March 2, 2015
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Spinning for Municipal Bankruptcy: In the Red or Black? Try and imagine the intractable quandary of Atlantic City Mayor Don Guardian: his Governor, Chris Christie, appears not only determined to crash land the city into municipal bankruptcy, but has also imposed an emergency manager—without any guidance which official is really in charge; the city’s assessed property values are plummeting; and the city’s plans to fix the way its casinos pay property taxes appears mired in inaction in the state legislature. These are all issues of time—a luxury the city does not have. In his State of the City presentation last week, Mayor Guardian had pledged to “do everything humanly possible” to avoid a property tax increase this year—even though the official budget he will present to the Council in June will come in at $235 million, a $30 million drop compared to FY2014: he noted that Atlantic City’s assessed total property values will soon be assessed at $7.35 billion, down from a high of about $20 billion. In the face of that decline, the city underspent its 2014 budget by $10 million, according to the Mayor―a savings that can be applied to cash-flow needs in the coming year. In addition, Mayor Guardian said city staffing will have been reduced by 200 positions as of June, but he told his colleagues that has not adversely affected the quality of municipal services, because of increases in efficiency: noting official statistics demonstrating drops in crime along with fewer public complaints lodged against the police. By the end of this month, Atlantic City will have reduced its police force by nearly 15 percent down to 285 active police officers from 330. Mayor Guardian reported, moreover, that all patrolling officers will receive body cameras, while a new computer system will allow the department to prioritize resources in real time; the city’s municipal court will operate 8-10 hours a day, four days a week, allowing officers to return to street patrol on the fifth day. Nevertheless, Mayor Guardian told his colleagues the city’s debt remains his front and center issue, noting he was supporting state legislation to redirect casino taxes to debt service, and that the city will, by the end of the month, attempt a $52 million bond sale covering the $12 million it recently borrowed and the $40 million it owes back to the state. On the revenue side, he praised new development initiatives, such as those taken on by Stockton University, Boraie Development LLC, and Bass Pro Shops―all of which have helped to create a double: create new jobs, and enhance the city’s tax base. Nevertheless, he made clear how critical new forms of state assistance are to Atlantic City’s solvency, telling his Councilmembers Atlantic City receives far less than many other municipalities in school and budgetary aid and advocating that a greater percentage of revenues from the city’s room, luxury, and parking taxes should be returned to the municipality generating them: “Atlantic City isn’t a step child.” Reminding his colleagues that last year – a “terrible” year ― Atlantic City still brought in $700 million in taxes, clarifying: “We’re not asking for a buyout…We’re asking for a little of that $700 million to come back to Atlantic City.” In response, Council President Frank Gilliam offered support for Mayor Guardian’s presentation, but said the council must continue to look for further ways to cut the 2015 budget. He said council aims to put forward its own budget in March, before emergency manager Kevin Lavin produces his findings.
Coming up Lemons? Mayor Guardian’s please for a better return of the revenues the city has previously sent to the state, however, risk coming up three lemons: A quarter of the year after the “Casino Property Taxation Stabilization Act,” or payment in lieu of taxes (PILT) plan was in the state legislature as a means to transform the way Atlantic City casinos pay property taxes, there has been little, if any progress. Under the proposed legislation, casinos would no longer pay property taxes; instead, they would cumulatively make $150 million in PILT payments annually for two years, then $120 million for each of the next 13 years. The key sponsors, New Jersey Senate President Stephen Sweeney, Sen. Jim Whelan, and Assemblyman Vince Mazzeo describe the bipartisan bill as one which would help Atlantic City escape from the perennial property-tax appeals which, for years, have made fiscal planning a nightmare for Atlantic City, because challenging the city’s assessments in court has become almost as routine as spinning the roulette wheel for casino operators. Nevertheless, the bill, part of President Sweeney’s five-card Monte package of bills to come to the fiscal rescue of Atlantic City remain spinning without stop in the legislature. Even the Casino Association of New Jersey, has pressed the legislature for favorable spins, lobbying that the legislative proposal was the only cure for Atlantic City’s reeling gambling industry, which has seen about half its revenue disappear since 2006: “Make no mistake. Without this plan, certain casinos that remain in Atlantic City are at risk.” Nevertheless, the proposal appears iced over: despite sailing through committees last December, state Democrats have repeatedly balked at putting the legislation to a general vote: but no one appears to have an explanation why. One issue could be uncertainty with regard to Gov. Christie’s position: he has never publicly supported the proposed legislation—and, last week, did not return a request for comment about the bill.
A Chilling Credit Wind in the Windy City. Credit rating agency Moody’s has dropped Chicago’s credit rating to its second lowest investment grade, with analysts Rachel Cortez and Matthew Butler noting: “The main thing is that another year has passed and gone by without a solution to the pension issues, both with respect to curbing the growth in the unfunded liabilities and dealing with the police and fire pension spike that is getting closer and closer.” The decision, coming in the midst of Mayor Rahm Emanuel’s runoff campaign for re-election (he faces an April 7 runoff versus Jesus “Chuy” Garcia, a Cook County board commissioner), risks both the city’s reputation—and likely will adversely impact its costs of borrowing—or, as the prescient president of the Chicago Civic Federation Laurence Msall put it: “This is wakeup call for anyone still asleep as to the precarious financial condition of the state of Illinois and many local units of government especially Chicago…The downgrade has immediate financial costs to the taxpayers and puts enormous additional financial pressure on the city’s budget which is dependent on access to the credit markets.” Last month, the Federation had noted that between FY2004 and FY2013 the long-term debt for eight major Chicago governments had risen by just under 60 percent over the last decade to $20.4 billion; but mayhap more worriedly, long-term direct debt per capita rose at a faster rate, increasing by 66.8% from $4,504 to $7,514. A key concern is the city’s $20 billion unfunded pension tab. Moody’s decision means the Windy City now has a lower credit rating than all other major cities with the exception of Detroit. Nuveen lists Chicago as a pre-distressed credit which is “getting to a pretty critical point.” In their report, the Moody analysts wrote that their lowered credit rating “incorporates expected growth in Chicago’s already highly elevated unfunded pension liabilities and continued growth in costs to service those liabilities, even if recent pension reforms proceed and are not overturned in legal appeal,” adding that Chicago’s tax base is significantly leveraged by the direct debt and pension obligations of the city, as well as indirect debt and pension obligations of overlapping governments—albeit partially offset by the significant improvements Mayor Emanuel has achieved in structurally balancing its budget and strong economic base. Indeed, the Mayor’s office responded to Saturday’s moody report with a statement: “We strongly disagree with Moody’s decision to reduce the city’s credit rating and would note that Moody’s has been consistently and substantially out of step with the other rating agencies, ignoring the progress that has been achieved.” Fitch, indeed, last week affirmed its A-minus rating and negative outlook, whilst S&P affirmed its A-plus rating and negative outlook last Friday. The city has for years faced a reckoning on its public safety pensions in 2016 when a longstanding state mandate to stabilize public safety systems through actuarially based funding kicks in, driving Chicago’s annual contribution up by $550 million.