If coronavirus kills some casinos, Atlantic City's grief will soar
Shut down for months by the coronavirus pandemic, some Atlantic City casinos may fail, which would worsen the city's shaky financial condition.
The junk-rated city's nine casinos reopened in early July — limited to 25% of capacity and prohibited from serving food or drinks — nearly four months after they were forced to close under state shutdown orders. Michael Bulser, a professor of finance at New Jersey’s Stockton University said the health crisis might prompt one to three closures if the facilities aren’t able to fully open soon, which would further cripple an Atlantic City economy already facing revenue pressures.
“Casinos across the city are in bad shape,” Bulser said. “It is a disastrous situation.”
While limited to online betting when shuttered, the city’s casinos suffered a 64% revenue decline in April and May compared to a year ago, according to the New Jersey Division of Gaming Enforcement. Under the current conditions, Bulser stressed, the casinos won’t be able to make a profit.
In its heyday, 12 casinos fueled the city's economy, but five closed between 2014 and 2016, in the wake of the 2008 financial crisis and increased regional gaming competition. The Jersey Shore gambling hub then welcomed two new casino properties in June 2018, with the opening of Hard Rock Hotel & Casino Atlantic City and Ocean Casino Resort.
Since a near default on its debt in November 2016, the city has faced strict state oversight. Moody’s Investors Service analyst Douglas Goldmacher said casino closures would create economic aftershocks that would permeate a number of Atlantic City revenue streams.
“Although the city has tried to diversify in recent years, its economy is still tied to the casino industry,” Goldmacher said. “Many businesses within the city cater to the casino industry in one way or the other.”
Just before the pandemic, Moody’s upgraded Atlantic City general obligation bonds two notches to Ba3 from B2 with a stable outlook, citing improved financial conditions under state intervention. The Ba3 rating is six notches above where Moody’s rated Atlantic City debt from April 2016 to November 2018 when it was on the verge of default.
S&P Global Ratings also boosted Atlantic City debt two notches last November to BB-minus from B. The higher junk-level rating is comparable to Moody’s and two steps below investment-grade status.
Any budget impact from the casinos' struggles won’t be felt by the city this year, Goldmacher added, since 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 act was designed to help the city address its escalating debt caused by gambling properties filing tax appeals based on their profitability. The city held two bond sales in 2017 to finance more than $300 million in casino tax appeals dating back to 2009.
Atlantic City casinos reported $3.2 billion in revenue for 2019 and will collectively pay out roughly $152 million to the city, according to Goldmacher. Next year’s budget will face stiff challenges, however, because of far lower PILOT payments, he said.
“This is definitely a significant knock-on effect,” Goldmacher said. “It is a major challenge, but much will depend on how they budget for it and how they adjust.”
Atlantic City Mayor Marty Small and City Council President George Tibbitt did not respond to requests for comment on how the declining casino revenues will impact budgeting for next year’s spending plan.
Small proposed a $208 million 2020 budget in early June that would reduce property taxes by 5%, thanks to high 2019 PILOT payments and other increased revenues. The city council is scheduled to hold a public hearing on the budget plan this month.
The city's budgets have been subject to approval by New Jersey’s Department of Community Affairs through the Municipal Stabilization and Recovery Act, which expires in November 2021.
“Over the course of several months, DCA has worked closely with the city’s professional staff in putting together the proposed budget, which would mark the fourth consecutive year of no municipal property tax levy increase,” DCA spokeswoman Lisa Ryan said in a statement. “We believe it is a prudent financial plan and we are pleased that it includes a proposed decrease in the municipal property tax rate at a time when so many property owners in the city are being economically squeezed by the COVID-19 pandemic.”
Bulser noted Atlantic City’s looming drop in casino PILOT payments could be compounded by New Jersey’s own fiscal challenges, which could result in reduced state aid allotments. State aid comprises around 30% of Atlantic City’s current budget at $62 million, but figures for the next budget won’t be known until August or September, since New Jersey’s fiscal year was extended to Sept. 30.
Before the pandemic, Atlantic City was working toward expanding its economic base beyond hotels and casinos with the opening of a Stockton University satellite campus in September 2018. Bulser said this spurred some new businesses in the neighborhood and the university’s presence may eventually lead technology companies to join the city’s tax rolls.
“It is absolutely crucial that Atlantic City and all of Atlantic County diversity their economies beyond hospitality and casinos,” Bulser said.
Last month, an Atlantic City Restart and Recovery Working Group was created to assess the impact of the pandemic on casinos and explore ways to attract other industries into the city, DCA's Ryan said.
“The group's work will play an important role in how Atlantic City financially weathers the public health crisis," Ryan said.
Atlantic City had $357.3 million of outstanding bond debt as of Dec. 31, 2019, according to Moody’s.
The city's already high 8.4% February unemployment rate soared to to 43.3% in May, Goldmacher said, a consequence of the pandemic closures. The ongoing economic downturn will likely lead to reduced revenue-raising tools, as the city confronts a potential looming spike in property tax delinquencies that would further pressure credit conditions, he said.
“Their flexibility to handle these challenges is less than other municipalities that have more debt capacity,” Goldmacher said. “There are only so many levers they can pull.”