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Commonwealth Failing Chester
While it is now widely known that Chester has become so cash-strapped that a declaration of fiscal emergency has been issued and a Receiver appointed, the true extent of Chester’s financial troubles are not currently known because the City has not released audited financial statements since those for the fiscal year ending December 31, 2017. 13 It is unclear what the DCED and the Receiver controlled City do not want the world to see, but the failure of the City to produce audited financial statements, and the failure of the DCED in its Act 47 oversight capacity, are causes for great concern.
The DCED’s Act 47 Recovery Team has been involved in the City of Chester’s day-to-day strategic financial planning for decades. Before the new Recovery Coordinator took over, the City operated within budget for several years including establishing a revenue fund with excess revenues.14
That all changed, and the City ran operating deficits from 2013 through 2017 and began delaying payments to vendors and not funding required obligations. That fiscal mismanagement took its toll. In 2014, credit rating agency S&P suspended the ‘A’ rating issued in August of 2011 regarding Chester’s general obligation debt “because the city failed to supply needed documentation.”16 At the end of 2016, the City defaulted on its 2016 Tax and Revenue Anticipation Note. In addition, the City has admitted publicly that its failure to issue and produce audited financial statements is a violation of mandated Securities and Exchange Commission continuing disclosure obligations.
That all changed eight years ago when John Linder became Mayor. From 2013 through 2017, the City ran operating deficits, began delaying payments to vendors, and failed to fund required pension and other obligations.15 The Receiver has disclosed that “[t]he City has not made its full minimal municipal obligation (MMO) to the three pension plans since 2013, leading to a severely underfunded pension situation, particularly with the Police and Officers & Employees (non-uniform) plans.”16 In 2014, credit rating agency S&P suspended the “A” rating it previously provided in August of 2011 regarding Chester’s general obligation debt because in 2014 “the city failed to supply needed documentation.”17 At the end of 2016, the City defaulted on its 2016 Tax and Revenue Anticipation Note18, and underpaid for its healthcare costs, accumulating an outstanding balance to its health insurance provider of almost $8 million19. The DCED picked Receiver has stated that due to the lack of fiscal oversight “[t]he City faced a severe situation in 2017 with $28 million in unpaid obligations, including past due pension minimum municipal obligations (MMOs), health insurance premium payments, vendor payments, and workers compensation premiums.”20 The only way the City made it through 2017 was because the DCED issued an emergency $2 million loan in January 2017 to meet the City’s immediate cash flow needs, and in August 2017, the City issued $12,000,000 Series 2017A Bonds to pay certain unfunded General Fund liabilities and to fund required reserve funds.21 Mayor Linder and the DCED were forewarned in January of 2012 of the looming pension issues as a result of an adverse arbitration award and had the opportunity to appeal that decision based on a powerful dissent that laid out the legal and factual basis to do so. Mayor Linder, and the Act 47 Oversight team, chose not to appeal that decision, and then ignored the impact it had on the City by simply letting the unpaid benefits pile up year after year for the present day residents of Chester to now deal with.22
In 2018, the DCED Recovery Team recognized that “[a]t the beginning of 2017, the City had accumulated approximately $28 million of unpaid obligations including over $14 million in past due pension MMOs, $6.9 million of health insurance premium payments, $1.1 million of workers compensation premiums, and $2.3 million of other vendor payments.”23
While it has been long thought that the City was shoving bills in drawers without paying them, it has now been confirmed by the Receiver that millions of dollars of unpaid bills were carried over from year to year, such that the “[t]he pattern of pushing a portion of each fiscal year’s obligations into the next one has made it difficult to accurately analyze the [City’s] financial performance on an annual basis.”24
In addition, the City has admitted publicly that its failure to issue and produce audited financial statements is a violation of mandated Securities and Exchange Commission continuing disclosure obligations.25
A review of the City’s financial statements between 2011 and 2017 reveals alarming trends, as well as a complete disregard for accounting rules and proper fiscal management. The City consistently produced budgets that it did not meet, and which used improper data and assumptions to overstate expected revenues. When compared to actual results, the financial mismanagement of the City and lack of oversight by the DCED are shocking.
The City took in significantly less revenue each year than it was projecting. The budget to actual variances to Total Revenue for the General Fund was as high as 19% during the period 2011-2017. At the same time, the City spent more and more money with its expenses far outpacing revenue. Total Actual Expenditures for the General Fund increased from $40 million to over $47 million from 2011-2017 and Total Liabilities for the City’s basic services went from $4 million to almost $25 million during the same timeframe. This mismatch between revenue and expenditures resulted in the positive year-end fund balances for the General & Reserve Funds to go from a beginning fund balance of $10.4 million to start 2011, to negative $15.3 million at the end of 2017.
In 2018, the DCED Recovery Team recognized that “[a]t the beginning of 2017, the City had accumulated approximately $28 million of unpaid obligations including over $14 million in past due pension MMOs, $6.9 million of health insurance premium payments, $1.1 million of workers compensation premiums, and $2.3 million of other vendor payments.”
This poor budgeting meant that the City took in significantly less revenue each year than it was projecting, and the DCED should have known these projections were unrealistic. The budget to actual variances to Total Revenue for the General Fund were as high as 19% during the period 2013-2017.33 At the same time, the City spent more and more money with its expenses far outpacing revenue. Total Actual Expenditures for the General Fund increased from $40 million to over $47 million from 2011-2017 and Total Liabilities for the City’s basic services went from $4 million to almost $25 million during the same timeframe.34 This mismatch between revenue and expenditures, largely occurring during Mayor Linder’s administration, resulted in the positive year-end fund balances for the General & Reserve Funds to go from a beginning fund balance surplus of $10.4 million to start 2011, to negative fund balance deficit of -$15.3 million at the end of 2017 – a swing in the wrong direction of more than $25 million dollars.35
Moreover, the 2016 and 2018 Amended Recovery and Exit Plans issued by the Act 47 Recovery Coordinator noted serious financial management infrastructure deficiencies, including that the City had fallen years behind on its annual independent financial audits.36 The Recovery Coordinator also warned of significant breakdowns in basic accounting functions at the City, stating that “[t]he Finance Department has had significant delays in completing its trial balances and struggled to deliver clean, accurate internal financial information to its auditor.”37
