Is troubled Atlantic City headed for municipal bankruptcy?

Is troubled Atlantic City headed for municipal bankruptcy?

Atlantic City faces a $100 million annual budget shortfall and carries some $500 million in low-rated debt. Real estate values have dropped about 70 percent.

Atlantic City promotional Image, courtesy http://www.atlanticcitynj.com/

WASHINGTON, November 15, 2016 — On Tuesday November 1, 2016, the state of New Jersey formally rejected the plan submitted by Atlantic City government, a plan that was supposed to bring financial stability to the city within five years. A week later the state decided to take over Atlantic City’s government. While there is much finger-pointing and alleged political posturing regarding the reasons behind the rejection, the reality is that Atlantic City’s proposal was simply a bad plan.

The state believes that local government leaders simply don’t get it. The facts are daunting. The city is facing about a $100 million annual budget shortfall and is carrying about $500 million worth of debt, some of it sold at high, junk bond rates. Real estate values, which have dropped about 70 percent, continue to fall which will reduce property tax revenues further.

At the same time, real estate tax rates have risen significantly, which drives people from their homes, a situation made even worse after the loss of more than 8,000 jobs for casino workers. Future casino tax revenues will remain uncertain until the Borgata casino tax debt suit is settled and the PILOT program—defined as payments to municipalities by businesses and developers in lieu of taxes—is finalized.

The city’s annual budget was about $250 million in 2013 before increasing to $262 million. Now the city says it can be cut to $242 million, which is still about $80 million too high.

The law currently requires the city budget to be balanced. The plan says that by 2021 spending will be reduced to $207 million. Among other maneuvers, the trickery involved with the city’s attempt to sell Bader Field, Atlantic City’s currently shuttered airport—which sits on 140 acres of prime development land—essentially to itself, wasn’t going to help the debt situation either.

So now what?

Assuming no legitimate legal action by the city, the state will move quickly. Its first step will be to take stock of city assets that could be sold to reduce the debt. The assets so identified will have to be properly marketed and not just casually sold off by putting up confusing signs and placing online and newspaper ads choked with legalese. There are creative methods to market and potentially finance properties in order to maximize cash flow and eliminate debt.

Admittedly, selling city assets isn’t pleasant. But Atlantic City is in desperate straits, the solutions to which require desperate measures.

Next, the city’s annual expenses must be significantly reduced, another unpleasant necessity. Reductions in the city’s labor force is a start, but larger reductions may be needed, though there are valid arguments why the police and fire departments need to maintain current manpower levels.

These provisions would be successful, assuming there is a good faith showing by all involved. Aside from the Bader Field fiasco, the real reason the city’s current fiscal plan failed was that it did not address the very high costs of unionized city labor. The salaries of many public service employees are simply too extravagant for the city to afford given its ever-shrinking tax and revenue base.

Given the city’s dismal track record when it comes to fiscal discipline, the push to change current law to allow Atlantic City to keep some of the city’s gaming tax revenue that currently goes to the state will fall on deaf ears. Cuts simply must be made.

Next, the state will need to rewrite the city’s union labor contracts to reduce public employee salaries and wages. Workers could take legal action to try to stop this, but that move will likely fail and could lead to the state placing the city into bankruptcy where the bankruptcy judge/receiver has very far reaching powers including the authority to unilaterally rewrite any and all labor and other contracts. The judge can also force debt settlement and/or restructuring.

It is very unfortunate that Atlantic City has seen a 50 percent drop in gaming revenue, a misfortune that has  caused at least 10,000 people to lose their jobs, in turn significantly reducing the city’s population. All this plus the lack of timely response by elected government officials has led to the current financial crisis.

In the end, the state will do what is necessary, no matter how painful, to turn Atlantic city around and restore its greatness. It’s what happens when a city’s elected officials simply refuse to seriously address adverse budgetary situations that may jeopardize their political careers.

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