What happens in Atlantic City might not stay in Atlantic City.

New Jersey’s wobbly gambling town is running so low on cash that it plans to shut most of its local government offices for three weeks, starting next Friday. It will pay its bondholders this week but might default within a few months. Bankruptcy remains unlikely but not impossible.

Legislative leaders are battling on the terms of rescuing Atlantic City, but this much they agree on: A default or bankruptcy there would cause collateral damage for other New Jersey cities and towns.

“We’re out of time,” Senate President Stephen Sweeney said. “And bankruptcy will have an impact on many cities throughout the state, and unfortunately it will be an impact on cities that didn’t do anything wrong, but just because they’re getting transitional aid they’re going to be hurt.”

Atlantic City has $240 million in debt and is making its April 1 debt payment of around $600,000. Mayor Don Guardian has said it is doing so to avoid complications for other New Jersey municipalities wanting to sell bonds.

'This is something that we’ve never seen before, and that’s a problem'

“The fact of that matter is that once one municipality in a state or in a location or in a county or in a region becomes troubled, everybody’s antenna goes up and there’s a little bit more scrutiny that will be put upon those other municipalities to make sure that they are not going to be faced with the same kind of challenges,” said David Fernandez, a public finance attorney with Buchanan, Ingersoll & Rooney.

That’s a legitimate but manageable concern, said Marc Pfeiffer, a senior policy fellow and assistant director of Rutgers University’s Bloustein Local Government Research Center.

Pfeiffer said New Jersey’s policy since 1940 has been to intervene to prevent municipal bankruptcies, and that oversight helps with local credit ratings.

“Bankruptcy could happen, Pfeiffer said. “However, if the administration makes it very clear that Atlantic City is an outlier, and we're not changing any of our policies regarding other municipalities, and that becomes a credible argument with the bond markets and the rating agencies, a bankruptcy in Atlantic City may not have a significant effect on other municipalities’ bond ratings.”

Short of bankruptcy, a default could also impact other cities and towns and drive up interest rates on their bonds, which eventually could force some municipalities to raise taxes or cut services. It’s not clear how quickly, however, Pfeiffer said. It depends on whether rating agencies and the bond market think New Jersey is abandoning its normal policies.

“You could have a wide range of effects, and the problem is we can’t really predict what a lot of that would be because we’ve never been here before. This is something that we’ve never seen before, and that’s a problem,” Pfeiffer said.

Fernandez said the state’s reaction will directly impact investors’ comfort level in all New Jersey debt.

“When a position is taken to help ameliorate a situation, it sends a message that the state has municipalities’ backs. It has the backs of the taxpayers. It has the backs of those who are investing in those markets and gives some level of comfort. If the state takes a very hands-off approach and allows things to just unwind, it sends a different message, and it creates a little bit more uncertainty,” he said.

A black mark on New Jersey?

It would not affect every municipality because some don’t have debt, Pfeiffer said. It won’t likely affect smaller towns, but municipalities with fiscal stress could be affected, even if they aren’t getting transitional aid.

The state provides transitional aid to municipalities with fiscal problems. It awarded that aid to Asbury Park, Atlantic City, Camden, Harrison, Kearny, Newark, Paterson, Penns Grove, Salem, Trenton and Union City this year.

Fernandez says the impact could be more widespread. Small municipalities might encounter higher levels of sensitivity than they’ve seen before, while cities with lesser challenges than Atlantic City may also encounter trouble borrowing or have to pay more to do it.

“Cities like Newark are going to have issues. Cities like Trenton will have issues. Only because the antenna will be raised,” Fernandez said. “Rating agencies are going to start taking a deeper look at revenue streams. They’re going to start taking a deeper look at collective bargaining agreements. They’re going to start taking a deeper look at the unsecured indebtedness.”

Assembly Speaker Vincent Prieto, who won’t post takeover legislation for a vote because it would let Gov. Chris Christie break union contracts, said “if there’s a default on any of the bonds, that actually has a ripple effect on all the credit ratings of all the municipalities in the state.”

Prieto suggests Atlantic City’s problems could be a black mark for New Jersey’s finances, not just its municipalities. The state’s bond rating has been downgraded three times each by the three major Wall Street rating agencies since Christie became governor.

Prieto says New Jersey and North Carolina are “the gold standard in the nation” for municipal bond ratings because state laws give the states extensive supervision over local finances, including the responsibility to approve any bankruptcy applications.

“That’s one of the mechanisms, that’s why credit rating agencies find it so favorably,” Prieto said. “… If they even default on a bond payment, it is the obligation and there is the mechanism for the state to step in and actually bail them out. That’s already in the law.”

Atlantic City’s $262 million budget for fiscal 2016, which ends in June, includes $33.5 million that had been expected from a ‘payment in lieu of taxes’ from casinos, but Christie has twice vetoed the bill that would have provided that funding.

Most Atlantic City government offices will shut April 8 for three weeks, reopening May 2 when the quarterly property tax payments begin arriving. Police officers, firefighters and sanitation workers will work without pay. They’ll be paid later.

The city will forward the school district its aid payment, allowing schools to remain open.

Michael Symons has covered the Statehouse since 2000. He can be reached at michael.symons@townsquaremedia.com or @MichaelSymons_ on Twitter.

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