Budget surplus during pandemic earns Atlantic City positive Moody's outlook

Atlantic City’s improved fiscal management under state supervision, indicated by a budget surplus despite the COVID-19 pandemic, led Moody’s Investors Service to lift the city’s credit outlook to positive despite challenges to its casino industry posed by coronavirus restrictions.

Moody’s affirmed Atlantic City’s junk-level Ba3 rating late Tuesday while revising the outlook from stable. Moody’s upgraded Atlantic City general obligation bonds by two notches to Ba3 from B2 in January.

Atlantic City has been under state intervention since November 2016.

While Atlantic City has faced financial pressures from the COVID-19 pandemic, it is expected to end 2020 with a “substantial” surplus of up to $7 million thanks to a reworked budget that cut expenses and assumed “dramatically reduced” revenues, according to Moody's analyst Douglas Goldmacher. Revenues ended up not as negatively impacted as initially projected, he said, with property tax collections close to normal levels.

Lost casino revenues during the pandemic won't impact the city budget, since the New Jersey’s Casino Property Tax Stabilization Act of 2016 converted casino property taxes into payments in lieu of taxes based on the previous year’s revenues. The city’s nine casino properties were closed under state shutdown orders from March 17 to July 3 and are now operating at 25% of capacity.

Atlantic City’s government has been under state control since November 2016, following a near default on its debt,. The five-year state takeover is set to expire in November 2021, but Gov. Phil Murphy’s administration has indicated that some degree of oversight will remain in place beyond this period.

“State oversight has been critical to the city’s progress,” Goldmacher said. "While the pandemic has negatively impacted the casino industry, the negative credit consequences are fairly offset by the improved management of city operations.”

The press offices for Atlantic City Mayor Marty Small did not immediately respond for comment.

"This outlook improvement occurred even in the face of significant economic challenges posed by the COVID-19 pandemic and is the result of the strength of both the City’s present finances and projections for the next five years,” said Lisa Ryan spokeswoman for the New Jersey Department of Community Affairs, which is overseeing the state takeover. “We believe that if it wasn’t for COVID-19, the city might have even seen a ratings upgrade.”

Atlantic City had $345.4 million of bonded debt outstanding as of November, according to Moody's. The city has no plans to issue additional debt.

The Moody’s rating is on par with S&P Global Ratings, which rates the city’s general obligation debt at BB-minus with a positive outlook. S&P lifted the city’s bonds two notches to BB-minus from B in November 2019.

“We have recognized the city’s improved financial management and state oversight as positives,” said S&P credit analyst Victor Medeiros. “However, the city’s economy is heavily concentrated in casino gaming, and hotel and hospitality which remains acutely pressured by the pandemic. We are reviewing how these pressures are affecting the city’s finances and budgetary flexibility.”

Atlantic City has been aided this year by the success of online gambling, which Goldmacher said provided a cushion when facilities were forced to shut down. Internet gambling is taxed at a 2.5% rate compared with a 1.25% rate for in-person bets, which Goldmacher said will result in Atlantic City achieving around $5 million more of combined revenues from the state's investment alternative tax (IAT) and casino PILOTs from last year even though total gaming revenue is down. IAT funds were redirected to Atlantic City to pay down its debt under the state takeover law.

Total gaming revenue reported by Atlantic City’s casinos was $304 million in October, a 14.2% year-over-year increase, according to the latest data released by New Jersey’s Division of Gaming Enforcement. A 106% spike in online gaming revenue accounted for 31% of the industry’s monthly total.

Michael Bulser, a professor of finance at New Jersey’s Stockton University, said while online gambling has been crucial toward aiding casinos in 2020, a quick resumption of in-person gambling will be vital for Atlantic City’s economic growth since many small businesses around casinos rely on the foot traffic. Bulser hopes casinos will be able to open at near full capacity by early spring if the COVID-19 vaccine distribution process goes smoothly.

“It is very important for the Atlantic City economy that the casinos and restaurants be able to reopen at full capacity as soon as possible,” he said. “It will be hard for many businesses around casinos to make it without casinos drawing visitors.”

For reprint and licensing requests for this article, click here.
Bond ratings Speculative grade bonds City of Atlantic City, NJ New Jersey
MORE FROM BOND BUYER