The governing body overseeing Atlantic City’s state takeover sees a “major” breakthrough following a nearly $50 million bond sale Wednesday to finance deferred pension and healthcare contributions.
The New Jersey Department of Community Affairs announced Thursday that a $49.2 million transaction of federally taxable, deferred contribution refunding bonds sold “rapidly” at an “attractive” true interest cost of 4.2%.
The bonds were priced by Morgan Stanley under New Jersey’s Qualified Bond Act program to fund $37.7 million of pension and healthcare payments Atlantic City received state approval to defer in 2015 while facing a $101 million budget shortfall. The cash-strapped city will owe by the end of 2018 around $47 million for these obligations along with a 10% interest cost.
“These deferred contributions from 2015 were the last major debt hurdle facing Atlantic City,” Lt. Governor Sheila Y. Oliver said in a statement. Newly elected Gov. Phil Murphy appointed her became DCA commissioner in January.
“With yesterday’s successful bond sale, the city is now positioned to responsibly finance this debt within its budget and have confidence in its future,” she said.
The bonds, which have a final maturity of 2026, are wrapped with the state’s credit enhancement program and backed by Investment Alternative Tax revenue from casinos, which are directed to pay down debt or debt service payments under New Jersey’s state takeover powers that took effect on Nov. 9, 2016.
The MQBA program, in which the state treasurer withholds a portion of the city’s state aid in amounts sufficient to pay the principal and interest on the bonds, landed the deal a Baa1 enhanced rating with a stable outlook by Moody’s Investors Service. Moody's assigns Atlantic City its speculative-grade Caa3 long-term issuer rating.
“This strategy, which culminated in yesterday’s bond sale, demonstrates the state’s willingness and ability to find creative solutions to Atlantic City’s difficult financial problems,” said Timothy J. Cunningham, director of DCA’s Division of Local Government Services and chairman of New Jersey’s Local Finance Board. “Conventional thinking would have been to take the deferred contributions the city owes and incorporate them as part of the city’s budget over the next five years. But that would have resulted in significant tax increases for residents and it wouldn’t have stopped interest from accruing on the deferred contributions.”
Following this week’s bond sale, Atlantic City has around $400 million in outstanding bond debt, according to Moody’s. New Jersey officials said that without the bond sale, Atlantic City would have been forced to raise property taxes on residents by more than $700 on the average assessed home of $140,000.
The press office for Atlantic City Mayor Frank Gilliam Jr. did not immediately respond for comment on the latest bond sale. The city held two bond sales last year under former Mayor Donald Guardian to finance casino property tax appeal settlements.