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March 25, 2015
Visit the project blog: The Municipal Sustainability Project

Rolling the Die on Atlantic City’s Fiscal Fate. New Jersey Governor Chris Christie’s appointed emergency manager Kevin Lavin yesterday issued his assessment (please see opening part below) and recommendations as directed under the state executive order which tasked him, along with former Detroit emergency manager Kevyn Orr, with determining whether the city should be forced into municipal bankruptcy or not. Noting that “[B]ankruptcy is not something that we are contemplating,” Mr. Lavin instead said, “We think that this process can be done without that necessity.” That is, the report and recommendations mean there will continue to be a hybrid form of municipal government between the city’s mayor and council and the state-appointed emergency manager for the forseeable future. The report, as one expert notes, “kicks the can down the road,” and offers no specifics with regard to specific steps the city could take to grow its eroding tax base so that it could someday have a fiscally sustainable path to a viable future. Mr. Lavin’s report indicates that, even taking adjustments into account, including deferring municipal contributions into pension funds, operational cuts and the addition of $77 million of state aid―Atlantic City’s cash flow would still dip below zero twice by August, or, as he put it yesterday: “Absent the continuation of significant state assistance…the city simply cannot stand on its own.”

In the report, Mr. Lavin wrote: “The decline in revenues has exceeded the worst estimates that were published earlier this year. Moreover, absent the continuation of significant state assistance, the City is simply incapable of self-funding even its reduced budget for the coming fiscal year and this incapacity will only continue and worsen throughout the following years. The City simply cannot stand on its own. Thus, one thing is clear: there is no reasonable likelihood that these headwinds will abate at any point in the near future. In fact, as discussed in detail herein, all reasonable forecasts confirm that these troubling factors will continue to beset the City for the foreseeable future and, absent immediate and urgent corrective action, the City’s ability to function as a thriving and viable municipal enterprise is imperiled. In short, the acute financial distress facing the City is imminent and the causes of such distress are not transitory. Absent an urgent, material realignment of revenues and expenses, this crisis will rapidly deepen and will threaten the City’s ability to deliver and maintain essential government services impacting the health, safety and welfare of its residents. Lastly, the taxpayers of the City need and deserve a much more efficient and financially stable place to live and work. Atlantic City is a beautiful place with great people and tremendous potential. Indeed, I believe we all would like to see investors and developers aggressively pursuing investment opportunities here. Together we need to fix these challenges the City is facing and to that end I look forward to continuing to work closely and collaboratively with Kevyn Orr, the Mayor and his team, City Council, Atlantic County (the “County”) and the State of New Jersey (the “State”) personnel as well as all other City stakeholders.”

Mr. Lavin’s report notes the city will confront a liquidity crisis by the third quarter of this year and that its ratable tax base has declined 64% to just $7.35 billion in 2015 from $20.5 billion in 2010, as its casinos suffered from competition in neighboring states, noting the city’s fiscal deterioration is actually “a lot more severe than we thought when we first started.” About 85% of Atlantic City’s budget is derived from property taxes. Four Atlantic City casinos have closed since the start of 2014. The city’s gambling revenue has dropped from $5.2 billion in 2006 to $2.6 billion in 2014, as casinos have proliferated across the region. Casinos also have appealed their property-tax bills and often won rebates, creating “significant refunds and unsustainable debt load,” the report said. Mr. Lavin said he would appoint a mediator to negotiate with stakeholders, including labor unions and casinos. Atlantic City currently is projecting a deficit of $101 million. Without significant change, Mr. Lavin noted, the cumulative deficit will be $393 million over five years. The cuts, he noted, will have to come from a combination of operational cuts and a 20 percent to 30 percent reduction of the city’s 1,150 or so full-time employees. That warning comes as six of Atlantic City’s labor contracts have expired and are already in negotiations. Those negotiations will also have to address public pension obligations—not only of the employees, but also with regard to the separate retirement plan for the city’s lifeguards. The report said bondholders may need to consider negotiating lower interest rates for the city. And it called for possible changes in benefits for certain city retirees. The emergency managers did not specify whether discussions had taken place about layoffs or cuts to employee benefits. The city’s workforce of about 1,100 has already been trimmed by Mayor Don Guardian. The emergency managers said another 20% to 30% of the workforce might need to be cut. The city’s school system also has about a $45 million budget gap, according to the report. They recommended possible layoffs in the school system and said the state probably would need to help keep the system afloat.Their ideas for fixing the city’s troubled finances were largely dependent on state assistance and reductions in expenditures—not on additional revenue. While city and state officials have emphasized a need for diversification in the city’s economy beyond casinos, the report proposes taking money that was used to do that through a tourism and marketing agency, and using it to close the budget gap.

Governance. Mayor Don Guardian yesterday said he had been working with the Lavin—Orr team, which will consider long-term solutions in a second phase of work. But the nature of this quasi-shared governance is not addressed in Mr. Lavin’s report. Ergo, the nature or balance of power remains unclear—especially as very hard choices have been deferred. The decision, however, not to direct or mandate Atlantic City to file for chapter 9 municipal bankruptcy in federal court indicates the state has a vested stake in trying to make Atlantic City come out whole instead of throwing the city to the federal bankruptcy court. That could be an important step to the prevention of further fiscal contagion for other New Jersey municipalities.

Governor Chris Christie appointed me as Emergency Manager and Kevyn Orr as Expert Consultant to the City of Atlantic City on January 22, 2015. This action was taken only after numerous reports analyzed and described the dire financial status of the City that currently threatens the City’s ability to provide the crucial services that the citizens, businesses, visitors and stakeholders of the City expect and deserve. Since my appointment, I have met with numerous stakeholders, including: elected officials, business partners, taxpayers, union representatives and other interested parties to discuss their observations and concerns about the financial and operating state of the City. Commendably, the City, County, and State have made great efforts to confront these headwinds and develop plans to address the significant revenue shortfalls that are a direct consequence of the precipitous decline in both the City’s ratable tax base and other limited revenue sources, a decline that has become even more severe within just the past 90 days. Indeed, the decline in revenues has exceeded the worst estimates that were published earlier this year. Moreover, absent the continuation of significant state assistance, the City is simply incapable of self-funding even its reduced budget for the coming fiscal year and this incapacity will only continue and worsen throughout the following years. The City simply cannot stand on its own. Thus, one thing is clear–there is no reasonable likelihood that these headwinds will abate at any point in the near future. In fact, as discussed in detail herein, all reasonable forecasts confirm that these troubling factors will continue to beset the City for the foreseeable future and, absent immediate and urgent corrective action, the City’s ability to function as a thriving and viable municipal enterprise is imperiled. In short, the acute financial distress facing the City is imminent and the causes of such distress are not transitory. Absent an urgent, material realignment of revenues and expenses, this crisis will rapidly deepen and will threaten the City’s ability to deliver and maintain essential government services impacting the health, safety and welfare of its residents. Lastly, the taxpayers of the City need and deserve a much more efficient and financially stable place to live and work. Atlantic City is a beautiful place with great people and tremendous potential. Indeed, I believe we all would like to see investors and developers aggressively pursuing investment opportunities here. Together we need to fix these challenges the City is facing and to that end I look forward to continuing to work closely and collaboratively with Kevyn Orr, the Mayor and his team, City Council, Atlantic County (the “County”) and the State of New Jersey (the “State”) personnel as well as all other City stakeholders.

Chinese Municipal Fiscal Distress. The Economist this week notes that severe municipal fiscal unsustainability is not unique to the U.S., writing that China’s finance ministry has proposed measures to address still another cloud looming over the heretofore booming economy: local government debt, which, the Ministry reports, has ballooned to over 40% of GDP. To help (this is where China is profoundly different than the U.S. federal government), local Chinese governments will now be permitted to refinance $1 trillion yuan (about $160 billion) of exiting high-interest municipal debt for lower cost municipal bonds—federal government assistance which could save these cities as much as 50 billion yuan in interest costs alone this year. 哇!

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