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Op-Ed: To Get the Answers About Atlantic City, Ask the Right Questions

Talk about ‘emergency managers’ and uncertain legislative proposals may have contributed to disquiet about the city’s fiscal situation

marc pfeiffer
Marc Pfeiffer

In late January, Gov. Chris Christie issued an executive order appointing experts in restructuring private businesses to look at Atlantic City’s well-publicized financial challenges and recommend ways to address them. His action resulted in a flurry of financial-market concerns about Atlantic City’s fiscal future, but also raised questions about the state’s fiscal commitment to other cities.

What caused that concern?

State engagement with financially distressed municipalities is not new; it goes back almost 80 years. Every few years one or two municipalities get into fiscal hot water. This activates well-established processes administered by the state’s Division of Local Government Services and its Local Finance Board. The agencies can provide direct oversight, management assistance, and relief from statutory requirements that give local officials time to solve their problems. In extreme cases, targeted legislation is enacted or financial assistance provided as solutions to unique problems that our oversight laws did not anticipate.

The governor’s order, however, introduced new ideas. His public statements and language in the order, such as “adjustment of debts” and “restructuring of operations,” implied that an “emergency manager” could oversee a “comprehensive overhaul” of Atlantic City’s government. This public discussion of the city’s fiscal challenges raised concerns among bondholders about timely repayment, residents about cutbacks in city services, and city employees about layoffs or nullification of labor agreements.

As a result, the statements obligated bond-rating agencies to review Atlantic City’s credit rating, which led them to inform bond markets that repayment of debt may be threatened unless conditions improved. Following this warning, the city’s credit rating was lowered.

This concern focused attention on efforts of Mayor Donald Guardian to address the loss in property values due to casino closings. The closings, and the loss of property-tax revenues, would substantially increase property taxes unless a combination of proportional decreases in municipal and school property tax levies (budget cuts) or new revenues are made available to replace the lost value. The mayor has been renegotiating labor contracts and has announced municipal layoffs to reduce taxpayer burdens.

What impact does this have?

For about 80 years through generations of governors and legislatures, the state has implemented laws, policies, and oversight activities to ensure solvency of our local governments and to prevent bankruptcy. The result: a high degree of investor and bond-rating agency confidence that the state “had the back” of municipalities and would ensure that bond investors would always be paid on time. The system has served us well; that market confidence benefits all New Jersey municipalities and counties with lower interest rates and higher bond ratings. A lack of confidence does the opposite.

The new advisers are experienced private-sector bankruptcy attorneys, and one managed the recent bankruptcy of the city of Detroit. Combined with an expansive description of the authority granted the team and a very public, negative portrayal of the Atlantic City’s financial condition, rating agencies and investors raised concerns that the governor is not supporting the state’s long-held local government fiscal policies. That places at risk the “extra-credit” that rating agencies have traditionally accorded New Jersey public debt, likely leading to lower bond ratings and higher interest rates in the future.

Is that concern realistic?

Think of Atlantic City’s finances as an iceberg. We’ve only seen the top; we don’t know what’s below. The advisers are charged with assessing the condition of the city’s finances, determining the “right size” and “right costs” of running the city, and recommending options on how to get there. The city has the reputation of having a bloated workforce and the perception of costly employee contracts, and it has the second-largest municipal tax levy in the state. These are remnants from the era of successful casinos that paid 80 percent of the property-tax burden. It’s been said that budgets expand to fill the revenues available to them; Atlantic City is now paying a price for that.

Several years ago, the state’s Local Finance Board and Atlantic City agreed to place the city’s finances under the supervision of the board under the laws that allow the state to supervise a municipality’s finances (the Local Government Supervision Act). The city also signed a Memorandum of Understanding (MOU) that placed conditions on financial aid the city received under the state’s Transitional Aid Program. Both actions provide the state a large degree of, but not total control over municipal finances. The advisers’ power is limited to what is allowed under the Supervision Act and MOU.

To “declare bankruptcy,” however, the city has to apply to the Local Finance Board pursuant to the procedures of the state’s never-used municipal bankruptcy law (enacted in the 1930s and amended in 1953). It is the last stop on the continuum of increasing state engagement to help a municipality work out fiscal problems.

“Emergency manager” (a term used in Michigan) has no meaning under New Jersey law. The board and the Division of Local Government Services have authority under the Supervision Act and the MOU. Anything the state wants to do must be authorized by those entities; though they are part of the administration, and while the governor has influence, his authority has statutory limits.

While Guardian’s administration was attempting to address the fiscal challenges on its own, the state was unable to measure the possibility of success until the full extent of the problem was understood. This is something the new advisers can determine.

What Should Happen Next?

Once the advisers know the extent of Atlantic City’s problems, they can explore credible solutions and publicly report on it. Then the administration can consider the alternatives, and the public and investors can comment. Finally, the Legislature can engage in thoughtful bipartisan discussions, and all parties can then work together toward informed, fiscally sound solutions.

Until then, well-meaning legislative proposals offer uncertain solutions to uncertain problems. If market uncertainty affects Atlantic City’s finances, then the state should act consistent with our laws to ensure the city’s solvency. If market uncertainty affects other New Jersey local governments, then the governor should address the fiscal problems by clarifying his policies on bankruptcy and the state’s fiscal traditions.

Marc Pfeiffer is the assistant director of the Bloustein Local Government Research Center at Rutgers University and the principal of PfeifferGov, LLC.

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