March 10, 2016. Share on Twitter
Seems to me
I’ve been a long time
On this road
Has there been a sign
And I’ve passed it by
I don’t know what it is that drives me on
Gotta keep movin’
Gotta keep movin’ on
Moody Blues in Atlantic City. In their lyrical rendition, above, the Moody Blues, in Nervous, set the kind of tone with which, yesterday, Moody’s Vice President-Senior Analyst Josellyn Yousef warned that, absent state rescue legislation, Atlantic City could soon default and need to file for municipal bankruptcy, warning that: “Without drastic action, Atlantic City could face a default as early as next month.” Ms. Yousef noted the city also owes $190 million to casinos which have successfully appealed their property taxes. Factoring in those different liabilities, she noted that Moody’s projects a budget deficit of $102 million for FY 2016. Thus, the city cannot afford to roll the dice, but rather state legislation would be what she termed the “Key to Fiscal Recovery.” Her red flag fiscal warning comes as the state legislature is considering two bills to help Atlantic City: the Casino Property Tax Stabilization Act (PILOT bill) and the Municipal Stabilization and Recovery Act (state intervention bill); thus, the credit rating agency identified three scenarios that would be key to a positive or negative credit impact on the city’s credit quality—and fiscal future.
First, and most credit positive, Moody’s noted that if the legislature and Gov. Chris Christie passed and enacted both bills, that would give the state authority to implement proposals included in Atlantic City’s state-appointed emergency manager Kevin Lavin’s report and recommendations from January—fiscal steps which Moody’s projects could reduce the city’s current $102 million deficit by nearly 75 percent this year—and nearly eliminate it by 2020. Mr. Lavin’s proposals include added revenues, expense cuts, and restructured casino debt. And, as Ms. Yousef wrote: “The state would also generate savings by eliminating city departments and terminating union contracts, which would allow it to turn over police and fire operations to the county,” noting that reorganizing the police and fire departments has been, just as in San Bernardino, a political football—albeit with one significant difference: the state is very much involved with Atlantic City’s fiscal fate; whereas it seems unclear whether Governor Brown or the California legislature care in the slightest about San Bernardino’s municipal bankruptcy or fiscal future.
Ms. Yousef notes that Moody’s believes if only the PILOT bill were to be enacted, Atlantic City would continue to face fiscal distress, since the bill, by itself, would be insufficient to restore Atlantic City’s fiscal health. While the PILOT bill would produce additional revenues and avoid incurring additional casino tax liabilities for the city, it would not, Moody’s moodily noted, suffice to avoid crippling deficits of $30 million to $40 million annually over the next five years. Moreover, Moody’s believes that the state intervention bill is too politically contentious to pass on its own. If neither bill passes, Moody’s becomes especially moody, warning the municipality will deplete all of its cash in the next few weeks, leading to a potential default, distressed exchange, or chapter 9 municipal bankruptcy filing—adding that the state could take stopgap measures to help Atlantic City, such as a providing a loan or allowing the deferment of pension contributions, but that such action would not solve the underlying causes of the crisis—and, to make the outlook mayhap bleaker—adding that Atlantic City’s financial position remains vulnerable to external factors such as further casino closures and deteriorating state finances.
Atlantic City’s Perspective: An American City at a Crossroads. Even as Gov. Christie continues to trail candidate Donald Trump across the country, Atlantic City Mayor Don Guardian, yesterday, in a letter to the Bond Buyer, provided his own perspective on his city’s plight and fiscal outlook:
Mayor Donald A. Guardian
March 9, 2016
Three summits, two take over bills, and an emergency manager later, and Atlantic City has not yet seen the assistance it was promised in 2014. Within the past two years, the State has hired a nationally respected emergency manager and put together a world-class team with the promise of restructuring the City’s $240 million in legacy debt and to negotiate a settlement for our outstanding $148 million bill from Borgata’s successful line of tax appeal victories. Unfortunately, as it stands today, the State has neither restructured our debt nor settled the Borgata tax appeal case.
There was a glimmer of hope in 2014 when Senate President Steve Sweeney introduced a PILOT bill that would have locked in Atlantic City casinos at a collective payment of $120 million a year. It was a brilliant move that would have stabilized our local economy by locking in the casinos at this set amount and would have protected against devastating casino tax appeals. Everyone, including the casinos themselves, agreed that this bill would have been a significant in helping Atlantic City stabilize its finances. The state legislature even added two more amendments that would have given Atlantic City an additional $45 million in 2015 and 2016. Unfortunately, the PILOT bill has since been vetoed twice by the Governor, leaving Atlantic City in an even more perilous position. Without having the PILOT bill signed into law and having the guarantee of no future devastating tax appeals – the city, county, school system, and library all stand to lose over $25 million of revenue from 2015 when the casinos file their respective property tax appeals. Meanwhile, the city inches closer towards bankruptcy each day.
Since 2014, I wake up every day and try to be the most proactive Mayor that Atlantic City has ever seen. We have made significant cuts within every department and dramatically reduced the size of our workforce including the police and fire departments. There are over 300 less employees working for city hall today than when I was sworn into office. We have saved over $25 million in fiscal year 2015, and expect to save $25 million in fiscal year 2016. I will be first to acknowledge this is not enough, but I will not be the last to say that we have not done our part.
I am working diligently with city council to find more ways to cut costs and save money while bringing in more revenue. As such, I want to maximize the value of the Atlantic City Municipal Utilities Authority by bringing it under city control and leveraging it for at least another $4 million a year without raising residential rates more than 2% annually. This is a common sense solution that would benefit everyone.
We believe that no stone should be left unturned, that is why we are increasing fees that have not been touched in decades. Our State Monitor, Ed Sasdelli, has been guiding us scrupulously. We are increasing our fees across the board for construction, code, and fire inspections. We are lining up valuable property to be sold at auction. We reviewed the necessity of all city vehicles and brought in those that are not needed. In my first year of office, we had over 60 vehicles returned that are no longer take home cars. I have tasked my business administrator to once again meet with the Atlantic County business administrator and other government business administrators in the area to find additional cost savings through mutual beneficial shared services. We are in the process of putting out an RFP for a parking utility that we anticipate would triple the amount of parking meters in the City. I would have undertaken all of these good government initiatives even if this was just a normal time for Atlantic City. However, this is not a normal time in Atlantic City. In fact, our city is at a cross roads of historic proportions.
A wise leader once challenged the President of the United States by saying, “I have a particular message for the president: He should get in and lead and bring them together. And he should have those people in the same room and he should say to them, ‘We’re not leaving here until we’ve resolved this issue.’”
That wise leader was Governor Chris Christie, in 2011, who was referring to a potential shutdown of the federal government just a few years ago. As Mayor of Atlantic City, I could not agree with the Governor’s sentiments more. I hope and expect the Governor will apply the same advice he once gave the President to the current situation facing Atlantic City. Allowing one of the state’s most iconic cities to declare bankruptcy should not be a viable option.
The New Jersey legislature is considering two bills to endow the State of New Jersey with greater powers to put Atlantic on a path to fiscal health: the Casino Property Tax Stabilization Act (PILOT bill) and the Municipal Stabilization and Recovery Act (state intervention bill) were introduced in the New Jersey General Assembly on February 22nd. Moody’s, as these debates on these bills continue, has, for its part, identified three potential scenarios that would, in its view, have a positive or negative effect on the city’s credit quality. Under all three scenarios, however, Atlantic City’s financial position will remain vulnerable to external factors such as further casino closures and deteriorating state finances:
Scenario 1: Both bills pass. Under such a scenario, the PILOT and state intervention bills would give the state expanded authority to set the city’s finances on a path to fiscal recovery: the legislation would allow the state to restructure casino liabilities, shift casinos to a PILOT (payment-in-lieu-of-taxes) structure, provide additional aid, and cut city expenses. If the bills were successfully implemented, Moody’s notes it would expect the city’s projected $102 million structural budget deficit (42% of the city budget) to drop dramatically by the end of this calendar year and disappear by 2020.
Scenario 2: Neither bill passes. In this scenario, the rating agency writes that if political disputes prevent adoption of either bill, Atlantic City faces a debt service default as early as next month or May as well as municipal bondholder impairment. While it finds that the state could take stopgap actions, such as allowing the city to, once again, defer pension contributions or to provide a loan; it warns that these actions would only delay the fiscal crisis for a year or two. Moody’s writes that New Jersey could also force the city to raise property taxes under existing state oversight powers, but gloomily notes that would be an unrealistic option for a tax base with a 34 percent poverty rate, adding that the city’s bondholder impairment would also occur if the city were to negotiate a distressed exchange, or successfully file for chapter 9 municipal bankruptcy, in order to reduce its onerous $437 million casino and general obligation (GO) debt burden.
Scenario 3: Only the PILOT bill passes. Finally, under its third scenario, the agency notes that Atlantic City continues to face duress, because the PILOT bill alone is insufficient to restore the city’s fiscal health, writing that the PILOT bill would produce additional revenues for the city, but the cost-cutting allowed under the new state intervention bill or other difficult steps would still be needed in order to prevent the city from running deficits in excess of $30 million at least through 2020. The PILOT bill, Moody’s notes, is less politically contentious, making it more likely to pass than the state intervention bill.
Pass or Fail? Warning that a Detroit Public Schools (DPS) chapter 9 municipal bankruptcy would not earn a passing grade—because such an option would not erase DPS’ debt, DPS overseer, retired U.S. bankruptcy Judge Steven Rhodes yesterday warned the Motor City’s school system might be unable to pay teachers after April 8th absent state action to enact $50 million in aid. Judge Rhodes noted that he could not in “good conscience” ask the city’s teachers to continue to work without assuring them they would be paid for their work: “I’m deeply concerned about the district running out of money after April 8,” he told reporters in the wake of testifying before the Michigan House Appropriations Committee, carefully noting: “There is no plan B. I plan to work as hard as I can, and as hard as necessary, to persuade the Legislature that the kids of the City of Detroit need their help and their support not only in the $50 million supplemental appropriation, but also for the larger reorganization proposal.” Ivy Bailey, interim president of the union, the Detroit Federation of Teachers, said in a statement that besides teachers and staff not being paid, many students would not receive breakfast or lunch if the school system runs out of money. The legislature is currently considering Gov. Rick Snyder’s proposal to divert $72 million per year for the next decade from Michigan’s tobacco settlement revenues to generate sufficient fiscal resources to pay down DPS’ anticipated $515 million in debt and split the district into two. The original DPS district would exist only to repay the outstanding debt and then would be phased out; the plan would then create a new Detroit Community School District to educate students and handle all other operations.