New Jersey's Atlantic County faces credit risks due to financial distress in Atlantic City, according to Moody's Investors Service

Atlantic City's fiscal distress is spilling over into the surrounding county.

Moody's Investors Service called the city's problems a credit negative for New Jersey's Atlantic County in a commentary Friday.

"The knock-on effect from Atlantic City, which accounts for nearly one quarter of the county's tax base, is credit negative because continued funding losses from Atlantic City will negatively affect county finances, requiring tax increases or spending cuts," said Moody's analyst Douglas Goldmacher in a Feb. 12 report.

Moody's rates Atlantic County Aa2 with a negative outlook. Standard & Poor's revised its AA Atlantic County rating outlook to negative from positive last June citing uncertainty with Atlantic City's eroding finances and tax base.

Atlantic County Executive Dennis Levinson cited Atlantic City's struggles in his Feb. 2 budget address. The County has until Feb. 23 to present its new budget and has prepared multiple spending plans with various combinations of cost-cutting steps along with tax increases that would help offset potential delays or declines in tax contributions from Atlantic City. Moody's estimates the county's current fund balance to be $22.5 million, or 10.1% of revenues.

Atlantic County's tax base fell to $36.6 billion in 2015 from $58.2 billion in 2008, and Atlantic City's sunk to $8.4 billion from a high of $22.2 billion over the same period, according to Moody's data. The city's contribution to the county's share of property taxes is "a significant 22% of equalized value", but has shrunk over that seven-year period, Goldmacher said. The gambling hub contributed $40 million, or 25.5%, of the county's revenue in 2014.

Goldmacher noted that most New Jersey counties receive property taxes promptly, but Atlantic City was late with its 2014 payment to Atlantic County.

"Although this did not cause a material problem for the county because the city was only in arrears for a short time and county liquidity is strong, a more prolonged delay would be a more severe problem," said Goldmacher.

 "Any further decline in casino-related revenue has the potential to be material and would need to be swiftly absorbed into the county's budget," said Goldmacher. "The longer the county's revenue picture is uncertain, the more difficult it will be for county officials to make budget adjustments mid-year.

Despite the ripple effect of Atlantic City, Atlantic County has "excellent market access" with a low debt burden of 0.4% equalized value that is roughly $149 million, according to Goldmacher. The county may also get a boost if legislation passes that would allow the state further control of Atlantic City's finances, but uncertainty with details and timing provide no clarity for the current budget process. Goldmacher noted that one notable proposal that could benefit Atlantic County is converting casino property taxes into payment-in-lieu-of taxes.

"If passed, such legislation would have a knock-on effect on the county and prove helpful if the city can restore its structural balance," said Goldmacher.

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