Atlantic City’s new proposed structurally balanced budget is a credit positive for the junk-rated city, according to Moody’s Investors Service.

Moody’s analyst Douglas Goldmacher noted in an April 20 report that the 2017 fiscal plan contains 14.6% cut in expenditures, which allowed the city to modestly reduce taxes. The biggest cuts in the $206.3 million budget proposal crafted on the heels of state intervention that took effect in November are in the areas of public safety ($8 million or 13.3%) and general administration ($3.2 million or 26%). The city, which Moody’s rates at Caa3, also reduced debt service costs by $6 million, or 16.2%.

The Borgata Hotel Casino & Spa, from left, The Water Club, The Golden Nugget Inc., and Harrah's Waterfront Towers stand in this aerial photograph taken above Atlantic City, New Jersey, U.S., on Monday, July 11, 2016.
Atlantic City has been under a state takeover since November 2016. Bloomberg News

“Some of the expenditure reduction comes from increased outsourcing that is intended to provide equal services at a reduced cost,” Goldmacher wrote. “Even if the outsourcing leads to service declines, which would risk hurting the city’s ability to attract new business and retain residents, the more immediate savings will materially assist in reducing the probability of default.”

Goldmacher noted that state courts have allowed the city and state to proceed with reducing firefighter salaries and benefits. A plan to cut 100 firefighter jobs is still in litigation and could provide more budgetary savings.

The budget’s expenditure cuts were accompanied with revenue reductions and adjustments including a $14 million, or 32.6%, drop in Atlantic City Alliance and Investment Alternative Tax income. Other state aid sources were cut by $11.2 million, or 21.3%, which Goldmacher noted was partially offset by increased assistance under the state’s Consolidated Municipal Property Tax Relief Act. The budget also incorporates for the first time payments in lieu of taxes (PILOTs) by casinos.

Goldmacher noted that local property taxes appear to have declined in the budget by $67.8 million, or 54.8%. However when factoring in the conversion of casino taxes to PILOTs, the drop is a more modest $4.9 million, or 3.9%, according to Goldmacher.

“Although a reduction in taxes will positively affect the economy, the city could certainly have used the extra money to build reserves or pay down liabilities,” said Goldmacher. “Since the size of the tax cut is fairly small, especially relative to the city’s liabilities, the overall credit effect is likely negligible.”

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