Could Atlantic City’s Financial Crisis Hurt Other N.J. Municipalities?

Atlantic City’s financial crisis is unlikely to have severe consequences for other New Jersey local governments in the near term, according to observers following the situation there closely.

But as the uncertainty and political gamesmanship surrounding the gambling town’s money troubles grinds on, it threatens to taint the municipal bond market’s view of the Garden State, possibly driving up borrowing costs—especially for jurisdictions with shaky finances.

"Peoples' perception of New Jersey municipalities has weakened,” Lisa Washburn, the managing director at Municipal Market Analytics, Inc., an independent research firm based in Concord, Massachusetts, said by phone Wednesday.

Moody’s Investors Service issued a comment Tuesday reflecting that view.

Analysts with the ratings agency noted that, on March 24, Gov. Chris Christie said during a radio interview that Atlantic City bondholders should be prepared to make sacrifices as efforts to aid the city unfold.

“The governor’s comment provides another indication that the state is considering impairing the city’s general obligation (GO) bondholders, whether through a negotiated debt restructuring or possibly a Chapter 9 bankruptcy filing,” the Moody’s analysts wrote.

They added: “While Atlantic City is an extreme case and no other New Jersey municipality is currently facing such acute financial pressure, the state’s posture toward Atlantic City reduces the likelihood that it would rescue other financially distressed cities.”

Ongoing Political Fight

Atlantic City’s financial problems stem from a sharp downturn in the casino industry there.

The city has about $437 million of debt, with around $190 million owed in tax refunds to casinos that won property taxes appeals. Moody’s projected in early March that the city’s 2016 budget deficit would be $102 million when taking the total tax refund liabilities into consideration. A partial shutdown of local government services was averted this week after the City Council voted to shift the payroll cycle for public workers to four weeks from two.

Debate about how to rescue Atlantic City has turned into a grudge match between Christie, a Republican, and state Assembly Speaker Vincent Prieto, a Democrat. The governor supports a pair of bills backed by state Senate President Stephen Sweeney, who is a Democrat.

One bill would exempt casinos in Atlantic City from property taxes, and establish a framework where they’d make “payments-in-lieu-of-taxes” totalling at least $120 million annually instead. The idea is to help the city stabilize its income and avoid future tax appeal refunds.

The other piece of legislation involves the state largely taking over Atlantic City.

Prieto has argued the takeover bill would allow the state to trample the collective bargaining rights of public workers in Atlantic City by breaking union contracts. He has not allowed either piece of legislation to come up for a vote in the Assembly.

Atlantic City Mayor Don Guardian also opposes the takeover bill.

Adding a further twist: Christie this week said the state would sue Atlantic City in order to prod the government there into paying about $34 million it owes the city’s school district.

An Alternative Bill

On Thursday, Prieto introduced fresh legislation, which would provide the city an opportunity to meet certain financial benchmarks in the coming years, and thereby avoid giving up so much control to the state. The bill has cleared the Assembly’s Judiciary Committee.

Prieto framed it as “a very fair compromise that accomplishes everyone's goals.”

Christie didn’t see it that way.

“It is a completely ineffective solution,” he said at a Thursday press conference, according to a transcript of the event. Later the governor referred to Prieto’s proposal as a “union protection bill.”

Christie has pointed to high labor costs as one of the main factors driving Atlantic City’s fiscal problems.

During his remarks on Thursday the governor warned ominously: “Atlantic City will run out of money in the middle of May. They will not be able to pay their debt service, they will not be able to make their school payments, they will not be able to pay their employees.”

‘Beyond The Last Resort’

Michael Darcy, executive director of the New Jersey State League of Municipalities, said during a phone interview Thursday that local officials in the state, even those in fiscally distressed localities, were not voicing fears that they might soon face a takeover similar to the one that could confront Atlantic City.

"I don't know any mayor who’s thinking that the governor is chomping at the bit to come take over a city," Darcy said. "You really do look at this kind of activity with Atlantic City as being beyond the last resort,” he added. “It's so extraordinary, it's never really been done before."

But that doesn’t mean municipal officials in the state are not tracking developments closely.

"Everybody knows when you mess with the emotions in the bond market, it can be a problem," Darcy said. "Everybody would prefer that didn't happen. But it's not going to be catastrophic. It's not going to mean that all municipal bonds in New Jersey are now going to be downgraded to junk."

As it stands, Washburn said, added borrowing costs due to Atlantic City fallout, for fiscally strong local governments in New Jersey, would be negligible. But such costs would “become more visible as you work your way down the ratings scale,” she noted, toward borrowers with poorer credit.

Darcy stressed that “most municipalities in the state are in good shape, well run, providing services and things are going fine. So we hope that the bond market will realize that.”

“Other municipalities around the state,” he said, “I don't think they should be dragged into this.”

A Credit Negative

Darcy might see it that way. But, by the end of the first paragraph of the Tuesday Moody’s comment, a link was drawn between Atlantic City’s problems and other jurisdictions in the state.

“The willingness to impair bondholders is also credit negative for other financially distressed New Jersey municipalities,” the analysts wrote, offering Newark and Paterson as two examples.

“It calls into question the state’s future willingness to support these cities,” they added.

Newark and Paterson are among about a dozen municipalities that have been awarded financial assistance in recent years from New Jersey, through what’s known as the Transitional Aid program.

Neither city’s finances are anywhere close to Atlantic City’s in terms of going over the brink toward debt defaults, or bankruptcy. And Newark’s business administrator, Jack Kelly, said in an email Wednesday that the city was rebounding financially.

“The city's ironbound industrial market is as hot as a firecracker,” he said.

Kelly suggested that Newark’s finances were improving to the point that, by 2017, the city might not even be eligible for transitional aid. In 2015, Newark received $10 million through the state program.

“Moody's missed the mark with a negative outlook,” he added. “I'll be back for a revised rating in 90 days.”

Washburn described the financial deterioration in Atlantic City as unique, and not akin to anything else happening among New Jersey municipalities right now. “No. I don't think that anybody shares those characteristics,” she said. But then she added: “That's kind of missing the point.” This is because a key concern for investors would be what happens down the road, when some other fiscal ill strikes another jurisdiction, that then can’t absorb the shock.

“Is New Jersey going to come forth with that money?” she said. “If they allow Atlantic City to go, it raises the question… Would you potentially allow another city to go?”