The appointment of an emergency manager for Atlantic City has led many to question whether the city is heading for bankruptcy, which would mark long uncharted territory for the Garden State.
New Jersey law authorizes municipalities to file for Chapter 9, but no city has entered bankruptcy since Asbury Park in the 1930s.
The state's Division of Local Government Services, which formed in the late 1940s, has approval power over Chapter 9 requests from municipalities and is tasked with approving local budgets to ensure that cities can pay their debts. If a locality fails to meet its obligations, the state then has authority to raise taxes on residents.
"New Jersey has a strong tradition of intervention when it comes to their local governments," said Kil Huh, director of state and local fiscal health at Pew Charitable Trusts, which
The closest New Jersey has come to a municipal bankruptcy since the Great Depression was in 1999, when Camden filed for Chapter 9 without state approval, before withdrawing its petition after receiving $62 million in state aid.
The Division of Local Government Services attributes its oversight, which includes offering technical advice, for New Jersey's long track record of avoiding a city bankruptcy, according to the Pew report.
"The key has been having a system in place that has worked for many years that speaks to a deliberate and thorough process of evaluating municipal financial conditions," said Marc Pfeiffer, assistant director of the Bloustein Local Government Research Center at Rutgers University. "It works so well that New Jersey has a well- earned reputation in the bond market."
Pfeiffer said Camden is the only example in recent New Jersey history of state intervention on the scale Atlantic City faces today; in the early 2000s a chief operating officer was appointed to run Camden's government.
He added that the situation differed in that Camden's troubles stemmed from a much longer period of struggles.
"Camden's tax base was gradually eroding," said Pfeiffer. "In Atlantic City it has been eroding in a much shorter period of time with the recent casino closures."
Christie appointed corporate restructuring attorney Kevin Lavin from FTI Consulting to oversee Atlantic City's finances and daily operations as emergency manager. The Republican governor also named Kevyn Orr, Detroit's emergency manager during its recent Chapter 9 bankruptcy, as a part-time consultant.
The arrival of the emergency manager through Christie's executive order triggered a six-notch downgrade by Moody's Investors Service to Caa1 of the city's $344 million in general obligation debt, with concerns expressed about an increased default risk stemming from the looming maturity of $12.8 million of notes Tuesday.
After a planned competitive $12 million note sale was delayed, with the Jan. 27 East Coast blizzard given as a reason, city officials opted to convert it to a negotiated transaction, a move that did not surprise Tom Kozlik, a director and municipal bond analyst at Philadelphia-based Janney Capital Markets.
"It gives the issuer a little more control over the underwriting process," said Kozlik of converting to a negotiated transaction.
Kozlik said it is too early to know how bond investors will react to the Atlantic City developments and that the notes sale will likely not provide an indication. He emphasized that there were major concerns about Atlantic City even before the emergency manager move.
"This is a city that even under its best of circumstances had its tax base very concentrated," said Kozlik. "It wasn't a highly rated credit to begin with."
Moody's noted that Christie's approach toward Atlantic City represents a "rapid, dramatic change from the State of New Jersey's prior policy of preventing default or bankruptcy of Atlantic City or any New Jersey local government." Standard & Poor's also dropped Atlantic City to a junk-bond rating to BB from BBB-plus on the heels of Christie's announcement.
In a September 2013 report, Moody's found state oversight to often be a credit positive for distressed local governments, though not an absolute guarantee against default, as was the case in Michigan, where Detroit filed the largest Chapter 9 bankruptcy case ever in July 2013.
Moody's noted that New Jersey has helped cities experiencing fiscal distress with transitional aid, including Harrison, rated Ba1, Patterson, rated Baa2, Camden, not rated by Moody's, Trenton, rated A3, and Baa1-rated Asbury Park. However, transitional aid has dropped since Christie took office in 2010 from around $200 million to $95 million in fiscal year 2014, according to the Pew Trusts.
A Jan. 27 report issued by Moody's said Christie's executive order is a credit negative for Atlantic City and other financially struggling New Jersey municipalities since the move could signal a "limit" on trying to prevent defaults or bankruptcies.
New Jersey has had a lengthy track record of no municipal bankruptcies or defaults on general obligation bonds which Moody's analyst Naomi Richman attributes largely to the active stance Garden State elected officials have taken to assist troubled localities. However, Richman noted that Atlantic City's financial troubles are more serious than those of other New Jersey cities.
"For now there is a risk to bondholders," said Richman. "It doesn't mean that Atlantic City is going to file for bankruptcy, but that option is on the table."
New Jersey Senate President Stephen Sweeney proposed legislation last November aimed at propping up Atlantic City financially and helping it avoid bankruptcy. Sweeney did not respond to a request for comment, but blasted Christie's emergency manager decision at a Jan. 29 meeting of the New Jersey Conference Mayors.
"This administration is trying to force a bankruptcy," said Sweeney at the meeting, according to NJ.com. "We cannot nor will we ever allow the city to go bankrupt."
Christie and Atlantic City Mayor Don Guardian did not respond to emails seeking comment.
Atlantic City Revenue Director Michael Stinson said he has not yet gotten an indication on how much power the emergency management team will have over the city's financial operations, but remains optimistic a default or bankruptcy can be avoided.
In addition to looking at ways to generate more revenue, restructuring old debt also remains a possible option to improve fiscal conditions, Stinson said. He added that the city has had a positive relationship with the Division of Local Government Services since limited state oversight began in 2010 and is hopeful about five pending bills in the New Jersey legislature that would provide financial support for the next 15 years.
One goal of Atlantic City's turnaround efforts is to diversify from being known simply as a gambling hub. Tourism has suffered with total visitors dropping from 31 million in 2009 to around 25 million in 2013, even before four casino closures in 2014, according to Moody's. The ratings agency also said emergency manager appointment and a potential default or bankruptcy could hamper efforts to revitalize Atlantic City's economy.
"I think the state would do everything they can to prevent us from filing for bankruptcy," said Stinson. "We're going to come out of this."
