Amendment to Home Rule Charter absent Voter Referendum; Act 47 Recovery Plan Modification
Pennsylvania Dep’t of Comm. & Econ. Dev. v. City of Chester, Opinion and order, No. 336 MD 2020 (Pa. Cmwlth. Jan. 31, 2023), King’s Bench jurisdiction, appeal dockets 12 and 15 MAP 2022
In this case, the Supreme Court has exercised King’s Bench jurisdiction to consider issues arising from the Commonwealth Court’s approval, in part, of a modified Act 47 Recovery Plan proposed by the Receiver for the City of Chester.
Factual and Procedural Background
Judge Ellen Ceisler of the Commonwealth Court summarized the relevant background as follows:
Since 1995, the City has been designated a financially distressed municipality under Act 47. Between 1995 and 2020, the City operated under numerous Act 47 fiscal recovery plans.
On April 13, 2020, as a result of the City’s continuing and deepening financial crisis, Governor Tom Wolf issued a Declaration of Fiscal Emergency for the City under Act 47. On June 22, 2020, the Court placed the City under receivership and approved the appointment of Mr. Doweary as Receiver under Act 47.
The Court confirmed Receiver’s initial Act 47 recovery plan in October 2020. On April 7, 2021, Receiver submitted an Amended Recovery Plan, which the Court confirmed on June 7, 2021. At that time, the Court determined that the Amended Recovery Plan “contain[ed] a number of initiatives that set forth short- and longterm strategies to address structural issues” in the City and “propose[d] certain initiatives, in cooperation with City officials and other stakeholders, to address the fiscal emergency and continue to provide necessary and vital services in the City.” Davin v. City of Chester (Pa. Cmwlth., No. 336 M.D. 2020, filed June 7, 2021) (Davin I), slip op. at 6-7.
On March 4, 2022, Receiver filed a Petition for Writ of Mandamus (Mandamus Petition) with the Court pursuant to Section 709(a) of Act 47, 53 P.S. § 11701.709(a). In his Mandamus Petition, Receiver asked the Court to direct that the City’s elected officials comply with the initiatives outlined in the Amended Recovery Plan and with two prior orders issued by Receiver.
On March 22, 2022, after an evidentiary hearing, the Court granted in part and denied in part the Mandamus Petition. Most notably, the Court found that Councilman William Morgan, who heads the City’s Department of Finance and Human Resources (Finance Department), failed to cooperate with Receiver and his team and “engaged in conduct that has impeded Receiver’s ability carry out the goals of the Amended Recovery Plan.” Davin v. City of Chester (Pa. Cmwlth., No. 336 M.D. 2020, filed Mar. 22, 2022) (Davin II), slip op. at 9-10. As such, the Court ordered that “Councilman Morgan and his team shall immediately share any future correspondence or information they receive relating to the City’s finances with Receiver” and that “Mr. Morgan shall not direct any employee to act or take any action that in any way interferes with the operations of the City’s Finance . . . Department.” Id. at 11 n.11 & 13.
C. City’s Governance Structure
The City is a City of the Third Class and has operated under a Home Rule Charter since 1980. The Home Rule Charter incorporates the City’s Administrative Code, which was adopted by ordinance and “provide[s] for the administrative organization of the City government, the assignment of duties and responsibilities to officers and employees, and procedural requirements set forth in the general laws or in the Charter.” Home Rule Charter § 602; see also id. §§ 211, 213, and 215 (incorporating provisions of the Administrative Code). The City is governed by an elected Mayor, who is the City’s “chief executive.” Id. § 301. The Mayor “shall have any and all additional powers and duties which may be conferred upon him by the Administrative Code.” Id. § 302. The Mayor supervises the conduct of all City officers, examines all reasonable complaints against them, and causes any violations or neglect of duty to be promptly punished or reported to City Council. Id. § 303. The City is also governed by an elected five-member Council, one of whom is the Mayor who has full voting rights. Id. §§ 201, 301. City Council members serve four-year staggered terms. Id. § 205. City Council is exclusively vested with “[a]ll legislative powers and duties of the City.” Id. § 215. Such legislative powers include adopting a budget, making appropriations for expenditures, levying taxes, conducting audits and investigations, modifying the Administrative Code to create or abolish municipal departments, and adopting ordinances and resolutions. Id.
Slip op. at 6-8 (footnotes omitted).
Modification of the Amended Recovery Plan
The Receiver filed an application with Commonwealth Court seeking approval of a modified Act 47 recovery plan, containing 33 proposed initiatives, which Receiver categorized as : (1) administrative duties and professional management; (2) core internal administrative functions and ethics; (3) parking services; (4) monetization of the Stormwater Authority of the City of Chester (Stormwater Authority); and (5) economic development. As summarized by the court, “[t]he most contested initiatives seek to”:
remove the City’s elected officials from their appointed positions as department heads; suspend the administrative duties of the City’s elected officials as they relate to day-to-day operations; and give Receiver the sole authority to take certain actions on the City’s behalf, including entering into contracts and controlling and directing the expenditure of federal and state funds. Receiver also seeks to convert the City’s current Chief Operating Officer (COO) into the City’s Chief of Staff, who would report exclusively to Receiver and oversee each of the City’s departments.
Slip op. at 10.
The City of Chester, Mayor Thaddeus Kirkland, and City Council of the City of Chester (collectively, the City) filed objections to the Plan Modification, asserting that:
The Receiver’s proposed [m]odifications, inter alia: a) strip the mayor and city council (the “Elected Officials”) of all administrative duties with respect to the City; b) give all administrative duties to a chief operating officer who reports solely to the Receiver; c) give the Receiver a de facto veto over all of the City’s legislative activity by authorizing the Receiver to remove items from City Council’s legislative agenda; and d) give the Receiver the sole authority to sell the City’s assets and dissolve the City’s municipal authorities.
In short, the Receiver seeks to remove the Elected Officials from power and install himself as the unelected supreme authority of the City who is not answerable to the citizens.
Order at 10 (quoting City Br. in Opp. to Plan Modification at 1 (emphasis in original)).
On January 4, 2023, Judge Ceisler entered an order scheduling an evidentiary hearing and defining the scope thereof, providing that:
(1) The parties shall be precluded from presenting testimony or evidence as to Receiver’s qualifications and experience to serve as an appointed receiver at the Plan Modification hearing. Governor Tom Wolf nominated Receiver to oversee the City of Chester’s fiscal recovery pursuant the Municipalities Financial Recovery Act, Act of July 10, 1987, P.L. 246, No. 47, as amended, 53 P.S. § 11701.101-11701.712 (Act 47), in April 2020, and this Court confirmed Receiver’s appointment in June 2020. Any challenges to Receiver’s qualifications and experience to serve as an Act 47 receiver could have and should have been raised at that time, not two-and-one-half years later. To the extent such challenges were not raised at that time, they are now waived.
(2) In considering the factual and legal issues presented by Receiver’s Plan Modification and the City of Chester’s objections thereto, the Court will apply the standard of review set forth in Section 703(e) of Act 47, which states that “[t]he [C]ourt shall confirm the modification within 60 days of receipt of notification of the modification unless it finds clear and convincing evidence that the recovery plan as modified is arbitrary, capricious or wholly inadequate to alleviate the fiscal emergency in the distressed municipality .” 53 P.S. § 11701.703(e) (emphasis added).
(3) As discussed during the pre-hearing conference, the Court will not address or receive evidence on Receiver’s proposed initiatives relating to the Stormwater Authority at the Plan Modification hearing, nor will it address or receive evidence on the outstanding “Application for an Order Determining that the City is Authorized to Pay Attorney Fees in Excess of $7,500” filed by the City of Chester on September 2, 2022.
Docket sheet at 45.
The Court heard testimony during a three-day evidentiary hearing on the Plan Modification, which Judge Ceisler summarized as follows:
The testimony presented at the hearing revealed to the Court a culture of denial, blame shifting, arrogance, and nepotism within the City’s government. The testimony also demonstrated the existence of significant operational issues within the City’s departments, as well as City officials’ lack of transparency, lack of cooperation, and blatant disrespect of Receiver and his team. Receiver contends that these issues, collectively, have impeded his ability to carry out the goals of the Amended Recovery Plan that was approved by the Court in June 2021.
Slip op. at 2.
January 31, 2023 Commonwealth Court Opinion and Order
Judge Ceisler issued an opinion and order approving the modified plan, in part. First, the court addressed the City’s arguments that (1) the Receiver’s proposed initiatives effectuate a change in the form of government, which is prohibited by Act 47; (2) the Receiver lacks the authority to remove the City’s elected officials from their positions as department heads; and (3) the Receiver lacks the authority to unilaterally enter into contracts on the City’s behalf.
First, as to whether the plan effectuates a change in the form of government, Judge Ceisler reasoned that:
Section 704(b) of Act 47 states that the Court’s confirmation a plan modification “shall not be construed to . . . change the form of government of the distressed municipality.” 53 P.S. § 11701.704(b) (emphasis added). The City also argues that many of the proposed initiatives violate Article IX, Section 2 of the Pennsylvania Constitution, 14 which prohibits the amendment of a municipality’s home rule charter without a voter referendum. See Pa. Const. art IX, § 2 (“Adoption, amendment[,] or repeal of a home rule charter shall be by referendum.”). Article IX, Section 2 also provides that a home rule municipality, such as the City, “may exercise any power or perform any function not denied by this Constitution, by its home rule charter[,]or by the General Assembly at any time.” Id. (emphasis added).
The law in Pennsylvania regarding what constitutes a change in the form government is extremely sparse. However, the Court finds Harrisburg School District v. Zogby, 828 A.2d 1079 (Pa. 2003), instructive on this issue. In Zogby, our Supreme Court interpreted Article 9, Section 3 of the Pennsylvania Constitution, which applies to the selection by municipalities of an optional form of government and requires that any change in the form of government be by voter referendum. See Pa. Const. art. IX, § 3 (“Adoption or repeal of an optional form of government shall be by referendum.”). At issue in Zogby was a statute enacted by the General Assembly, known as Act 91, which gave the Mayor of the City of Harrisburg the authority to appoint a board of control for the Harrisburg public school district.
The Supreme Court noted that “form” is defined as “the organization, placement, or relationship of basic elements” and “the structure, organization, or essential character of something, as opposed to its matter.” Zogby, 828 A.2d at 1092. The Zogby Court determined that Article 9, Section 3 of the Pennsylvania Constitution “does not per se preclude a legislative grant of particularized powers and duties to the mayor of a city that has opted for a mayor-council form of government, but refers instead to a wholesale change of municipal government.” Id. (emphasis added). Therefore, the Supreme Court concluded that “[s]o long as the addition of such duties is not inconsistent with the basic existence, structure, and powers of the office of mayor or the other branches of city government, it does not alter its form.” Id. (emphasis added).
Here, Receiver seeks to have the Chief of Staff report solely to Receiver and not take any directives from the Mayor or City Council. However, the City’s Administrative Code provides that the Chief of Staff “shall serve at the pleasure of . . . City Council” and that his powers and duties are “set by City Council from time to time.” Admin. Code §§ 112.02, 112.06. Receiver also seeks the sole authority to act on the City’s behalf with regard to entering into contracts and directing the expenditures of federal and state funds, contrary to the provisions of the Home Rule Charter and Administrative Code, which give such authority to the Mayor and/or other City officials. See id. § 115.005(a) and (b)(1) (the City Treasurer, who shall be appointed by and “serve[s] at the will of [the] Mayor and [City] Council,” shall be responsible for “the safe keeping and payment over of all public moneys entrusted to his care); id. § 111.002(b) (all City contracts shall be signed by the director of the department having jurisdiction thereof); Home Rule Charter § 713 (City Council may enter contracts for all lawful purposes). Receiver also seeks to require that City Council pass any budget or budget amendment as he directs. However, the Home Rule Charter grants budget-making authority to the City’s Chief Financial Officer (CFO) and City Council. See Home Rule Charter § 703 (the CFO “shall prepare 11 In so holding, the Supreme Court relied in part on Judge Leadbetter’s Dissenting Opinion in Harrisburg School District v. Hickok, 781 A.2d 221, 239 (Pa. Cmwlth. 2001) (en banc) (Leadbetter, J., dissenting) (citation omitted; emphasis added), wherein she stated: “Pa. Const. art. IX, § 3, by its own terms, only requires voter referendum when an optional form of government is adopted or repealed . . . . The provision thus speaks only to a wholesale change of municipal government, not to amendments of municipal powers which may be made from time to time by the General Assembly.” The evidence presented at the Plan Modification hearing established that Receiver and the City officials are currently in the process of hiring a new CFO. and submit to [City] Council a proposed operating budget for the ensuing fiscal year”); id. § 707 (City Council shall “adopt a final budget with such amendments as [City]Council considers advisable”).
While Zogby suggests that a mere change in duties does not alter the form of government, the Court concludes that any initiatives that give Receiver exclusive authority over internal administrative matters, while concomitantly stripping the Mayor and City Council of duties expressly granted to them by the City’s governing documents, effectuate “a wholesale change of municipal government.” Zogby, 828 A.2d at 1092. Indeed, Act 47 recognizes that, the “principal responsibility for conducting the governmental affairs of a [distressed] municipality, including choosing the priorities for and manner of expenditures based on available revenues,” shall be left to “the charge of its elected officials.” 53 P.S. § 11701.102(b)(1)(ii) (emphasis added); see also id. § 11701.605 (“During a fiscal emergency, the . . . appointed and elected officials of the distressed municipality shall continue to carry out the duties of their respective offices.”).
Slip op. at 14-16 (footnotes omitted).
Second, Judge Ceisler concluded that the Receiver does not lack the authority to remove the City’s elected officials from their positions as department heads, reasoning that:
The City’s Home Rule Charter provides that City “Council may, by ordinance, . . . . designate department heads from City Council.” Home Rule Charter § 601 (emphasis added). The Home Rule Charter also provides that during City Council’s annual organizational meeting, “the Mayor may assign to each Council member a responsibility as department head of one or more departments or agencies of the City government.” Id. § 603 (emphasis added). While the Home Rule Charter provides that either City Council or the Mayor may assign department heads, Mayor Kirkland testified at the Plan Modification hearing that, since he took office in 2016, he has appointed department heads each January. N.T., 1/10/23, at 243-44.
It is evident from the plain language of the City’s Charter – which uses the term “may” instead of “shall” – that the Mayor’s authority to assign department head responsibilities to City Council members is permissive, not mandatory. The Court finds nothing in the City’s Charter or Administrative Code that would preclude Receiver from removing Council members from their positions as department heads or from appointing non-Council members as department heads, if the Court finds that such changes are not arbitrary, capricious, or wholly inadequate to alleviate the City’s fiscal emergency. See 53 P.S. § 11701.703(e).
In its post-hearing brief, the City argues that Council members can only be removed from their positions via the legislative impeachment procedures outlined in the Pennsylvania Constitution. However, Receiver does not seek to remove Council members from their elected positions. Receiver only seeks to remove certain Council members from their non-mandatory administrative roles as department heads; they would still remain in their elected positions as legislators on City Council for the remainder of their terms. The removal of elected officials’ administrative duties does not trigger an impeachment process under the Pennsylvania Constitution, which applies to the removal of government officials from their public offices. See Pa. Const., art. VI, §§ 6-7. Therefore, the Court rejects this claim.
Slip op. at 16-17 (footnotes omitted).
Third and finally, the court agreed with the City that the Receiver lacks the authority to unilaterally enter into contracts on the City’s behalf because Section 706(a) of Act 47, which identifies each of the Receiver’s enumerated powers, does not include the authority to enter contracts.
The court went on to review the Receiver’s following proposed initiatives identified in the Plan Modification: (1) administrative duties and professional management; (2) core internal administrative functions and ethics; and (3) economic development.
As to administrative duties and professional management, Receiver sought approval of the following eight initiatives: (1) Chief Operating Officer (COO), (2) Chief of Staff Reporting, (3) Administrative Duties of Elected Officials, (4) Compliance with Chief of Staff Directives, (5) Interference with Chief of Staff and Receiver Directives, (6) Duty to Provide Information, (7) Ability to Audit, and (8) Council and Board Agendas. The court approved all eight initiatives, with revision to the reporting initiative to allow the Chief of Staff to report to Receiver, but without changing the form of government pursuant to the Home Rule Charter and Administrative Code, reasoning that:
…all of this evidence, viewed together, demonstrates the City officials’ continued lack of transparency and lack of cooperation with Receiver and his team. Even worse, Mayor Kirkland has verbally – and publicly – threatened and disrespected Receiver on more than one occasion. The Court discredits Mayor Kirkland’s testimony to the contrary. This type of adverse behavior obstructs Receiver’s ability to work amicably and productively with City officials to achieve the City’s fiscal recovery goals. While the gift card issue, in particular, may seem minor in the grand scheme of the City’s financial troubles, the Court believes it reflects the City officials’ overall pattern of failing to work in partnership with Receiver. The Court agrees with Receiver that if the City officials responsible for carrying out the goals of the recovery plan “are incapable of doing so or refuse to do so and face no repercussions, then nothing will ever change and . . . Receiver will not be able to ensure the provision of vital and necessary services” to the City’s residents. Plan Modification at 11.
The Court is also extremely troubled by the fact that Councilman Morgan failed to notify Receiver about the phishing incident for three months, in direct contravention of this Court’s prior order to “immediately” share any information relating to the City’s finances with Receiver. Davin II, slip op. at 13. Councilman Morgan’s failure to promptly disclose this critical financial information is even more egregious considering that he meets with Receiver every week. See N.T., 1/10/23 at 29-30. Councilman Morgan also inexplicably failed to inform the Mayor of the phishing incident for two months prior to the Mayor’s medical absence.
Compounding Councilman Morgan’s recent actions is the fact that, in ruling on the Mandamus Petition, the Court previously found that “Councilman Morgan … ha[s] engaged in conduct that has impeded Receiver’s ability carry out the goals of the Amended Recovery Plan,” including, inter alia, failing to complete monthly bank reconciliations, making late and/or inaccurate federal tax payments, making improper “hazard” payments to certain employees, and allowing himself and other City officials to remain on an expensive health care plan that had been discontinued. See Davin II, slip op. at 9-10. In the Court’s view, Councilman Morgan can no longer effectively serve as the head of the Department of Finance and Human Resources.
As explained in Section II.B.2. above, the Court concludes that Receiver has the authority to remove City Council members from their assigned positions as department heads and to appoint experienced professionals in their place. Based on the credible evidence presented at the hearing, the Court believes that such administrative changes are not only permissible, but necessary.
The Court also believes that having a Chief of Staff oversee the day-to-day operations of all City departments would help alleviate many of the obstacles Receiver and his team have experienced. Mr. Lightner, the present COO who would become the Chief of Staff, credibly testified: “[F]rom my standpoint, from an operational standpoint to meet the needs of the citizens, we need to have clear direction. The employees need to have clear direction of who they can take orders from, who’s in charge, how do we move things forward.” N.T., 1/10/23, at 135 (emphasis added).
Slip op. at 27-29 (footnotes omitted).
As to the 19 initiatives contained in the “core administrative functions and ethics” category, the court reasoned that:
The credible evidence presented at the hearing demonstrates that the City’s elected officials are not empowering Receiver in the eyes of the City’s employees. Rather, the evidence shows that City officials frequently ignore Receiver’s advice and directives, and even direct other employees in their departments to ignore his directives. City officials also have historically overlooked issues such as the unauthorized payroll payments to an incarcerated employee, the former police chief allowing his friends to boost their pensions by working extra overtime before retirement, and the City’s seven-year default on its MMO payments. These incidents, together with the evidence of widespread nepotism within the City’s government, demonstrate a pattern of City officials taking care of their own and intentionally turning their backs on wrongdoing within their departments. Further exacerbating these problems is the Mayor’s assignment of Council members as department heads based on their loyalty to City Council and the Mayor’s own inclination in a particular year, rather than on the person’s actual qualifications to oversee a particular area. These practices cannot continue.
Mr. Lightner testified that, as COO, he needs three things to help the City emerge from its fiscal emergency: “[W]e need consistency, we need stability, and we need direction.” N.T., 1/10/23, at 134 (emphasis added). The Court believes that Receiver’s initiatives in this category, relating to human resources, finance, auditing, procurement, and legal, will help provide the City with that consistency, stability, and direction.
Slip op. at 39. Accordingly, the court approved 12 of the initiatives without change, but ordered the following initiatives from the Plan Modification be stricken and revised:
…Human Resources Policy Development, Implementation and Enforcement; Development, Implementation and Enforcement of Procurement Policies; and Development, Implementation and Enforcement of Ethics Policy. These three initiatives should be revised only to remove the language regarding the filing of a plan modification with the Court and asking the Court to render a decision within 21 days. The remaining language in these three initiatives is acceptable pursuant to Act 47.
Slip op. at 40 (emphasis in original).
Finally, the court confirmed the two “economic development” initiatives – City and Authority Compliance with Update to Municipal Comprehensive Plan Without Delay and Approval of Economic Development Incentives, reasoning that:
It is evident that both Receiver and the City recognize that fostering economic development is critical to the City’s financial recovery. Yet, in working toward that goal, the Mayor simply parachuted his former relative into the business development position, without providing any clear directives or oversight to ensure that the City’s economic development objectives were being met. By all accounts, the only progress Mr. Starr made on that front during his tenure was to obtain a liquor license for one of his businesses.
Slip op. at 43.
Judge Ceisler concluded:
The appointment of a receiver under Act 47 is the Commonwealth’s final attempt to save a distressed municipality from total financial collapse. That is why the General Assembly grants so much power to an appointed receiver under Act 47 and mandates that the elected officials comply with a fiscal recovery plan that has been confirmed by the Court. See 53 P.S. §11701.706(a)(1); id. § 11701.704(a)(1) and (2). Act 47, however, also cautions that the Court’s confirmation of a recovery plan shall not be construed to change the form of government. See id. § 11701.704(b)(1). Thus, in ruling on a plan modification, the Court must balance the receiver’s broad powers with the powers legislatively granted to the elected officials so as not to remove all such authority from the elected officials, while giving the receiver meaningful participation and authority to carry out his duties under Act 47.
In this case, the credible evidence of record demonstrates that aside from the severe financial distress plaguing the City, the City also suffers from a municipal government that is internally dysfunctional. While the recent hiring of Mr. Lightner as COO is a step in the right direction, the Court does not see a viable path forward for the City unless major changes are made to its internal administrative operations. According to Receiver, “the City’s current administrative organization and allocation of duties is the single greatest operational obstacle to the City’s ability to provide vital and necessary services” to its residents. Plan Modification at 25. The Court agrees.
The Court concludes that not only is there no clear and convincing evidence that the Plan Modification is arbitrary, capricious, or wholly inadequate to alleviate the City’s fiscal emergency, but the credible evidence establishes that Receiver’s proposed initiatives are necessary to help Receiver and his team work constructively with the COO (soon to become the Chief of Staff) and the elected officials to save the City from the brink of financial doom. As explained in Section II.C. above, however, several of Receiver’s proposed initiatives cannot be confirmed as written, but should be modified to conform with Act 47 and the City’s Home Rule Charter and Administrative Code. For this reason, the Court grants Receiver leave to amend the Plan Modification in accordance with the attached Order.
Slip op. at 44-45.
King’s Bench Jurisdiction
The City of Chester, Kirkland, and the City Council of the City of Chester appealed to the Supreme Court. On March 29, 2023, the Supreme Court entered an order exercising King’s Bench jurisdiction over the appeal, and directed the parties “to brief the following questions as set forth in the Jurisdictional Statements”:
1. Whether the City’s home rule charter may be amended without a voter referendum required by Article IX, Section 2 of the Pennsylvania Constitution[?]
2. Whether the modification to the Act 47 recovery plan may change the form of local government[?]
3. Whether the administrative duties of the appointed officials may be suspended by a modification to an Act 47 recovery plan[?]
4. Whether an Act 47 receiver may be given the right to remove items from the legislative agenda of city council[?]
5. Whether a city solicitor may be required to disclose privileged information to an Act 47 receiver[?]
6. Whether the confirmed modifications to the Act 47 recovery plan are necessary to achieve financial stability of the distressed municipality[?]
7. Whether the separation of powers doctrine permits the Commonwealth Court to empower a receiver to exercise control over a local government[?].
8. Whether the facts of the case warrant the suspension of the administrative duties of the officials [?]
9. Whether the Commonwealth Court should have employed a more narrow remedy than suspension of the duties of the officials[?]
Docket Sheet at 11.