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Lessons of receivership: the legacy of Chelsea.

The state-appointed receiver for the City of Chelsea, Massachusetts, has confronted many obstacles in his quest for a more viable economic future for the city.

The receivership of Chelsea, Mass.--now in its second year--and the daunting responsibilities of the state-appointed receiver have not only touched the lives of the citizens of Chelsea but also are providing government leaders in and outside of Massachusetts with numerous lessons in government restructuring.

In September 1991, Massachusetts enacted special legislation to place Chelsea into receivership. Events preceding the action included failed financial intervention by the state, a political stalemate over the city's budget, deepening economic decline, and a spiraling fiscal crisis.

Fortunately, Chelsea had no publicly held long-term debt--thus, a solution to its problems could be explored in isolation of creditors. To avoid political inhibitions--the second obstacle to achieving substantive governmental change--the receiver was given broad powers and responsibilities in lieu of the elected mayor and aldermen and other officials. Appointed by the governor and advised by a broad spectrum of public and private leaders, the receiver will likely remain in office through 1996, with the goal of providing a framework for sound operating and capital budgets and, ultimately, recommending a new form of government.

The public policy and finance communities have a great deal to learn from the example of Chelsea. In turn, the citizens and leaders of Chelsea have a unique opportunity to implement absolute change in isolation of political recriminations.

Across the nation, at every level of government, leaders are grappling with the difficult problem of choosing, delivering, and paying for appropriate levels of service amid economic and political change. Much public debate has focused on the need to "reinvent government." The popularity of that theme can be attributed to a confluence of events that include the recent recession's unexpectedly severe impact on governmental revenues, the increased burdens of social and federally mandated costs, an explosion of public debt, decreased accountability, and a growing perception of infrastructure decay.

The events taking place in Chelsea fill the gap between the theory and practice of "reinventing government." In a real-life experiment, policy specialists, government officials, employees, and--most importantly--the community are engaging in the reformation their local government.

The stories being told of past and present operations in Chelsea provide a virtual index of the rights and wrongs of governing. All of the recurrent themes of "reinvention" are at play: competition, privatization, employee partnerships, economic and urban redevelopment, information technology, user fees, customer service, and accountability.

Crisis Amid Growth

Chelsea's financial decline began in the mid-1980s. While the rest of the commonwealth was experiencing unprecedented growth, Chelsea was mired in a recession that, in some part, was due to its own political structure. Antiquated and allegedly inconsistent zoning practices and grossly inefficient allocation of personnel are among the reasons cited for Chelsea's inability to participate in the "Massachusetts miracle."

Initial commonwealth intervention consisted of loans, grants, and fiscal oversight. S&P |Standard & Poor's~ visited Chelsea in early 1991 in conjunction with its analysis of the financial condition of many communities that would be affected by the large capital program of the Massachusetts Water Resources Authority (MWRA) designed to clean Boston Harbor. It was clear at the time that Chelsea's problems were severe, but they were not unique relative to other Massachusetts cities and towns: Local aid was cut severely; MWRA costs were set to rise from $2.1 million in 1991 to $4 million in 1993; the tax base was shrinking; Proposition 2 1/2 limited revenue-raising flexibility; and voters' lack of confidence in its elected officials led to a failed Proposition 2 1/2 override referendum.

Faced with a $10 million budget gap and an inability to garner concessions from unions, Chelsea's mayor turned to the commonwealth's administration, which initiated the unique receivership legislation.

Prior to receivership, if long-term debt had been issued by Chelsea it clearly would have been rated noninvestment-grade. Based on information available thus far, at the end of the receivership period it is possible that Chelsea will re-enter the capital markets with a rating at least in the lower end of the investment-grade spectrum. In the meantime, S&P is focused on the changes taking place in Chelsea in a number of key areas that will lead to a return to self sufficiency and experiences to be shared with other communities.


Even before receivership, Chelsea's schools were being managed by Boston University (BU) in an experimental program thought to be an innovative solution to the all-too-familiar plight of inner-city schools. However, some isolated political resistance and the city administration's lack of control over the school budget threatened the experiment.

By gaining control of the school budget and working directly with the community, the receiver reversed course and ensured that the BU project will continue through the year 2000. The ability to exercise executive authority over as a significant a portion of budget as a school system is necessary for the financial stability of Chelsea as well as other communities. Other recent examples include Boston, where the mayor's measures to consolidate control over school spending contributed to S&P's recent affirmation of that city's 'A' rating. Chelsea's rewards already include the approval of a commonwealth-funded $95 million bond issue for school projects. Such investment, which could only follow fiscal reforms, will increase the chance of successful educational reform in Chelsea.

Employee Relationships

Next to education, the most sensitive issue faced by many municipalities is in the realm of labor relations. Chelsea's labor practices were tangled in many strings that bound prior administrations from enacting any real operating reforms. Contracts contained minimum staffing clauses; organizational conflicts minimized accountability; management was inhibited by "past practices," such as overtime abuses that were politically impossible to overcome; and the city's 30 department heads were essentially granted life tenure in exchange for their competitively low wages.

The changes enacted by the receiver are too numerous to discuss here, but the end result is a significantly reduced city bureaucracy--to 224 from 309. There are fewer department heads with significantly higher wages and higher accountability. Negotiating from a position of strength the receiver had enacted a new but sensible contract with firefighters and eliminated 23% of the senior positions in the police department.

The gathering of talent from within the bureaucracy and throughout the community has changed the face and attitude of government in Chelsea. Community leaders acting as volunteers serve an important role in all levels of fiscal operations. Through the use of "project action teams" the city's various departments, including the firemen, now operate as cooperatives between administrators and staff to address the management of the city's operations. The result of all of this change is reduced costs, accountability, and a willingness of existing employees to participate in, rather than resist the shaping of the city's future.

Fiscal Stability

A balanced budget was presented and adhered to for fiscal 1992 and thus far for 1993. Fiscal 1992, when fully audited, will likely be the first in many years where Chelsea is in a positive free cash position. The help of one-time revenue sources, such as the $5 million advance in-lieu-of-tax payment from the Massachusetts Port Authority, were essential to achieving near-term balance, but efforts to achieve long-term balance also include:

* User fees,

* Privatization, and

* Technology.

The adoption of full-cost recovery user fees for water, sewer, and trash operations allows Chelsea to work within the property tax raising limit of Proposition 2 1/2 without resorting to overrides or significant service reductions. User fees address the need many municipalities face to justify every dollar raised from taxpayers. An important feature of proper allocation of new revenues raised from user fees is the establishment of enterprise funds, which are under-utilized by cities and towns in Massachusetts but are meeting great success in Chelsea.

Chelsea also has undergone serious examination of the proper role and place for privatized services. Thus far, the receiver has retained control of most traditional city functions but has allocated portions of those operations to private contractors. An example is the day-to-day maintenance of the water distribution system, which has been turned over to a private contractor to avoid the difficult governmental procurement and construction practices that add to costs. The city also has significantly altered the contractual relationship with its trash haulers and cut costs in half.

In the area of technology, a $250,000 investment in new computer and phone systems has resulted in annual savings of nearly the same amount. Additional benefits will accrue as the city learns to take advantage of the technology to improve its zoning, assessing, accounting, and procurement practices.

Economic & Capital Plans

The receiver has confronted many obstacles that ultimately will deliver a more viable economic future for Chelsea. Most basically, the development of long-term capital and infrastructure plans lay out the problems and possibilities.

Many communities in and out of Massachusetts operate without the priorities provided by a long-term capital plan, but Chelsea's successes over time should lead to change elsewhere. As a byproduct of the capital plan, the receiver has standardized the zoning ordinances and shared them with developers with the guarantee of fair and consistent application. In addition, such overlooked assets as Chelsea's proximity to Logan International Airport are being turned into opportunities. Success has been immediate, with at least three major relocations that will add employment and revenues to the community and over $100 million of permit applications.

Longstanding issues of crime, safety, and corruption are the most difficult problems to overcome but are being addressed through community and intergovernmental involvement.

Willingness to acknowledge limits and coordinate efforts in these areas with state and federal task forces has led to recent successes that will encourage further reforms.

A New Beginning

Chelsea is poised for a new beginning. While the fiscal and economic success of its transformation will be relatively easy to assess, the debate over the methods and roles of its government will continue well past this period of change. Successful political evolution will be contingent upon the total involvement and cooperation of the community.

Much like the national political trend toward localized voter participation in governing, Chelsea's management has taken its program to the people. There is sure to be debate over Chelsea's new government structure but, regardless of the choice, if the process is inclusive, the result will likely be a return to self sufficiency.

Author WILLIAM COX is director of the municipal finance department of Standard & Poor's. This article was initially published in the March 29, 1993, issue of Standard & Poor's Creditweek Municipal and is reprinted with permission.
COPYRIGHT 1993 Government Finance Officers Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Massachusetts
Author:Cox, William
Publication:Government Finance Review
Date:Aug 1, 1993
Previous Article:Quality tools are applicable to local government.
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