Takeover of Atlantic City Moves Closer Despite Anger Over Extent of Control

Meir Rinde | March 11, 2016 | More Issues
Delegation from city protests ‘draconian’ measures, which could face legal challenge

Gov. Chris Christie, flanked by state Senate President Stephen Sweeney (D-Gloucester), left, and Mayor Don Guardian, right.
Despite raucous opposition in Trenton yesterday, the state is getting closer to an unprecedented takeover of Atlantic City’s government, a move that supporters say is the only way to avoid bankruptcy and a resulting stigma in the bond markets that would make it more expensive for other New Jersey cities to borrow money.

The takeover would go further than any previous intervention in municipal affairs, allowing a state-appointed director to essentially replace the mayor and council if necessary and even unilaterally cancel union contracts.

The potential loss of sovereignty and threat to collective bargaining rights have sparked intense anger in the city, but sponsors of the takeover bill say measures that would normally be unpalatable are the only way to prevent a total collapse of city government in a few weeks.

“I would love to be able to tell people what they want to hear. But what we cannot do is sustain what we have any longer,” said Senate President Stephen Sweeney (D-Gloucester), a bill co-sponsor. “I respect enormously the mayor and the council president. This isn’t personal. They are not bad people. But we need to fix this now. Otherwise, how are we going to pay employees in a month, if there are no funds?”

But while a Senate committee endorsed the bill yesterday, it still faces major headwinds in the Assembly, where Speaker Vincent Prieto (D-Hudson) says he opposes a proviso that would allow the state to unilaterally cancel union contracts.

In addition, it’s unclear if such sweeping powers are allowed under the state constitution; attempts to implement the bill could face lengthy legal challenges, according to one expert on municipal finance.

Ending a labor agreement could violate the “sanctity of contract” under state and federal law, said Marc Pfeiffer, assistant director of the Bloustein Local Government Research Center at Rutgers and a former deputy director of the state Division of Local Government Services. The cancellation of a collective bargaining agreement would thus likely spark a lawsuit, he said.

Legal challenges ahead?

The takeover law may have other legal problems as well, Pfeiffer said. By taking broad authority over areas beyond financial management, the bill may violate constitutional provisions barring the state from running a municipality, he said. It could also violate a rule against legislation that targets only one town.

A court might ultimately agree that the severity of Atlantic City’s crisis, with a taxable base that has shrunk from $20 billion to $7 billion in a few years, merits extreme measures, Pfeiffer said. But the legal wrangling would still take much longer than the city can afford.

“It would likely go up to the Supreme Court,” Pfeiffer said. “There are so many legal issues that could be raised that you could go through a protracted litigation and meanwhile the issues continue to get worse.”

One of Sweeney’s arguments is that union contracts could be broken anyway as part of a bankruptcy proceeding.

During yesterday’s hearing of the Senate Budget and Appropriations Committee, Robert McDevitt, president of Local 54 of UNITE-HERE, Atlantic City’s largest casino union, pointed out that a judge agreed to allow the Trump Taj Mahal casino to dissolve its labor agreements during bankruptcy and stop funding health care and pensions. McDevitt supports the takeover bill.

Municipal defaults differ from corporate bankruptcies, however. Pfeiffer said unions have often fared relatively well in municipal bankruptcies around the country, with their contracts being maintained but modified as part of court-supervised recovery packages.

Sweeney and others say that a bankruptcy would raise questions in bond markets about the fiscal soundness of other New Jersey municipalities, hiking their borrowing costs.

But given the risk of legal challenges and the city’s uniquely dire plight, Gov. Chris Christie and the Legislature might do better to allow the city to proceed into bankruptcy and use the state’s existing powers over distressed municipalities to restructure its finances, Pfeiffer argued.

“I’ve been the first to say, yes, you don’t want to go into bankruptcy, because it’ll have an effect on everybody else, but you can credibly argue that Atlantic City is such an outlier that if you go through an organized bankruptcy process, you can get out of it and the markets can say, you know, Atlantic City is this outlier, and the state is still supporting other municipalities,” he said.

Is takeover too far-reaching?

Some legislators have also expressed concerns about the law’s broad scope, including budget committee member Sen. Jennifer Beck (R-Monmouth), who voted against it yesterday. Echoing Atlantic City Mayor Don Guardian and other critics, Beck said the measure went too far and appeared to potentially threaten other struggling towns with unwelcome takeovers.

“I understand we need to give Atlantic City a hand up, and in doing that the state of New Jersey should have a significant voice, as we’re going to lend both expertise and financial support. But I think that this bill is an overreach,” Beck said. “While I understand…there are reasons the language of the bill is worded so broadly, it does raise concerns to me for future challenges within other municipalities around the state.”

The bill passed with nine votes in favor and one against. Senators Sandra Cunningham (D-Hudson), Linda Greenstein (D-Mercer) and Teresa Ruiz (D-Essex) abstained. Greenstein said she was concerned that the bill would “chip away” at the collective bargaining rights of public employee unions and force the city to sell off its water utility, and said it should be amended to address those concerns.

Assembly Speaker Vincent Prieto (D-Hudson) also repeated his objections to the measure’s language on labor agreements, saying in a Twitter message yesterday that the state already has the power to help the city without “trampling” on collective bargaining.

Prieto controls the agenda in the Assembly and could block the bill from being considered. Christie has said that if Prieto doesn’t help pass the bill, he will be responsible for whatever happens to Atlantic City.

During the two-hour Senate committee hearing yesterday, participants generally agreed that blame for the city’s problems is shared by state and local officials who failed to prepare for the decline of the gaming industry. One speaker, lifelong city resident Linda Steele, said gambling even made the city worse by displacing other businesses and employment options.

“The legislation allowing gaming allowed the gaming halls to usurp the life out of Atlantic City, because they were self-sustaining and small businesses could not compete with the gaming industry,” she said. “It did not give us a year-round economy. It actually sucked the life out of those small businesses.”

Who’s ultimately to blame?

But participants were much more divided over responsibility for the current fiscal crisis. Guardian saying the state has failed to keep its promises to help, while Sweeney maintained that the city has overspent and has no viable “Plan B” other than receiving more financial aid.

During a break in the hearing, Guardian said that despite holding a series of summits in Atlantic City and appointing an emergency manager, the Christie administration ultimately failed to renegotiate the city’s heavy debt load; failed to settle a dispute over $170 million in tax refunds due to the Borgata casino; and, by vetoing an earlier version of the PILOT bill, failed to provide $33.5 million in promised funds.

Meanwhile, Guardian has cut the payroll by over 300 workers since he took office two years ago, and reduced the annual budget by $50 million, he said.

Sweeney and others praise Guardian’s efforts but say the cuts are nowhere near enough. The payroll cut addresses one-tenth of the financial problem, and at $262 million, the annual budget for the 40,000-person city is much larger than the budgets of comparable municipalities, Sweeney said. New Brunswick, for example, has close to 60,000 residents and expenses from hosting Rutgers University, but a budget of just $58 million, he said.

“The numbers just don’t work,” Sweeney said of Atlantic City’s budget.

Guardian defended the budget, saying that the city regularly hosts 200,000 people on weekends and draws 25 million visitors a year to an industry with high associated costs for managing crime, traffic, and other issues.

“That’s the price of a sin industry,” he said. “Atlantic City’s in a unique situation. This isn’t a college town where you come, you do a lot of studying, maybe Thursday nights you go out and get drunk. This is a town where everyone comes and plays every day, and we’ve got to make sure it’s safe for them. And that comes with a cost.”

Guardian was accompanied to the hearing by a busload of takeover opponents, including the council president, police and fire officials, other city employees, and residents. They assailed the plan as draconian and unjust, and after the vote Guardian pledged to work against the reelection of the senators who supported the takeover.

“We need to point out all of the senators that have voted against unions, against labor, against collective bargaining, against the civil rights of residents and officials, and we have to take them out at election time,” he said.

The denunciations included heated testimony from Steven Young, director of the National Action Network of South Jersey. He said taking away the power of elected city leaders was comparable to “civil war,” and warned, “If we don’t have no justice, there won’t be no peace. You can take that any way you want to take it.” When he refused to end his speech, Ruiz called a recess in the hearing, police escorted Young out, and he was subsequently arrested.

Far less controversial than the takeover bill is a second measure that would create a program of payments in lieu of taxes for casinos to stabilize Atlantic City’s tax base. The PILOT, which Christie has twice vetoed, would require the remaining eight casinos to pay the city $120 million a year, plus an additional amount starting at $30 million and decreasing over time. The Senate budget committee approved the latest version yesterday.

Moody’s issued a report Wednesday that said Atlantic City has a $102 million structural budget deficit and a $437 million debt burden, in part due to casino tax appeals. Implementation of both bills would set it “on a path to fiscal health,” but the PILOT bill alone would not suffice, and failure of both bills could lead to a default in April or May, Moody’s said. Stopgap actions such as a state loan or pension payment deferral would only delay the fiscal crisis by a year or two.

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