Atlantic City Lurches Toward a Takeover as State Rejects its Recovery Plan

Chase Brush | November 2, 2016 | Politics
Down-on-its-luck gaming mecca faces a takeover by the state, which says the city’s strategy is ‘not likely to achieve financial stability’

sandy map ac boardwalk empty
Despite producing a five-year recovery plan last week that was praised by lawmakers and financial auditors as a viable solution to the seaside gaming mecca’s severe economic woes, Atlantic City still faces a likely — if at this point inevitable — state takeover of parts or all of its government following the rejection by Gov. Chris Christie’s administration of the proposed plan.

In a late-breaking decision yesterday, Department of Community Affairs Commissioner Charles Richman said that, after “thoroughly” analyzing the city’s proposed strategy, he has “concluded that it is not likely to achieve financial stability for Atlantic City.” Richman said the state’s decision to reject the plan is based not only on deficiencies in some of the fiscal recovery measures city officials have proposed, but also on “what the city does not have” in it.

“I would have much preferred to leave management of the City’s recovery in the hands of its municipal officials,” Richman wrote in his report. “However, I am constrained by the plan before me.”

That plan, representing the culmination of efforts by city officials over the last several months to put its economy on a firmer fiscal footing, was announced last week ahead of a November 3 deadline set by state lawmakers under the fiscal recovery package they passed earlier this year. Relying on a combination of cost-saving measures and revenue generators that officials said they’d already begun to implement, the city’s strategy was two-pronged, seeking to address over $500 million the city currently faces in outstanding debt stemming from damaging casino tax appeals over the years.

At the same time, it sought to plug the city’s budget deficit, which has bloomed to almost $100 million in the face of plummeting local tax revenues spurred in part by the crumbling of the city’s economic core, its casino industry. Five of Atlantic City’s 12 casinos have shuttered their doors in recent years, costing thousands of jobs. And the casinos that still stand have successfully challenged their tax assessments, helping to reduce a ratable base that in 2008 totaled $20 billion to just over $7 billion in 2015.

City officials — as well as state lawmakers and other major players — had heralded the plan over the last several days, calling it a “Herculean effort” they thought would almost certainly stave off a takeover. Assemblymen John McKeon (D-Union) and Lou Greenwald (D-Camden) praised the strategy at an Assembly Judiciary hearing, while Moody’s Investment Service — which has come down hard on the city for fiscal issues in the past — called it “robust and detailed.”

“Once our Fiscal Recovery Plan is fully executed, Atlantic City will no longer struggle to pay its bills or address its capital improvement needs,” Mayor Don Guardian said at a council meeting where the plan was unveiled. “No longer will our residents, or employees, have to watch and worry as the City moves from one crisis to the next in a constant state of uncertainty and instability.”

But Richman threw cold water on those hopes yesterday, saying the plan does not meet the directives laid out in the “Municipal Stabilization and Recovery Act,” the rescue package lawmakers passed for the city in May; that gave city officials 150 days to come up with a balanced budget for 2017 and a five-year plan to get its overall finances in order. He said the plan did not include that balanced budget, or at least one that “complies with all of the applicable conditions of the Local Budget Law.”

Richman said the city’s plan included only a “general summary” of its 2017 budget and not the mandatory preface or separate sections required by the local budget law. He said it also failed to provide a “schedule for the repayment of debts,” while excluding the interest rates used to determine the future payment of bonds.

While city officials said last week they anticipated the plan to result in millions of dollars in savings over several years — including $18.5 million by 2021 — Richman said those figures relied on a series of underestimates and overestimates in what Atlantic City would spend and bring in over the next few years. The plan, he said, “underestimates debt service over the next five years by approximately $18 million; fails to accurately estimate the revenues collected from the investment alternative tax by improperly anticipating an excess of IATs of approximately $31 million over the life of its Plan; and overstates property tax revenues by approximately $20.5 million, based on the City’s flawed assumption that the property tax base will remain constant for the duration of the Plan.”

Notably, city officials did not include any tax increases in their recovery plan, contending that residents have already shouldered enough of the city’s economic burden, having seen their taxes increase by 50 percent between 2014 and 2015. That choice — and the state’s response to the city’s 2016 budget, which also lacked tax hikes — seemed to foreshadow yesterday’s decision, which slammed city officials for taking “virtually no concrete actions during the course of the past 150 days to begin to turn its budgetary problems around.”

Echoing some lawmakers who had called the move a “shell game,” Richman also criticized the city’s plan to sell Bader Field —a 143-acre former airstrip long considered one of the city’s most valuable assets — to its independent Municipal Utility Authority. Guardian announced the city would use $110 million in proceeds from that sale, combined with $105 million raised through the issuance of tax-exempt bonds secured by the state’s Municipal Qualified Bond Act, to help cover outstanding liabilities the city has accrued through recent tax appeals from casinos.

Both the Borgata, which won more than $170 million in tax appeals by challenging its property’s assessed value over the years, and MGM, which won $33 million in a similar settlement, are on that list — though officials have said if the debt to the Borgata is paid in a timely manner, it could drop closer to $103 million.

Richman, however, worried the MUA’s purchase of Bader Field could “financially burden the City and the MUA,” which he also called a significant asset. A condition of a $73 million bridge loan provided to the city by the state in August called on city council members to vote to dissolve the authority and set its assets aside as collateral, but local stakeholders and community advocates protested, saying it would jeopardize the city’s water utility. Guardian seemed to side with those protests in announcing the MUA-Bader Field purchase, calling it a “poison pill” for the state.

“The sale of Bader Field to the MUA for $110 million and a $105 million bond offering initiative by the City itself… are speculative in terms of their viability and the City has taken no significant steps to advance these transactions or provided any details about the structure of each transaction to instill confidence that either or both of them could be successfully consummated,” Richman said.

Guardian and others had touted other small steps the city had begun to implement to cut costs over the last few months, including eliminating more than 27 percent of the municipal workforce and restructuring employee prescription and dental programs to save over $1 million. But Richman suggested those steps were not enough, either.

“The enormous problems confronting the City did not occur overnight. City leadership has had ample time to improve the City’s financial condition yet has avoided doing so in a meaningful way,” he said. “That inaction, combined with the plan’s disappointing shortcomings … compel me to conclude that the plan is not likely to achieve financial stability for the City.”

While the department’s rejection of the plan does not signal an automatic state takeover, it’s unlikely the city’s long saga could end any other way. The plan now goes before the state’s Local Finance Board, according to the DCA, which will “consider whether to assume powers of the governing body that may be substantially related to the City’s fiscal condition or financial rehabilitation and recovery, pursuant to the Municipal Stabilization and Recovery Act.” But the finance board’s members are appointed by Christie, a Republican, and the board itself operates under the DCA, which issued yesterday’s decision.

Under the Legislature’s rescue package, the Christie administration could now come in and assume control of the city’s governing apparatus, with the power to rip up current labor deals and spin off city assets. A future administration would also have the power to step in and take over the city if it determined the local government wasn’t living up to its promises over the five-year period of the plan.

Guardian, who was at a city planning board meeting when the news broke Tuesday, said in a statement that he was “truly disappointed” by Richman’s announcement and thought the state had missed a “golden opportunity.” He called on the state to reconsider its decision and allow the city to respond to any concerns in the commissioner’s review.

Guardian said that he and city council president Marty Small will hold a press conference this afternoon in City Hall Chambers to address the state’s decision.

“For the last five years, the State of New Jersey has controlled Atlantic City’s finances. Now, we have produced a plan that experts agree will put the City on solid financial footing,” Guardian said. “Our plan will do what the State has failed to do — it will employ practical, real-world solutions to cooperatively stabilize the City while avoiding tax increases and maintaining local sovereignty. Much of what the State has questioned in our plan can be easily answered by our team of experts.”

Other lawmakers also criticized the decision. Assembly Speaker Vincent Prieto (D-Hudson), who helped put the rescue package together earlier this year, said it “prompts many concerns for both state and city taxpayers,” suggesting that the state had it in mind all along to move forward with a takeover.

“State takeovers of school districts have been disastrous,” Prieto said. “The administration needs to immediately detail whether a takeover would cost taxpayer money and how much. It must also detail whether it will push a property tax hike upon Atlantic City residents that the city’s plan showed was unnecessary.”

State Senator Jim Whelan (D-Atlantic), whose district includes Atlantic City and who served three terms as mayor there, echoed those concerns, saying the state’s own budget issues ought to give Christie pause before absorbing the city’s problems.

“My hope would be Atlantic City can continue to govern itself,” Whelan said prior to the state’s announcement. “I think there are particular issues and concerns with the plan, but ultimately I don’t think the state is in any better position to come in and make decisions.”