Judge sides with A.C. in schools case; city countersues state
ATLANTIC CITY - If it were poker, Atlantic City might not even have enough money to ante up. But inside a city courtroom Tuesday, the broke seaside resort raised the stakes against the State of New Jersey, filing a counterclaim seeking $33.5 million in promised state aid.
ATLANTIC CITY - If it were poker, Atlantic City might not even have enough money to ante up. But inside a city courtroom Tuesday, the broke seaside resort raised the stakes against the State of New Jersey, filing a counterclaim seeking $33.5 million in promised state aid.
The city's action only intensified the ongoing drama on the Boardwalk, with the city fending off legal action from the state education commissioner over school payments and awaiting the end of a Trenton stalemate over aid.
Its coffers are "basically at zero," said city finance director Michael P. Stinson.
Tuesday afternoon, Judge Julio Mendez ruled that the city was in compliance with required payments to the school district, and denied a state request to bar the city from spending future tax revenue until all the year's school payments were made.
But immediately after the hearing and ruling came the new twist.
City Attorney Robert Tarver announced that Atlantic City had filed the counterclaim against the state, specifically the Department of Community Affairs and Division of Local Government Services, which have provided oversight of its finances for the last five years. It contends that the state has "taken actions which undermine the bedrock of the City of Atlantic City's long-term fiscal stability."
The claim demands that the state "immediately provide" the $33.5 million in state aid that was approved by the state monitor in the city's 2015 budget.
That aid was supposed to come in legislation that was twice vetoed by Gov. Christie. State monitors told the city to list it under a line item known as Casino Redirected Anticipated Payment and approved the budget. The city's claim describes an "epic fiscal tsunami of unparalleled proportions" that has brought it to near-bankruptcy. It says that the state monitors bypassed the city in approving a budget and that Timothy Cunningham, director of the DLGS, praised the city's cooperation and the budget, which was put together by a member of the Local Finance Board. But then, the money was never delivered.
The city's claim asks the judge to appoint a special master to oversee the Division of Local Government Services "to ensure that the DLGS acts in a manner consistent with its statutory mission."
The city also asked that the state be ordered to produce reports written by Ernst & Young, which the city said it was never given access to. It says the state "deliberately deprived the city of the tools necessary to fully comply" with a request for a financial plan. The city was then blamed for failing to provide a contingency plan. The reports by Ernst & Young were part of the $2.6 million spent by two emergency managers, Kevin Lavin and Kevyn Orr, hired by Christie to oversee the city and negotiate with creditors.
The city is also asking the state to produce documents related to an investigation performed by the Skadden Arps law firm related to the Borgata casino tax appeal and settlement. Through tax appeals, Borgata is now owed in excess of $150 million in judgment and settlement, and was given permission by Mendez to withhold taxes.
Christie this month dismissed as "stupid" a question about the outcome of negotiations conducted by his state monitors.
The city's counterclaim also seeks documents related to the state's planned takeover of Atlantic City, and asks the judge to bar any "punitive retributive or adverse action."
In the schools case, an action filed against the city by Education Commissioner David Hespe, Mendez denied the state's request for injunctive relief to force the city to set aside $25.4 million it will owe the school board between May and August.
He said such an order would create other problems for the city. The city had made the second of two $4.25 million payments this month to the school board earlier in the day Tuesday.
It has paid about $56.4 million to the district this year, out of a total of $82 million due by August.
"If an injunction is granted, it does not allow the city to be creative in its budgetary process," Mendez said.
Mendez noted that the state had initially sought to stop the city from making payroll April 8, which the judge refused to do.
The city is currently operating on an agreement with unions to switch from a 14-day payroll period to a 28-day period, which delays its next payroll until after May quarterly taxes are due.
The city said it was expecting between $40 million and $50 million in taxes around May 2, and typically takes in between $100,000 and $150,000 daily in miscellaneous revenue.
Echoing a debate that has been ongoing in Trenton, Mendez noted that the state already had monitors in place.
"The checks and balances are already in place," Mendez said. "The authority of the monitor was pretty substantial."
Mendez asked the state's attorney, Deputy Attorney General Dan Dryzga, if the state had a contingency plan in case the city defaulted, "to ensure that the children of Atlantic City receive a thorough and efficient education," as the state constitution requires.
Dryzga said he was unable to answer.
Mendez said both case law and the state constitution provide "definite responsibility on the part of the state" to step in to provide education if the city is unable to. The state might later sue the city to recoup money it spent if that were to happen.
Both the city's attorney and Kevin Jarvis, an attorney representing municipal unions, said there would be "massive litigation" if the city were barred from making payroll.
"This is somewhat of a manufactured crisis," Jarvis said. "The crisis doesn't exist. The crisis has been averted. The payments have been made."
Mendez ruled that the state did have standing to take legal action, saying he would hold another hearing May 15, when the next school payment is due.
Mayor Don Guardian issued a statement after the hearing calling for compromise in Trenton. "I am confident that once we get past the politics, we will find a winning solution that everyone can agree upon," he said.
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