Atlantic City's fiscal gamble could end in bankruptcy

Atlantic City's fiscal gamble could end in bankruptcy
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After years of rising costs and declining revenues, Atlantic City officials are embarking on an ambitious and risky gambit that could save their city from bankruptcy — or plunge them deeper into the financial doldrums.

City officials have told New Jersey regulators they will miss a Monday deadline to meet conditions of an August agreement to secure a $73 million bridge loan. The city has asked for more time to finalize a plan that would provide a new infusion of money, while loading up their last remaining valuable public asset with a mountain of new debt.

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A key element of the plan, revealed this week by Mayor Don Guardian, would have the city’s water works, the Municipal Utilities Authority, purchase a city airfield that has been closed since 2006 for $100 million. 

But municipal budget and bond experts say the deal is far from finished. The Municipal Utilities Authority would have to finance the purchase almost entirely through new bonds, and investors may be wary about purchasing bonds from such a financially precarious institution, albeit one in better position than the city itself.  

The deal isn’t so much like shuffling deck chairs on the Titanic as it is like moving those chairs from the Titanic to the Lusitania: It may imperil the long-term finances of both Atlantic City and the MUA, the city’s sole remaining profitable asset.

“The city’s not stupid. They have good attorneys working for them, and they’ve got something that they think is going to work,” said Marc Pfeiffer, a senior policy fellow at the Bloustein Local Government Research Center at Rutgers University. “We just don’t know what the details are.” 

Once the East Coast’s only legal gambling mecca, Atlantic City’s iconic casinos have been hammered by the combination of the global recession and newly liberalized gaming laws in neighboring states.  

The number of tourists visiting Atlantic City has dropped precipitously, from a peak of 35 million in 2005 to 26.7 million in 2013, according to the Lloyd D. Levenson Institute of Gaming, Hospitality and Tourism at the Richard Stockton College of New Jersey. In the intervening years, Pennsylvania, New York, Delaware, Maryland and Connecticut have all expanded casino gambling, cutting into Atlantic City’s market share.

As gaming revenue declined, the city’s tax base shrunk precipitously. In 2014, four of Atlantic City’s 12 casinos closed. In October, a fifth — the Trump Taj Mahal, no longer owned by the Republican presidential nominee Donald TrumpDonald TrumpPence: Supreme Court has chance to right 'historic wrong' with abortion ruling Prosecutor says during trial that actor Jussie Smollett staged 'fake hate crime' Overnight Defense & National Security — US, Iran return to negotiating table MORE — will shut its doors.

Making matters worse, the drop-off in tourism and gaming revenues has forced the city to pay back some of the property taxes it has collected from casinos that are still operating. To plug the gaps, the city borrowed millions in general obligation bonds in 2012 and 2013. 

Now, in order to make payments on those bonds, the city is relying on a $73 million bridge loan from the state of New Jersey. Gov. Chris Christie (R) signed legislation in May providing the loan on the condition that city officials submit plans to bring their budgetary house in order. 

But one of the other conditions of that loan was that the city council vote dissolve the Municipal Utilities Authority by September 15, a step that would make selling the authority simpler if the city does go into default. The city council missed that deadline, and they will miss a secondary deadline on Monday. 

Missing the second deadline would allow New Jersey to immediately demand repayment on the loan, more than $60 million of which has already been paid out, and to begin collecting collateral — including both the MUA and the airfield.

A city spokesman said Friday that Mayor Guardian was out of the office, and that the city council would not meet again until Wednesday. The city has asked the state to waive Monday’s deadline; Guardian said this week they are close to a deal to solve the budget crisis. 

Even coming up with a deal to repay the loan and slash its budget would not guarantee that Atlantic City avoids a state takeover of its finances. Any such deal would have to win approval from the state Department of Community Affairs, an agency within the Christie administration. 

Christie’s office referred questions on the deal to the DCA. Tammori Petty, DCA’s communications director, declined to comment on Atlantic City’s fiscal situation. 

Assuming the state doesn’t step in to seize assets immediately, Atlantic City officials face another looming deadline that underscores the depth of their fiscal crunch: On Nov. 1, the city must make a $9.3 million payment on bonds issued in 2012. At the moment, analysts say, it’s not clear the city has the money to make that payment.

“If they continue to get money from the state, they can definitely make the payment without a problem,” said Doug Goldmacher, an analyst at Moody’s Investors Service. But if the rest of the loan doesn’t come through, he said, repaying the loan is “going to be extremely difficult.” 

Almost no matter what happens, Atlantic City residents are likely to face higher bills, either in the form of increased property taxes, which the city would levy, or higher utility rates, which the MUA would implement. 

The MUA had just $7.9 million in cash and investments at the end of 2015, meaning the utility would have to rely on new bonds to buy the airfield. To make payments on the new bonds, likely at exorbitantly high interest rates, the MUA would almost certainly have to raise rates on consumers.

It’s not even clear, Rutgers’s Pfeiffer said, whether the MUA has the legal authority to purchase the unused airfield. If the new plan doesn’t get the approval of both the city council and the Department of Community Affairs, he said, Atlantic City’s financial future would be up in air once again. 

“It’s a very clever move. I’m not sure if it works at the end of the day, but it might be buying them some time,” Pfeiffer said.

“I don’t gamble on Atlantic City,” he added. But he predicted: “There are going to be substantive legal challenges.”