(Atlantic City) The odds these day don’t look all that good for Atlantic City.
It’s not just that four casinos have closed. The city has a $100 million gap in its budget and tax appeals by at least five casino properties could dig that hole even deeper. Atlantic City’s property values have dropped by two-thirds in the last five years, its spending has increased, and millions in
The financial crisis in the resort town has led to a loss of faith by Wall Street, with major downgrades in the city’s bond ratings in recent months over fears the place could ultimately go broke.
But the Christie administration, which took over the city’s finances in January through the appointment of an emergency manager, is not yet talking about bankruptcy. In fact, it is not saying much of anything at all, as it works to figure out a way for the city to pay its bills.
“I do not see a need to file for bankruptcy,” said an official close to the situation, who asked not to be identified because he was not authorized to speak on the record. “I think they can negotiate their way through it.”
Driving the talk of bankruptcy from the start had been Gov. Chris Christie’s appointment of emergency manager Kevin Lavin, and his special consultant, attorney Kevyn Orr, who orchestrated Detroit’s bankruptcy filing. But a 60-day assessment report in March by Lavin does not even mention the work bankruptcy, nor does it say it is even being contemplated.
The governor’s office declined to make Lavin available for an interview. Orr recently leftto return to his former law firm. A spokesman for the governor, though, said had never been any hidden meaning behind the hiring of bankruptcy experts.
“Naturally, legal counsel with exactly this financial expertise would be engaged as part of the ongoing reform efforts underway in Atlantic City,” said spokesman Brian Murray.
Despite the city’s mounting problems, Mark Pfeiffer, former deputy director of the state Division of Local Government Services and now with the Bloustein Local Government Research Center at Rutgers University, believes bankruptcy in Atlantic City can yet be staved off.
“I think it can be done, but it requires the city to get its cost structure consistent with the new environment,” he said.
MOUNTING FINANCIAL WOES
Few consider Atlantic City’s long-term debt obligations to be unreasonable. What is really driving the city’s financial woes is the collapse of its casino industry and accompanying drop in tax revenues, along with the tax appeals that have cost $186 million in refunds.
The city’s labor contracts are also generally perceived to be out of line with it’s ability to afford them, said Pfeiffer, and analysts suggest the reason the Christie administration has not publicly ruled out bankruptcy is the leverage it provides in negotiating with Atlantic City’s unions. A lawyer for the city’s municipal unions did not return calls to his office.
The city’s payroll includes about 1,150 employees serving a population of 39,551—or about 29 workers for every 1,000 residents. That’s more than Newark, the state’s largest city, which has 11 employees for every 1,000 residents, and Jersey City, with about 10 employees on the payroll for each 1,000 people, based on a population of 257,341, according to an analysis of statewide municipal employee payrolls.
The mayor of Atlantic City, Donald Guardian, has proposed layoffs eliminating 228 jobs effective June 26, including a third of the fire department. But that still would leave a total per capita workforce larger than Newark. Guardian did not respond to requests for an interview.
Bankruptcy, though, would create fallout far beyond Atlantic City. No New Jersey municipality has filed for bankruptcy since the Great Depression, according to state officials. Indeed, the policies of every administration since then—along with the Legislature—has been to avoid such a nuclear option. While the city of Camden briefly attempted it in 1999, when then-Mayor Milton Milan filed for bankruptcy after the state withheld additional municipal aid until auditors were permitted to monitor spending at City Hall, the petition was later withdrawn.
Still, a day after Christie installed his emergency management team to take charge of Atlantic City’s troubled finances, the major ratings agencies downgraded the city’s outstanding debt to junk bond status.
“The situation is very acute,” said Josellyn Gonzalez Yousef, an assistant vice president at Moody’s Investors Service. “Certainly they have a massive budget deficit they have to grapple with. Whether they will spiral into bankruptcy is not something we’re positioned to say right now. It’s potentially a dire situation.”
While legislative leaders, as well as the city, have proposed a number of measures to address the situation, Yousef noted they all need to happen in a very short time period.
“They will run into liquidity trouble by the end of the year if they don’t pass some of the legislation they’ve discussed,” she said. “You need multiple pieces of the puzzle falling into position.”
A STALLED RESCUE PLAN
Some of those pieces include legislation now stalled in the state Senate. Orlie Prince, a vice president and senior analyst with Moody’s Public Finance Group, questioned the sustainability of any state commitment to local governments in New Jersey, in light of its own financial pressures.
Last month, the state gave Atlantic City a 60-day extension on a $40 million loan, temporarily easing the pressure, but marking the second time in the last four months that the state had to assist the city because it had difficulties accessing the capital markets. In December, Atlantic City attempted to issue $140 million in bonds to finance tax appeal refunds to casinos, but was forced to postpone the sale given market conditions.
Standard & Poor’s, in a report in April, believes the city is unlikely to pursue bankruptcy as an immediate course of action. But based on Lavin’s interim report, the ratings agency noted the possibility of debt service and other payment deferrals as early as fiscal 2015 as an option to address the city’s budget deficit. It also noted the failure of any short-term solutions now on the table could still introduce bankruptcy as a potential course of action.
Public finance attorney, David Fernández of Buchanan, Ingersoll & Rooney in New York, said unless there are serious considerations by creditors to restructure, the city will be boxed into a financial corner.
“They are on the express train for bankruptcy for sure. I don’t think the revenue stream is there to help them keep everybody happy,” he remarked. “Unless there is a restructuring, you’re going to be in a Detroit situation and perhaps that will be the better way to go. That will force restructuring.”
Long term, he said the city must find a way to reinvent itself, as its casinos fall like dominoes.
“Casinos are not going to be the answer,” he said.