By Kate King 

Atlantic City slid closer to insolvency this week when its largest casino declined to pay its February property-tax bill, raising the stakes for New Jersey lawmakers who are crafting a bill that would allow a state takeover of the resort city.

The city was previously on track to run out of cash by April 1, but that timeline sped up when a state judge ruled on Feb. 5 that Borgata Hotel Casino & Spa could withhold its $7.2 million tax payment as a way of recouping some of the $150 million owed to it by the city.

Citing the financial turmoil in Atlantic City, which is facing a nearly $80 million budget deficit this year, the judge on Thursday ordered Borgata and state of New Jersey to hold a Feb. 23 settlement discussion to negotiate the outstanding debt.

An attorney representing Atlantic City in its court dispute with Borgata told the judge that the loss of Borgata's tax revenue would cause the city to run out of money by mid- to late February.

Atlantic City's finance director, however, said the city still has some money on hand after receiving checks from its other taxpayers this month.

"I don't want to, at this point, give any dates as to when I might run out of cash," said Michael P. Stinson, the city's finance director.

The loss of Borgata's payment is a major blow to Atlantic City's coffers, reducing its February tax revenue by 17% to $35 million. The city collects taxes quarterly and shares the revenue with its school district and the Atlantic County government, Mr. Stinson said.

Atlantic City owes Borgata an estimated $150 million, plus interest, after the casino successfully appealed its property assessments dating back to 2009. The city's poor credit rating prevents it from raising money in the bond market to pay off the debt.

Joe Corbo, vice president and general counsel for the casino, said Borgata has been "tremendously patient" but has a fiduciary duty to its parent companies' shareholders to collect the outstanding tax refunds.

Meanwhile, lawmakers in Trenton have been scrambling to introduce legislation to gain control of Atlantic City's finances and send the city a much-needed cash infusion.

"I'm optimistic we can get a deal done, but we have to move really fast right now," said Assemblyman Vincent Mazzeo, a Democrat whose district includes Atlantic City.

Mr. Mazzeo said the litigation with Borgata could have been resolved a month ago, when state lawmakers approved several bills that would have sent money to the city and stabilized property taxes for the city's casinos.

"This was supposed to stop the bleeding for Atlantic City," he said. "Now we're back at square one."

Gov. Chris Christie declined to sign the rescue package, instead announcing late last month that the Legislature would pass a new bill to give the state more authority over Atlantic City's finances.

Lawmakers promised to include a cash infusion in the legislation, which they pledged to craft in partnership with Atlantic City officials. Some city officials and residents strongly oppose a takeover and have discussed seeking bankruptcy protection.

State representatives met with Atlantic City officials twice over the past 2 1/2 weeks but have yet to show them a draft of the bill, said City Council President Marty Small.

"It was a good meeting, ideas were exchanged and we're just waiting on the bill," Mr. Small said.

A spokesman for Mr. Christie declined to comment on Friday.

A spokesman for state Senate President Steve Sweeney, a Democrat, said the legislation would be introduced "very soon."

"We want Atlantic City to recover from its fiscal crisis and we intend to work in a cooperative way to have that happen," the spokesman said.

Write to Kate King at Kate.King@wsj.com

(END) Dow Jones Newswires

February 12, 2016 19:25 ET (00:25 GMT)