Atlantic City, N.J., Downgraded to BBB-Plus by S&P

Standard & Poor's Ratings Services said it lowered its rating on Atlantic City, N.J.'s general obligation bonds outstanding one notch to BBB-plus from A-minus, with a negative outlook.

"The downgrade and negative outlook reflect our opinion of the revenue and potential liquidity pressures that the city faces following the closure of four of its 12 casinos, two of which are in bankruptcy," said Standard & Poor's credit analyst Lindsay Wilhelm.

These closures will have a substantial impact on the city's revenue structure given the city's tax base concentration, with 12 casinos (prior to the closures) representing 56% of 2014 assessed value (AV), the agency said. However, officials at multiple levels of government (primarily the city and state) are actively working to address the city's financial situation from both an economic and a financial perspective.

Atlantic City's budgetary flexibility remains very weak, which effectively caps the rating, based on a combination of its available reserve levels and practical limitations on its ability to raise revenue.

After the prior administration opted to finance current-year tax appeals out of the 2013 budget, rather than bond (which would have resulted in additional state oversight), the city closed fiscal 2013 with a $10.5 million deficit.

When combined with prior-year deferred charges related to a 2009 deficit and recorded reserves of $2.26 million, we estimate the city's available reserve deficit at fiscal 2013 year-end at $10 million, or negative 4% of expenditures.

Pursuant to New Jersey regulatory requirements, this type of deficit is typically recorded as a deferred charge on the balance sheet and raised in subsequent years budget; however, in this instance the state granted 10 years in the case of the 2013 deficit.

While the city has maintained a relatively flat tax levy and has built up $31 million in banked levy capacity relative to the state's levy cap, it has had to implement substantial tax rate increases just to maintain a flat levy, including a rate increase of nearly 30% in 2014.

The agency said it believes, and officials also acknowledge, that rate increases of this magnitude are unsustainable and they are looking to alternative sources of revenue and substantial expenditure cuts.

The state has already agreed to provide $13 million in transitional aid in 2014, along with a $7 million community development block grant. However, given the casino bankruptcies and late tax payments totaling up to $28 million (on total tax revenue of $202 million) from two of its casinos, there is a large revenue gap to fill in fiscal 2015.

City officials are actively working with both state and county officials to address these issues, and a recent summit held in Atlantic City, to be reconvened in October, is working to identify  solutions to the city's economic and financial pressure. However, in the medium term, the city's flexibility will remain challenged.

The BBB-plus GO rating further reflects the following credit factors: a very weak economy caused by high concentration in the resort and gaming industry; adequate budgetary performance in fiscal 2013 reflecting the city's structural performance offset by a heavily casino-dependent property tax revenue stream. The city faces substantial risk in both its 2014 and 2015 budgets; very strong liquidity position with strong access to external liquidity; adequate management conditions, which are enhanced by increased state oversight; and adequate debt and contingent liability profile that will likely grow with the issuance of the planned 2014 tax appeal refunding bonds and further deterioration in market values.

The negative outlook reflects Atlantic City's stressed tax base due to declines in the casino industry and the magnitude of the revenue gap that it could introduce to the city's budget if unaddressed.

If the city does not implement meaningful, corrective actions to address the potential revenue shortfalls, the rating could be lowered. However, if the city identifies meaningful corrective actions, the outlook could be revised back to stable.

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