WASHINGTON, Feb. 18, 2016 — The state of New Jersey is about to take over Atlantic City (AC) in an effort to keep the city financially solvent. Because of a collapse in tax revenue and because the Borgata Casino recently decided to withhold a $7.5 million tax payment, the city will run out of cash before the end of February.
The state says that in 2011, AC was given five years to improve its financial condition. In 2016, not only has the situation not improved, it has descended to crisis proportion. Declining tax revenue, resulting from a 70 percent drop in real estate values, has pushed the city budget tens of millions of dollars into the red. And the heavy debt burden has pushed the city’s credit rating to junk bond status.
Making matters worse, the city continues to rely heavily on tax revenues from the casino industry, which continues to decline. While the recently purchased Showboat Casino Hotel and parts of the Revel Casino Hotel will likely re-open soon, it is difficult to determine whether those openings will increase the market or take business from existing casinos.
There have been broad discussions about moving Atlantic City forward. Most experts conclude that the city must reinvent itself as a tourist and resort destination that does not rely solely on casino gambling. Little, however, has been accomplished thus far.
When the state takes control, it will likely conclude that it is time to overhaul Atlantic City.
The first thing the state will do is to supply the money to make sure city bills and city employees are paid. Then it will reduce expenses as quickly as possible. The largest expenses for the city are personnel related. This includes the wages and salaries of workers and benefits and pensions.
Although there are contracts in place, the new law gives the state the right to void the contracts. The state will probably seek cost reductions in the 30 percent range through a combination of pay and benefit cuts and layoffs. The state may even consider switching to county-wide services.
A legal dispute could develop that might delay the state’s plans. But any delay in the plan to reduce expenses quickly will likely result in a bankruptcy action, which, at this point, may be the city’s best way forward. While bankruptcy conveys a negative perception that will damage the resort’s image, it is a relatively quick way to turn things around and get the finances in order.
While the city’s finances are in terrible condition, the root cause of the problem has been a lack of visionary leadership. However, deals were made, and the leadership always seemed focused on conveniently solving problems by providing short-term solutions rather than considering the long-term economic effects. Most of the city’s problems can be traced to that lack of vision.
For the first 25 years of casino gambling in AC, tax revenue flowed, seemingly without limit, into the city’s coffers. Patronage jobs were given out freely, often without regard for future budget implications. City employee costs ballooned with higher salaries, generous benefits and generous pensions adding relentlessly to the burden. A leader with vision would have kept these costs in check and would have made adjustments as early as 2007, when Atlantic City’s decline began. But that never happened.
After stabilizing annual expenses, the state will examine the $400+ million of debt plus other obligations, such as the $160 million that is owed to Borgata and the tens of millions of dollars owed to other casinos because of tax overpayments. Assuming bankruptcy is avoided by the city, those debts will likely be settled by selling city assets such as the now-shuttered city airport, the Convention Center and the municipal water company.
The state takeover could last as long as five years. When the state leaves, the city’s finances will be sound, although the city government may look much different. The state will hope that the next generation of leaders elected in Atlantic City will have enough vision to lead their overhauled city toward a more promising future.