A Small City's Descent Into Bankruptcy

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Welcome back to the Route Fifty Public Finance Update! I’m Liz Farmer and this week’s newsletter will be the first in a three-part series about Chester, Pennsylvania, a small city outside Philadelphia that filed for bankruptcy late last year. We'll start off by looking at how the situation in Chester compares to another Chapter 9 bankruptcy that took place about a decade ago. But first, here’s the backstory.

Chester is an old city with a long history of manufacturing due to its location along the Delaware River. In fact, a marker in the city along the river commemorates the site where William Penn first landed in 1682. Its former courthouse was built in 1724 and is the longest continuously-used public building in the country. In the late 1800s, textile mills gave way to factories and by the mid-20th century, more than 66,000 people lived in Chester. During World War II, the shipyard along the Delaware River was home to 28 ship bays and employed 36,000—greater than the entire population of the city today.

The city’s decline over the following decades mirrored that of many other post industrial cities. The loss of manufacturing jobs led to a massive population decline and a diminished tax base. The city’s poverty rate increased along with crime and a proliferation of low-income rental housing. Racial tensions between white and Black residents were constantly in the backdrop. In the 1960s, students protesting Chester’s de facto segregation in public schools—a decade after the U.S. Supreme Court outlawed it—were brutalized by police and civil rights activist James Farmer dubbed Chester the "Birmingham of the North.”

These days, the once-industrious riverfront is home to a casino and a waste-treatment industrial campus. One of the poorest cities in Pennsylvania, Chester was declared a financially distressed municipality in 1995 under a state law known as Act 47 and given a recovery coordinator who reported to the state. Despite the many alarm bells raised over the ensuing years about the city’s deteriorating financial situation, little seems to have changed. 

“The critically low funding status of the Police Pension Plan and the potentially disastrous impact of its insolvency on the City’s General Fund cannot be overemphasized,” the city’s 2018 recovery plan states.

In 2020, a court placed Chester under receivership, only the second time such proceedings had been instituted by the state. The receiver, Michael T. Doweary, is the former business administrator for the city of York, Pennsylvania and had some direct control over city finances but still needed local approval to restructure services and financial liabilities to avoid bankruptcy and harm to residents. But after two years of butting heads over the deficit—nearly as high as the city's $55 million budget—and how to resolve $430 million in mostly pension and retiree healthcare liabilities, Doweary filed for Chapter 9 bankruptcy protection on behalf of Chester.

While municipal bankruptcy cases are unique, Chester has a lot in common with another small city that filed for bankruptcy. Central Falls, Rhode Island, sits outside of Providence and faced a similar post industrial decline. It’s also majority-minority, has a high poverty rate, and was buried in pension and retiree health care debt. It was placed under receivership in 2010 and filed for bankruptcy a year later after negotiations to restructure the city’s retiree debt failed.

Central Falls’ experience in bankruptcy may be instructive for Chester in a few key ways.

Pension Cuts

Retirees in Central Falls ended up taking a massive pension cut—up to 55% for some retirees. While the severity of the cut was partly due to a state law at the time that prevented the city from cutting its bondholder obligations, the retiree liabilities were so high (equal to five times the city’s annual budget) that some amount of cuts were inevitable. 

Even so, that didn’t make the decision any easier. “These were cuts we had to make to people who were living real lives and these decisions were making people’s lives more difficult,” Ted Orson, the attorney for Central Falls’ receiver, told Route Fifty this month. “That’s a terrible thing to have to do and we didn’t take it lightly.”

Doweary has said that Chester will also have to renegotiate pension and health-benefit agreements as part of the city’s restructuring. Unlike Central Falls, cuts to bondholders are also on the table. But according to the bankruptcy filing, the city’s outstanding bond debt of about $24 million pales in comparison to its $232 million in retiree health-care debt and $127 million in pension liabilities. This month, Chester municipal retirees succeeded in getting a court-appointed representative to protect their interests.

Orson says a key step in negotiating while in bankruptcy was when the Central Falls retirees hired their own actuary to assess the financial condition of their pension plans. “They came back and told us…'You were the first people who were being honest with us.’ As horrible as it was, they appreciated honesty,” Orson said.

A Government Takeover

Another parallel is that Central Falls elected officials lost significant power during receivership and were reduced to advisory status. Chester’s Doweary is seeking a more permanent restructuring of city governance that would also reduce elected officials’ control over city agencies. In court proceedings this week, an attorney for Doweary said local elected officials “continue to block information regarding financial records or potential misconduct. There are essentially no internal controls,” said Tiffany Allen.

In Central Falls, receiver Robert G. Flanders Jr. said the city needed to be rescued from itself and that his actions were centered on returning the city to fiscal stability.

“The law suspends the usual democratic process because the economic crisis that caused the city to be running out of cash—and having to go file for bankruptcy—needed drastic action,” Flanders told the Associated Press in 2012. “I’m sensitive to the fact that I am not an elected official, that I don’t live in the city and that people are leery of a situation where one person ... has as much power as one person does to run the city and to try and right the economic ship of Central Falls,” he added. “That’s the law that the General Assembly passed and I have to say, it’s working, from my view, remarkably well.”

State Help

As much as the Rhode Island Assembly made decisions that seemed to make things more difficult on Central Falls residents, it also stepped in to smooth things over down the road. State officials ultimately directed more than $7 million over 35 years to restore up to 75% of Central Falls retiree pensions. Former State Treasurer Seth Magaziner also facilitated moving the city’s municipal pension plan into the state’s system, where it has benefited from better oversight, lower costs, and increased long-term stability. 

State funding also went to new streetscaping in downtown Central Falls. These small-scale investments from the state were followed by the city cracking down on slum landlords, demolishing abandoned buildings, and restoring others for use as affordable housing. Rhode Island College also opened a workforce development hub in the city and the city’s crime rate has fallen by more than 25%, according to former mayor James Diossa, who is now Rhode Island's treasurer.

These small investments by the state were significant for a city the size of Central Falls. If lawmakers in Harrisburg find ways to aid in Chester’s restructuring, residents will likely see the benefit. For his part, Chester Mayor Thaddeus Kirkland has expressed hope that incoming governor Josh Shapiro would be amenable to working with the city, given Shapiro’s work as state attorney general on anti-crime initiatives in the region.

Up Next

Next time, I’ll do a deep dive into Chester’s complicated financial problems that led the city receiver to declare, “Without a doubt, Chester’s financial situation is by far the worst that we have encountered.”