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Red Or Black? Difficult Decisions Ahead for Atlantic City

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June 23, 2016 (Originally Published May 31, 2016)
Law360

New Jersey has taken steps to aid troubled Atlantic City in an apparent attempt to avoid a bankruptcy filing that may not only impact the distressed city but also other cities and towns in the state. On May 27, 2016, New Jersey Gov. Chris Christie signed into law the Casino Tax Property Stabilization Act in an effort to help Atlantic City — a once-thriving gambling mecca — get back on the path to fiscal stability.

The troubles of Atlantic City have been widely reported and serve as a cautionary tale for any municipality that relies on a single industry for its economic well-being. In the immediate two decades following New Jersey’s authorization of casino gambling in Atlantic City in 1976, Atlantic City experienced explosive growth. This was because Atlantic City held a virtual gambling monopoly on the East Coast during this time. Then, other states decided that they, too, wanted to get in on the act; and the ensuing regional competition, combined with prolific government spending when the going was good, led to Atlantic City’s fiscal demise.

The act aims to tackle a central problem resulting from the competitive environment in which Atlantic City now operates: Over time, operating a casino in Atlantic City has become less profitable and casino property values have declined concomitantly. The casinos, therefore, began challenging their property assessments, and won. Atlantic City was therefore not only facing significant unemployment resulting from closing casinos and decreased visitors to the city and a drop in other revenues, it was required to make substantial property tax refunds to its casinos.

The act seeks to establish a steady stream of revenue for Atlantic City over the next 10 years, by replacing property taxes for certain casinos with a guaranteed mandatory minimum payment. The goal of this guaranteed minimum payment is to stabilize Atlantic City’s finances, while reducing the time and burden of property tax appeals in the city. Specifically, the act would apply to “casino gaming properties” in Atlantic City, meaning those properties upon which a facility licensed to operate as a casino existed in 2014 (whether or not the casino is actually operating), and which have more than 500 hotel rooms.

In exchange for an exemption from property taxation, casinos meeting the requirements of the act now have the option to enter into a 10-year financial agreement with Atlantic City to make quarterly payments to Atlantic City of the casino’s allocated portion of the annual payment in lieu of taxes. Any new owner of a casino that is an existing party to such a financial agreement with Atlantic City would immediately be required to enter into its own agreement with the city. It is important to note, however, that participating casinos may withdraw from the agreement, and if a participating casino withdraws, it will no longer be required to pay its allocated share of the annual payment.

In 2016, the first amount in lieu of taxes, divided by all participating casinos, is $120 million. Pursuant to the act, this amount will fluctuate based upon a formula derived from the annual gross gaming revenues of the participating casinos, as determined by the New Jersey Division of Gaming Enforcement of the New Jersey Department of Law and Public Safety. The New Jersey Local Finance Board is responsible for establishing the formula for dividing the $120 million obligation among the participating casinos, using a criterion set forth in the act. The role played by the Local Finance Board amounts to state supervision of Atlantic City’s affairs, as the board is a component of the New Jersey Department of Community Affairs.

Additionally, participating casinos are also required to make certain payments to the state of New Jersey. The state would then remit those payments back to Atlantic City upon the approval by the Local Finance Board of a financial plan submitted to it by Atlantic City. This permits the state to continue to monitor Atlantic City and gives it significant leverage to keep the city on a path to stability. Given the novelty of the act’s taxation provisions, the act also establishes a review commission to determine whether the act’s provisions should be expanded beyond 10 years.

In addition, the New Jersey Legislature has stated that it intends to request that $10 million be included in New Jersey’s budget for economic development in Atlantic City, and that another $8 million be appropriated to fund the promotion of Atlantic City. Whether these funds will actually be provided remains to be seen.

Meanwhile, the city has until November to develop a five-year plan to balance its budgets and return to solvency. Success, if possible, will require buy-in by not only the city’s casinos but also the city itself and its citizens.

The city will need to overcome other challenges as well. While the city’s remaining eight casinos have seen their revenue and profitability begin to stabilize recently as a result of less competition, with four casinos closing in 2014, unions in four of the remaining casinos voted to strike on July 1, 2016, if contract negotiations are unsuccessful. They join the union at a fifth casino that previously authorized a walkout. Also, Atlantic City may see increased competition in its own backyard with New Jersey voting this fall on whether to add two new casinos near New York City. At least one report predicted that three to five of Atlantic City’s remaining casinos could close if voters authorize gambling elsewhere in the state.

If the city is unable to come up with a plan, or if it proposes a plan that is ultimately rejected the board, the city could find its government taken over by the state, many of its assets sold, its contracts renegotiated, as well as other actions taken out of its control. The Local Finance Board could also approve a bankruptcy filing by the city. In New Jersey, a municipality such as Atlantic City may only file for Chapter 9 bankruptcy protection if the Local Finance Board has approved such filing. Only one New Jersey city has previously filed a Chapter 9 petition — Camden in 1999. However, that case was later dismissed.

Casting doubt on the city’s ability to restructure absent additional help, at least one rating agency already has questioned the ability of Atlantic City to avoid a municipal bankruptcy filing. Analysts Timothy W. Little and Jane H. Ridley of S&P Global Ratings wrote in a recent report that, “[d]espite aid received by the city, it is our opinion that some form of debt restructuring or debt impairment is highly likely unless a credible recovery plan that protects the city’s promise to bondholders is produced.” Still, after months of disagreement and heated political battles (even by New Jersey standards), New Jersey now appears to be moving forward to help stabilize Atlantic City and is willing to use creative methods to redevelop that region. A New Jersey assemblyman went so far as to introduce a bill in the state Assembly to allow for the legalization of recreational marijuana sales in the city — though Christie has vowed to veto any such legislation.

New Jersey, in the passage of the act, is just another example of cash-strapped states devising creative solutions to help troubled municipalities restructure. Only time will tell, however, if the act will successfully set Atlantic City on a path to long-term financial stability. While the act seeks to provide the city with baseline revenues as well as additional assistance from the state, Atlantic City will still be required to make difficult decisions to establish a successful financial recovery plan and positive future.

This article was published by Law360 on June 23, 2016 and is republished with permission.

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