Atlantic City, N.J., averted default Monday by making a $1.8 million debt service payment.
Mayor Donald Guardian had said last week he was considering not making the payment, but announced Monday morning that the city was going to meet the obligations even though the city is running low on cash.
The distressed municipality implemented a 28-day pay period on April 8 to avert a government shutdown because the city needed May tax revenue to pay workers.
The struggling Jersey Shore gambling hub, which suffered four casino closures in 2014, is facing a $102 million budget deficit with more than $400 million in debt outstanding, according to Moody's Investors Service.
“After careful review of the city’s finances and taking into consideration other debt including bond ratings for Atlantic County and other municipalities in New Jersey as well as the effects on my own city, we’ve made the decision to pay our bond payments as of 10:00 a.m. this morning of $1.8 million dollars,” said Guardian during a press conference.
While Atlantic City avoided defaulting this month, it has $24 million of other debt service payments coming due for the rest of the year, including $1.6 million on June 1 and $41,000 in July, according to Moody’s, citing a report from former emergency manager Kevin Lavin.
The city then owes $3.6 million in August, $1.9 million in September, $70,000 in October, $9.3 million in November and $7.1 million in December.
“Financially we are running on fumes,” said Guardian. “We really are teetering on the edge.”
The $1.8 million debt service payment is for two 2012 bond issues.
A portion of Atlantic City’s bonds are insured by Assured Guaranty and the company emphasized in a statement that bondholders who hold these securities will be protected.
"As always, investors that hold bonds insured by Assured Guaranty can be certain they will continue to receive full and timely payment of scheduled debt service when due in accordance with the terms of Assured Guaranty’s insurance policies,” said Assured spokesman Robert Tucker.
Moody's cut Atlantic City's junk-level bond rating two notches to Caa3 on April 4 because of default concerns. Standard & Poor's slashed the city's credit rating four notches to CCC-minus in late January citing a "near-term liquidity crisis."
Marc Pfeiffer, assistant director of the Bloustein Local Government Research Center at Rutgers University, said Atlantic City avoiding default is important for the credibility of other New Jersey municipalities looking to enter the bond market.
“As much as Atlantic City is an outlier, a default would have stained the state’s reputation,” said Pfeiffer. “It is important from a reputation standpoint as far as how the bond market views us.”
Gov. Chris Christie and Senate President Steve Sweeney, D-Gloucester, have pushed for a state intervention package opposed by Guardian that would empower New Jersey's Local Finance Board to renegotiate outstanding debt and municipal contracts for up to five years.
The Republican governor has said he will not support a companion bill to allow Atlantic City's eight remaining casinos to make payments in lieu of taxes for 10 years, including $30 million collectively in 2016, without state intervention powers. Sweeney and Assembly Speaker Vincent Prieto, D-Secaucus, have floated separate alternative bills that would involve state intervention if Atlantic City doesn’t meet certain benchmarks.
Guardian continued to express opposition to a state takeover Monday and urged legislators to support Speaker Prieto’s proposal, which would have a five-member planning committee develop a five-year financial plan and monitor if certain benchmarks are being reached. The bill emphasizes that worker rights would be prioritized when determining what spending cuts to make.
Christie predicted during a press conference Monday that Atlantic City won’t be able to make its June debt service payment and said the $1.8 million paid Monday does not give him any additional confidence in the city government.
“They will not have the money to make their June payments under current circumstances,” said Christie. “Nobody should be taking any bows for making a $1.8 million dollar debt payment, which you were supposed to make.”