Revenue from Atlantic City's Municipal Utilities Authority is viewed as a tool that could help the city avert a state takeover.

A junk-rated water utility could play a key role in deciding the financial fate of Atlantic City, N.J.

Former Atlantic City Emergency Manager Kevin Lavin said in a January report that the Atlantic City Municipal Utilities Authority, which provides Atlantic City's water, has "significant assets" that present opportunities to increase revenue for the distressed gambling hub.

He recommended that Atlantic City and Atlantic County work together to dissolve and restructure the water authority and then operate it for the benefit of city residents. New Jersey Senate President Steve Sweeney, D-Gloucester, estimated earlier this year that the MUA, which is financially independent from Atlantic City, is valued at around $100 million.

Lavin, whose one year-stint as Atlantic City emergency manager wrapped up on Jan. 21, told The Bond Buyer in early June that the best course for the city would be a long-term lease of the authority. The corporate restructuring attorney, who is now co-president of Dallas-based Ankura Consulting Group, said the city could achieve $7 to $8 million annually compared to the $700,000 it currently takes in yearly. He recommends putting the new funds into a trust devoted to debt service payments.

"There are revenue opportunities without having to harm residential ratepayers," said Lavin, a former global co-leader of FTI Consulting's corporate finance/restructuring practice. "There is lot of cash flow opportunity there."

After Atlantic City barely averted a default in late May, New Jersey lawmakers this month approved a rescue package for the city that includes $60 million bridge loan and substitutes payments in lieu of taxes from casinos for their property taxes for a 10-year period, removing the uncertainty of the casinos' highly variable property assessments.

The legislation gives Atlantic City five months to balance a more than $80 million budget deficit and prepare a sustainable five-year financial plan or face state intervention that allows New Jersey's Local Finance Board to alter outstanding debt and municipal contracts. State officials estimate that Atlantic City is saddled with over $550 million in total debt.

Atlantic City Mayor Donald Guardian said he favors bringing the MUA under city control and is against privatization or a public-private partnership. If a state intervention plan takes effect, the Local Finance Board would have authority to sell off city assets such as the MUA, but would need to keep the water utility in public control for at least a year.

"I would like for the city to bring it in house and leverage it in a way that protects the rates of our residents and helps us pay down our debt," said Guardian. "It belongs to the people of Atlantic City and it should stay under our residents' control."

ACMUA executive director Bruce Ward could not be reached for comment.

A February analysis released by Ford-Scott & Associates said Atlantic City could save more than $4 million annually by dissolving the MUA.

The authority acquired the Atlantic City Water Utility in January 1980 after it was created by the city's board of commissioners. It has $15.7 million in annual revenues with $16.6 million of net water revenue debt outstanding, according to Moody's Investors Service.

Sweeney has suggested that Atlantic County assume ownership of the MUA as a way of keeping it in public hands while also generating revenue for the city. Atlantic County Executive Dennis Levinson said he is open to acquiring the MUA, but needs more details before committing. Levinson said the county had discussions with the city earlier this year that did not lead to a deal and he is ready to revisit the issue.

"We are most certainly interested in an asset like the MUA," said Levinson. "It would stay in public hands and they would get a certain amount of money with the Atlantic County Utilities Authority running the MUA."

S&P Global Services downgraded MUA water system revenue bonds six notches to B-minus from triple-B in late April, citing risks of a debt restructuring after Lavin's report. S&P noted that if the MUA is dissolved and debt is assumed by Atlantic City there could be "further deterioration" in the credit rating because of concerns about the city's financial viability.

Moody's lowered MUA to B2 from B3 in early April, also citing the authority's governance relationship with Atlantic City. The ratings agency said a further downgrade could occur if plans to dissolve, sell, or lease MUA assets fail to fully protect water revenue bondholders.

Richard Perniciaro, executive vice president of planning and research at Atlantic Cape Community College, said if Atlantic City sells the MUA it should spread out the payments over a five-year period rather than structuring the deal as a lump sum. This strategy would enable city officials to count on revenue for future budgets, he said.

"If they take a lump sum, the state will have no incentive to continue to subsidize their budget over a multi-year period and the political pressure to spend the money on local constituents would increase dramatically," said Perniciaro, who is director of Atlantic Cape's Center for Regional and Business Research. "I cannot imagine that even the state would expect them to use that income stream to bond for current expenses, especially given past performance and their current bond rating."

Perniciaro added that it would be positive if the Atlantic County Utilities Authority plays a role in managing MUA operations since it has a strong track record and would foster public confidence. The authority has been recognized by the New Jersey Department of Environmental Protection's Environmental Stewardship Initiative for sustainability practices

"The good part of the ACUA playing a role is that the City would not need to manage anything (their ability is questionable) and a contract would give them a fixed income stream," said Perniciaro. "Having a more diversified operation and an excellent history of efficient operating experience, the MUA would provide the City an income stream that it can be very sure of receiving."

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