The Challenging Transition in the Wake of a State Takeover

September 25, 2018

Good Morning! In this morning’s eBlog, we report on the likely extension of the Garden State takeover of Atlantic City, because, as one of our most respected and insightful fiscal experts there, Marc Pfeiffer, the Assistant Director of Rutgers University’s Bloustein Local Government Research Center, put it: it is important for New Jersey and Atlantic City to focus on long-term challenges beyond the state takeover period. That is, Mr. Pfeiffer believes continued state oversight will be a positive for Atlantic City municipal bondholders, because it assures more fiscal discipline will be in place—or, in his own words: “You are going to have ongoing stability while the state is involved…The city will have to show that it can stand on its own.”

The Steep Road to Municipal Fiscal Recovery. In the wake of a release of a new state report, “Atlantic City, Building a Foundation for a Shared Prosperity,” [64-page report]  released by New Jersey Gov. Phil Murphy’s administration, a report recommending continuation of the almost two-year-old state takeover of Atlantic City’s finances, that state governance now appears likely to last a full five years, due to “longstanding challenges” to New Jersey officials, as recommended by the Governor’s office. While the Governor, in his campaign, had, as part of his platform, a commitment to terminate the state takeover of Atlantic City, now, three-quarters of a year after taking office, the Governor appears likely to leave the state takeover in place—indeed, possibly for an additional three years.

The Murphy Administration has released a plan to assist the city to get back on its fiscal feet, a plan which benefited from input from numerous study groups, task forces, and committees, as well as a redirection of some state government funds to youth programs, and a training program for municipal department heads; that plan does not end the takeover; rather the report recommends keeping the takeover in place for the full five years called for under the 2016 law, unless signal fiscal and financial improvement is put in place before then, including the significant reduction or total elimination of Atlantic City’s reliance on state aid—or, as Gov. Murphy put it: “We had a pretty clear-eyed sense of what the challenge was…That doesn’t mean Atlantic City doesn’t need the state, that the state won’t continue to stay the course and be a partner. We’re not going away; we’re going to go out and executive this plan.”

Under New Jersey’s state takeover law gave the state broad powers, including the right to overturn decisions of the city council, override or even abolish city agencies and seize and sell assets, including Atlantic City’s much-coveted water utility. The statue empowers state overseers, in addition, to hire or fire workers, break union contracts, and restructure Atlantic City’s debt, most of which was done to varying degrees, although no major assets have been sold off.

What Is the City’s Perspective? Atlantic City Mayor Frank Gilliam has conceded the uncomfortable governance challenge under the takeover, which was initiated in November of 2016 by former Governor Chris Christie, but he notes that Gov. Murphy’s administration has been willing to listen to concerns and work with city officials, even as it has retained the final governing say-so.

How Can a State Transition Governance Back to a City? Unlike under a chapter 9 municipal bankruptcy, where a federal bankruptcy court has the final say in approving (or not) a plan of debt adjustment under which governance authority reverts back to a municipality’s elected leaders, a state takeover lacks a Betty Crocker cookbook set of instructions. Gov. Murphy’s quasi-emergency manager, Jim Johnson, whom the Governor named to review Atlantic City’s transition back to local control, said the state administration should remain in place for an additional three years, unless Atlantic City’s reliance on state aid has been “substantially reduced or eliminated” and that its municipal workforce is on “solid footing.”  Under the provisions of the state takeover, enacted shortly after Atlantic City nearly defaulted on its municipal bond debt, the state was empowered to alter outstanding debt and municipal contracts—or, as Mr. Johnson wrote: “Atlantic City has a set of fiscal, operational, economic and social challenges that will only be resolved with significant direction from, and partnership with the State.”

Focus on the Fiscal Future. Mr. Pfeiffer said it is important for New Jersey and Atlantic City to focus on long-term challenges beyond the state takeover period, adding that the continued state oversight will be a positive for Atlantic City municipal bondholders, because it will assure greater fiscal discipline will be in place, or, as he put it: “You are going to have ongoing stability while the state is involved: The city will have to show that it can stand on its own.”

The report outlines a series of recommendations such, as:

  • the importance of diversifying Atlantic City’s economy beyond casinos,
  • providing increased training for senior municipal workers, and
  • purchasing data that can better track city services.

Mr. Johnson also urged Atlantic City to redirect Casino Reinvestment Development Authority funds into new development projects and toward providing increased financial support for youth programming.

Transitioning Back to Local Control. Atlantic City Mayor Frank Gilliam noted: “The citizens of Atlantic City deserve to have their local elected officials control their destiny…I am very optimistic that this is a huge step in the right direction for Atlantic City and its future.” Mr. Johnson, who was a primary challenger to the Gov. two years ago, was named after that election as a special counsel to review the state’s oversight of Atlantic City—and he came somewhat prepared thanks to his previous service as a U.S. Treasury Undersecretary for enforcement under former President Bill Clinton.

Gov. Murphy, who had been critical of the state takeover during his gubernatorial campaign, and who had criticized former Gov. Chris Christie’s administration for implementing it without support from former Mayor Donald Guardian, noted: “This is a community that needs the state’s help as a partner, not as a big-footing jamming down, taking away—you know, taxation without representation,” adding: “That doesn’t mean that Atlantic City doesn’t need the state, that the state isn’t going to stay the course and be a partner.” The Governor, soon after assuming office, had removed former Gov. Christie’s designated takeover manager Jeffrey Chiesa as the state designee to oversee the state role in Atlantic City. It should be noted, as we have previously, that Mr. Chiesa forged a number of settlements on owed casino property tax appeals and effected a $56 million reduction in Atlantic City’s FY2017 budget. All of which brings us back to the wary fiscal trepidation of Mr. Pfeiffer, because Atlantic City’s debt is still in the high risk range so favored by some casino players in the city: a CCC-plus from S&P Global Ratings and Caa3 from Moody’s Investors Service.

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Betting on the Garden City’s Fiscal Future

May 16, 2018

Good Morning! In this morning’s eBlog, we take a fiscal gamble that Monday’s U.S. Supreme Court decision to strike down the federal anti-gambling law could reap significant fiscal gains for Atlantic City, fueling its fiscal recovery from near insolvency.  

Betting on Atlantic City’s Fiscal Future?  In the wake of the U.S Supreme Court’s PASPA decision to legalize professional sports gambling [Murphy, Governor of New Jersey, et al. v. National Collegiate Athletic Assn. et al, U.S. Supreme Court, No. 16-476] —a decision which could bring in as much as $10 billion in annual new revenues to the State of New Jersey, Atlantic City Mayor Frank Gilliam, expressed excitement, noting: “Sports betting could generate millions in revenue for Atlantic City and diversify our gaming market: I hope that New Jersey is an early adapter of legalized sports betting so we can capitalize on another revenue stream.” Indeed, it would appear that the state’s commitment over the last seven years of $9 million in taxpayer funds on the court battle to legalize sports betting at its casinos and racetracks will be great fiscal news for Atlantic City, which has spent the last few years recovering from the closure of multiple casinos, going into a state fiscal takeover, and skirting the threat of chapter 9 municipal bankruptcy. Or, as New Jersey State Senate President Stephen Sweeney (D-Gloucester) put it: “If legalized sports gambling was in place when the Eagles won the Super Bowl, just think what Atlantic City would have looked like.”

Atlantic City is, after all, celebrating its 40th year of casino gambling—albeit, in recent years, it has witnessed the closure of four casinos. Already, though, two of those, including the Hard Rock (which had replaced the former Trump Taj Mahal casino) are set to reopen this summer.  Even before the decision, gaming revenues were increasing: Rummy Pandit, the Executive Director of the Levenson Institute of Gaming, Hospitality, and Tourism at Stockton University noted sports betting will add “another new segment” to provide fiscal sustenance to the boardwalk city. Daniel Wallach, a gaming and sports attorney, in response the query whether the decision would save Atlantic City, noted: “I don’t know that Atlantic City needs saving…but it will provide a dramatic, positive economic impact.”  Emily Raimes, a Vice President at Moody’s, noted that local and state governments which legalize sports betting will “see minor benefits from the incremental tax revenues, although it will take time to implement—adding: “States like New Jersey and Pennsylvania which planned ahead will see the benefits first…Cities like Atlantic City which have long desired sports gambling will see a positive impact depending on how states regulate it.”  

The landmark ruling striking down the federal law which barred states from drafting their own regulations for local sports betting, will allow legal sports books to begin operations throughout the country—something heretofore only allowed in grandfathered-in states Nevada, Oregon, Delaware, and Montana. The case here pitted the State of New Jersey versus the nation’s major sports leagues:  New Jersey had argued legalization of sports gambling would allow the state to capture a new and significant stream of revenue. In its 6-3 decision, the 6-3 majority sided with state authority to legalize sports betting on a case-by-case basis, citing PASPA’s provision prohibiting state authorization of sports gambling schemes as violating the anti-commandeering rule—and holding that PASPA’s provision prohibiting state “licens[ing]” of sports gambling schemes also violates the anti-commandeering rule. In Justice Samuel Alito’s opinion, the Court ruled that, “Congress can be allowed to regulate sports gambling directly, but if it elects not to do so, each State is free to act on its own.”

The decision is expected to bring immediate fiscal benefits not just to the State of New Jersey, which has been fighting for legalized sports gambling since amending its state constitution in November of 2011—a reform which drew legal challenges from the NFL, NBA, MLB, NHL, and the NCAA, whose lawyers were able to use PASPA as precedent to prevent the referendums New Jersey residents twice approved—with the Garden State pressing its case all the way to the Supreme Court, but also key to the fiscal recovery of Atlantic City: estimated revenue from now legalized sportsbooks is projected to bring up to $9 billion in new revenues to the city—with New Jersey one of 14 states which has active sports betting reforms chambered for debate in their local legislative bodies. Elected and appointed leaders in Atlantic City and Trenton are preparing to roll the dice by capitalizing on a soon-to-be regulated industry—with three members of the New Jersey Legislature already having proposed such legislation in the state Assembly.  State Senate President Steve Sweeney (D-Salem, Gloucester, and Cumberland) noted: “We want to act quickly to capitalize on the court’s decision so that we can get sports gaming in place and operating in New Jersey.”

New Jersey voters overwhelmingly approved creating a constitutional amendment to allow sports betting in 2011. The following year, the state Legislature passed the Sports Wagering Act, which was sponsored by former state Sen. Raymond Lesniak (D-Union). Former Gov. Chris Christie signed off on legislation in 2012 and 2014 to enact the amendment. Five sports leagues challenged that statute: the NBA, NCAA, NFL, NHL and MLB — and the case was contested all the way to the U.S. Supreme Court, which heard oral arguments in December. Former Gov. Chris Christie noted: “The favorable Supreme Court ruling on sports gaming will significantly boost the economy of Atlantic City, Atlantic County, and New Jersey as a whole. It will create jobs, encourage tourism, and increase participation at our casinos and sports venues. With today’s ruling, New Jersey’s economy has taken great strides in the right direction;” while state Assemblyman Vince Mazzeo (D-Atlantic) noted: “The timing could not be better. Atlantic City has seen major growth over the last year, with two new casinos opening next month and online gaming revenues rising. Thanks to today’s Supreme Court decision, we can add regulated sports betting to the list of Atlantic City attractions fueling a comeback. This is something the majority of New Jerseyans said they wanted, and now thanks to this decision, will benefit from, as additional funding will be available for social programs that are critical for our residents. This is a good day for Atlantic City and the State of New Jersey. “