On November 10, the city of Chester, Pennsylvania filed a Chapter 9 municipal bankruptcy petition. Although it has operated under state supervision since 1995, the Philadelphia suburb has not been able to address its large employee retirement liabilities.

In recent years, municipal bankruptcy filings have been rare. Only three cities invoked Chapter 9 between 2014 and 2021: Hillview, KY in 2015, Perla, AR in 2019, and Fairfield, AL in 2020. Although the large allocations of federal funds to local governments under the American Rescue Plan Act (ARPA) may have been expected to ward off bankruptcies for a few years, Chester’s situation is especially dire.

The city has received $30 million under ARPA. But this amount pales compared to the $430 million in liabilities reported on its most recent audited financial report, dated December 31, 2018. Further, the city has dedicated over $1.5 million of the ARPA funds to premium pay and other forms of employee compensation.

The fact that Chester has yet to publish financial statements for years beyond 2018 is also problematic because it deprives decisionmakers, creditors, analysts, and other interested parties of a current snapshot of Chester’s financial condition. The city’s tardy disclosure also violates the federal Single Audit Act as interpreted by 2 CFR 200.512 which requires a local government receiving substantial federal funding to produce an audit within nine months of its fiscal year end.

Of the city’s $430 million in reported liabilities as of 2018, the lion’s share is unfunded pension and retiree health benefits. The city’s three pension systems reported a total of $130 million in Net Pension Liabilities. According to the Pennsylvania Auditor General, the systems had an overall funded ratio of 47 percent in 2021. The Auditor designated Chester’s pensions as severely underfunded, the only city it placed in this category.

In fact, the pension systems’ funded status is even worse than official financial reports imply. In pension reporting, a funded ratio is the quotient of a system’s assets and its actuarially determined liabilities. Assets are normally available to make current benefit payments or are invested in securities expected to generate income and capital gains that can help meet future benefit obligations. But in the case of Chester’s pension systems, a large portion of the reported assets are receivables—amounts the city was supposed to pay over the years but has yet to actually pay. Given Chester’s severe financial distress, these receivables seem to be at risk.

The most indebted pension system in Chester is its Police Plan. According to a 2021 Actuarial Report, the plan had $34 million in assets and $98 million in liabilities, resulting in a funded ratio of 35%. But $32 million of the plan’s assets were receivables from the city, leaving less than $2 million of assets available to be invested or paid to beneficiaries. With the injection of some ARPA funds from the city, the police plan’s asset position improved somewhat in 2021, but Pensions & Investments recently reported that the system’s investable assets are sufficient to cover less than one year of retiree benefits.

The other large liability on Chester’s balance sheet is its Other Postemployment Benefit (OPEB) obligation. In 2018, this liability, which reflects amounts the city must pay for retiree healthcare, was $233 million.

Although Pennsylvania law protects retiree pension benefits, there does not appear to be similar legal support for retiree health benefits. Chester could greatly improve its financial situation by terminating its retiree health plan. Although this would be an adverse development for retirees, those over 65 have access to Medicare, while younger retirees on modest incomes would be able to take advantage of insurance subsidies available under the Affordable Care Act.

To meet its pension obligations, the city has a simple option: it can get a cash infusion from privatizing the local water authority. The Chester Water Authority, which is a separate government entity, reported a positive net position of $242 million in 2021, but may be able to fetch as much as $400 million from a private water provider. Since the authority serves customers outside of the city, Chester would probably not reap all of the sale proceeds. Although some analysts and journalists have been highly critical of water privatization, it is worth noting that the two worst municipal water crises of the last decade—Flint, MI and Jackson, MS—involved municipal water utilities.

Having experienced a fifty percent population decline since 1950, the City of Chester is no longer capable of servicing the large liabilities it has assumed. Perhaps the bankruptcy process will enable the city to make the adjustments necessary to function in a fiscally sustainable manner going forward.