Continued state control of Atlantic City a credit positive

New Jersey’s plan to continue controlling Atlantic City's finances is a credit positive for the junk-rated gambling hub, according to Moody’s Investors Service.

Gov. Phil Murphy's administration released a 64-page report last week recommending continued state intervention in Atlantic City through the fall of 2021. The state's five-year involvement under the Municipal Stabilization and Recovery Act began in November 2016 under Murphy's predecessor, Chris Christie, just after Atlantic City nearly defaulted on its debt.

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"State control has had a strong, positive impact on the city's financial position, which remains weak," Moody’s analyst Douglas Goldmacher wrote in an analysis Wednesday. "Without continued state oversight, the city's ability to continue making substantial fiscal improvements is dubious."

Goldmacher noted that under state intervention the city resolved long-standing tax appeals by casinos and reduced municipal employee headcount. The state also reduced the city’s transitional aid and increased its Consolidated Municipal Property Tax Relief Act revenue, which Goldmacher said creates better reliability with state funding and a more predictable revenue stream.

Despite Atlantic City seeing a surge in net cash and an improving reserves under state control, Goldmacher said Atlantic City’s Moody’s-adjusted fund balance is still near zero. The city received a $108 million lift in 2017 thanks to tax appeal settlements with casinos.

Attorney Jim Johnson, who Murphy appointed in February to review Atlantic City’s transition to local control, laid out a long-term future in the state’s report that includes improvements to municipal governance and developing a master plan for redevelopment that diversifies beyond casino gambling.

Near-term challenges facing Atlantic City, according to Goldmacher, include a lawsuit with the firefighters’ union, a “decimated tax base” and the fact that New Jersey’s Casino Reinvestment Development Authority has partial jurisdiction over many properties that could be developed. Goldmacher said continued state involvement will make it “far more likely” that the city and CRDA can coordinate redevelopment efforts.

Atlantic City had $223.6 million of outstanding bond debt, according to its latest budget documents. Moody’s rates Atlantic City general obligation bonds Caa3 with a positive outlook. The cash-strapped city’s debt is rated CCC-plus with a stable outlook by S&P Global Ratings, two notches higher than Moody’s.

“While the continued oversight is a credit positive, the city is far from being financially secure," said Goldmacher. "The report, which has received preliminary approval from the governor and is being reviewed in detail, lays out a strong vision for the future. But the devil is in the details and it remains for the city, state and CRDA to demonstrate that they can turn this vision into a sound plan.”