Atlantic City hit the jackpot with a four-step upgrade in its credit rating earlier this month, a significant accomplishment for a city that not too long ago was close to defaulting on a debt payment.
The ratings boost came from Moody’s Investors Service, which highlighted the role of an ongoing state takeover of the city’s finances as a “critical” factor and also praised local officials for “materially trimming expenditures.”
But even as the credit upgrade — which leaves the city with a “B2” debt grade and a “positive” outlook — is being celebrated by state and local officials, Moody’s also made clear Atlantic City is still dealing with some serious economic question marks. Among them are the continued close ties between the resort and the still-shaky casino-gambling industry along with ongoing efforts to diversify the local economy and improve the incomes of the area residents. Even at B2, the city’s credit rating remains firmly below investment grade.
“Atlantic City’s tax base will continue to face pressure as the casino industry remains stressed and developers wait for the city’s ongoing uncertainty to be resolved before deciding whether or not to invest in the city,” Moody’s said.
Pay cuts when state took control in 2016
The fiscal problems that sent Atlantic City’s debt grade tumbling into “junk” status became chronic during the Great Recession, when five casinos closed, costing the city thousands of jobs and billions of dollars’ worth of tax ratables. The city also faced an estimated $500 million in unpaid debts in the wake of the downturn, as well as a projected $100 million budget deficit. Just weeks before bipartisan legislation for the state intervention was enacted in 2016, Atlantic City narrowly avoided defaulting on a $1.8 million debt payment.
The state takeover was launched in late 2016, giving officials in Trenton wide authority, including control over city labor contracts for up to five years. The takeover started during the tenure of former Gov. Chris Christie, who put former chief counsel and state attorney general Jeffrey Chiesa in charge of the intervention. Chiesa served under Christie when he was U.S. Attorney for New Jersey and Chiesa was also a U.S. senator for several months in 2013 after Christie appointed him to temporarily fill a vacancy created by the death of former U.S. Sen. Frank Lautenberg.
Among other actions, Chiesa cut pay for police officers and firefighters to ease pressure on the city budget and moved to resolve outstanding tax appeals with several casinos to stabilize revenues. But Chiesa also drew heavy criticism after billing the state nearly $5 million for his law firm’s services, and he was eventually dismissed by Gov. Phil Murphy after he took office earlier this year.
While Murphy, a Democrat, suggested during the 2017 gubernatorial campaign that he opposed the takeover, he announced in September that the state intervention would continue indefinitely to advance goals laid out in a lengthy report issued by Jim Johnson, a former U.S. Treasury official from Montclair. Johnson was tasked by Murphy with mapping a way forward for the troubled resort in February.
The credit opinion issued by Moody’s earlier this month highlighted several benefits of the state takeover, including the ability to make spending cuts and the striking of payment-in-lieu-of-taxes deals with the resort’s remaining casinos.
Continued oversight is ‘critical’
“We view the continued oversight of the State of New Jersey as critical to the city’s continued well-being and progress,” Moody’s said.
In the wake of the ratings upgrade, Atlantic City Mayor Frank Gilliam, Jr. praised local officials for developing a “solid financial plan.”
“There is more work to be done, but we feel that the (city) is moving in the right direction,” Gilliam said.
A statement issued by Murphy and Lt. Gov. Sheila Oliver, who is serving as commissioner of the Department of Community Affairs, the agency overseeing the takeover, suggested the Murphy administration’s decision to follow a more “collaborative and cooperative” approach with local officials has also been a key factor.
“This is a tremendous step in the right direction and we are committed to working with local leaders to ensure the City’s long-term sustainability and financial viability,” the statement said.
City’s liquidity is ‘extremely weak’
But the Moody’s review also highlighted several fiscal challenges the city is still facing, including high fixed costs. For example, debt payments and obligations to retired workers took up roughly 25 percent of the city’s revenues in 2017, Moody’s said, and while conditions aren’t as strained as they were in 2016, the firm said the city’s liquidity remains “extremely weak.”
Moody’s listed the legalization of sports gambling in New Jersey earlier this year and the recent opening of two new casinos — Hard Rock at the site of the former Taj Mahal and Ocean Resort at the site of the former Revel — as positive developments. But the firm also suggested a key issue in the ongoing economic recovery is whether the new casinos are successful in bringing in new, high-end customers to Atlantic City or simply end up competing against the existing casinos for the same pool of customers.
Another major concern highlighted by Moody’s is the ongoing effort to diversify the local economy. South Jersey Gas Company has recently relocated to a new corporate center in the city and Stockton University has also opened a new campus in the resort.
“Although these are positive signs, diversification will take a considerable amount of time to have a material economic impact,” Moody’s said.
Even with the ratings upgrade, the city’s debt grade remains toward the lower end of Moody’s ratings scale and is well below the state’s “A3” debt grade.