Michael Doweary is the state-appointed receiver for Chester, Pennsylvania.

Chester, Pennsylvania, is broke, its state-appointed receiver says.

This fact is just not in dispute. Chester is one among the one two municipalities within the country with an lively bankruptcy, and is thousands and thousands of dollars wanting its pension obligations.

But nearly the whole lot else concerning the Chester bankruptcy — the causes, the town’s obligations, the receiver’s proposals — is more complicated.

As the town nears the top of its second yr in Chapter 9 proceedings, it’s weathered explosive disputes inside the city council and spurred court cases testing state and national laws.

Town’s murky funds and contentious policymaking, thus far, have stayed mostly contained inside its limits. However the court cases in progress because the troubled city southwest of Philadelphia nears yr three of bankruptcy could have wide-ranging precedents.

Chester’s problems have deep roots. Town, which is one among Pennsylvania’s oldest and poorest, sits right next to Philadelphia on the bank of the Delaware River. Its economy was once boosted by textile mills, factories and a shipyard. 

When the town began hemorrhaging manufacturing jobs within the mid-Twentieth century, many residents fled, too — especially the wealthier, whiter residents. Stark racial tensions and extreme poverty remained. 

By 1995, when Pennsylvania designated Chester a distressed municipality under its Act 47 program, residents felt left behind by the federal government. Just three years later, the state opened a recent prison directly on Chester’s waterfront. 

An Act 47 distressed designation grants municipalities access to recent funding, however it also compels them to cooperate with the state, and make their required pension payments in full. Chester, in response to former officials, made no try to cooperate, and repeatedly ignored the state’s recommendations and audits. 

The pandemic exacerbated Chester’s problems, and then-Gov. Tom Wolf declared a fiscal emergency in the town. Michael Doweary, former administrator for the town of York, Pennsylvania, was appointed receiver in June of 2020, with PFM veteran Vijay Kapoor as his chief of staff. 

The declaration of “emergency” was apt, Kapoor said. Chester had laid off most of its public works department, leaving the town of 34,000 individuals with just two full-time employees and 4 part-time employees. 

“We were going into December later that yr worrying concerning the ability to plow snow,” Kapoor said. 

Doweary was required to create a recovery plan inside the first thirty days of his tenure, Kapoor said, with a more fleshed out plan due in six months. However the team quickly realized it might take for much longer than that to determine Chester’s problems. 

Inside Doweary’s first month, the Pennsylvania auditor general released a report that Chester had did not make its legally required pension payments for years. Not only did Chester owe its pension plans greater than $34 million, it may additionally have misallocated $10 million of pension-related state aid, the auditor general said. 

Town’s police pension fund contained just $1.2 million, or around two months of payments, Kapoor said; far lower than what everyone assumed. Chester had also neglected to pay payroll taxes, and owed $750,000 to the IRS. 

Town council and mayor, who had been cooperating with the state and its advisors since 2015, once more became “adversarial” to the state and the receiver, Doweary said. 

Members of the town council also served as department heads, Kapoor said, an arrangement unique to Pennsylvania and most parts of the country. It enabled the corruption and mismanagement that the receiver argued was widespread in the town.

There are a lot of potential explanations for the way Chester’s funds ended up so poorly, Doweary said, but he lays much of the blame with the town’s government; many Pennsylvania municipalities suffered “the identical decline of urban manufacturing” as Chester, and received the identical “counseling” through Act 47, he said.

“That local entity, it’s as much as them to barter contracts, take appropriate actions, be conservative, foresee whatever it’s that they should do,” Doweary said. 

But Chester didn’t receive the identical level of state involvement as other distressed municipalities, Pew Charitable Trusts journalist Liz Farmer said.

“In some ways, you could possibly say that the state prevented other cities from taking it this far,” Farmer said. 

Pennsylvania intervened heavily to stop a bankruptcy in Scranton, and the state legislature outright blocked Harrisburg’s bankruptcy filing in 2011. “None of that happened with Chester,” Farmer said.

The state made no try to stop the town council’s corruption until the declaration of emergency in 2020, and Chester’s failure to make its pension contributions went either unnoticed or unpunished for years. 

Distressed municipal governments often have acrimonious relationships with state-appointed officials, Farmer said. But Doweary’s treatment in Chester was unusually hostile. 

In a municipal bankruptcy, “the baseline is friction,” Farmer said. “But just the best way wherein all the government resisted, due to the ability of the elected officials who also ran the town agencies,” was unique. 

Tensions eventually escalated and Doweary filed a lawsuit to wrest control of the town’s funds from the council. 

The Pennsylvania Supreme Court sided with Doweary in January, affirming that receivers under Act 47 have the ability to “protect the health, safety and welfare of a municipality’s residents.” 

“The City of Chester’s local officials must accept the exercise of that power,” the court found, “whether or not they prefer it or not.”

The lawsuit was the primary test of Act 47’s powers because it was passed in 1987. Doweary acknowledges it was needed, but additionally regards it as a waste of money and time. Kapoor viewed the legal battle more positively. 

“It also demonstrated to the general public and to the parties here that this receiver was actually serious about doing the things that needed to be done with the intention to turn the town around.”

The very first thing Doweary did together with his newfound power was to file for bankruptcy in November 2022. Chester’s budget had a $46.5 million deficit in 2023, and the town faced liabilities price a whole lot of thousands and thousands of dollars with just $10-50 million of assets.

“Had it not been for the revenue alternative dollars which are given to the town and the capital dollars and the return to work dollars, the complete package,” Doweary said, “if it weren’t for that, probably we’d have needed to declare bankruptcy two years earlier.”

Municipal bankruptcies are rare, in response to Cadwalader partner Lary Stromfeld. They’re rare enough that certain legal principles are less settled than many bondholders assume.

The newly-bankrupt city filed an adversarial proceeding difficult the liens on its 2017 revenue bonds, in a “creative” effort to use some undefined terms, Stromfeld said.

The municipal bankruptcy code was modeled after the business bankruptcy code, where property acquired after a business bankruptcy is just not subject to liens. Industrial entities often put liens on their physical properties, Cadwalader partner Casey Servais noted, and cutting off a lien on propeties acquired post-bankruptcy gives those entities “a fresh start.” But a government cannot issue a lien on its physical property, and in most municipal finance contexts, the lien is sort of exclusively on their revenue.

“But that whole financing structure doesn’t work if the lien then gets cut off in bankruptcy,” Servais said.

“In a municipal revenue deal, each time revenues are paid, like in a toll booth, each time that toll money is available in,” Stromfeld said, it “could possibly be viewed as property that was acquired after the bankruptcy.”

The municipal bankruptcy law has an exception for this context, preserving liens on “special revenues” acquired after a bankruptcy, Servais said. The category of “special revenues” includes “special excise taxes,” but special excise taxes haven’t any clear definition.  

Chester argued that special excise taxes shouldn’t include the revenue it pledged in its bonds: slot machine license fees, gambling tax revenue, and costs from a waste incinerator operator. The bankruptcy court sided with the town on this a part of its challenge late last yr.

But bondholders appealed, and earlier this month, the federal Third Circuit court agreed to listen to the case.

“And so the Third Circuit, in consequence of this direct appeal that is going to occur now, is de facto going to get the primary crack at attempting to impose some form of definition on that term,” Servais said.

The municipal market has lalways expected bondholders’ liens on revenue to proceed after bankruptcy, Stromfeld said; Detroit could have challenged the liens to its revenue during its bankruptcy but, for a lot of special revenue bonds, made no try to accomplish that.

“It was at all times assumed [the liens were] wonderful,” Stromfeld said. “And if Chester is capable of make the argument and win that, it might be good for the case, however it creates an issue for the municipal market generally. The market has expectations about continuing to be secured.”

In August, Doweary filed a proposed plan of adjustment with the bankruptcy court.

Its centerpiece is “a process to generate annual revenue for City services by monetizing Chester’s water, wastewater and stormwater assets, while keeping them in public hands, the receiver’s office said.

Even assuming the monetization goes to plan, Doweary said, it would never generate enough revenue to cover the town’s liabilities and needed investments, especially considering the upcoming fiscal cliff when ARPA funds run out in 2026. Town is in mediation with its pensioners and other creditors to create a plan of adjustment to its pension obligations, Doweary said.