Litigation Slowing Atlantic City Cuts a Credit Negative

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A court ruling momentarily preventing New Jersey from cutting Atlantic City's firefighter workforce as part of its state takeover is a credit negative for the cash-strapped city, according to Moody's Investors Service.

Atlantic City Superior Court Judge Julio Mendez issued a restraining order on Feb. 2 preventing the layoffs and also blocking the state from unilaterally altering any firefighter contracts. The state then attempted to shift the case to federal court and U.S. District Court Judge Renee Marie Bumb ruled that it should be decided at the state level. Unions fighting the cuts stated in court filings that the state is seeking to cut 100 firefighters along with modifying the department's pay scale and other benefits.

"These developments signal that any actions the state takes to reduce the city's work force or abrogate labor contracts will prompt a legal challenge, leading to considerable delays in the Atlantic City recovery process, a credit negative for the city," said Moody's analyst Douglas Goldmacher in a Feb. 16 report. "The success or failure of the state to implement broad expenditure cuts for Atlantic City is of tremendous import to the city's credit quality."

Goldmacher noted that negotiations with the firefighters and other unions would typically be handled by city officials, but the Municipal Stabilization and Recovery Act legislation approved by New Jersey lawmakers last year enables the state to alter outstanding municipal contracts, an authority that is now uncertain. He emphasized that the firefighters' court challenge could pave the way for other unions to fight staffing cuts. Current city revenues are "insufficient" for debt service and routine expenditures making budget cuts the most likely avenue for permanent financial improvement, according to Goldmacher.

"Leaving aside the question of constitutionality, extensive litigation will delay negotiations," he said. "Even if other unions refrain from filing suit, the state's negotiations will be materially impacted by the ongoing lawsuit, delaying or even preventing cost-cutting efforts."

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