Talk about getting kicked while you’re down. Atlantic City continues to be eaten alive by both its state and local governments with no mercy. As of May 27, New Jersey Governor Chris Christie signed a bill into law that would see Atlantic City casinos collectively robbed for a 9-year period, initially of the sum of $120 million, to increase by 2% every year for the 9 years. This is according to the New York Times.
I would say that the hypocrisy is astounding here, but there is nothing astounding anymore about what governments can do these days. What makes this especially infuriating is that Christie put out a big press release about how this “pro taxpayer” bill will really teach the Atlantic City politicians a thing or two about “responsible spending”. In what really amounts to nothing more than self-righteous buffoonery, Christie spewed forth this gem of a line:
“These new laws will ultimately accomplish my mission to reform Atlantic City’s overblown municipal government, and in turn protect local and state taxpayers from being perpetually abused by the special political interests who admit to owning this city’s elected officials.”
Pots have more of a right to call kettles black than Christie has the right to call Atlantic City’s government “overblown”, and then recharacterize yet another government bailout in terms of “protecting taxpayers” and casting himself as incorruptible. The truth is, New Jersey’s state government, headed by none other than Christie, is one of the most profligate in the United States, with the highest absolute and per capita debt levels in the country. The way Christie berates the spending habits of his Atlantic City underlings makes you think that he’s a Ron Paul libertarian, when he’s actually closer to Bernie Sanders when it comes to tax-and-spend like there’s no tomorrow.
New Jersey has the highest property tax rate of any State in the Union, and by far the highest median property tax of $6,579 per piece of registered property. The runner up is far behind, Connecticut at $4,738. No other state even comes remotely close. New Jersey is in a league of its own with property taxes. But that doesn’t stop it from being one of the most indebted as well under Christie. And it’s this guy who’s telling Atlantic City how to better manage its finances.
The best way to reform a government is to let it go bankrupt and let those who loaned it money by buying its bonds, lose their investment entirely. That way investors will think twice about buying an Atlantic City municipal bond and maybe they’ll be more careful with the loans they do take. What Christie has done is simply rip off more money from whatever decrepit business is left there, and the casinos can do nothing but bend over and take it. What makes the situation so hilariously tragic is that one of the largest companies operating in Atlantic City is none other than Caesars, which now has to pay off the debts of Atlantic City politicians when it cannot even pay off its own massive debt pile. Caesars owns 3 of the 8 major casinos in the city including including Bally’s, Harrah’s, and Caesars itself. The other public companies involved with what’s left of the place include MGM and Boyd, who both own 50% of the Borgata, and Icahn Enterprises which owns Tropicana and the Trump Taj Mahal.
What essentially happened here is that Atlantic City having a local near-monopoly on the gambling supply in the eastern United States, that value was capitalized into the real estate of the Atlantic City casinos just like the value of being able to drive a taxi without being harassed by police is capitalized in a taxi medallion. As Uber grew, the value of a medallion tanked. Same with casino property values. As more and more casinos began opening up in the areas surrounding Atlantic City in areas with much lower taxes, and as online gaming became legalized throughout the entire state, that capital value seeped out into the surrounding areas as supply expanded. This lowered the property value of the casinos, bringing the local government less and less revenue to the point where it was about to topple over until Christie decided to bail out his buddies.
Last year a program cynically called PILOT for “Payment in Lieu of Taxes” was vetoed by Christie, but there is little practical difference between that and what ended up actually happening as of May 27. The lesson is once again how to be a politician – when you can’t raise “taxes” anymore, just call them “payment in lieu of taxes” and give it a nice acronym that will get people cheering about new beginnings and just take the money anyway. There’s your “PILOT program”.
Is there any future for investment in Atlantic City? Yes, but not right now. There is just too much debt that will not be cleared out. The best choice for those who do want exposure in a “buy when there’s blood in the streets” sort of way is to buy Icahn Enterprises. The stock is basically a hedge fund that pays a really nice dividend at 11% as hedge funds tend to do. Icahn also owns Trump’s former properties there. If Trump makes it to the 8-year throne he might throw some tax dollars at his old property just for the hell of it because that’s the kind of guy he is. But even Icahn is wading in a toxic sea of debt leveraged 170% and hasn’t been profitable since 2013. Its casinos are recovering a bit though. Gaming revenues were up 13% last quarter due to competitor closures. Icahn may be one of the last men standing in Atlantic City, but that doesn’t make the company healthy by any means.
The best thing for Atlantic City would be for the municipal government to default and the State of New Jersey to default as well. After that taxes will go down and growth can begin again, with the only ones hurting being those who get government paychecks and those banks who decide to lend the government money on the assumption that the bonds will always be paid by bailout if need be, an assumption which has always proven correct so far. The problem is that in Christie’s responsible spending haven that is the Fiscal Paradise of New Jersey, one out of every 9 people are on government food stamps, so a default would not be pretty.