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New Documents Detail DCED’s Involvement in Attempted Hostile Takeover of the Chester Water Authority

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New Documents Detail DCED’s Involvement in Attempted Hostile Takeover of the Chester Water Authority
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The City of Chester has been in financial difficulty for decades. Since the mid-1990s, the Pennsylvania Department of Community and Economic Development has been obligated under state law to help the City recover financially. DCED and the Recovery Coordinator acting at DCED’s direction have failed in this responsibility. Under DCED’s watch, the situation has only gotten worse for the City and its citizens.

Out of constructive ideas, and to cover its own mismanagement, DCED has pushed a radical “solution” onto the City: sell, for the City’s sole benefit, the Chester Water Authority, a multi-jurisdictional entity providing safe water at low rates throughout Chester and Delaware Counties. This DCED agenda is confirmed by numerous documents DCED recently produced in response to public records requests.

DCED’s own documents also suggest that when the City and the Authority were close to reaching a mutually beneficial settlement to avoid a sale, DCED derailed the deal. DCED has even continued to insist on a sale after recognizing that a sale would dramatically increase water rates. On April 3, 2020, the Recovery Coordinator wrote a letter to Kim Bracey at DCED analyzing the City’s options for monetizing the Authority. The Recovery Coordinator made clear that: 

“A higher bid [to buy the Authority] does not necessarily indicate a more generous offer.  In general a higher bid is conditional on a steeper rate increase for water customers.”1

Despite this acknowledgement, the receiver DCED now employs for the City and his financial analysts continue to analyze bids for the sale of the Authority without any regard for the punishing rate increase that would follow a sale.

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DCED documents now reveal that on May 31, 2016, attorneys hired by the Recovery Coordinator for the City ordered the Authority’s articles of incorporation from the Pennsylvania Corporations Bureau.2 There was only one plausible reason for such diligence on the Authority: DCED was exploring whether the Authority could be sold to bail out the failures of DCED and its appointees to fix the City’s finances throughout the City’s protracted tenure in financial distress.

On May 8, 2017, Aqua Pennsylvania sent an unsolicited proposal to the Authority seeking to purchase it for $320,000,000. The Authority’s board unanimously rejected the proposal ten days later as not being in the best interest of the Authority’s customers. If Aqua took over the Authority’s operations, Aqua would ultimately impose a significant rate hike of over 100% onto the customers.

The City has been in financial distress for decades. Even though Aqua’s proposed purchase failed, it sparked an apparent interest in the City to for the first time to claim ownership of and attempt to sell off the Authority to bolster its poor financial condition. In October 2017, the City’s Mayor sent a letter to the Authority expressing interest in exploring ways to monetize the Authority for the City’s sole benefit. The Authority responded the following month that the City does not have the legal authority to unilaterally terminate and sell-off the Authority.

The Authority’s steadfast position is that as an authority funded solely by its ratepayers, and as an Act 73 Authority with a board appointed by the jurisdictions within its large service area (Chester County, Delaware County and Chester City), it does not belong to the City. Its position is supported by the law. However, in an effort to avoid protracted litigation over that issue, the Authority began discussions with the City. To aid those discussions, on March 15, 2018, the City and the Authority entered into a “Standstill Agreement.”3 The Standstill Agreement had the goal of “provid[ing] the framework to continue . . . discussions with the mutual goal of entering into a definitive agreement between the City of Chester and the Chester Water Authority concerning future Authority operations.” The City and the Authority continued their discussions past the expiration date of the Standstill Agreement, on December 31, 2018. The Authority believed those discussions were productive and that a final resolution was imminent.  

In consideration of ongoing discussions with the City, on January 24, 2019, the Authority’s board unanimously approved a proposed settlement agreement that would end this dispute.4 The proposed settlement agreement provided that the Authority would make a one-time payment to the City of $60,285,000. In exchange, the City would agree, for a forty-year period, to release any purported claim that it could unilaterally terminate the Authority and then sell its operations for the City’s sole benefit. The Authority would take out bonds to cover the payment to the City. The Authority would pay for the bonds through a proposed rate increase on customers of up to 10%. A small water rate increase was ultimately better for customers than any risk that the City would try to sell the system outright to a for-profit company that would double rates, and the protracted litigation that would be triggered by the City’s attempt to do so.

From January 2019 through June 2019, the Authority and the City continued to negotiate the finer points of the proposed settlement agreement.

Even though the Authority had been negotiating in good faith with the City for a mutually beneficial and amicable settlement, the Authority was unaware that the DCED was attempting to force dissolution and sale of the Authority in the shadows through pressure on the City. On June 11, 2019, the City’s Mayor sent a letter to the Chairperson of the Board of the Authority, Cynthia Leitzell, stating the City was displeased with the state of negotiations and that it would “issue a request for proposals” to attempt to unilaterally sell the Authority. The City’s new position was directed by DCED and forced the Authority to go to the courts to preserve its very existence.

During the course of this now multi-year dispute, the Authority and its representatives issued public records requests under Pennsylvania’s Right to Know law to understand what was going on behind the scenes. The Authority directed several of those requests to the City’s overseers at DCED. One of the Authority’s goals in issuing these requests was to explore exactly why the City blew up settlement negotiations that were nearly concluded and would have provided a significant influx of immediate money to the City.

In response, DCED was forced to turn over public documents, which DCED heavily redacted. The redactions are so extensive that in one instance, DCED redacted more than 80 consecutive pages in their entirety.

Despite the redactions, a picture begins to emerge about why the City backed out of settlement discussions at the last moment. The clear inference is that DCED and the Recovery Coordinator derailed the proposed settlement between the City and the Authority. For example, a month before the City and the Authority finalized the standstill agreement, DCED wrote to the City to discuss the Authority.5 Although DCED produced this letter with heavy reactions, in a summary DCED said the redacted portion “discusses a proposed agreement between the City and the CWA and makes recommendations to the City regarding the proposed agreement.”

Two days before the City and the Authority finalized the standstill agreement, DCED wrote another letter to the City. Again, DCED heavily redacted the actual letter. But in another summary DCED said the letter “discusses improving the relationship between the Recovery Team, DCED, and the City of Chester and proposes that the Recovery Team be able to review any agreements regarding Chester’s water system.”6 In a March 2018 meeting, DCED criticized the standstill agreement, calling it a bad deal for the city. At that point, the City’s Mayor disagreed, and stormed out of the meeting.7

Through November and December 2019, a director at DCED, Kim Bracey, frequently wrote about the pros and cons of “ownership of the CWA.”8

In January 2019, around the time the Authority’s board unanimously approved the settlement offer, Kim Bracey said DCED “put our concerns in writing to Chester regarding the proposed deal.”9 Throughout January and February 2019, DCED representatives wrote to the City’s representatives many times about the proposed settlement agreement.10 There was discussion within DCED that a sale would cause a water rate increase.11 But through redactions, DCED is blocking release of the specifics. 

Not long after this barrage of communications from DCED to the City, the City backed out of seemingly productive settlement negotiations with the Authority.

As late as February 2020, there may have been even more discussions about DCED’s distaste for settlement with the Authority, though DCED continues to hide the details through its redactions.12

The bottom line is that the Authority and the City had a settlement nearly worked out, but DCED derailed it. In doing so, DCED cared little about the ratepayers of the Authority. DCED consistently pushed for a sale of the Authority, even though DCED recognized the devastating rate increase that would ultimately result from such a sale. 

1 See DCED document number IV 119-122.

2 See DCED document number 1372016_Reacted, pages 59-60.

3 http://chesterwater.com/pdf/Mutual_LetterofIntent_City_Chester_Resolution.pdf

4 http://www.chesterwater.com/pdf/ProposedSettlementAgreement.pdf

5 See DCED document number 000030K-31K, dated 2/16/18.

6 See DCED document number 001084I-1085I, dated 3/13/18.

7 See DCED document number V 31.

8 See DCED document numbers 001569A-001572A; 000400B-403B; 000421B-423B; and 001106I-001109I.

9 See DCED document number V 140.

10 See DCED document numbers: 000012A-13A, dated 1/7/19; 000142B-143B, dated 1/18/19; 000030H, dated 2/21/19.

11 See DCED document numbers 000027K; 000028K; and 000028K-29K.

12 See DCED document number 1287A, dated 2/18/20.  Kim Bracey is identifying the City’s sources of financial hardship but DCED is hiding that discussion through these redactions.

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Links to PDF documents detailing DCED’s Involvement in Attempted Hostile Takeover of the Chester Water Authority, Derailing of a Settlement Between the Authority and the City, and Acknowledgement that a Sale to of the Authority to Aqua would Lead to Dramatically Increased Rates.

https://chesterwaterfacts.com/wp-content/uploads/2021/02/2020-93-Redacted-000001K-000052K.pdf

https://chesterwaterfacts.com/wp-content/uploads/2021/02/2020-117-Part-IV.pdf

https://chesterwaterfacts.com/wp-content/uploads/2021/02/2020-117-Part-V.pdf

https://chesterwaterfacts.com/wp-content/uploads/2021/02/2020-117-Redacted-000001A-000785A.pdf

https://chesterwaterfacts.com/wp-content/uploads/2021/02/2020-117-Redacted-000001I-001600I.pdf

https://chesterwaterfacts.com/wp-content/uploads/2021/02/2020-117-Redacted-000260B-000495B.pdf

https://chesterwaterfacts.com/wp-content/uploads/2021/02/2020-117-Redacted-000786A-001572A.pdf

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