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Municipal Bankruptcies Are Rare as Hen’s Teeth – But Other Examples Show Selling Off Water Rights Is Not the Answer

This week marks the one-year anniversary of the City of Chester’s bankruptcy filing, whereby the City joined an inglorious club of only a handful of other municipalities to have declared bankruptcy in recent years. A 2022 article discussing the City’s imminent bankruptcy pointed out that, nationwide, only 31 municipalities have filed for bankruptcy relief since 2001—and that’s out of the “nearly 39,000 local governments across the country.” According to the article, only 27 states, including Pennsylvania, allow certain localities to declare bankruptcy, and “[t]he last time a municipality filed for bankruptcy was Fairfield, Alabama, in 2020.”

Like the City of Chester, Fairfield has a pension problem. It has been reported that “at least $28 million in unpaid debts has left former employees”—including former police officers—”without a retirement pension” in Fairfield. Unlike Chester, however, no one is proposing that Fairfield privatize its water source, nor can they. Fairfield gets its water from Birmingham Water Works (BWW) and Fairfield does not have any seats on BWW’s board. Residents of Fairfield, therefore, do not need to worry about their water rates skyrocketing as a result of a for-profit company taking over their water supplier.

This has been the case for residents of other municipalities that have gone through bankruptcy. Take Vallejo, California, for example. An article from when Vallejo emerged from bankruptcy in 2011 explained:

Vallejo’s City Council declared bankruptcy in May 2008, faced with large deficits, few reserves, costly police and fire contracts and plunging tax revenue. Declaring bankruptcy gave the city protection from creditors and allowed it to renegotiate its employee contracts.

Among other changes, city staffers now contribute more to their health insurance, new firefighters have lower pension plans, and the fire department no longer has minimum staffing requirements.

The city has also taken steps to find more revenue. . . . The moves have paid off.

Another article, which examined Vallejo’s financial condition 10 years after its bankruptcy, offered this assessment: “A decade after Vallejo, Calif. entered bankruptcy, the city appears to have turned a corner. ‘Vallejo has done a ground-up restructuring . . . They are now routinely one of the top 10 cities where people want to live, which is a huge turn-around from when they entered bankruptcy.’”

Notably, Vallejo’s “ground-up restructuring” did not include privatizing its water or wastewater systems. Rather, Vallejo continues to operate its own authorities for both drinking water and wastewater.

The 2013 bankruptcy case of Detroit, Michigan—the largest municipal bankruptcy filing in U.S. history in terms of both debt and population—tells a somewhat different story. After the city declared bankruptcy, Detroit’s emergency manager began “looking into finding a private buyer for the bankrupt city’s water department.” Privatization, however, never happened. Rather, as a way to help the city emerge out of its bankruptcy, Detroit reached a deal with three Michigan counties over regional water and sewer services and created the Great Lakes Water Authority (GLWA), a new regional water and sewer authority. Under the deal, Detroit retained ownership of its water and wastewater systems and, through the Detroit Water & Sewerage Department, continues to provide water and wastewater services within Detroit city limits. However, the city now leases infrastructure and treatment facilities to GLWA under a 40-year lease for $50 million per year. While some ratepayers in GLWA’s service area (outside of Detroit) have reported issues with water affordability, it is easy to imagine how a sale to a for-profit water company—an entity duty-bound to enhance shareholder profits—would have exacerbated affordability issues exponentially.

While Chester claims it has as much as $500 million in debt, the complexity of its bankruptcy case pales in comparison to Detroit’s in 2013, where the debt was estimated at $18-20 billion. If privatization can be avoided in Detroit—as well as in those other municipalities with the rare and dubious distinction of having declared bankruptcy—it can, and should, be avoided in Chester too.


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