Atlantic City Council member again vote on dissolving the Municipal Utilities Authority, during meeting Wednesday Sept 7, 2016 They risk defaulting on state loan terms if they fail to dissolve the water works (The Press of Atlantic City / Edward Lea Staff Photographer)

ATLANTIC CITY — With the city staring at default, the state showed mercy by not making it immediately repay $62 million, even though the city violated terms of a state loan agreement.

The state officially notified the city Tuesday that the resort breached the agreement by missing a Monday deadline to initiate dissolution of its water authority, which was collateral for the loan.

But the state decided not to demand immediate repayment “due to our continued working relationship with the city,” a state spokeswoman said Wednesday.

“The Division (of Local Government Services) has elected not to accelerate the repayment terms and declare the Recovery Loan immediately due and payable,” said Department of Community Affairs spokeswoman Tammori Petty. “We will continue to work with the city to allow officials to take appropriate actions.”

But in a letter to the city solicitor, the DCA said it reserves the right to demand immediate repayment of the loan at any time.

The city was grateful for the reprieve, Mayor Don Guardian said at Wednesday night’s City Council meeting.

“We had approached them after we were not able to meet the requirements of the MUA. And we’re committed to the (fiscal recovery) plan.”

However, the state will not provide any additional loan advances and state aid will be withheld “as necessary to ensure that the loan is fully collateralized,” Petty said. The city could have borrowed an additional $11 million.

The state had the ability to demand immediate loan repayment or seize the city’s collateral after Monday’s loan-term violation, according to the agreement.

The loan was part of a law that gave the broke city until Nov. 3 to submit a five-year fiscal recovery plan to the state. The plan’s rejection would result in a five-year state takeover of the city’s finances and major decision-making powers.

The city originally had until Sept. 15 to initiate dissolution of the Municipal Utilities Authority, the valuable water system that has long been at the center of negotiations between the city and state over the resort’s financial future. City Council failed to approve the authority-related measures, so the state gave the city until Monday to come into compliance with the agreement.

City officials asked the state for a reprieve on the loan violation, saying the authority would be part of the city’s fiscal recovery plan. The city unveiled its plans for the authority last week when it announced that the water works agreed to buy Bader Field for at least $100 million. The proceeds would pay down the city’s roughly $500 million debt. The sale still requires council and state approval.

The complicated and controversial loan agreement is also part of a lawsuit from Liberty & Prosperity, a tea party group that seeks, in part, to void the agreement altogether. The group is represented by former city Councilman Seth Grossman, who has said council’s approval of the loan broke public-meeting and local-budget laws.

The city had planned to repay the loan with up to $78 million in redirected casino tax funds that were part of a state financial rescue package for the city. But the state chose to withhold that money until after it accepts or rejects the city’s fiscal recovery plan.

Staff writer, politics

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