(Adds background on city's distress and legislative efforts, details about the package, bondholder comments)
By Hilary Russ
May 26 (Reuters) - The New Jersey legislature approved a rescue package on Thursday to lift Atlantic City out of its fiscal distress and give the struggling gambling hub more time to craft a recovery plan before facing a possible state takeover.
The compromise came after weeks of rancor between lawmakers, local officials and Governor Chris Christie over the magnitude of state control.
The deal comes nearly a year after the legislature first passed rescue bills, which Christie went on to reject twice.
A Christie spokesman did not reply to a request for comment on whether the governor would sign the legislation. Christie told a local radio show on Wednesday night that he believed the measures give him "all of the authority I would need" and that he would decide quickly.
Bondholders will benefit because the deal "significantly reduces the risk of bankruptcy," said Columbia Threadneedle Investment analyst Daniel Belcher, whose firm recently bought Atlantic City bonds. "They will have an enormous challenge achieving structural balance, but it puts them on the right path."
Increased gambling competition in neighboring states has cut into Atlantic City's main source of tax revenue, and the decline in casino property values since 2010 has lowered the tax base a whopping 70 percent.
Four of the city's 12 casinos closed in 2014 and remain shuttered.
Mayor Don Guardian, in office for two years, has already cut the municipal workforce, but further reductions are considered critical to lower spending to manageable levels.
The latest bills retain key measures from previous legislation, but they give the seaside resort town more time - 150 days - to craft a balanced budget and five-year recovery plan before facing state takeover.
The bills call for casinos to make $120 million of combined payments annually in lieu of property taxes for 10 years.
Casinos are also to make additional lump-sum payments totaling as much as $110 million through 2023. Some alternative casino taxes would also be redirected to pay city debt service.
In addition, the city could offer incentives for early retirement and delay for another year any repayment plan for its deferred pension and health benefit payments to the state.
Should the state take over, it could, among other things, terminate collective bargaining agreements, dissolve city departments, file a municipal bankruptcy, reject city council measures, and sell or lease municipal assets.
Guardian has said the city, whose bonds are rated "junk," could refinance and restructure annual debt service costs to under $10 million from about $38 million now. However, that might impair the city's ability to regain access to capital markets, said Columbia's Belcher.
Other hurdles include a budget gap of up to $100 million; as much as $550 million of debt and liabilities; and huge, unresolved property tax appeals with the city's most profitable casino.
James Colby, portfolio manager at VanEck, which holds a small amount of the city's debt, said state support is an "enormous relief" for the city.
"But there are no evident long-term solutions. Yet," he said.
Reporting by Hilary Russ in New York; Editing by Phil Berlowitz and Matthew Lewis