Moody's Investors Service has released a scenario analysis of possible outcomes for Atlantic City, N.J., (Caa1 review for downgrade) as the New Jersey (A2 negative) legislature considers rescue legislation and greater influence in placing it on the path to fiscal recovery.
"Without drastic action, Atlantic City could face a default as early as April or May. The city also owes $190 million to casinos that successfully appealed their property taxes. Factoring in these liabilities, we project a budget deficit of $102 million in fiscal 2016, ending December 31," according to Josellyn Yousef.
The state legislature is considering two bills to help Atlantic City: the Casino Property Tax Stabilization Act (PILOT bill) and the Municipal Stabilization and Recovery Act (state intervention bill) with Moody's identifying three scenarios that would have a positive or negative credit impact on the city's credit quality.
The first, and most credit positive scenario, is if the state passes both bills, which grants N.J. the authority to implement proposals included in the city's emergency manager's January 2016 report. Under this scenario, Moody's projects the city's $102 million deficit will shrink by 73% to $27.8 million in 2016 and be almost gone by 2020. The proposals include added revenues, expense cuts and restructured casino debt.
"The state would also generate savings by eliminating city departments and terminating union contracts, which would allow it to turn over police and fire operations to the county. Reorganizing the police and fire departments has been politically contentious between the city and state," Yousef says.
Moody's believes if only the PILOT bill passes, the city will continue to face distress since the single bill is insufficient to restore Atlantic City's fiscal health. While the PILOT bill produces additional revenues and avoids incurring additional casino tax liabilities, it is not enough to avoid crippling deficits of $30 million to $40 million annually over the next five years. Moody's believes the state intervention bill is too politically contentious to pass on its own.
If neither bill passes, Atlantic City will run out of cash in the next few weeks, leading to a potential default, distressed exchange, or bankruptcy filing. The state could take stopgap measures to help Atlantic City, such as a providing a loan or allowing the deferment of pension contributions, but this would not solve the underlying causes of the crisis.
No matter which scenario ultimately occurs, Atlantic City's financial position remains vulnerable to external factors such as further casino closures and deteriorating state finances, the rating agency said.
