October 28, 2019
Good Morning! In this morning’s eBlog, we consider the ongoing governance challenges in Atlantic City, New Jersey, before sweeping west to California to assess why nearly a score of its cities are at fiscal risk.
… Everything dies baby that’s a fact
But maybe everything that dies someday comes back
Put your makeup on fix your hair up pretty and
Meet me tonight in Atlantic City
Betting on a City’s Future? Atlantic City Mayor Frank Gilliam last week pleaded guilty to soliciting donations to a non-profit youth basketball club he co-founded, where he had promised the funds would go to helping underprivileged children. Instead, however, he defrauded contributors of $87,000, which he spent on designer clothes, expensive meals, and trips. Thus, last Thursday, he pled guilty in a federal court to fraud and resigned from office hours later. The former Mayor thus became the sixth Atlantic City Mayor since the 1970s to leave office in disgrace: four of the past nine mayors have been arrested for graft; twelve years ago, one-third of the nine-member City Council pled guilty to receiving bribes—continuing what appears to have become a sordid tradition of more than a century of political bosses, many of them corrupt, associating with mobsters, shaking down constituents and businesses.
For his part, two years ago, allegations of campaign finance fraud arose—allegations a judge dismissed last year; then, last November he was involved in a fist-fight outside a nightclub at the Golden Nugget casino; the state declined to press charges. Last December the FBI and the Internal Revenue Service raided his home. Interestingly, in his book Boardwalk Empire: The Birth, High Times and Corruption of Atlantic City, author Nelson Johnson wrote that right from the get-go “corruption was organic.” He points back to Louis “the Commodore” Kuehnle, who ‘ran’ the city from 1890 to 1910: under his watch brothels, gambling dens, and speakeasies operated openly—noting that the only time the police stepped in came when someone was late with a payment. The “Commodore” eventually served time for election fraud, while his successor, Enoch “Nucky” Johnson ran the city and everything else: after three decades he was dethroned for tax evasion.
In the wake of World War II, the sea side city’s fortunes took a downturn as one of the nation’s premier gaming sites—and for governance: Two Mayors were arrested for extortion in the early 1970s. But, when gambling became legal in 1976, the city once again became a mecca, albeit, as author Bryant Simon noted: “There was a mismatch between the money in the city and the size of the city itself (the population is 38,000).” By the next decade, notwithstanding pledges to keep gambling clean, politicians kept getting into trouble: former Mayor Mike Matthews was arrested in 1983 for extortion. At his sentencing, he told the court: “Frankly, greed got the better of me.” His successor, Atlantic City’s first black Mayor, James Leroy Usry, a former professional basketball player, accepted bribes and broke a campaign-finance law. Twelve years ago, former Mayor Bob Levy resigned as Mayor after disappearing for a spell: he subsequently plead guilty to lying about his military record to inflate his veteran benefits. By the time former Mayor Don Guardian was elected in 2014, the city had lost its gambling monopoly: casinos were closing and the city was running out of money—leading to a state takeover. Unsurprisingly, former Mayor Guardian lost his re-election bid to Mr. Gilliam.
In New Jersey, where filing for chapter 9 municipal bankruptcy is permitted only with the consent of the Municipal Finance Commission, the Governor is authorized to appoint a chief operating officer to effectively co-manage—and, in the event of receivership, allows for the appointment of a receiver to address revenue municipal bonds; property owners, who were caught off guard by a tax increase this past summer, may see more of the same in coming years unless state and city officials develop long- and short-term plans to tackle the issue head on. The issue will be framed by the outcome of a citywide property revaluation scheduled to be completed by the end of this year: increasing debt payments and the likely reduction in casino investment alternative tax revenue used to pay down the city’s debt obligations could all contribute to an increase in taxes. Indeed, last August, property owners were shocked to see their taxes had increased significantly: $676.50 on a home assessed at $150,000, notwithstanding that county, school, and city officials adopted budgets with flat or reduced tax rates.
Ergo, a tax task force, formed by Lt. Gov. Sheila Oliver to address the present tax increase and identify solutions which would prevent future increases, is nearing the end of its work—work which could result in findings and recommendations as soon as the end of the month. Lt. Gov. Oliver noted there remained a possibility the task force could present a solution to assist Atlantic City property owners with this year’s fourth quarter increases. Mayor Marty Small Sr., who served as Chairman of the City Council’s Revenue and Finance Committee for the past several years, said state and local officials are aware of the looming fiscal pitfalls, noting: “No. 1 goal as mayor is to come up with solutions to not put this on the taxpayers of Atlantic City…We’re in a tough situation…but the bottom line is we need more revenue sources and we need to grow the ratable base.” (Atlantic City’s ratable base has shrunk by nearly 86% over the last decade, from $20 billion in 2008 to less than $3 billion last year; nevertheless, the city’s property base is still overvalued, based on a formula used by Atlantic County.) Indeed, the property revaluation—the first since 2008, and only the second since 1978, according to Council Vice President George Tibbit, is going to have an impact on taxes: “When property values go up, taxes go up…because of the revaluation, a lot of people’s taxes are going to go up.”
Betting against Taxes? We have yet to find anyone who likes taxes—and even fewer who like the concept of increasing taxes. Ergo, unsurprisingly, in Atlantic City, there is an effort (via a petition) to change the city’s form of government : Jim Kennedy, local economist and former Executive Director of the Casino Reinvestment Development Authority, reports two ways local officials could stave off another tax increase would be to seek additional state aid or defer certain costs in upcoming budgets—adding that, because the state has been weaning the city off transitional aid for several years, an increase in aid is unlikely, and adding: “The other option is to find a (line item in the upcoming budget) that they just don’t pay this year.” Some would describe this as digging the fiscal hole deeper: the last time Atlantic City deferred paying its obligations, in 2015, it resulted in a $49 million municipal bond issuance last year which increased the municipality’s annual debt payments: based on the bond statement, Atlantic City was scheduled to only make payments on the interest in 2018 and 2019, but, beginning in 2021, will begin making multimillion-dollar payments on the principal, with the combined interest and principal payment reaching nearly $5 million for the FY2021 budget year before nearly doubling to $9.9 million the next four years and finishing with a $12.5 million payment in FY2026. The city, uneager to gamble on its fiscal future, also plans to look for other ways to generate revenue—especially because of its substandard credit rating, which has limited its access to capital markets—and raised the cost of borrowing: two years ago, the city paid $29 million toward municipal debt, but for FY2019, Atlantic City made $35.3 million in debt payments—a 20% increase. Indeed, Atlantic City’s total debt increased nearly $130 million between 2015 and 2018, according to annual statements filed with the New Jersey Department of Community Affairs. For FY2018, Atlantic City’s municipal debt was $376.7 million—and, when local school debt is included, the total jumps to $441.5 million.
A view from the State Perspective. Lisa Ryan, spokeswoman for the state Department of Community Affairs, the agency which oversees city operations, noted: “Debt service payments will increase in the next few years, so the city’s and state’s focus is on keeping the city budget stable, holding the line on municipal property taxes, and addressing quality-of-life issues, so that Atlantic City retains its current residents and positions itself to attract new residents to strengthen the city’s ratable base.” However, a provision in the Payment in Lieu of Taxes legislation includes a crediting mechanism which holds the casino’s payments at 2015 levels. Thus, even though total gaming revenue is projected to eclipse the next benchmark ($3 billion), the increase in payments by the casinos is offset by a larger credit that is paid using money dedicated to pay down the city’s debt. Council Vice President Tibbitt said the “double-standard” which exists for the casinos compared to the city’s taxpayers needs to be addressed immediately: he said if the state would return even a portion of the nearly $90 million in taxes and fees collected from luxury, parking, room, and sports betting to the city, property taxes would not be an issue right now.
A view from a Task Force Perspective. The Taskforce on Atlantic City Initiatives has developed proposals regarding fiscally responsible academic opportunities in Atlantic City, noting that everything is on the table,” as stakeholders have been meeting behind closed doors, even as Steve Callendar, President of the Casino Association of New Jersey, said the PILOT has stabilized the city’s economy, noting, in a statement: “As intended, the PILOT has brought certainty and stability to tax payments for the operating casinos and the government of Atlantic City…This stabilization has helped maintain thousands of jobs and investment dollars in the market and enabled and stimulated further diversification, investment and growth.” One option, reducing spending, could eliminate the need for a tax increase; however, there appear to be few areas left in municipal expenditures where local officials could cut costs: the city has reduced spending by more than $53 million in the past five years and passed an operating budget for 2019 that was slightly more than $207 million.
Are California’s Cities at Physical and Fiscal Risk? In California, where wildfires are wreaking such awful human and fiscal havoc, new data from the state auditor indicates pensions, questionable management, and other fiscal risks have put at least 18 municipalities at some fiscal risk, finding that pockets of the state could be devastated in the next recession, according to a first-in-the-nation dashboard released Thursday by State Auditor Elaine Howle. According to the Auditor’s report, Compton, Atwater, Blythe, Lindsay, and Calexico were the top 5 cities, based on their cash flow, debt burden and pension liabilities in a new online display for the High Risk Local Government Audit Program. Others include Oakland, Richmond, and El Cerrito in the San Francisco Bay Area and San Gabriel, Monrovia, West Covina, Vernon, and Maywood in Los Angeles County. The Central Valley towns of Lindsay and Ione also signaled possible distress. Auditor Howle noted: “Right now, we’re in strong economic times, but everyone is expecting that recession to hit…So hopefully this information will trigger discussions and decision-making that better prepares cities to be able to respond without cutting services.” Her office began examining local governments for signs of fiscal shakiness in the wake of a financial scandal in the City of Bell, an incorporated city in Los Angeles County, near the center of the former San Antonio Township, with a population of 35,477. Then-Assemblyman Ricardo Lara, whose district includes Bell, authored Assembly Bill 187, authorizing the Auditor to determine whether local agencies are at risk of fraud, waste, or mismanagement: the resulting top 18 high-risk cities comprise a mix of size and geographic areas, but regional pockets were apparent in the East Bay and inland Los Angeles County. Indeed, Compton was determined to be at highest risk due to the lack of transparency over its finances: the working class city near Los Angeles, known in years past for its high crime rates and gang problems, also has a history of being cited for alleged waste, fraud, and abuse—and, previously, neared chapter 9 municipal bankruptcy. The Auditor also noted that the desert town of Blythe in Riverside County has also been perceived as at some fiscal risk, due to its high poverty rate and shrinking population.
More bad gnus: The East Bay city of El Cerrito made the list at No. 7 for poor liquidity and low reserves in addition to a high ratio of pension obligations and costs. And suburban communities to the east of Los Angeles – San Gabriel, Monrovia and West Covina – were singled out for being saddled by high pension and retirement burdens. Compton City Manager Craig Cornwell, in a statement, said that the city has been working for the past year with the state Controller’s office, and “diligently preparing to release the audited financials so the public will have a better understanding of our fiscal health,” adding: “We remain dedicated to continuing to make improvements.” Atwater City Manager Lori Waterman said the Central Valley community has been cooperating with the state auditor’s team, and has implemented recommendations that helped take a $4.1 million deficit down to zero over the past five years, noting: “We didn’t get here overnight…and so they understand we’re not going to get out of it overnight.” But Jill Oviatt, Director of Communications and Marketing for the League of California Cities, took issue with Auditor Howle’s findings, calling the dashboard “a data dump that’s void of context and analysis,” noting that most of the numbers are from the 2016-17 fiscal year, which is the most recent year for which information is complete: “It doesn’t tell the story of now, and so we’re not really clear on how helpful this dashboard is to the public, to the cities, or basically anybody.” However, Oakland City Administrator Sabrina Landreth acknowledged that the dashboard “does highlight the challenges many California cities, including Oakland, are facing related to pension obligations and retiree medical benefits,” while City Manager Waterman noted it offers an additional incentive to improve Atwater’s fiscal health next year: “I would anticipate when the new list comes out you’re going to see more valley communities on here because of the retirement obligations, but I would anticipate that Atwater is going to be substantially moved down the list because of the strides that we made.”
Auditor Howle said her office can investigate local agencies if it receives authorization from the Joint Legislative Audit Committee. In the case of Bell, eight officials, including the City Manager and Councilmembers, were convicted on corruption charges for looting the city treasury and boosting their pay and benefits; she also noted there are pockets of the state gravely at risk to the next recession, noting she hopes the dashboard will prevent the next City of Bell scandal by fostering transparency—and better prepare cities for the next economic downturn even as pension costs continue to climb: “If some of these costs continue to go up and these cities aren’t prepared for them, will they have to cut services in order to pay pensions, to pay for benefits, to pay for the debts that some of the cities have taken on.” With assistance from a panel of local government financial experts, Auditor Howle’s office has filtered nearly all 482 California cities through 10 financial criteria, six of them addressing pension and retirement debt. (Eleven cities were omitted, because they were either too small or had incompatible financial reporting requirements.) Her office used green-yellow-red traffic light colors to indicate a city’s level of risk, finding that while 18 cities are at high risk overall, 236 cities were labeled moderate risk, and 217 cities deemed low risk for the 2016-17 fiscal year.
In assessing the amount of revenues a municipality is collecting and spending each year, Auditor Howle’s team looked heavily at the pension and retirement obligations that make up a big part of local government debt in California: for example, the dashboard displays a city’s pension obligations by comparing its unfunded pension liability and so-called pension obligation bonds, a form of borrowing to cover existing pension costs, to the city’s revenue. And, in trying to forecast how well cities can manage future pension costs, her team pulled 5-year financial projections from the California Public Employees’ Retirement System (CALPERS), finding a high number—nearly half of all cities—are at high risk of insufficient funds to cover their CalPERS payments unless they cut services or impose new taxes. (She said she plans to update the list annually.)