Fiscal progress drives Atlantic City bond rating upgrade
Continued upward fiscal momentum gave Atlantic City its second multi-notch upgrade in a two-week stretch.
Moody’s Investors Service boosted the Jersey Shore gambling hub four notches Thursday to B2 from Caa3 and assigned a positive outlook, citing an improved casino industry and ongoing efforts to diversify the city’s tax base.
The rating remains speculative grade, but the higher junk mark from Moody’s is in line with S&P Global Ratings, which upgraded Atlantic City general obligation bonds two notches on Oct. 16 to B from CCC-plus due largely to fiscal improvements achieved under state oversight.
“The new B2 rating reflects the city's continued but reduced financial and economic distress,” wrote Moody’s analyst Douglas Goldmacher. "The rating is also informed by the material budgetary improvements and especially by the continued, strong oversight by the State of New Jersey.”
It's the first time Moody’s has rated Atlantic City at B level since a six-notch downgrade in January 2015 to Caa1 from Ba1 after former New Jersey Gov. Christie hired an emergency manager to oversee city finances. Atlantic City was then slashed two notches by Moody's to Caa3 in April 2016 just seven months before state intervention took effect after a near-default. The current higher rating is still well below investment grade and subject to high credit risk.
Moody’s concurrently affirmed Atlantic City’s Baa1 enhanced rating for bonds issued under New Jersey’s Municipal Qualified Bond Act with the outlook remaining stable. Atlantic City has around $400 million in outstanding debt, with about half of it MQBA-enhanced, according to Moody’s.
"The Moody's credit upgrade is one more step in the right financial direction for Atlantic City,” Mayor Frank Gilliam said in a statement. “We still have a lot of work to be done, but the City of Atlantic City looks forward to continued growth."
Goldmacher noted that Atlantic City will benefit in the future from new state legislation under the Casino Property Tax Stabilization Act that will prevent gambling properties from filing tax appeals. The bill converts casino property taxes into payments-in-lieu-of taxes. The city had two bond sales last year to finance long-outstanding casino property tax appeal settlements.
“Formerly, casinos were assessed based on profitability and not based on the market rate for resale,” Goldmacher wrote. “As a result, when revenues declined, the casinos were able to file large tax appeals.”
Moody's credited Atlantic City for finding budget savings with less reliance on state aid. The city reduced expenditures for public safety by 13.3% and general administration by 26% in its 2017 budget. A 16.2%, or $6 million drop in debt service also benefited the city's budget flexibility, according to Goldmacher.
“Favorably, the city has taken steps to address its financial situation, most notably adjusting labor contracts and materially trimming expenditures,” said Goldmacher. “Even with the improvements, however, the city's liquidity will remain weak and adjusted fund balance is likely to remain narrow for at least the next few years.”
The administration of Gov. Phil Murphy recommended in a late September report continuing state involvement of Atlantic City finances through at least the fall of 2021 under the Municipal Stabilization and Recovery Act. The 64-page report also urged increased diversification of Atlantic City’s economy beyond casinos and improved practices for senior municipal workers.
"The ratings agencies clearly recognize the significant hard work and collaboration being done by Atlantic City and the state to return the city to sound financial footing," said Lisa Ryan, a spokeswoman for New Jersey's Department of Community Affairs, which is overseeing the state takeover. "If we stay the course, we expect to see much more progress."