At first glance, Atlantic City's current crisis bears little resemblance to those of Detroit, Puerto Rico and the other recent cases of fiscal catastrophe. The city is on the brink of bankruptcy due almost exclusively to a bad bet on casinos: around 20,000 industry jobs and half of annual gaming revenues have been lost in the last decade.
“Atlantic City is already unable to both pay its debts and support basic municipal operations... what it really needs is to cut its debt, not come up with different payment schedules.”
But though governments can go broke for any number of reasons, the solutions to their distress tend to be broadly similar. Atlantic City can learn many lessons from how other cities have dealt with insolvency.
First, unionized employees will have to make major concessions. This has been a sticking point between New Jersey Gov. Chris Christie and Vincent Prieto, the pro-union speaker of the New Jersey Assembly. Christie wants to take over Atlantic City and give state appointees the authority to break labor contracts. Prieto has blocked the governor's plan, saying, "We don't need to destroy collective bargaining rights to fix Atlantic City." Prieto is raising false hopes. Not only is most city spending bound up in salaries and benefits, state and local officials cannot hope for any concessions from corporate creditors without sacrifices by labor.
One analogy here is the 1994 bankruptcy of Orange County, California. Orange County became insolvent not from overstaffing but an overreliance on investment return to fund basic services. Nonetheless, more than 2,000 positions had to be eliminated to restore solvency.
Second, the state should not only take over Atlantic City but invest its appointees with broad powers. Atlantic City Mayor Don Guardian has denounced Christie's plan to replace local authorities as a "fascist dictatorship." But many difficult decisions lie ahead along Atlantic City's long road back to fiscal stability.
Because they are less exposed to union and other local pressures, unelected state officials are generally better positioned to play bad cop than elected city officials. Vallejo, California, whose 2008-11 bankruptcy was locally-managed, continued to hand out raises while in federal court. Detroit and Central Falls, Rhode Island, both got more out of bankruptcy than Vallejo because state-appointed receivers drew up their exit plans.
Third, if bankruptcy is inevitable, best to file sooner than later. The tendency of distressed cities is always to procrastinate, hoping against hope for a bailout. For a community of only 40,000 which boasts a 36 percent poverty rate, Atlantic City's $437 million debt load is unsustainable. Despite efforts by state and local officials to rejuvenate the local economy, there is no chance that Atlantic City will be able to grow its way out of its fiscal woes. Indeed, the situation could deteriorate further. Unions might balk at giveback demands, confident in their ability to fight the city in court. The local gambling industry might continue to contract, thanks to the possibility that new casinos will open in northern New Jersey. The economy could slip into recession.
Atlantic City is already unable to both pay its debts and support basic municipal operations. In theory, Atlantic City could restructure all its obligations simply through asking creditors to renegotiate terms. But meaningful concessions will be very difficult to achieve out of federal court, since what Atlantic City really needs is to cut its debt, not come up with different payment schedules.
Of course, the most important lesson here is what Atlantic City can teach other governments: Gambling is an unreliable source of funding for public services. But with plans on the table to open more casinos in New Jersey and elsewhere, officials seem determined to repeat the mistakes of the past. What they should be doing is making an example out of Atlantic City, which has by now overlearned its lesson about casino gambling.
This piece originally appeared in U.S. News & World Report
This piece originally appeared in U.S. News and World Report