Union City Mayor Brian Stack said he is confident his administration can improve its financial footing after credit rating agency Moody’s Investor Service downgraded its assessment of the city’s municipal bonds earlier this month, potentially making it harder for the city to borrow in the future.
Citing an overreliance on state transitional aid and a limited preparedness for any reduction of such revenue, Moody’s Investor Service lowered its rating for Union City’s general obligation bonds from A3 to Baa1 on May 8. The agency also gave Union City a negative outlook, meaning it sees the potential for further credit rating downgrades of the city’s debt in the next two years.
Stack blamed the downgrade on New Jersey’s difficult state-wide economic climate, and in particular the potential collapse of Atlantic City’s finances, which Moody’s believes would draw aid away from other state-supported municipalities like Union City.
“We had a positive conversation with Moody’s,” said Stack, who is also a Democratic state senator representing the 33rd Legislative District. “This is a bump in the road and we will get it back up in the future.”
Union City’s general obligation bonds, which amount to $44.15 million in total, remain within Moody’s’ investment grade tier, meaning they are still expected to be honored and can be held by banks.
Betting on bust
At its core, Moody’s rating for Union City amounts to a bet on the future of Atlantic City and the implications that a bankruptcy or default there would have for state aid to other troubled municipalities.
As neighboring states gradually warm to casinos of their own, Atlantic City has been saddled with a hemorrhaging tax base and an increasingly fragile raison d’etre. As of March, the city faced a projected $101 million budget deficit and over $358 million in total outstanding debt, according to a state report.
In January, Christie appointed an emergency management team for the city featuring Kevyn Orr, a lawyer best known for orchestrating Detroit’s landmark bankruptcy filing in 2013. Fearing a similar fate for Atlantic City, Moody’s downgraded its bond rating from Ba1 to Caa1, and put the 10 other New Jersey municipalities receiving transitional aid on notice for potential downgrades.
Moody’s based its rating on the city’s heavy reliance on state aid.
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Moody’s was also concerned by a February New Jersey Superior Court ruling that the state must pay $1.6 billion more into its pension fund in its 2015 budget. Gov. Chris Christie has appealed the decision.
Though the Atlantic City team has consistently denied contemplating bankruptcy, and Orr resigned at the beginning of May, Moody’s downgraded Trenton in April, followed by Kearny, Asbury Park, Paterson, Newark and Union City in May.
Seeking surplus
In Union City’s particular case, Moody’s said a loss of state aid would be exacerbated by the city’s “above-average debt burden” and slim budgetary surplus. Moody’s also took issue with Union City’s “weak socioeconomic profile,” which limits the size of its tax base.
In 2014, Union City had a surplus of $3 million, up from $2.3 million in 2013, and $7.6 million in debt service obligations. For the 2015 fiscal year, it received $17.9 million in state transitional aid, amounting to 16 percent of its budget for that year.
“Governor Christie has been very supportive in terms of aid,” said Stack, “and they have seen that we spend it responsibly.” While he did not foresee cuts to state transitional aid in the near term, Stack admitted that the situation in Atlantic City was a legitimate concern.
Still, Stack stood by his management of Union City’s budget, saying he has reduced the number of city employees and pursued new residential developments aimed at bringing more taxpayers to the city. “The people of Union City see the improvements, regardless of what the press sees,” he said.
“We have started to decrease transitional aid reliance, little by little, and that’s our goal in the future,” said Susan Colditz, Union City’s chief financial officer.
Though transitional aid to Union City is down from $18 million in fiscal year 2014, it is still well above its mark of $13 million in 2011.
One thing Stack said he had no intention of changing was the socioeconomic makeup of his city. According to the 2013 American Community Survey, 24.4 percent of Union City’s 68,247 residents live below the poverty level.
“We have a wonderful diverse community,” said Stack. “Everyone who lives here is welcome. We can’t change that and we wouldn’t want to.”
Development coming
Stack said future improvements of Union City’s surplus and economic outlook would depend in part on expanding its tax base by opening up residential development. As a landlocked city with little in the way of undeveloped land, “the only thing we can do is go up,” said Stack.
Several large-scale projects are under consideration in Union City, chief among them a proposed residential tower complex perched atop the Palisades. On the site of the Yardley building, a former soap factory above the Fourteenth Street Viaduct, Panepinto Properties hopes to build two 29-story towers encompassing 590 units.
With new developments like Yardley, “equalized value assessments will go up,” said Colditz, “which in turn will give us a higher tax base, which brings in more revenue for the city and helps to start increasing our fund balance even more so.”
Carlo Davis may be reached at cdavis@hudsonreporter.com.