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A Small City in Pennsylvania Filed for Ch. 9 Bankruptcy Protection
After decades of fiscal stress, a state appointed receiver filed for bankruptcy protection on behalf of the city of Chester, PA.
Chester, PA, a small city outside Philadelphia on the Delaware River, filed for bankruptcy protection on November 10 – the action was taken by the state appointed receiver put in place two years ago. The fiscal situation has been challenging for decades, with the state first subjecting the city to financial oversight in 1995 pursuant to its Municipalities Financial Recovery Act (Act 47 of 1987). The state changed the law in 2014 and created a series of “escalating steps” to address the municipality’s financial problems.
The bankruptcy filing was seen as a last resort, as city leaders worked in recent years to avoid this drastic measure. Some of the programs put in place by the state included financial and labor reforms, budget cuts, and revenue enhancements. However, legacy issues beyond the city’s control are insurmountable for it to address on its own.
Municipal Bankruptcies are Rare, Fiscal Distress in Pennsylvania is Not
According to research by the Pew Charitable Trusts, of the 38,779 municipal governments in the U.S. only 31 have filed for bankruptcy protection since 2001.
The most recent was Fairfield, AL in May 2020 which sought protection from creditors and time to adjust its debt. Alabama is also home to Jefferson County; in 2011 the County filed for bankruptcy with $4.2 billion in outstanding debt. It is also home to the city of Pritchard which has sought bankruptcy protection twice and took the unusual step in 2010 of temporarily stopping monthly pension checks to its 150 retirees in violation of state law.
Despite the headlines, municipal bankruptcies are rare and typically occurs after years, often decades, of changing economic conditions and fiscal mismanagement.
In Pennsylvania, these types of occurrences are not new. Here are some notable examples:
Harrisburg, PA: Guaranteed incinerator debt nearly bankrupt the city, including a missed bond payment over a decade ago. Although the city filed for bankruptcy protection, the case was later dismissed. But the heavy indebtedness placed a significant burden on taxpayers and essential services.
Scranton, PA: The City Council decided not to pay on guaranteed parking revenue debt, causing it to lose capital market access for some time. Other problems also came to light as the city recovered, including needing to issue debt to fund backpay to police and firefighters and sale of its water system in order to make required improvements.
Pittsburgh, PA: To avoid a state takeover of its poorly funded pension system, the city monetized its parking system and directed an estimated $735 million to the fund over 30 years. The city is on a better fiscal and economic footing but struggled for decades.
A state budget impasse in 2015 left the state’s 500 school districts without aid. According to one state association at the time, districts were without 30% of anticipated state subsidies and “largely depending on tax revenue, fund balance, and borrowing options to continue day-to-day operations.”
Like many post-industrial areas, Pennsylvania municipalities struggled to adapt to changing demographic trends, a collapse of its traditional manufacturing industries, and factors beyond their control. To its credit, the state’s Act 47 fiscal monitoring and intervention system works and has been beneficial in reversing fiscal distress among many communities.
A Closer Look at What’s Happening in Chester
Excerpted from the Municipalities Financial Recovery Act report of the city receiver’s fiscal recovery plan – May 2020:
City government has two cash crises: One in the General Fund that supports basic operations and one in the Police Pension Fund.
In recent years, the City has dealt with this problem by defaulting on its Tax Revenue Anticipation Note (TRAN) repayment (2016); falling behind on its payments for employee health insurance (2016); issuing new debt to cover current year obligations (2017); and pushing a portion of its current year obligations into the next year (2018 and 2019).
The police pension plan spends $500,000 - $550,000 per month, mostly on monthly pension benefit payments to retirees. The plan did not have enough cash on hand to make every payment in June or July , so the City converted about $500,000 of investments to cash.
The bankruptcy petition filed Thursday estimated hundreds of millions in liabilities. Chester is also seeking to close a $46.5 million deficit – the city’s budget is only $55 million. There is also increasing concern pensioners could lose their benefits and health insurance, but this would be a rare action to take.
However, one thing is clear: the city itself will be unable to recover on its own. According to one of its Act 47 Exit Plans:
Devastated by decades of deindustrialization and population loss, the City of Chester is one of Pennsylvania’s poorest jurisdictions, with a weak economy exhibiting little or no growth, and correspondingly high unemployment with few job opportunities to reverse the course.
One study linked the city’s poverty to housing challenges and that to reduce Chester's poverty rate in the long run, there needs to be more affordable housing options for low-income households spread out evenly across Delaware County. The study noted that:
If it is only communities with high poverty rates that work to provide decent, affordable housing for the poor, then poverty will remain geographically concentrated, and the social problems that accompany high-poverty neighborhoods will persist.
Bankruptcy Raises Issues of Social and Racial Equity in Public Finance
It shouldn't be surprising that most distressed communities are also facing racial and economic inequality.
When it comes to municipal distress there is a common theme – communities that have a large concentration of minority residents and high poverty rates are more likely to have financial problems.
Some demographic data on notable examples of places that have undergone fiscal distress across the country share these characteristics:
While bankruptcy may be a necessary step to help cities such as Chester get back on track, it is important that we also consider social and racial equity issues. Citizens, city workers, and retirees will all be impacted by the bankruptcy process and, importantly, have been marginalized for years.
Without addressing underlying issues, there will always be a risk of future financial distress in vulnerable communities. Policies need to ensure that cities such as Chester can provide essential services and invest in the long-term well-being of their residents, regardless of their socioeconomic status or racial background.
Any opinions expressed herein are those of the author and the author alone.