Last Wednesday, Philadelphia developer Bart Blatstein held a groundbreaking ceremony for a $100 million indoor water park to be built by the Atlantic City Boardwalk next to his Lucky Snake Arcade and Sports Bar at Showboat. There, Atlantic City Mayor Marty Small mentioned a long history of similar water parks being proposed for Atlantic City–and then never getting built. Five years ago, a proposal to turn the former Atlantic Club Casino Hotel Building (Steve Wynn’s original Golden Nugget) into a water park fell through.
What makes this project different? The short answer is that 97% of this project is financed by the government. Ten months ago, the un-elected Atlantic County Improvement Authority agreed to borrow $97 million for this $100 million project. The elected Atlantic County Commissioners (formerly Freeholders) then voted to approve the loan. Officials for both government agencies repeatedly claimed there was no risk for taxpayers.
Both said that the County Improvement Authority would raise the $97 million by selling “revenue bonds” to investors. If the Blatstein’s waterpark succeeded, it would pay back the investors with tax-free interest. If the project failed, these investors would lose some or all of their money. Investors were specifically warned in writing that their investment was NOT guaranteed by taxpayers. However, this is not necessarily true.
Some good examples are “contract bonds” or “revenue bonds” issued by many New Jersey and county “authorities”. The New Jersey Constitution specifically states that state government cannot borrow money without voter approval. However, during the 1960’s, state politicians and judgment created a loophole to get around this. The State set up dozens of agencies and “authorities” like the “Transportation Trust Fund Authority” or the “Higher Education Development Authority”. These “authorities” routinely borrow money for state projects without voter approval. They do it by selling “contract” or “revenue bonds” that clearly state that investors can lose their money if the project fails. Investors are warned in writing that taxpayers are not legally responsible in any way if the project fails.
However, during the past fifty years, taxpayers were almost always forced to bail out state and county “contract” and “revenue” bonds when projects fail and government “authorities” are too broke to pay the money back.
There are several reasons for this. First, many state officials have close ties with Wall Street banks and brokers that would face heavy losses and expensive lawsuits their investors lost money from “safe” state and municipal bonds.
Also, when a “revenue bonds” default, the credit ratings of every state, county, and local government and government agency are damaged. Often financial “experts” (also with close ties to Wall Street bankers) warn that bond defaults by government agencies will trigger a “financial crisis”. As a result, New Jersey taxpayers routinely bail out insolvent agencies that default on their “revenue bonds”, even when there is no legal obligation to do so.
In 1992, Republican Governor Christie Todd Whitman bullied Atlantic County into bailing out its Utilities Authority. The Atlantic County Utilities Authority had used “revenue bonds” to borrow $82 million to build a trash incinerator that was supposed to pay for itself. Somehow, the $82 million was spent and the incinerator was never built. Five years ago, Republican Governor Chris Christie and a Democrat State Senate and Assembly bailed out “revenue bonds” of the insolvent NJ Transportation Trust Fund Authority even though they had no legal obligation to do so. They did it by giving us hikes in tolls and gasoline taxes almost every year since 2016.
Taxpayers can also suffer losses in another way. In 2011, New Jersey’s “Economic Development Authority” (EDA) sold $305 million “mezzanine” revenue bonds to investors to finance the completion of the Revel Casino Hotel in the uptown Inlet section by the Atlantic City Boardwalk. The project was a complete failure. It was sold for pennies on the dollar to investors who re-opened the property as the Ocean Casino. The Revel “mezzanine” bonds became worthless and investors lost their money. However, it was later announced that New Jersey pension funds had bought $100 million of those worthless bonds!
Will Blatstein’s waterpark earn enough money to pay back $97 million in revenue bonds plus interest? Five years ago, Blatstein bought the Ocean One Pier across the Boardwalk from Caesars Casino for $2.7 million. Blatstein called his project “The Playground”. He claimed it would be “an entertainment complex without rival”. However, that project failed and closed in less than a year. Private investors lost a lot of money. Who bought the $97 million of revenue bonds from the Atlantic County Improvement Authority. Were any bought by New Jersey pension funds?
Another sign of trouble happened last summer when the Atlantic County Improvement Authority abruptly switched underwriters to sell the waterpark bonds. Last March, the Authority hired the Wall Street investment bank Janney Montgomery Scott to sell the revenue bonds. However, a few months later, Bloomberg.com reported that Janney was unable to find investors to buy those bonds. Last summer, Bloomberg reported that the Authority planned to have Citigroup Inc. take over the deal.
According to Bloomberg.com, these “revenue bonds” were “unrated” but paid a high rate of interest. Wall Street investors are usually offered extra high interest when there is extra high risk that bonds from a troubled private corporation or “revenue bonds” from a government agency might not be paid back and lose most or all of their value. Wall Street investors commonly describe these bonds as “junk”. The Bloomberg article reported that these Blatstein Water Park bonds failed to sell “despite surging investor demand for high yield debt” elsewhere.
According to Bloomberg, “It is rare for borrowers in the municipal-bond market to change underwriters just as a deal is set to price”. Bart Blatstein said Janney would still be part of the transaction. Blatstein’s lawyer, Jeffrey Winitsky said a new underwriter would “give the transaction a fresh perspective and marketing effort”. However, spokespersons for Janney and Citigroup declined to comment to Bloomberg.
It also seems unusual that the Authority is not doing any investigation or holding any public hearings on why Wall Street Investors did not want to lend money to this project. If they think the project is too risky for them, should we ask if it is too risky for Atlantic County taxpayers? Is this a sound project? Or is this to reward Blatstein for bailing out Stockton University. In 2014, Stockton University spent $18 million to buy the Showboat Casino when it closed, but was unable to use it because of a restrictive covenant. However, one year later, Blatstein rescued Stockton by paying it $22 million for the building.
It is worth mentioning that proposals to build a waterpark at the abandoned Atlantic Palace Casino at Boston Avenue and the Boardwalk (Steve Wynn’s original Golden Nugget) failed because they could not find enough lenders or investors in 2015, and again in 2017.. What makes this water park project better?
But what will Citicorp do to sell this “junk” that Janny Montgomery Scott could not do? The failed Revel Casino comes to mind. In 2011 Republican Governor Chris Christie and top Democratic leaders in the legislature agreed to support a $1.15 billion loan package to complete the Revel Casino project after the Wall Street firm Morgan Stanley abandoned it. Private investors would loan $850 million, which would be secured by the completed building. New Jersey’s “Economic Development Authority” would sell “mezzanine bonds” to borrow the other $350 million which would be secured by nothing! The Revel Casino was completed and opened in 2012. It was a complete flop and closed two years later. It was sold to Florida developer Glen Straub for $82 million in 2015.
That means “secured” investors who loaned the $850 million got less than nine cents back on every dollar they invested. Those who bought “mezzanine bonds” got nothing. Who lost more than a billion dollars in just two years? Why didn’t any of them sue the banks or brokers who sold them this junk? Why didn’t any of them even publicly complain about their colossal losses?
Later we learned that several hedge funds operating out of Morris County, invested in these Revel bonds. We also later learned that administrators of New Jersey’s public employee pension funds had given these hedge funds hundreds of millions of dollars to invest. We also remember that at least one Republican Governor of a another state publicly complained that our Governor Chris Christie had persuaded him to invest some of his state’s pension money in Revel Casino bonds. Is Citicorp being selected because it has more political juice than Janney? Will Citicorp “persuade” pension fund administrators to invest in Blatstein’s Water Park bonds?
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