Monday, September 10, 2012

Taxpayers will pay as Atlantic City borrows to cover casino tax appeals

Atlantic City?s government, as it approves a $103 million bond to cover tax-appeal payments to the casinos, is already considering another $40 million bond for next year.

That would add to the $35 million already borrowed at the end of last year.

How much will the average city homeowner?s tax bill increase to cover these bonds? An extra $106 a year ? each year ? for the next 20 years.

Financial ratings firm Standard Poor?s already has warned that more such bonds could weaken Atlantic City finances and possibly trigger another downgrade of its debt rating.

Michael Stinson, Atlantic City revenue and finance director, said taking on the bonding debt is preferable to the alternative of paying the casinos over five years ? the longest term they would accept. The five-year plan would require combined tax credits of $20 million a year and substantial cuts to the city budget.

?We?re working to cut hundreds of thousands, a million dollars ? not $20 million to $25 million,? he said Friday.

Interest costs on the money borrowed to pay casinos will be substantial.

Casino repayment bonding within the past year alone will cost $46 million in interest over 20 years, given the 3.6 percent interest on its $35 million bond. This assumes the city gets the same rate on the $103 million recently proposed, according to the city?s application to the state Local Finance Board.

Negative outlook

But the city may get a less favorable bond rate since Standard Poor?s in April lowered the city?s bond rating to A-, six steps below AAA, and warned it may downgrade the city again as a result of additional casino tax rebate costs.

SP a1so gave Atlantic City a negative outlook on its debt because of ?continued uncertainty regarding the impact of future casino tax appeal settlements on the city?s finances and the city?s ability to produce structurally balanced budgets without reliance on tax appeal funding bonds.?

In conjunction with the April downgrade, Andrew Teras, credit analyst with SP, wrote that ?further budget stress from the financing of additional appeal settlements that results in a weakened financial position or a significantly increased debt burden? could result in an additional lowering of Atlantic City?s debt rating.

That could make it harder and more expensive for the city to borrow money.

SP said other factors in the downgrade included:

n ?concentrated and decreasing property tax base,

n ?concentrated economy that relies on the city?s struggling gaming market

n and ?high unemployment rate and low income levels.?

A bond market expert said he thinks Atlantic City?s debt rating probably will hold steady for now and that the proposed bonds will find plenty of buyers even if the city is downgraded again.

John Mousseau, portfolio manager at Vineland-based Cumberland Advisors, where municipal bonds are a key part of the $2 billion in investments it manages, said the relative scarcity of New Jersey debt issues this year and the yield on the Atlantic City bonds will assure there is demand for them.

?Even if it?s downgraded, the need for yield out there is heavy right now,? said Mousseau, 55, of Maplewood. ?The yield on the bonds is positive, not zero, and they?re more secure than most things.?

But investors will need to worry about the city?s long-term prospects and whether the market value of the bonds will fall.

?Is there headline risk with Atlantic City? I?d really want to watch what gambling revenues do over the next few years. They?ve gone in a different direction from other states, and there?s no shortage of competition,? Mousseau said. ?Do you reach a tipping point on how people view the fortunes of Atlantic City? ? Is gambling as it relates to Atlantic City and its fortunes in a spiral that?s still going down??

Investors also will need to watch how well city government handles the cost of servicing additional debt to pay casino tax appeals and how many more appeals are paid off with debt, he said. ?Who knows if they?ll be having appeals in five years of assessments they?ve settled on now??

Mousseau said he?s a bit optimistic about Atlantic City?s future, although perhaps not enough to be a buyer.

?I actually think from the things I?ve read that things are bottoming out, and I think it?s a decent buy,? he said. ?But I don?t know that Cumberland will buy it.?

Shrinking tax base

Atlantic City?s current budget of $234 million, approved in May, required a tax increase of 9 percent.

Asked by city officials how much the pending casino tax appeals by Revel, Borgata and Tropicana may cost, the city finance office has figured the payoffs from those may require another $40 million in bonds next year.

?We?ve been asked for the potential, and yes, that could be the number, but ? it?s too early to say whether we?ll bond again next year,? Stinson said. ?If we decide it makes sense, we?d revisit that. We had settlements this year with Caesars and Harrah?s that didn?t cause us to borrow, so the hope is that in the future we can structure agreements that way. Time will tell.?

The city also has used just $146 million of its $658.4 million borrowing capacity, according to the city?s debt statement in the $35 million bond prospectus.

That threshold is determined by state law, which limits municipal borrowing to 3.5 percent of its ratable base value.

This much is sure: Atlantic City will be paying its budget and casino tax rebates out of taxes from a ratable base with a much lower value.

Atlantic City?s ratable base was about $20.5 billion during 2008 through 2010 ? the highest in New Jersey then, according to data from the New Jersey Department of Community Affairs.

Resort property owners filed more than 3,000 tax appeals during that time. Most municipalities experienced a similar onslaught following the severe recession and collapse of the real estate market.

In Atlantic City, property values sank just after a citywide revaluation of tax assessments in 2007. The first in three decades, the revaluation was conducted as annual casino industry revenue peaked. It also more than doubled the city?s ratable base.

Subsequent tax appeals decreased the Atlantic City ratable base by $1 billion. Despite that, the resort continued to have New Jersey?s highest value in taxable property in 2011 because other towns were facing similar circumstances.

Other municipalities also borrowed to offset shrinking tax revenues. The state Local Finance Board authorized more than 60 tax appeal relief bonds for municipalities since 2011, Department of Community Affairs documents show.

But Atlantic City?s challenge went beyond the general fall in property values.

Gambling competition proliferated in nearby states, ending the city?s East Coast casino monopoly and greatly reducing the value of its casino properties.

The local casino industry?s annual revenue declined from $5.2 billion in 2006 to $3.3 billion in 2011. Since then, the city ratable base has dropped another $3.5 billion ? a trend driven nearly exclusively by casinos, according to casino tax appeal settlements.

?Atlantic City is unique in that one industry has accounted for 65 to 75 percent of the land (value),? Stinson said.

That could cause major tax increases for noncasino taxpayers. Within the past year, tax appeals have reduced Atlantic City?s ratable base by more than $3.5 billion. Based on the current tax rate of $1.13 per $100 of assessed value, that means those properties would have generated $39.6 million less in taxes in 2012 if their appeals had concluded earlier. In that scenario, the $39.6 million would have been redistributed over the entire tax base ? meaning higher taxes for everyone else. ?

Savings sought

Bearing this in mind, city officials have been looking for ways to save or make money. But so far, the amounts have been small relative to the ratable base devaluation. ?

The city recently switched prescription plans for government workers, which will save more than $200,000 annually, and is looking into doing the same for dental coverage. Alternative energy initiatives also will save the city nearly $500,000 annually: about $420,000 through municipal vehicle natural gas conversion expected to start before the end of the year and $50,000 or so from a solar installation recently completed on the roof of the city public works building.

Cell towers being installed this fall will generate steady income as well; just one typically brings in $240,000 annually, which the city will split with its contractor.

?No other city in New Jersey has the concentration of one industry in such a dominant majority of the taxable base,? Stinson said. ?With their downturn, it?s had a very adverse effect on the valuation of the city.?

Business editor Kevin Post contributed to this report.

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