Last week, Atlantic City, New Jersey’s state-appointed emergency manager Kevin Lavin and expert consultant Kevyn Orr released a report about the local fiscal outlook. In its central discussion of how to reestablish solvency, the report contained an ominous line: “Debt deferrals—TBD.” Only if creditors agree to take less in the near term does Atlantic City’s budget get balanced. The pregnant uncertainty of that “TBD” undermines the suggestion, found in much news coverage, that bankruptcy now looks less likely than before the report’s release. On the contrary, as more details emerge about Atlantic City’s balance sheet and budget, it becomes increasingly difficult to see how this fiscal mess gets resolved outside federal court.
Atlantic City faces three challenges: keeping revenues in line with expenditures, reducing or restructuring its debt load, and revitalizing the local economy. The second challenge is the most important. Atlantic City owes creditors at least $845 million: $270 million in outstanding bonded debt, $350 million in pension debt (per Moody’s), and $225 million in other “off balance sheet” obligations, mostly related to reimbursements to casinos after overcharging them on property tax bills. Lavin and Orr did not recommend bankruptcy in last week’s “preliminary” report because, at this stage, they’re legally prohibited from doing so. Federal law requires that a municipality must have entered into “good faith” negotiations with its creditors prior to filing for bankruptcy. Those negotiations have not yet begun in earnest. The city’s counterparties will be the state government, on behalf of itself and the city’s retirees, casinos, bondholders, and bond insurance companies.
For four reasons, persuading these parties to “defer” payment on their debt will be a very tough sell. First, a creditor legally entitled to a multimillion-dollar payment will tend to insist on his claim—particularly if he is in a position to afford talented lawyers. Second, scant reason exists to believe that Atlantic City will be in a better position to pay anyone back ten years from now. Lavin and Orr themselves remarked that “there is no reasonable likelihood that these [financial] headwinds will abate at any point in the near future.” Asking creditors to accept a debt deferral instead of a debt reduction looks like a distinction without a difference. Third, no one wants to be a sucker. Every creditor believes that his concession should be milder than the next guy’s and will resist signing off on a plan until he’s satisfied that it is impossible to pay him more. Municipal bankruptcy’s sole purpose is to provide a legal process overseen by federal court to overcome this so-called “holdout” problem. Finally, Orr, who directed Detroit’s bankruptcy, has acquired a reputation for lacking respect for the legal rights of creditors. Past comments about “these Huns on Wall Street” will cause Atlantic City creditors to doubt that whatever offer Orr has put on the table is truly the best the city can do by them.
In order to think clearly about a way forward for Atlantic City, it’s helpful to distinguish between its fiscal and economic challenges. The latter are well known: casino gambling has contracted dramatically since 2008, leaving the already-poor city with the seventh-highest unemployment rate among 387 US metros. Local officials might as well be left in charge of economic revitalization. A federal bankruptcy judge won’t be of much assistance; New Jersey governor Chris Christie’s efforts at reviving Atlantic City, though well-intentioned, have thus far failed to impress. Atlantic City does not suffer from Detroit-level incompetence or corruption. None of the recent reports that have taken stock of the city’s challenges have ventured major criticisms of basic operations or municipal services. Clearly, Mayor Don Guardian is no Kwame Kilpatrick.
Fiscal difficulties are another matter. Unusual for a municipal government, Atlantic City faces significant short-term debt commitments. According to a February Moody’s report, $82 million in credit-market debt—a sum equivalent to almost one-third of the city’s annual budget—comes due this year. And to pay back the casinos for overbilling them, Atlantic City must issue even more bonds. But the market has recently indicated that, if it lends at all to Atlantic City, it will do so only at near-usurious rates.
Traditionally, municipal bankruptcy was contemplated by localities faced with a debt problem that was overwhelming yet isolated, such as a massive tort payment. Detroit faced manifold structural difficulties that bankruptcy did not and cannot address. If not for its casino-tax repayment problem, Atlantic City would still be a struggling city but not an insolvent one. The more details that emerge about its budget, balance sheet, and municipal operations, the more Atlantic City’s crisis seems like the isolated cases of fiscal distress than the structural cases such as Detroit. And in that respect, bankruptcy may actually make more sense for Atlantic City than it did for Detroit.