we combine both these zones then it shall be the largest as far as gaming revenues are concerned. In 1994, we had the first river casino. Gulf Coat is the third reporting zone. You will get 12 casinos operating in an area of 674,000 square feet. Biloxi, Bat St. Louis, and Gulfport is the place where you will get this region located. In 1992, the first ever casino came up here and it is here where we have 87% of the visitors from the southeastern part. It was back in the year 2004 when the total revenue from this region alone was $1.2 billion. The residents of Mississippi consisted 24% of the total patronage in this area. All these were prior to the hurricane Katrina. This report has been collected from Mississippi Gaming Commission in 2007. The state here tries to follow the protection model for gaming given by the government (Wagoner and Ryan, 2003). The casinos hereby are located where the residents are minimized form the fun of gambling and the draw from state patron is maximum. As the North River region gets huge bucks form Arkansas and Memphis. Likewise, for the Gulf Coast region, it is Alabama, Florida, and Georgia. These mentioned states are without any casino gaming. The operations on the casino gaming has been changed constantly by the gaming commission of Mississippi, this hereby facilitates the analysis through various time ( Russell, 1997). 12% tax is the constant one since the beginning. This 12% tax is split accordingly like 8% of the total tax shall go to the state where as 3.2% are kept for the local municipalities ( City of Biloxi, 2007). If we check the period between 1992-2004 the annual gaming revenue form casino increased to $121 million to $2.7 million. This is a report by the tax commission of Mississippi. Effect of Katrina on Mississippi casino industry: Casino amusement space of Mississippi is peaked over 1.4000000 square feet before the Katrina took its appearance. Table 1 use to show numbers of casinos, the area, the count of machine slots, and the count of table plays operating in the months before and after Katrina showed up. Mississippi’s Gulf Coastline casinos were supposed to be built to tackle the 3rd Category hurricanes. It is claimed by the news’s that around seventeen casinos being closed at Mississippi on August 28, 2005 when it is heard that the Katrina is approaching. These casinos used to service almost 60,000 tourists per day and 17,000 people were employed there (Cope 2005, Gilligan, 2005). After Katrina made its hit 12 casinos were kept close shown in the table 1. The estimated lost tax profit was supposed to be around $400,000 to $500,000 per day, dropped by 50% from before hurricane levels (Cope 2005, Kovaleski, 2005). The Gaming Commission of Mississippi showed the statistics where it is visible that casino industries of Mississippi employed around 32,603 people in the August of 2005. After Katrina banged in 2005, September, numerous employees declined to only 16,217, 16,386 lost their jobs (Mississippi Gaming Commission, 2007). Casino operations were effected badly beyond the revenues. It affected the hotels and other facilities. If we see the quarter half of June we shall see that the regions of Mississippi had 7,391 hotels which also had some additional 400 rooms under the process of coming up. This operation employed around 2,784 people and the occupancy rate was 86% on an average. The second quarter, which followed the hurricane, had no rooms apart from a devastated land. An initial strategy was taken by in changing the gaming laws after Katrina had struck the shore before the rebuilding strategy was adopted (Brush, 2005). On 3 October 2005, the law some changes which was initially to build the casinos on water but now it shall be rebuilt in shore with 800 feet (Mississippi Gaming Commission 2007; Robertson, 2005; Brush, 2005). The operators of the casino were waiting for Mr. Barbour the Governor to sign on the papers having new legislation about the rebuild programme of Gulf Coast Casinos. Out of the thirteen casinos, 12 were in dilapidated condition. The time, which was allotted, for this programme was five years. The operators of casino wanted fewer but much better and larger casinos along the coast ( Krantz, 2005) The governor Barbour, on 31 October signed the new amended legislation, when the politicians of Mississippi predicted to have around 20 casinos on Gulf Coast in a frame of five year (Power, 2006). There was other negative report, which said that Gulf Coast was on the verge of losing on $ 1.2 billion annually. It was estimated that by the end of July 2006 at least 15 Gulf Coat casinos has to be reopened and new projects should be in hand for further development which shall also include new programs from Foxwoods ( Pike, 2006). The most favorable factor, which will help the Gulf Coast to recover in a rapid condition, was the insurance policy undertaken by Biloxi, whose insurance plan was $10million, which was undertaken to incur the huge and heavy loss. Such a policy was adopted just 2 months before Katrina had struck; the cost was $92K. This policy gave a return payment of $7.5million to the city. the city took a step forward and covered the city buildings from the insurance policy of National Flood ( Bratford, 2006). ANALYSIS AND FINDINGS This section will analyze the findings from the Mississippi Gaming Commission’s Quarterly Survey reports and in order to get an in-depth view of the effect of Katrina on Mississippi gaming industry this section will take into account the findings of a rigorous empirical research conducted by Steven E. Moss, Chuck Ryan, and Janet Moss in 2008. Let us first consider the findings from the quarterly reports of Mississippi Gaming Commission. According to this report, For the Gulf Coast region, 69.9% of customers came from the areas OF Florida, Georgia, Louisiana, and Mississippi in the fourth quarter of 2004. On the other hand, in the first quarter of 2005 those same states provided only 66.4% of total customer base of Gulf Coast. The customer base reduced further in the first quarter of 2006. In the first quarter following Katrina, overall volume of customers in the North River region was down, except for the states of Florida, Georgia, Louisiana, and Mississippi. In the South River region as well customer volume increased from 1st quarter of 2004 to that of 2005 prior to the period when Katrina hit the region. However, customer volume decreased after the hurricane incident. Here again, Florida, Georgia, Louisiana, and Mississippi show large increases in patron volume while most other states decline. As far as revenues in North river region and South river region are concerned, figure 1 and 2 show the changes in revenue from 1st quarter of 2005 to the 1st quarter of 2006 in north river and south river regions, respectively. Figure 1 and figure 2 show that in all the states in both north river and south river regions revenues decreased except of the states of Florida, Georgia, Louisiana, and Mississippi. Thus hurricane Katrina devastated the casino industry of Mississippi severely in terms of revenues. Figure 1 Figure 2 The tables corresponding to these figures have been included in the appendix. In order to have in depth view regarding the effect of hurricane Katrina casino industry of the findings of the empirical research of Mississippi of Steven E. Moss, Chuck Ryan, and Janet Moss can now be explored. In this study, the Gulf coast regions and the river regions have been estimated to have separate ratios to centered moving average seasonal indices. The average percentage of annual average for each month of the year has been represented by these seasonal indices. In March it has been observed for people who were receiving their tax returns were being attributed to have an increased percentage of seasonal indices of 1.06 and 1.09. It is being seen that the seasonal indices are significantly above average in the months of July and August. The months when the impact of Katrina was felt, the revenues from the games in casino fell down in both the Gulf coast and river regions. . (Moss, Ryan & Moss,2008). In every region, the estimation of the ARIMA model is done by the deseasonalized, first-differenced data. The data has been collected from the period August 1992. Although in September 2005, there was a severe intervention done in the estimation procedure but the intervention factor was not used during this period as the series went to zero for a period of three months. The month of August is not used for estimation purpose as the casinos get closed on the 28th date of this month. The model is an Ar2 with R2 . The seasonal indices forecasts values are estimated by the help of the Arima model. In order to remove the hurricane from the forecast series, forecast values are actually being substituted by actual values. This is done for the months that require lagged values that are impacted by Katrina. . (Moss, Ryan & Moss,2008). Among the months that lead upto Katrina, there are 154 forecast months. Among these 154 forecast months, in only four of these months, the difference between actual and forecast gaming revenues exceeded two standard errors which is 2.6% of the forecasts. Starting from September 2005, there were twelve consecutive months for which the actual gaming revenues were more than two standard errors below forecasts. The gaming revenues in the region of Gulf coast exceeded forecast by more than two standard errors in the period of September 2006. The subsequent months were within the two standard error range. Hence we can say from this observation that the negative impact of Katrina occurred between September 2005 to August 2006. In order to test whether there is a significant change on or around the time of Katrina, an intervention factor has been used. The model is Ar2 with an R2 of 88%. The ACF, PACF and Ljung-box test show the residual series to be white noise. In October 2005, there was a positive intervention that took place. Due to Katrina, none of the casinos in the North river region were open. The reason behind this may be that most of the casino patrons might have gone to the casinos in the Gulf coast region than the river coast region casinos. The State tax revenues for the gaming revenues accumulated by these casino patrons are therefore a wash for the State. At the local municipality level, this would have incurred a loss of about 3.2 % to the Gulf coast region while a profit to the casinos in the River region. . (Moss, Ryan & Moss,2008). There are 138 forecast months for the River region, combining the North and South regions. Among these, only seven of these months there is a difference between actual and forecast gaming revenues which exceeded two standard errors in about 5% of the forecasts. In the River region forecasts, the same method of forecasting has been applied. . (Moss, Ryan & Moss,2008). Starting with the month of intervention, all the forecasts using the intervention month and the subsequent months substitute forecast values for lagged variables. Due to this, the intervention from the forecast has been removed. Starting in October 2005 and then the subsequent three months , the revenues from casino gaming exceeded two standard errors above forecast for the River region. In total, out the seven months, in five of these months, Katrina exceeded two standard errors above forecast for the River region which implies a substitution effect from the Gulf Coast to the River region. For the same time period, the Gulf Coast fell short $646,663,993.80, the River region exceeded forecasts by $156,851,688.92. These results represent a net loss of $489,812,304.88 in gaming revenues for the entire state. For the twelve months following Katrina, this outcome indicates a shift in local taxes of approximately $5 million, a loss of local tax revenues of approximately $15.6 million, and a shortfall in state tax revenues of approximately $39 million. This shows the actual – forecast gaming revenues for twelve months following Katrina and the impact on tax revenues. The thirteenth month following Katrina, Gulf Coast revenues recovered to the level that they exceeded forecast. This finding was supported by Commissioner Chief Larry Gregory, in Pettus, who commented in September 2006 that he expected casino revenues in the Gulf Coast to hit one billion dollar in 2006. (Moss, Ryan & Moss,2008). CONCLUSION The Mississippi casino industry and associated state governments and local government units have been rocked by Katrina. It has been observed that there was a resulting shortfall of more than 646 million dollar in the Gulf Coast region however these losses have been made up by unexpected increase of approximately 157 million dollar in the River regions. This substitution effect in turn lessened the hurricane’s impact on state tax revenues, the fact remains that results of our analyses suggest that Mississippi’s casinos lost nearly $489 million in total revenue solely owing to Hurricane Katrina. Of course, tax revenues on those earnings were forfeited as well. Here there is a number of good things to be considered. Firstly, Katrina’s effect was relatively short lived. Secondly, the projected net shortfall of 489 million dollar was substantially less than the predicted 1.2 billion dollar loss. Finally, the industry appears to have recovered, a conclusion supported by members of the state gaming commission. Certainly a key contributor to this recovery was the relatively quick action of the legislature and the change allowing Gulf Coast casinos to rebuild on land 800 feet in-shore. The new law helped spur the rebuilding and development of 15 casinos much sooner than the expected three to five year lead-time. The new legislation allows dry-land operations which is being applied only to casinos operating in the Mississippi sound, St. Louis Bay Biloxi Bay and Pascagoula Bay. But this is not applied on the casinos in the River regions. This has been suggested by the Mississippi gaming commission in the year 2007. According to Mc Cann in 1994, the state is often plagued with floods. Unfortunately, the casinos of both the South River region and the North River region are located on waters connected to the mighty Mississippi River, who showed her power in 2001 and flooded the Isle of Capri Casino in Davenport, Iowa. The flood forced the closing of the casino for 3.5 days (Isle of Capri Casino, 2001). Similar events in Mississippi are not unusual occurrences in the River regions. For instance, several casinos are located in Vicksburg, which have been flooded in 1990 and then again in 1997. A typical casino in the North River region have generated 12,400 dollar in one hour for just gaming in casinos. If these revenue is spend within a number of weeks then this will have a impact on the State tax revenues and also in the local government revenues. Hence, it is better that the lawmakers revisit the dry land legislation with a view that the same option will be applicable with the existing casino operators in the River regions. References: 1. Bradford, M. (2006). Biloxi’s ’05 bet pays off in covering casino taxes. Business Insurance, 40(28), 3-24. 2. Mississippi Gaming Commission (2007). Public Information – Quarterly Survey Information. Retrieved January 17,2007, from http://www.mstc.state.ms. 3. Pike, J. (2006, July 3). Mississippi Gulf Coast rebuilds. Travel Agent, 18-19. 4. Powers, M. (2006). Relaxed Casino siting rules prime Gulf building boom. Architectural Record, 194(2), 28. 5. Levack, K. (2006). Upping the ante. Successful Meetings, 55(4) 44-48. 6. Gilligan, E. (2005). Hope amid destruction in Mississippi hotel market. Commercial Property News, 19(18), 22. 7. Cope, P. (2005). Katrina Ravages Gulf Coast Gaming. Travel Agent, 322(8), 665. 8. Krantz, M. (2005). Mississippi’s silver lining. Meeting News, 29(15), 12-13. 9. Moss, S.E., C. Ryan & C. Wagoner. (2003). Forecasting casino revenues: An empirical test of Butler’s model. Journal of Travel Research, 41(4), 393-399. 10. Robertson, E. (2005, Oct. 7). Mississippi on the mend. Travel Weekly, Iss. 1790, 15 11. Roehl, W.S. (1994). Gambling as a tourist attraction: Trends and issues for the 21st century. In Seaton, A. V. et al. (Eds.), Tourism: The State of the Art (pp. 156-168). Chichester, West Sussex, UK: John Wiley & Sons. 12. Moss, S.E., C. Ryan & J. Moss (2008). THE IMPACT OF HURRICANE KATRINA ON MISSISSIPPI’S CASINO INDUSTRY. Academy of Strategic Management Journal, 7; 17-30. Appendix: Table 1: Changes in revenues from 1st quarter of 2005 to 1st quarter of 2006 in North river region States changes in revenue AL -26% AR -26% FL 36% GA -1% IL -42% IN -44% LA 12% MO -40% MS -4% NC -6% OH -27% OK -46% TN -14% TX -38% Table 2: Changes in revenues from 1st quarter of 2005 to 1st quarter of 2006 in South river region States changes in revenue AL -13% AR -7% FL 50% GA 60% IL -53% IN -52% LA 21% MO 57% MS 15% NC -26% OH -78% OK -44% TN -20% TX -22% Read More