The Tricky Challenge of State Takeovers or Authority Usurpation

March 15, 2016. Share on Twitter

Moody Blues in Atlantic City. The New Jersey Senate took the State of New Jersey a step closer to an unprecedented takeover of Atlantic City’s government, at least in part motivated by not just avoiding have the city go into municipal bankruptcy, but also to avoid fiscal contagion that could affect the cost of capital finance for other municipalities in New Jersey—or, as Sen. Paul Sarlo (D-Bergen) put it during the debate: “When Wall Street and other credit agencies realize New Jersey will not support its public institution, it could mean major financial trouble for many of our institutions…I think the (takeover is) the only solution we have to get the financial house in order in Atlantic City.” Even former Atlantic City Mayor, Sen. Jim Whelan (D-Atlantic City) supported the bill, noting: “…this is one we have to make for the betterment of Atlantic City.” The bill, S1711, adopted on a 27-9 vote, would allow a virtual state takeover of Atlantic City, an effort to rescue the financially struggling gambling resort municipality. New Jersey Senate President Stephen Sweeney (D-Gloucester), a co-sponsor, told his colleague: “I would love to be able to tell people what they want to hear. But what we cannot do is sustain what we have any longer,” adding: “I respect enormously the Mayor and the council president. This isn’t personal. They are not bad people. But we need to fix this now. Otherwise, how are we going to pay employees in a month, if there are no funds?” Just as in Puerto Rico, there are apprehensions of a default at the end of the month.

In addition, both bodies yesterday agreed to a resolution to put a question on the November 8th ballot.

The proposed state takeover would set an unprecedented state intervention in municipal affairs, certainly a significant step beyond last year’s appointment of emergency manager Kevin Lavin, because—should this takeover become law, it would allow a state-appointed director to essentially replace the mayor and council if necessary and even unilaterally cancel union contracts. Under its provisions, the New Jersey Local Finance Board would gain the authority for five years to restructure Atlantic City’s debt, break union contracts, and sell off the city’s assets. The plan, nevertheless, faces an uncertain fate in the Assembly, notwithstanding the support of New Jersey Assembly Speaker Vincent Prieto (D-Hudson), who has said he will support the plan only if it protects unions’ collective-bargaining rights. Moreover, even if the state takeover were signed into state law, Marc Pfeiffer, assistant Director of the Bloustein Local Government Research Center at Rutgers and a former deputy Director of the New Jersey Division of Local Government Services, warns that the cancellation of a collective bargaining agreement could trigger a lawsuit, especially as it is unclear if the local power usurped under the proposed legislative action is permitted under New Jersey’s constitution; moreover, ending a labor agreement could violate the “sanctity of contract” under state and federal law.

Precedential Threats? A state takeover—that is a step significantly beyond the appointment of an emergency manager under New Jersey law—a role far weaker, for instance, than under Michigan law, during the debate raised other kinds of apprehensions: Sen. Jennifer Beck (R-Monmouth), who voted against the proposed takeover, told her colleagues the bill went too far and appeared to potentially threaten other struggling New Jersey municipalities with threatened state takeovers: “I understand we need to give Atlantic City a hand up, and in doing that the State of New Jersey should have a significant voice, as we’re going to lend both expertise and financial support. But I think that this bill is an overreach…While I understand…there are reasons the language of the bill is worded so broadly, it does raise concerns to me for future challenges within other municipalities around the state.” Assembly Speaker Vincent Prieto (D-Hudson) also repeated his objections to the measure’s language on labor agreements, saying in a Twitter message that the state already has the power to help the city without “trampling” on collective bargaining. Speaker Prieto, because he controls the agenda in the Assembly, could block the Senate bill from being considered, albeit Gov. Christie has stated that if the Speaker does not help, he will hold him responsible for whatever happens to Atlantic City.

Part of what makes the crisis in Atlantic City so distinct from, say, Detroit, is the indistinct legal authority under New Jersey’s intervention and gubernatorial appointment of Emergency Manager Lavin. While that manifested a state takeover in one sense, it was vastly different from in Detroit, where Kevyn Orr, upon his appointment by Gov. Rick Snyder, immediately effectively suspended the Mayor and City Council, and took over all operations of the city—a state absolute takeover that lasted nearly 18 months until now retired U.S. Bankruptcy Judge Steven Rhodes approved Mr. Orr’s plan of debt adjustment and the city emerged from municipal bankruptcy. Under New Jersey law, however, the appointed emergency manager has no such comparable authority, so that all the parties involved in Atlantic City’s fate have been in a fiscal twilight zone—leaving lots of room for finger pointing, but no ultimate accountability—or, as Atlantic City Mayor Don Guardian described it: despite holding a series of summits in Atlantic City and appointing an emergency manager, the Christie administration ultimately failed to renegotiate the city’s heavy debt load; failed to settle a dispute over $170 million in tax refunds due to the Borgata casino; and, by vetoing an earlier version of the PILOT bill, failed to provide $33.5 million in promised funds—even as the Mayor and Council reduced the city’s payroll by over 300 workers and reduced the annual budget by $50 million.

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