Even before the COVID-19 pandemic shuttered Atlantic City’s casinos, virtually every state and local official agreed that the state takeover of the resort town would need to continue for the foreseeable future. When the takeover started in 2016 under the administration of then-Gov. Chris Christie, a Republican, five of the city’s casinos closed, triggering job losses and cratering tax revenue for the city.
The other casinos appealed their tax bills, arguing that lower profits as a result of the Great Recession made their properties worth even less. With the city at risk of defaulting, Christie approved the controversial takeover that year.
The Department of Community Affairs was given the authority to override decisions by the city council, abolish city agencies, seize and sell assets — such as the city’s valuable water works — hire and fire employees, break union contracts and restructure city debt. Pay cuts were imposed for police and firefighters and the casino tax appeals were settled.
“There was grave doubt about how they would handle this, whether they would be able to handle this,” said Douglass Goldmacher, an analyst at Moody’s, one of the three main credit rating agencies.
After Gov. Phil Murphy took office, the state adopted a more collaborative approach. And many of those efforts since the takeover paid off, Goldmacher said. “They were able to get themselves into a much better financial position.
“They’re trying to make it amicable,” he said of the state takeover. “They’re still trying to work together, this is not something to impose their will.”
In September 2018, Murphy said the takeover would run the full five years originally envisioned, meaning it would last through the end of 2021. The following April, state and city officials, gathered in the shadow of the towering casino buildings, reiterated that timetable.
“We hope to demonstrate to our state Legislature that the work has been performed in Atlantic City, the salvation of its finances … land-use development and a number of other things, that the state has been set,” Lt. Gov. Sheila Oliver, who heads the DCA, said at the time.
Officials sought to diversify the economy beyond the gambling and entertainment so that in the event of another economic crash and loss of casino revenues, Atlantic City would not face the same distress.
Many financial experts, along with business leaders and state and local officials, agreed that such a change would take years. “This has been a longstanding goal of the city,” said Victor Medeiros, an analyst with S&P Global, another rating agency. “It’s not easy. You can’t just transform the face of a community overnight. It’s a very long process.”
Nonetheless, diversification remained attainable even with the pandemic, according to Matthew Doherty, executive director of the Casino Reinvestment Development Authority, a state regulatory body that ensures casino dollars go toward bettering the local community and the state as a whole.
“Does it slow it down a few months or a year? Yeah. But does the plan change? No,” he said in an interview.
Some progress is evident. Stockton University opened a new campus, South Jersey Industries set up a headquarters, and AtlantiCare expanded its hospital facilities. Ørsted said it plans to build a $1.6 billion offshore wind farm several miles off the coast of Atlantic City, capable of generating 1,110 megawatts of electricity, with Atlantic City as the nexus of the operation.
“While construction will not begin on our project for a few more years, we remain committed to Atlantic City and believe that offshore wind can play a key role in the region’s post COVID-19 economic recovery,” said Gabriel Martinez, a spokesperson for Ørsted. “Atlantic City will be home to Ocean Wind’s operations and maintenance facility which will have 69 full-time jobs during the 25-year lifecycle of the project.”
Still, for three months in 2020, all nine casinos remained shut amid the pandemic, leading to triple-digit revenue losses. They’ve been allowed since July to operate at reduced capacity, and are struggling to recoup their losses. Any profitability has been driven by the online gambling market.
Now, state and local officials envision takeover continuing past 2021. “There’s no doubt in my mind, because the state’s involvement is still needed here,” Oliver said in a recent interview. “The state still needs to be a partner with the city.”
“If it’s going to happen, I’m not going to fight it this time because it’s truly a partnership,” said Atlantic City Mayor Marty Smalls, who is campaigning for reelection to a one-year term. “As we position Atlantic City going into 2021, we do need the state’s resources financially and otherwise.”
The “partnership,” he added, is a “win-win for everybody.”
Those words – “partner” and “partnership” – remain crucial. The state and city need to work in tandem to lure in businesses beyond just gambling. Those efforts were evident at the Oct. 14 groundbreaking ceremony for Stockton’s new, 413-bed dorm in the city’s Chelsea neighborhood, which includes the $230 million “AC Gateway” anchored by the SJI headquarters and Stockton campus.
“I can tell you in the Chelsea neighborhood, we’re starting to see the impact of investment; community organizing and a basic kind of general good feeling that there is a bright future for that section,” Chris Paladino, president of the Atlantic City Development Corp., the AC Gateway’s developer. “We need to find a way to – at least in Chelsea – to take that one note and make lyrics out of it, to be able to get small businesses and get people to actually live here, work there long-term.”
At the Stockton dorm groundbreaking on Oct. 14, Murphy, Oliver, Senate President Stephen Sweeney, D-3rd District, and Smalls cited the new dorm as the kind of economic infusion the city needed. “These projects are diversifying the economy of this city and creating a stronger, fairer and more resilient post-coronavirus future for Atlantic City,” Murphy said in his prepared remarks. “It continues to change what people think when they hear the words ‘Atlantic City’.”
For now, though, the casino closures had been devastating for Atlantic City. Murphy shut them down on March 16, as the COVID-19 virus swept across the state, pushing the state’s health care infrastructure to its limit. Data from the New Jersey Labor Department of Labor and Workforce Development showed that the Atlantic City-Hammonton metropolitan area had the highest unemployment rate in the state during the pandemic.
Joblessness rose from 5.7% in March to 33.8% in April, compared to the state unemployment rate of 15.9%. As of August, the region’s unemployment rate held steady at 17.6%, compared to the statewide unemployment rate that month of 10.9%.
“The industry of Atlantic City, the prominent industry in Atlantic City, is always going to be tourism. The Atlantic Ocean is our greatest asset,” said Michael Chait, president of the Greater Atlantic City Chamber. But the key question, he said, “is how can we enhance other industries in Atlantic City: Offshore wind, fishing, clean energy.”
Leaders of those businesses expressed a degree of excitement with being situated in Atlantic City, both now and in the future.
“Our decision to invest in Atlantic City, where our first utility originated, reaffirmed our role as a driver of economic growth for the region,” Dave Robbins, president of SJI Utilities, said in a statement. “By bringing our South Jersey Gas headquarters to the city, we introduced new job opportunities, diversified the local economy and further stimulated growth in the area.”
Hedging their bets
Casinos will always play a central role in the city’s economy. So part of the 2016 state takeover entailed switching casino payments to the city from property taxes to payments-in-lieu-of-taxes, which are not subject to appeal by the casinos. The amount that the nine casinos pay is calculated using the number of acres comprising the casino property, the total number of rooms, and how much the casinos contributed to the total gaming revenue of the prior year.
In 2018, PILOT payments made up $68.8 million – or 30% – of Atlantic City’s revenues, according to Moody’s. That’s compared to just $40.1 million that year, or 17.5%, the city collected in property taxes.
“Although the formula is complex, and a useful estimate will not be possible until later in the year, the reduced casino revenues in 2020 will lead to lower PILOTs in 2021,” Moody’s said in a May 2020 report. “The degree of decline will depend on when the casinos reopen.”
The casino revenue base also expanded with the opening of the Ocean Resort Casino and the Hard Rock Hotel Casino Atlantic City, in addition to the lucrative sports-betting market where patrons have wagered billions of dollars each year.
“Is it going to delay the progress in terms of diversifying away from the casinos so their revenues are … diversified from the PILOT? I think the only way to diversify it is for the revenue stream to grow its base,” Medeiros said. “The base had been growing. Is the COVID pandemic … going to delay this? Possibly.”
In fact, a number of projects were delayed because of the pandemic. Stockton was initially scheduled to break ground on the new dorm in March, not October. AtlantiCare planned to break ground on its Medical Arts Pavilion in Atlantic City by the end of the summer, but that was pushed back to February 2021, with a planned construction completion by the end of summer the following year.
“The new facility will allow us to create a perinatal outpatient clinic to expand the Maternal Fetal Medicine services we currently provide in the HealthPlex, and to expand our Family Planning program, in the HealthPlex, said Jennifer Tornetta, a spokesperson for AtlantiCare. “Both of these services are key to our addressing maternal and infant mortality disparities in Atlantic City.”
“We rely on the casino industry. When you have only 25% of people allowed in, you’re not going to have a 100% fully staffed,” Smalls said. “Hopefully, slowly but surely we’ll start to gain some momentum.”
But Smalls and Oliver both maintained that the shock to the city’s finances would not be devastating in 2021.
Lisa Ryans, a spokesperson for the DCA, said that while the PILOT payments will be lower next year, the city has a tool known as the investment alternative tax, which could soften the blow at least in 2021.
“When an increase in gross gaming revenues requires the casinos to make larger PILOT payments to the city, the increase in payment is offset by a credit,” Ryans said in a statement. “Conversely, when there is a decrease in gross gaming revenue and PILOT payments to the city shrink, the casinos need less IATs, making more IAT revenue available to the city.
For those reasons, Ryan said, the DCA felt there would be “enough of an IAT offset so that casino payments in 2021 don’t appear to present any dramatic concerns for the city’s budget.”
“We’re on solid fiscal ground,” Smalls said. “We just had a 5.5% tax decrease for the residents of Atlantic City. Our budget projections are tax decreases for the next three years. So we’re in pretty good financial shape.”