City of Chester is considering filing for bankruptcy ahead of looming $46 million deficit
Bankruptcy would get rid of the city's method of putting off expenses year after year, one official said.
Chester Receiver Michael T. Doweary is considering bankruptcy as a way to steer the city toward solid financial footing in light of a looming $46.5 million deficit anticipated next year.
Through Act 47, the receiver has the power to file for bankruptcy and received authorization from the Pennsylvania Secretary of Community and Economic Development in February to proceed with bankruptcy filings.
As required by Act 47, Doweary consulted with the Municipal Financial Recovery Advisory Committee on Tuesday regarding taking a step forward in that direction. He has not yet filed for bankruptcy but is engaging in negotiations with relevant groups to avoid such a filing.
“What bankruptcy would mean for Chester is that it would provide Chester with the ability to try to reduce its pension to retiree health care … which it has to do to be fiscally solvent,” Vijay Kapoor, Doweary’s chief of staff, said. “The other thing that it would allow Chester to do is the opportunity to negotiate with other creditors so the city would have a fresh start, which it desperately needs.”
Bankruptcy would get rid of the city's method of putting off expenses year after year, according to Kapoor, who added that retiree health care and pensions could be adjusted through a bankruptcy process.
Chester would continue to provide services to its residents even through bankruptcy, he added, although he said he anticipated that some employees may leave because of the uncertainty around such a situation.
"At the end of the day what has to happen is recurring revenues have got to be able to meet recurring costs," Kapoor said. "That is what is going to make Chester fiscally solvent … where it's actually fixed for real as opposed to something that'll just kick the can down the road for five or six or seven or 10 years."
In evaluating Chester's general fund from 2013 to 2019, only in 2017 was there a surplus of $7.7 million due to a $12 million cash advance and a $2 million state loan. In the other years, the city's general fund ran a deficit from $2.2 million to $8.6 million.
Much of the pressure put on the city's budget was because of the costs of the pension, according to Kapoor.
Debt eating up city
In 2013, the city's minimum municipal obligation — the least amount required by law for a municipality to contribute to their pension fund — was $3.5 million. In 2021, it was $10.8 million. In seven of the years from 2013 to 2021, Chester was unable to pay its minimum amount, resulting in the balance being pushed off to future years.
Kapoor stated that $39.8 million is due next year for past-due pension payments but even if not including that, Chester is expected to see a $6.7 million deficit next year. Combined, that deficit would be $46.5 million.
In context, the city's 2023 operating budget is $61.2 million.
While American Rescue Plan Act funds are expected to help the city in 2024, those federal funds run out after that. Chester has been earmarked to receive $30.4 million.
To close the gap, Doweary has been looking at four options:
Eliminating retiree health care for all current and future retirees with estimates of saving $6 million to $8 million annually.
Cap city costs for active employee health care with project annual savings of $995,000 to $2 million.
Reduce annual city pension payments through pension cuts and one-time revenues from private or public monetization of the water system with savings ranging from a one-time $39 million payment the first year with $4 million in savings each year after that;
Eliminate or significantly reduce the city’s debt, with anticipated yearly savings of approximately $3.6 million.
Doweary said the impact on property taxes and changes in water rates through a monetization of the system have not yet been determined and asked his staff to report back how specifically a city bankruptcy would impact city residents.
“Taxes are high”
Kapoor spoke of the burden on residents already.
"Residents pay a pretty high price in the city," he said. "Their taxes are high. They've got the second highest earned income tax in the Commonwealth, behind Philadelphia."
In addition, residents pay water and stormwater fees.
"The needs that Chester has right now are monumental," Kapoor said, noting that the 2020 median household income in Chester was $32,867. "A great deal of this has fallen to residents."
The receiver said he continues to engage the groups that would be impacted by the options he is pursuing.
"This is still fluid, so to speak," Doweary said. "The order of magnitude is pretty much in place but there are still details being figured out here."
One thing he said he'd like to establish is an IT department of two employees for the city.
“Turned over every rock”
Andrew Sheaf from the Department of Community and Economic Development commented on the presentation.
"I do want to say I don't have any other options that I can think of as we're looking at the situation and some of the numbers," he said. "I do hope there is a way with some of your current negotiations to potentially avoid bankruptcy but if that's not the case, I do think that you guys have turned over every rock … and have put together a thorough and clear case to that end."
Kapoor said members of the Receiver's team have worked with many financially distressed municipalities across Pennsylvania and the country.
"Without a doubt, the situation that Chester faces is by far the worst we've ever encountered — whether it's the pension situation, whether it's the budget situation," he said. "The options are severe … and we didn't come to them lightly."
Chester has been in financial oversight since 1995 and Gov. Tom Wolf declared a fiscal emergency in 2020.