Atlantic City Rating Cut to Puerto Rico's Level by Moody'sby and
General-obligation debt downgraded to Caa3 amid stalemate
Political standoff raises risk of bondholder losses, default
Atlantic City’s credit rating was downgraded to the level of financially distressed Puerto Rico by Moody’s Investors Service, which said the political impasse over the New Jersey city’s rescue heightens the chance of bondholder losses and default.
The rating was cut two levels to Caa3, the third-lowest step of below investment grade, from Caa1, affecting $16 million of $345 million in general-obligation bonds outstanding, Moody’s said in a statement Monday.
The downgrade reflects renewed signals from the state that bondholders will face losses as part of a possible debt restructuring. Governor Chris Christie and state lawmakers are bickering over legislation that would take over the community’s operations and allocate additional gambling funds to close a $33.5 million budget shortfall. Without state help, Mayor Don Guardian said the city will run out of money this month until the next round of tax payments come in.
Escalating the clash between state and local officials, Christie said Monday that he directed the state to sue Atlantic City to prevent it from tapping money intended for schools to stay afloat. The governor also said there’s been no progress over the takeover legislation, which Speaker Vincent Prieto, a Democrat, opposes because of a provision that would let the administration change or end labor contracts.
“Atlantic City had been using property tax collections held in trust for the school district to fund city operations and their extraordinarily rich public-sector union contracts rather than send those dollars to the school children -- where they rightfully belong,” Christie told reporters during a news conference in Trenton. “This has to stop.”
Atlantic City’s finances have been undermined by the decline of its casino industry in the face of competition from nearby states. The 39,000-person city has seen the property-tax base cut by more than half in five years, with a third of its betting parlors shutting down in 2014. Others have demanded tax rebates as real estate values slide, further straining its budget.
Guardian told reporters in Trenton today that the city isn’t short-changing schools and has hewed to a payment schedule worked out by the state. Officials have already taken steps such as lowering starting pay for police officers to reduce expenses, he said.
"Unfortunately, it seems like another example where the governor is either using incorrect information or outdated information," Guardian said.
Moody’s has a negative outlook, meaning it could lower the rating again “from the absence of a plan to restore the city’s financial health,” it said in the release. Bondholders may see losses approaching 35 percent of principal, the company said.
“The city faces a liquidity crisis, large structural deficit and near-term service insolvency,” the company said.
The distressed gaming hub would avoid a partial shutdown Friday by paying workers every 28 days instead of every two weeks, under a resolution on the council’s agenda for Wednesday.
Christie said Monday that the city owes the school system about $34 million between now and June 30.
“This action won’t fix the city’s own financial problems, but it will prevent them from making Atlantic City’s students and their families collateral damage to their reckless financial games,” Christie said.