Atlantic City’s $100M Gamble to Keep Its Water Utility in Public Hands

Chase Brush | September 27, 2016 | Politics
The state wants the city to sell the utility to meet the terms of an overdue bridge loan, but the city has another plan to raise the money and protect the water system

atlantic city
Atlantic City officials think they’ve found a way to avoid more financial hardship while also preserving the independence of one of its most prized assets, its Municipal Utilities Authority.

Still facing a daunting financial crisis and a possible default on a $73 million bridge loan from the state, Atlantic City officials announced yesterday that its MUA will buy a 140-acre plot of land near downtown in an effort to help pay down city debt. At a press conference in front of its headquarters, local officials said they had convinced the authority, an independent entity that manages the city’s water works, to purchase Bader Field, once a municipal airstrip, for $100 million.

The money would be put toward a debt load of nearly five times as much that the city has picked up through the decline of its casino market and collapse of its ratable base over the past several years, said Republican Mayor Don Guardian.

Officials on Monday didn’t say exactly what the field would be used for, but the authority has expressed interest in using the land and neighboring Duck Island for solar and wind projects. 

“We heard the hew and cry about keeping the MUA in public hands, and under this agreement we would do just that,” said Council President Marty Smalls, who joined Guardian during yesterday’s press conference.

The announcement follows on the heels of last week’s news that the city had missed a deadline to dissolve its MUA and set aside its assets as collateral, one of the terms of the $73 million bridge loan the state gave the city back in May to shore up its finances and avoid bankruptcy while officials worked to come up with a long-term solution to the crisis. The city council had twice failed to vote on the move, which had come under fire from residents and activists who warned against compromising the sovereignty of the authority. Guardian, realizing the city would not make the deadline, asked for a reprieve on any penalties the state might choose to exact as a result.

The state answered that request on Thursday, saying it would give the city until October 3 to correct the violation. Failing that, the state can demand that the city repay the loan immediately, withhold state aid, or begin seizing collateral — including the MUA’s assets — according to the loan agreement.

The missed deadline was also chastised by Moody’s Investor Service, which gave the city formal notice that it was in danger of default.

“Regardless of the state’s reaction, Atlantic City’s inability to meet its loan covenants is a credit negative and indicative of the city’s severe fiscal distress. It also brings the city closer to a potential state takeover,” said Doug Goldmacher, an analyst at Moody’s, last week.

In that sense, yesterday’s proposal is also a sort of tactical gambit for the city, which has been under pressure by the state to monetize the authority since the start of its financial crisis. The authority had been a target as early as 2014, when Gov. Chris Christie announced he was appointing an emergency manager to study and come up with recommendations for stabilizing the city’s fiscal situation, which includes $500 million in debt and a $100 million budget hole. In his January report on the subject, Kevin Lavin, the former emergency manager, said the MUA had “significant assets which present opportunities to increase City revenues and provide much needed positive cash flow during the City’s financial transition.”

He mentioned ways to tap into those assets, first by dissolving the authority and letting the city assume control of its responsibilities, but also by privatization. Several private companies, including New Jersey American Water and its lobbyist Philip Norcross, brother of South Jersey political boss George Norcross, have expressed interest in buying the authority, which has been valued at $100 million in a sale.

“While the MUA presents multiple options for the City, in the near-term the City and County should work together to dissolve, restructure, and then operate the MUA for the benefit of the City,” the report read, adding that utility rates should be “analyzed and restructured to ensure reasonable rates across all classes of ratepayers.”

But the idea of a restructured MUA — either to one that is controlled by the city or to one that is privatized, operated by a commercial entity — has not been popular among Atlantic City constituents. City officials and environmental advocacy group say they have serious concerns about selling off the authority’s responsibilities to someone else, since it could lead to higher rates for residents or corner-cutting when it comes to ensuring clean water. The city council has repeatedly either voted down or declined to post a vote on the measure over the past several weeks, while New Jersey Chapter of Food & Water Watch, one of the most vocal opponents of the move, has called it a “recipe for disaster.”

A study conducted by the organization earlier this year found that households in New Jersey with private water systems pay an average of $230 more a year for water than those with publicly owned and operated systems.

The current proposal could help city officials avoid the question of what to do with the utility altogether. Yesterday, Guardian said the MUA would still earn the city $100 million in additional revenue while being kept intact, satisfying both the state and local constituents. It would also help the city make use of another one of its biggest assets, Bader Field, he said.

The city has repeatedly tried to auction off the old airfield but has been offered only less-than-ideal bids. In August, a company bid $50 million for the property, which the city has said it hopes to get at least $100 million for.

“Everybody said you should somehow get 100 million out of the MUA,” Guardian said. “This does that while still keeping it intact.”

Guardian also called the proposal a “poison pill,” since it would deter the state from coming after the MUA either as collateral for the $73 million bridge loan or in the future. The utility — which in 2013 had $5.4 million in reserves, according to its audit for that year — is unlikely to have the full price of the sale on hand, which means it would have to borrow either a part or the whole $100 million, putting it in debt.

Guardian said the next payment on the $73 million loan, which is due next week, could be paid through some $60 million in diverted casino marketing funds and $20 million in casino reinvestment taxes.

Bruce Ward, the Atlantic City MUA’s executive director, said addressing the city’s fiscal situation is like “performing root canal” and that the sale of Bader Field was the easiest treatment.

“In one proposal we would lose our jaw, another we would lose our mouth, but today’s measure is the most minimally invasive measure,” Ward said.

The city’s selling off one of its major assets to balance its budget parallels a similar strategy former Gov. Jim Florio adopted in the early ‘90s, when the Democrat sold one of the state’s busiest stretches of highway, the 4.4 miles of Interstate 95 between the George Washington Bridge and the New Jersey Turnpike, to the New Jersey Turnpike Authority for $400 million to help plug a budget shortfall during his term.

But it also comes with some big questions. It’s unclear, for one thing, whether either party supposed to be placated by the plan — the state on the one hand, the city council and residents on the other — will actually support it. While Guardian called the sale the best way out of the city’s predicament, the state and city council still must sign off on it, and neither has given any indication yet whether they will.

The Department of Community Affairs, which oversees the loan agreement, declined to comment when asked about the announcement yesterday. Meanwhile, Councilman Frank Gilliam, one of the main opponents of earlier efforts to vote on the MUA’s dissolution, was quoted saying he has not yet decided whether he’ll support the new plan.

It’s also unclear whether the MUA, which would likely have to borrow funds to buy Bader Field, will be able to do so. It would probably have to take the issue to the state’s Local Finance Board, which is run by a Christie appointee. Additionally, it’s not clear how the purchase of Bader Field meets the statutory purpose of the city’s waterworks.

These are all questions that Guardian and Smalls will have to answer going forward, said Marc Pfieffer, a senior policy associate at Rutgers University’s Bloustein School of Planning and Public Policy.

“The city is between a rock and a hard place with this and is trying to find a way out, but is still hemmed in by the terms and conditions of the loan agreement,” Pfeiffer said.

Guardian yesterday said that the new proposal is just one step in a seven-part rescue plan the city will present to the state in November, and that a second step will be unveiled next month, when the city discloses information on how it will settle a $150 million debt with the Borgata Hotel and Casino. But Christie’s office, Pfeiffer added, may stick to the earlier loan agreement and demand that the MUA be dissolved.

“The governor’s office I think made it very clear that when the loan agreement was done it was in a way superseding the financial plan law that was passed,” he said.

State Sen. Paul Sarlo (D-Bergen) called the proposal a “financial shell game” in a statement following the announcement, arguing that it does “far too little” to address the city’s immediate fiscal problems.

“Today’s proposal will add debt, possibly cause an increase in water rates for local consumers, and fails to generate revenue in a fiscally-responsible way,” the Democrat said.

Still, others praised yesterday’s proposal. Lena Smith, an organizer for NJ Food & Water Watch, said in a statement that the plan shows Guardian and city council are “listening to residents and trying to keep the MUA in public hands.”

“From day one, the state takeover has had one clear goal: stealing the water assets of Atlantic City and turning them over to private interests aligned with Sen. Steve Sweeney and Gov. Christie,” she said. “They must remain vigilant in the face of greedy private water companies that will stop at nothing to profit off this important public resource.”