On the Edge of Municipal Bankruptcy

January 21, 2016. Share on Twitter

On the Edge of Municipal Bankruptcy. In the wake of Gov. Chris Christie’s veto of bipartisan legislation that would have helped the city by the sea revive its tax revenues and cash flow, the city, instead, is facing default—a position under which, if the Local Finance Board of the New Jersey Department of Community Affairs determines that a triggering event has occurred, Atlantic City would be placed under the board’s supervision—which would, in turn, enable the city to file a petition for chapter 9 municipal bankruptcy. Atlantic City Mayor Don Guardian City Council President Marty Small are planning an emergency city meeting next week to consider filing for bankruptcy, a motion which must be approved by the state, with Mayor Guardian noting: “If the state is not able to come up with the funding we need within the next few weeks, we will have no choice but to declare bankruptcy.”

The legislation aid package, worth $33.5 million for Atlantic City, was first passed by state lawmakers last June: it included measures to stabilize the municipality’s property tax base and establish fixed payments for tax appeals. After months of delay, Gov. Christie vetoed the bill, and he asked for certain changes. When the legislature, in a bipartisan effort, incorporated the Gov.’s proposed changes and re-passed the bill, Gov. Christie this week vetoed it again—virtually forcing the city into municipal bankruptcy. Should Atlantic City file for municipal bankruptcy, as appears nearly certain to be the case, it will mark only the second time a city has so filed: Camden filed in 1999; however, its case was subsequently dismissed.

In vetoing the key measure, Gov. Christie’s spokesperson stated: “Atlantic City government has been given over five years and two city administrations to deal with its structural budget issues and excessive spending…It has not. The governor is not going to ask the taxpayers to continue to be enablers in this waste and abuse.” Without the legislation, Atlantic City could be in default by April.

Mayor Guardian stated; “We’re shocked that the governor, who presented us with his bill, reneged on the funding,” and Assemblyman Vince Mazzeo (D-Atlantic City) said that the Governor’s vetoes demonstrated a “brazen disregard” for Atlantic City’s fiscal recovery. Nevertheless, the city, which already is in a unique position of dual governance—with both a state-appointed emergency manager as well as a Mayor and Council—appears to have no support at the state level: New Jersey State Senate President, Democrat Steve Sweeney, initially supported the aid package, but no longer does; instead he supports a state takeover of the city’s operations, a move strongly opposed by Mayor Guardian. Sen. Sweeney said: “We cannot afford to let Atlantic City go bankrupt…The best way out is for the State of New Jersey to take control of Atlantic City’s finances and the best way to do it is to act quickly.”

It is unclear exactly how what Sen. Sweeney is proposing would differ from the current role the state is playing in Atlantic City’s oversight through its appointment of emergency manager Kevin Lavin nearly a year after he was appointed by Gov. Christie to find ways to fix the dire state of Atlantic City’s fiscal condition. Indeed, Mr. Lavin released a final report late Friday which stops short of recommending that the city file for municipal bankruptcy—instead suggesting massive spending cuts, as well as consolidating and privatizing some parts of the local government. Ergo, Mr. Lavin said he supported efforts in the state Legislature that are currently underway to help Atlantic City — albeit, he was not specific with regard to the recently unveiled plan by state Senate President Stephen Sweeney calling for the state to take over Atlantic City’s finances. Mr. Lavin’s report, released a year after his appointment by the Governor to the $135,000-a-year job and more than six months after it was due, was posted on the New Jersey Department of Community Affairs website around 5 p.m. Friday.

For his part, the beleaguered Mayor Guardian said in a statement late Tuesday that the municipal bankruptcy option is “now back on the table” in the wake of Gov. Christie’s veto of state legislature’s package which would have enabled the city’s eight remaining casinos to enter into a payment-in-lieu of taxes (PILOT) program for 15 years and aggregately pay $120 million annually over 15 years instead of a traditional property tax. The city’s adopted FY2015 budget relied on some $33.5 million in anticipated revenues from redirected casino taxes included in the rescue bills to address a $101 million deficit. In his statement, Mayor Guardian warned that: “if the State is not able to come up with the funding we need within the next few weeks, we will have no choice but to declare bankruptcy…The signing of the PILOT bill would have saved us from looking at that, but unfortunately, the Governor did not sign the bill so we have to think realistically. The next few weeks will be very interesting.” That package, which would also have reallocated the state’s casino alternative tax to pay debt service on Atlantic City-issued municipal bonds, would have, in addition, given the city a chance to receive $60 million in funding directed to the city’s marketing arm, the Atlantic City Alliance for 2015 and 2016 had the legislation been signed by Tuesday’s high noon deadline.

The beleaguered Mayor Guardian also took aim at Sen. President Sweeney’s proposed state takeover of Atlantic City operations: “We will not tolerate the stripping of our God-given civil rights and right to self-governance…Atlantic City has worked too hard and has come too far to let that happen,” adding, in a statement, yesterday, that municipal bankruptcy is not the right course for Atlantic City, noting that, in the Garden State, only the state has power to declare bankruptcy and that doing so would have “disastrous results” and hurt the financial standing of other New Jersey municipalities.

EM’s Report. In his second, and almost certainly final report, Atlantic City Emergency Manager Kevin Lavin, whose contract with the state is scheduled to expire tomorrow, urged the consolidation and privatization of municipal services and massive spending cuts, but stopped short of recommending chapter 9 municipal bankruptcy. Mr. Lavin wrote that the city would run out of cash by April if New Jersey Gov. Chris Christie did not—as he did not—sign the package of rescue bills passed by the State Legislature. Mr. Lavin, in his final report, recommended regionalizing Atlantic City’s police force with neighboring municipalities and privatizing its fire department, noting that that these two departments, alone, comprise 69 percent of the city’s budget for salaries and wages. Mr. Lavin also recommended privatizing the Boardwalk Hall sports arena and the Atlantic City Convention Center, noting that these two properties operate at a combined loss of $15 million to $20 million annually with $75 million currently reserved for “substantial capital expenditures,” and adding that Atlantic City’s Municipal Utilities Authority has “significant assets” that present opportunities to increase revenue; he recommended dissolving the water authority and restructuring it to better benefit Atlantic City.

In his report, Mr. Lavin gave credit to Mayor Guardian and Atlantic City officials for the way in which they took on the city’s $101 million deficit in crafting their FY2015 budget, but he noted the overwhelming $190 million plus of casino tax appeals and other non-bond debt the city now faces, noting that the city’s ability to raise public funds to repay the non-bond debt is “highly unlikely” due in large part to an inability to quality for adequate Qualified Bond Act financing, according to the report. Atlantic City’s credit ratings have dropped to junk status. As Mr. Lavin noted: “As this report shows, over the past year we have accomplished much by working together with all stakeholders, and successfully kept the City from falling into fiscal ruin, including taking on a $100 million budget deficit that ballooned by nearly 20% in the course of the year…Atlantic City had been losing yardage for years, but we began to move the ball down the field. Unfortunately, our momentum has been stalled by parochial politics that continue to inhibit progress.”

For his part, Senate President Sweeney issued a statement after the Lavin report’s release emphasizing the need for state involvement to avoid bankruptcy: “New Jersey taxpayers cannot afford to let this crisis continue and that is why our takeover bill must be acted upon promptly…We can avoid bankruptcy, but only if we act now.”

Frustration. With the multiple, but conflicting state roles—between the state-appointed emergency manager, peripatetic Presidential candidate Chris Christie, and state legislative leaders—all sending conflicting, as opposed to constructive messages, one could sense the growing frustration in the city: as Mayor Guardian put it; “We have already made definitive progress within the confines of all the options made available to us…“So why have the plans not worked out in the time since I have been elected?” Ticking off the multiple and oft conflicting state oversight roles, including the past five years under a state monitor, with emergency manager Kevin Lavin added to the mix last year and a Local Finance Board that must approve the city’s budgets, Mayor Guardian said even a paperclip could not be mismanaged without review, noting: “The wake-up call to those above us is that this simple one-step answer to the problems that have been created over 35 years does not exist, and more to the point, we can certainly not fix everything in just two short years.”

A City Perspective: Atlantic City Council President Frank Gilliam, in an op ed yesterday, wrote:

The behavior of the New Jersey state government toward Atlantic City in recent days can be compared to that of a mugger — a robber who takes his victim’s money, demands his jewelry, and then threatens to shoot him for not having enough money.

Let me explain. While it’s without doubt that Atlantic City faces difficult financial circumstances, much of the difficulty is caused by the state. For decades, the state and its agencies have treated Atlantic City as their own bank, taking more than $1 billion.
It currently takes, through the Casino Reinvestment Development Authority (CRDA), more than $55 million each year:
• $26.6 million in sales and luxury taxes
• $20.5 million in parking fees
• $9.25 million in hotel room taxes

When Atlantic City occupied space as the unique gaming destination on the East Coast, this was tolerable. But as the state acknowledges, Atlantic City is no longer unique. The city must change to face this reality. But the state must also face this reality. It needs to allow Atlantic City to keep the revenue generated in Atlantic City. This alone will allow the city to finance city services.
The threat of takeover by the state because of city finances is a cynical ploy. The state has set up Atlantic City to fail, so that it can be plundered by outsiders. The reality is that the state is seeking to take away the constitutional rights of the residents of Atlantic City to choose their own leaders.

The state has had control of all hiring, firing, and contracts let by the city for several years through its appointed monitor

Again, let me explain.

Legislation passed last week that would allow for casinos in North Jersey would further reduce revenue to Atlantic City and increase competition. It’s a double whammy for Atlantic City:

The legislation creates $50 million in payments from the casinos, but the recipients are the Atlantic County government and city schools. No payment comes to the city. All payments from northern casinos would go to another CRDA-like state agency.

The state is seeking to reduce revenue to the city in a cynical manner to attempt a takeover. If revenue falls below 50 percent of expenses locally, the state has used that as an excuse for takeover. Witness Camden City.

For these reasons, those who know the city best have opposed the recent state moves. Republican Mayor Don Guardian calls the takeover threat “our Pearl Harbor.” Democratic state Sen. Jim Whelan, a former Atlantic City mayor, also opposes a takeover.

As (Sen.) Whelan points out, the state has had control of Atlantic City’s tourism district for nearly five years. During that time, four casinos have closed and convention bookings are down.

But it’s not enough that the state has taken our money. It now wants our assets, including the Municipal Utilities Authority. These are wrong moves and the state’s own monitor and the Department of Community Affairs has said so.
The state is one of the biggest offenders of owning assets that contribute nothing to Atlantic City. The CRDA owns 675 properties that pay no taxes. The state could sell these assets, get them back on the tax rolls, and help generate additional revenue for Atlantic City.

One of the most distressing thoughts related to a state takeover is the potential disenfranchisement of voters. It would be unfair, undemocratic, and un-American for the state to deny Atlantic City voters their constitutional right to choose their own government, a mayor and city council with real authority.

Atlantic City is vastly diverse, and to deny any voter his or her right would be wrong. But it would be particularly hurtful to deny African Americans, the largest group of residents in Atlantic City, the full value of their votes.

The best course of action for the state is recognize Atlantic City no longer occupies a unique place in the gaming market, but is still unique in New Jersey. The state should allow Atlantic City to keep the revenue generated there and let those who know the city best — its locally elected officials — the freedom to determine the city’s future.
What About the Future? Children are cities’ futures, so it is understandable that Detroit Mayor Mike Duggan is trying to change not only the math of the system’s failing fisc, but also the failed governance of a system currently under a state-imposed emergency manager. With black mold climbing the interior walls of some classrooms, and free ranging, non-laboratory rats occupying classrooms, the arithmetic of the schools’ finance merit an F: Of the $7,450-per-pupil grant the school district will receive this year, $4,400 will be spent on debt servicing and benefits for retired teachers, according to the Citizens Research Council. Absent a turnaround, the failing school system is hardly likely to spur young families to move into Detroit.

Air Force One. President Barack Obama visited—but did not attend school in—Detroit yesterday to witness the city’s iconic—and federally bailed out auto industry; yet today marks still another sick out for the teachers of Detroit Public Schools (DPS)—where state-appointed DPS Emergency Manager Darnell Earley has filed for a temporary injunction to keep teachers in the classroom. Rather than learning from the city’s bankruptcy, the next round in the deteriorating school system will likely play out in the court room, where DPS is seeking a temporary injunction as a remedy to the sick-outs which shut down about 88 schools yesterday, alleging the sickouts are “depriving students of their right to attend school, adversely impacting their academic progress, and forcing parents to miss work.” Detroit’s teachers are leaving the district, class sizes are swelling, and the conditions in many school buildings are deplorable. State-appointed DPS Emergency Manager Darnell Earley yesterday warned that the sickouts are not the way do it: “Closing schools for reasons such as today and on previous dates further jeopardizes the limited resources the district has available to educate its students and address the many challenges it faces. We have heard teachers’ concerns and identified short and long-term solutions to several key issues.”

Bluegrass Blues. Kentucky State Representative Brad Montell (R-Shelbyville) has proposed reconsideration of Kentucky’s municipal restructuring law (Kentucky Rev, Statute §66.400), as well as whether the state should develop a program to assist financially struggling local governments, noting: “In looking at our statutes, we simply don’t address it…It seems to me we need to have sort of a blueprint of what authority the state government has in these instances.” In fact, Hillview, a Louisville suburb of just over 8,000, became Kentucky’s first municipality to file a Chapter 9 municipal bankruptcy petition last August, in an effort to address an $11.4 million legal judgment after losing a lawsuit to Truck America Training—a filing which U.S. Bankruptcy Judge Alan C. Stout is currently considering. Previously, two Kentucky utility districts had filed chapter 9 petitions. Rep. Montell has proposed House Concurrent Resolution 13, which proposes that the state’s Legislative Research Commission conduct a study of municipal bankruptcy, including laws and preventative practices employed by other states. For a municipality to be eligible to file for chapter 9 municipal bankruptcy, it must be authorized by the respective state. Currently, twelve states specifically authorize municipal bankruptcies, while twelve states authorize the filing of a petition with conditions. In those states which have acted, as is required under federal law, for a city to be eligible, such state laws have implemented programs to provide assistance, refinancing, oversight, and other mechanisms, giving local governments a “second look” at ways to avoid taking the final, last-resort option. Municipal bankruptcy wizard Jim Spiotto last December testified before the U.S. Senate that, over the last 40 years, those municipalities with no state “second look” or oversight have been over six times more likely to file for municipal. In the Bluegrass State, any taxing agency or instrumentality can file for municipal bankruptcy, but Kentucky counties are prohibited from filing a petition unless their restructuring plans first are approved by the state local debt officer and the state local finance officer—a provision which does not apply to cities or any entity other than counties. Rep. Montell said he proposed the bill in an effort to be “proactive” in the event of filings other than Hillview’s: the proposed study would include a review of other state laws, and the practices that they have employed in order to intervene in a city or county financial crisis, but it also cites apprehensions with regard to the financial health of its governments, as another reason to study Chapter 9 further—especially the state’s pension liabilities: In a report last week, Moody’s listed the worst performing states in terms of making their actuarially determined contribution in FY2014: New Jersey (18.6%), California (48.2%), Texas (62.9%), New York (64.4%), Kentucky (64.5%), and Virginia (69.3%)—making Kentucky the state with the second-lowest pension funding ratio of any state behind Illinois, and the third worst if Puerto Rico were included, according to Atlanta-based Asset Preservation Advisors. Rep. Montell said the state should look at its current municipal bankruptcy statute, because the budgets of cities, counties, and school districts also could be pressured because of their costs to participate in state-run pension plans, along with other stressors such as labor costs.

Puerto Rico. U.S. Treasury Secretary Jacob Lew yesterday met with Puerto Rico Governor García Padilla in San Juan, stating: “I have tried to be very clear that restructuring and oversight have to move together, but that oversight has to be done in a way that is respectful of Puerto Rico’s system of self-government…There are no alternatives to Congressional action in terms of coming up with a solution that is lasting and that provides the avoidance of a long protracted period of pain on the island.” In addition, Secretary Lew met with a group of officials, including Puerto Rico Senate Pres. Eduardo Bhatia Gautier, House President Jaime Perelló Borrás, Senate Minority Leader Larry Seilhamer Rodríguez and House Minority Leader Jenniffer González Colón—as well as Puerto Rico’s non-voting member of Congress, Delegate Pedro Pierluisi, who said in a statement: “With respect to a possible fiscal oversight board, I insisted that I would only support such a measure if it were paired with more equitable treatment under federal programs and a mechanism that enables Puerto Rico to restructure debt in a way that is fair to creditors and that enables Puerto Rico to provide essential services to our people. The board should have the power to oversee the Puerto Rico government’s budgeting and fiscal practices, but the board must respect our constitution.” Delegate Pierluisi is running in the New Progressive Party primary to become its candidate for Governor against Ricardo Rosselló Nevares—who, earlier this week, wrote to Secretary Lew that the Padilla administration’s “focus on debt restructuring is a distraction from the urgent need to reduce government expenditures and restore economic growth.”

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s