Chris Christie's Failed State Capitalism

Josh Barro is the lead writer for the Ticker, Bloomberg View's blog on economics, finance and politics. His primary areas of interest include tax and fiscal policy, state and local government, and planning and land use.
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In a case study showing that not all bipartisanship is good, New Jersey Governor Chris Christie, a Republican, has worked with his Democratic legislature to get his state invested in not one but two troubled real-estate megaprojects.

One is American Dream Meadowlands, a partly-built mega-mall just outside New York City that boasts an indoor ski slope. American Dream is more widely known by its former name, "Xanadu," but that name became so tainted by the project's troubles that rebranding was needed.

Construction on American Dream has been off and on since 2004, and in 2011, New Jersey put up $200 million to allow the $3 billion project to be completed. If and when the mall opens in 2014, we'll see whether Christie is right that state's investment will lead to job creation and robust sales.

We'll also see, before then, whether the property becomes any more visually appealing. In 2011, Christie called the unfinished mall "by far the ugliest damn building in New Jersey, and maybe America." Christie promised that de-uglificatgion would be a component of any restructuring deal. Having driven past it last month, I can attest that that hasn't happened yet.

Christie's other real estate venture, Revel Casino in Atlantic City, is already open -- and early returns are not favorable. Like Xanadu, Revel is a project that was conceived of at a time when the real estate market was strong and that stopped mid-construction when money ran out. And as with Xanadu, New Jersey re-started Revel's construction by agreeing to make a public investment in the project on favorable terms.

Technically, the state didn't invest any money in Revel. Instead, it agreed to reimburse $261 million in sales, hotel and corporate taxes that Revel might collect over the next 20 years. In exchange, the state will get 20 percent of any profits received by Revel's owners. This structure mimicks an equity investment without requiring the state to put up any cash.

Revel opened in April and needs to bring in about $25 million to $30 million a month in gaming revenue to service its bonds. Last month, it brought in $17.5 million. Andrew Zarnett, an analyst at Deustche Bank, tells the Philadelphia Inquirer that "time is running out," and Revel may be unable to make its debt service payments, which would likely lead to bankruptcy.

If Revel goes bankrupt, there won't be any profits to Revel's owners and therefore no kickback to the state. But the tax forgiveness will remain, costing the state tax revenues for years to come.

I can understand why Christie (and the Democrats who run New Jersey's legislature) felt the urge to invest in Revel. When construction on Revel stopped in 2010, it was already the tallest building in Atlantic City, even though it had no interior buildout and no fire sprinklers. Left unfinished, it would have sat as a monument of the city's decline, and Christie could have become known as The Governor Who Let Atlantic City Die.

Now Atlantic City is dying anyway -- gambling revenue this July was down 9.5 percent from a year earlier, even as tourism is improving nationally. The city is getting battered by new casinos located closer to Philadelphia and New York, a trend which Revel has failed to reverse.

The private markets knew that Revel was a bad investment, which is why the project stalled. Unfortunately, New Jersey lawmakers couldn't bring themselves to admit as much, and they ended up throwing taxpayers' good money after bad. New Jersey would be better off if its Republicans and Democrats had found themselves at odds.

(Josh Barro is lead writer for the Ticker. E-mail him and follow him on Twitter.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.