by Greg Clark
Atlantic City last week submitted a five-year financial recovery plan to the State of New Jersey with at least one major flaw that may lead the state to reject it.
Central to the plan is a USD 110m bond issue by the junk-rated Atlantic City Municipal Utilities Authority (MUA). Bond proceeds would be used to pay down city liabilities, but the MUA may be unable to find a buyer for its bonds.
Atlantic City’s five-year plan was submitted on October 25 to New Jersey’s Department of Community Affairs (DCA), which is expected on Tuesday to either approve or reject the plan. The city is hoping to prevent a state takeover.
DCA commissioner Charles Richman, appointed by Governor Chris Christie (R), is authorized to make the decision on his own but given his appointed status and the controversy surrounding any decision, it’s reasonable to think that this will be the governor’s call.
The plan, which consists of 120 pages, focuses on two major tasks: refinancing sizeable liabilities, some of which are accruing interest and thus pose an increasing burden on the city, and reducing annual city expenses.
Plan viability partly hinges on refinancing by junk-rated issuer
This part of the plan involve two bond issues, proceeds of which would refinance liabilities that the city is unable to pay from current revenues. These consist of:
~The Borgata Hotel and Casino tax appeal – The amount of this appeal is disputed and could be as high as USD 180m. The city believes it can settle with Borgata for USD 103m although the hotel has stated that no agreement with the city has been reached.
~ The MGM tax appeal settlement – MGM has agreed that it will settle this appeal for USD 33m.
~ Other pending casino-related appeals – The city needs a reserve of up to USD 35m to meet tax appeals by other casinos, former casinos, and casino-related properties.
~Payment of the deferred state contribution – In 2015, New Jersey allowed the city to defer its payments for pension and health benefits. By March 2017, the deferrals plus interest will total over USD 43 million.
The above obligations add to about USD 215m, which the city would pay from two sources:
MUA bond proceeds from a USD 110m issue – The property to be purchased by the MUA from bond proceeds is a city-owned property, Bader Field. There are a number of problems with this transaction.
The biggest is that the MUA is rated B3, with a negative outlook, by Moody’s Investors Service and B- by S&P Global Ratings. S&P also has the MUA on negative creditwatch. The city may have a difficult time finding a buyer for the bonds at these rating levels. The ratings might also be lowered upon sale of the bonds, as USD 110m is about seven times the amount of the MUA’s existing debt.
With the increase in debt would come a similar increase in MUA user fees. The city indicates in its plan that the increases could be structured to fall more heavily on businesses than on residences, but that would work against the city’s attempts at economic development.
Finally, the transaction doesn’t make economic sense. The city attempted to sell Bader Field earlier this year but the highest bid was USD 50m, and the city rejected the offer. A rate increase imposed to buy an asset worth only about half of what the MUA would pay for it is difficult to distinguish from a tax increase, which the city prides itself on having avoided in its plan.
City issuing USD 105m in bonds – The Borgata settlement would be paid from proceeds of these bonds. For repayment, the city will pledge a portion of its state aid, and the state would guarantee payment of debt service. The state guarantee would be through the Municipal Qualified Bond Act, which has been used on behalf of at least 16 other New Jersey cities. Bonds issued under the act are rated A3 by Moody’s.
Ambitious expense reductions to achieve
The five-year plan extends through 2021 and continues the city’s cost-cutting efforts in a number of areas. The expense reductions are reasonably detailed and seem attainable, but in some cases ambitious. This part of the plan focuses on elimination of 86 positions, with 52 of the 86 expected to accept early retirement. One hundred-ninety employees applied for early retirement by the city’s 17 October deadline, almost four times the number needed.
The other 34 positions may require ongoing management effort to eliminate. A shared services agreement with Atlantic County, for example, is expected to result in savings that will allow a workforce reduction of 20 people. Because the county agreement was just approved by the city council last month, it’s difficult to know how successful this initiative will be.
Another example is a proposed conversion to LED lighting for traffic lights and city-owned streetlights. Because LEDs require less maintenance, the city expects to be able to eliminate seven positions from its public works department. This proposal has only reached the point where the city has engaged an energy consultant.
The state’s analysis will thus entail an assessment of:
~ Whether the MUA will be able to sell its USD 110m bond issue
~ Whether the state is willing to backstop USD 105m of city bonds
~ The feasibility of the city’s budget projections through 2021
The MUA bond issue is the weakest part of the plan, and there are doubts about whether the city will be able to follow through on its spending cuts.