“EXTENSIVE’’ MISMANAGEMENT?: Staff squandered electric trust to avert fiscal disaster, borough officials charge

Published Date Written by Daniel Walmer

One critical day in 1998, Middletown controversially settled a lawsuit with electric supplier Met-Ed. The borough would lose its long-term bargain rate contract for electricity with the utility, but would be compensated with $18 million to keep electric rates down.

Eleven years later, millions of dollars from the settlement, placed in a trust fund, were gone, and residents were shocked by high electric bills. By 2012, Middletown Borough Council and its financial consultants were declaring Middletown to be on the brink of fiscal disaster.

What happened?

Council President Christopher McNamara thinks the answer lies in mismanagement by borough staff in the mid-2000s, which he believes squandered the trust and created sky-high electric rates to postpone an inevitable fiscal catastrophe – all without keeping council informed of the borough’s financial problems.

His suspicions are backed up by financial consultant Mark Morgan, hired by council to devise a financial plan for the borough.
“The information that has been provided to councils in the past has been sketchy at best,” said Morgan. “There has been extensive mismanagement.”

McNamara presented his evidence at a council meeting on Monday, May 6, showing the audience e-mails between former borough staff and other internal borough documents from the mid-2000s – evidence he hinted might play a role in litigation regarding the trust that council has authorized.

When the trust was formed, the borough continued to partially fund its general fund with electric system profits despite paying more for electricity from Met-Ed. But to keep electric rates low, the borough used $6.6 million of the electric trust money by 2005, according to documents McNamara presented.

Then the borough stopped spending the trust money – and immediately began to experience problems paying its bills, as evidenced by e-mails between former finance director Rick Grove and former borough manager Jeff Stonehill with titles like “The Cash Flow Problem is Serious” and “Russian Roulette.”

So Grove and Stonehill developed the Purchase Price Cost Adjustment (PPCA), a controversial formula that increased residents’ electric bills to provide additional cash to the borough. E-mails that they exchanged, McNamara asserted, showed that without the PPCA, borough management believed the only way to balance the borough’s budget was to consider enacting policies associated with the current council: de-funding the Middletown Public Library, cutting the police department, raising water and sewer rates and, possibly, selling the borough electric department.

To McNamara, the e-mails are evidence that borough management in the mid-2000s was attempting to deal with the same “structural deficit” – not enough general fund revenue to cover general fund expenses – that the current council believes exists.

“The financial situation is real … It’s a mess,” he said. “We got professional help [by hiring Morgan]. We didn’t let a borough manager and a finance director figure it out.”

McNamara also attempted to prove that Grove and Stonehill largely kept council in the dark about the financial problems and made major decisions regarding millions of dollars without informing council.

For instance, when McNamara joined council in 2012, none of the carryover council members were aware that the borough had all of its general fund money and some electric trust money invested in the School District Liquid Asset Fund rather than a bank, he said.

Councilor David Rhen, who was also on council in the mid-2000s, said Grove frequently evaded questions from council members.