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January 29, 2014
Visit the project blog: The Municipal Sustainability Project

Getting Ready to Rumble? New Jersey State Senate President Stephen Sweeney yesterday slammed Gov. Chris Christie for appointing an emergency manager in Atlantic City, warning that it was a clear sign the Governor and potential Presidential candidate intends to force the city into municipal bankruptcy; he pledged a “big fight” against such a move. Sen. Sweeney added: “This state is in trouble. This state has had eight bond rating downgrades. We all know about that. But the real problem is when the administration hires two bankruptcy experts to come into a city to assist the city. What do you think they’re going to assist them with?” Speaking at a meeting of the New Jersey Conference of Mayors, Sen. Sweeney told the municipal elected leaders: “We cannot nor will we ever allow the city to go bankrupt,” adding, in a statement directly to Atlantic City Mayor Don Guardian, who sat in the audience, “I’ve got your back….We will go to court, we will do whatever is necessary to stop this….We might have to get a big fight here. And I’m looking for the Conference of Mayors to get on board. Because if it’s him, who’s next?” Sen. Sweeney had been in the room with Gov. Christie when he made the announcement at an Atlantic City summit last week—at which time no objection was raised. Indeed, until yesterday, no public challenges had been made to the seeming road Gov. Christie appears to be taking towards forcing Atlantic City into municipal bankruptcy. Sen. Sweeney put it this way: “This administration is trying to force a bankruptcy. Trying to force it…So we — every one of you out there — should be concerned about that…How unfair is it to hire two bankruptcy experts to advise him? Guess what just happened? (Mayor Guardian) went out to try to sell some notes, and no one bought them…Why would you buy them? Your bond rating has dropped to junk bond status. Is that a surprise to anybody? It’s the wrong focus. It’s the wrong practice…And I’ll tell you, every one of us should be concerned and outraged over this. You don’t hire bankruptcy experts to dig out of a hole. You hire bankruptcy experts to bury it.” Sen. Sweeney has introduced a package of bills intended to offer fiscal help to the city, focused on redirecting $25 to $30 million from the state’s investment alternative tax that casinos pay towards economic development to pay down the city’s debt, and requiring casinos to pay $150 million in lieu of property taxes for two years to give the city some financial certainty in how much revenue it will collect. Highlights of the proposed legislation include:

• Requiring casinos to pay $150 million in lieu of property taxes for two years so city officials would know how much they could count on to pay the bills, with future payments tied to gaming revenues instead of property taxes.
• Redirecting about $25 million to $30 million a year from the investment alternative tax to pay down the city’s debt. Casinos pay a 1.25 percent on gross gaming revenues and 2.5 percent on internet gaming revenues to pay for economic development programs. About $30-$40 million is sitting in an account unspent.
• Finding $72 million in “cost savings” from the cost of running city government and the board of education.
• Amending casino licenses to require operators “provide a baseline health care and retirement package” for their workers, in response to the a judge’s decision last month to allow Taj Mahal billionaire investor Carl Icahn to void its contract with the union.

Contagious? As was a concern among Michigan cities in the wake of Detroit’s 2013 municipal bankruptcy filing, the possibility of Atlantic City seeking federal bankruptcy protection could cause fiscal tremors or contagion amongst other Jersey municipalities. Moody’s has, after all, not only downgraded Atlantic City, but also termed other municipalities “credit negative,” especially because the Atlantic City move, according to Moody’s, signaled “a limit to the state’s willingness to provide the financial support necessary to prevent a municipality from defaulting or declaring bankruptcy.” A number of other New Jersey communities, including Harrison, Paterson, Newark, Union City, Trenton, and Camden share Atlantic’s City’s struggles with an eroding property tax base.

Kern County Fiscal Emergency. Kern County, California, a county of 864,000, covering some 8,200 square miles in northern central California, with Bakersfield the county seat, this week is in emergency fiscal status in the wake of a severe oil and farm commodity price slump (some 60 percent since June), apprehensive the decline may reduce property-tax collections, Kern County’s largest revenue source, by almost 15 percent in the county’s fiscal year beginning July 1. Officials report the plunge in oil prices has cut projected property tax revenue for the 2015/16 fiscal year budget by $61 million—with oil companies accounting for about 30 percent of the county’s property tax revenues, according to Lee Smith, an assistant county assessor. Roughly two-thirds of Kern’s revenue is gleaned from property tax. Overall, according to Kern County Budget Director Nancy Lawson, the projected drop in property tax revenues, combined with rising pension costs, will cause a $44 million hit to the county’s general fund in 2015. Roughly two-thirds of the county’s revenue is gleaned from property tax. Kern’s general fund is currently $781 million and in surplus, but by 2015/16, officials predict a $27 million general fund deficit. By declaring a fiscal emergency, which the Kern County Board of Supervisors voted to do on Tuesday, officials have the legal authority to tap into a $40 million reserve fund to shore up the budget. The action also gives the Board greater power to cut staffing levels in the county fire department. Kern County is also under increasing strain because of pension costs. (Kern County does not pay into the California Public Employees’ Retirement System (CalPERS), which administers most public pensions in California.) Nevertheless, those pension costs are rising: estimated pension costs for fiscal year 2015/16 are $231 million. The county also has $213 million in outstanding pension obligation bonds the county issued in 2003 to shore up its pension fund—bonds which begin to mature in 2022. While the emergency status is a prerequisite to filing for Chapter 9 municipal bankruptcy under Golden State law, Ms. Lawson said the county’s declaration does not signal that the county will take that step. Instead, she notes, Kern will access the $40 million reserve and perhaps scale back firefighter staffing: “We were looking quite positive before this happened…Unfortunately, our advances in wind and solar power weren’t enough to offset the issues with oil prices.” In 2013, California produced more oil than every state except Texas and North Dakota, according to the U.S. Energy Information Administration. Kern County’s assessor factors in the price in determining the value of oil fields and natural-gas extraction operations: the assessor has indicated the local value for the year beginning July 1 will be $55 a barrel, or $44 less than this fiscal period, according to a report to the board. Cheaper oil may depress property-tax collections by $44 million next year, and consume $17 million from a $90 million special assessment for fire protection, according to Ms. Lawson.

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