By: Michael Busler*
February 16, 2015
According to the dictionary a "showdown" is a confrontational event that forces an issue to a conclusion. Using that definition, Atlantic City is about to face a financial showdown in both the public and private sectors. It is likely to come within the next 60 days and it will get a bit ugly. The problem, of course, is that for the past thirty-five years Atlantic City has relied almost exclusively on the casino industry. Last year casino revenue was almost 50% less than it was during the peak year in 2006. Since then, a number of casinos have closed including: the Sands, the Claridge, Atlantic Club, Showboat, Trump Plaza, and the Revel; leaving eight casinos still in business.
Government and business leaders are attempting to turn the city around. There are hundreds of millions of dollars being committed for investment into Atlantic City so that we should be able to re-invent the city again and move toward more prosperous times. In the meantime, this year will be very difficult. In the private sector the casinos that are currently operating are profitable primarily because they developed a business model that continues to attract a loyal customer base. However, the Taj Mahal and perhaps the re-opened Revel face some difficult problems when trying to develop a model that can be sustainable.
The Taj is on the verge of closing. They have defaulted on their debt and were forced to file for bankruptcy protection. Ownership will soon transfer to the holder of the debt: Carl Ichan. In order for Icahn to profitably keep the Taj opened he will have to reduce costs significantly. Since most of the costs are for labor, Icahn wants to shift the health care cost to the newly created Obamacare exchanges and essentially eliminate the pension program, along with some other employee perks. After looking at the numbers the bankruptcy court agreed this was necessary.
The employees, many of whom have worked at the Taj since it opened in 1990 are crying foul. They negotiated a legal and binding contract in good faith and they expect it to be honored. They wonder why a billionaire like Carl Icahn wants to take actions that will amount to a large reduction in compensation for these workers. They refuse to accept the bankruptcy court’s decision. The outcome will likely be either a closed casino or an opened casino with workers barely earning enough to survive.
This labor-management conflict will come up again when the Revel re-opens. Even though the property was purchased for less than 5% of the cost to build, high operating costs will force the new owners to pay low wages and offer few employer paid benefits. There are so many unemployed people in the area that the workers will be forced to accept the company’s terms and simply hope for better times. Prior labor contracts were terminated through Revel’s bankruptcy action.
In the public sector, the city itself is in crisis. Total spending by the city will exceed $260 million this year while revenue, primarily from property taxes, will fall millions short of that total. Add in additional costs and future payments from properties that have been re-assessed due to declining values and the deficit widens. Atlantic City will have to borrow money in the bond market to cover the shortfall, but with total debt already exceeding $400 million and with declining tax revenue, Atlantic City bond rating is now at junk bond status, meaning that borrowing is difficult and very costly.
The "showdown" will occur shortly. The city provides services to the residents, meaning that their spending is labor intensive. Since the value of real estate has fallen by about 50%, even with the 29% and 22% increases in tax rates seen during the past two years, tax revenue has fallen. In order to balance the budget spending will have to fall. This is where it gets ugly.
The cost to the city for policemen, firemen, teachers, and other public workers will have to fall by about 20% to 25%. The newly appointed emergency manager will attempt to renegotiate the contracts with the goal of reducing costs. They will probably propose a combination of layoffs and wage reductions. The employees will note that they have a legal and binding employment contract that was negotiated in good faith. The city will argue they simply do not have the money to honor that contract. Either the city and workers come to an agreement, which is not likely, or the city will be forced to file for bankruptcy protection, which is the likely conclusion. In bankruptcy, the judge has the authority to re-write the contracts.
It is unfortunate that Atlantic City is in the situation that it finds itself. There is no easy answer. Since there is generally a strong sense of community here, finding a solution where the city employees bear the burden for the financial problems is painful for all of us.
 See "showdown." Showdown, MERRIAM-WEBSTER ONLINE DICTIONARY, http://www.merriam-webster.com/dictionary/showdown (last visited Feb. 12, 2015).
 S.P. Sullivan, Then There Were 8: Trump Plaza Shutdown Marks a Bad Summer for Atlantic City, NJ.COM (Sept. 16, 2014, 2:29 PM), http://www.nj.com/news/index.ssf/2014/09/and_then_there_were_8_atlantic_city_could_lose_another_casino_by_years_end.html/.
 Associated Press, Atlantic City Mayor Predicts 2015 Will Be a Year of Healing, But Expects Another City to Close, NJ.COM (Jan. 4, 2015, 11:09 AM), http://www.nj.com/atlantic/index.ssf/2015/01/atlantic_city_mayor_predicts_2015_will_be_a_year_of_healing_for_struggling_resort.html.
 Erin O’Neill, Trump Taj Mahal to Remain Open Though Deal Fell Apart, NJ.COM (Dec. 18, 2014, 1:30 PM),http://www.nj.com/atlantic/index.ssf/2014/12/deal_to_keep_trump_taj_mahal_open_off_union_president_says.html.
 Myles Udland, Carl Ichan Offers to Keep the Trump Taj Mahal Open, BUSINESS INSIDER (Dec. 18, 2014, 2:32 PM), http://www.businessinsider.com/carl-icahn-taj-mahal-2014-12.
 Wayne Perry, Ichan Gives Taj Mahal Casino $20M to Stay Open, USATODAY (Dec. 18, 2014, 7:44 PM), http://www.usatoday.com/story/money/business/2014/12/18/carl-icahn-taj-mahal-atlantic-city/20610355/.
 See In Re Trump Entm't Resorts, Inc., 519 B.R. 76, 88 (Bankr. Del. 2014) (finding the proposed changes necessary to permit the reorganization of the debtor).
 Josh Kosman, Taj Mahal Union AWOL as Casino Teeters on Brink, NEW YORK POST (Dec. 16, 2014, 12:34 PM), available at http://nypost.com/2014/12/16/taj-mahal-owner-begs-carl-icahn-to-save-casino-in-last-ditch-effort/.
 ATLANTIC CITY, N.J. MUN. BUDGET (2014), available at http://www.cityofatlanticcity.org/docs/20140313110640-5.pdf.
 Ted Sherman, Second Ratings Agency Drops Atlantic City Debt to Junk Bond Status, NJ.COM (Jan. 27, 2015, 7:43 AM), http://www.nj.com/news/index.ssf/2015/01/second_ratings_agency_drops_atlantic_city_debt_to.html.
 Steve Lemongello, Atlantic City Council Approves Budget With 29% Tax Increase Despite Opposition, PRESS OF ATLANTIC CITY (Aug. 6, 2014, 9:31 PM), http://www.pressofatlanticcity.com/communities/atlantic-city_pleasantville_brigantine/atlantic-city-council-approves-budget-with-tax-increase-despite-opposition/article_8cde97f4-1dd2-11e4-b7b4-0019bb2963f4.html.