Detroit is Bankrupt and Creditors Are Looking To Their Renowned Art Museum

Originally published in The JHU Politik on May 6th, 2014.

Should Detroit have to sell off its art collection in order to pay its bills? To what extent is art off limits from municipal politics, especially when worker pensions are at stake? Over the past year these thorny ethical questions have cast an uncomfortable shadow over the Motor City.

When the city of Detroit filed for Chapter 9 bankruptcy this past summer—with debts estimated at between $18-$20 billion—many wondered how on earth the city would find the funds necessary to recover from this colossal financial crisis. With an estimated 700,000 residents, Detroit is the largest city by population ever to file for Chapter 9. The city also scored the largest municipal bankruptcy filing in United States history.

Unlike many other large art museums around the country, the Detroit Institute of Arts (DIA) is owned by the city and some of its 65,000 pieces were purchased with city funds. The internationally renowned collection includes, among others, enormous murals by Diego Rivera, famous pieces by Vincent van Gogh, Henri Matisse, Pieter Bruegel, Edgar Degas, Rembrandt and historic ancient sculptures. Christie’s, a fine arts auction house, appraised the art purchased with city funds to be worth between $454 million and $867 million, but some experts have speculated that the art could be worth more than $2 billion.

In March 2013, Michigan Governor Rick Snyder appointed Kevyn Orr to serve as an Emergency Manager for Detroit’s financial operations. After Detroit filed for bankruptcy in July, Orr requested an appraisal of the city-purchased art.

Orr’s spokesman Bill Nowling told Reuters, “We obviously don’t want to get rid of art” but “if we are going to ask creditors to get a big haircut, we have to look at how to rationalize all of the city’s assets, including the artwork.”

The threat of auctioning off the city’s art has yielded great controversy.

“In the world of the great museums, this is unprecedented as far as I know,” said Ford W. Bell, president of the American Alliance of Museums.

“People need to understand that this is so much more than a Matisse in a museum,” DIA Museum Director, Graham W. J. Beal said. “It’s a piece of American history.”

But, on the other side of the issue, significant problems loom. Political leaders remain struggling to figure out what will be done to meet the city’s pension obligations—benefits that retirees and other employees have been legally promised. Officials estimate that Detroit’s pension obligations could be underfunded by as much as $3.5 billion, which means the city will have to either take money previously spent elsewhere to pay for it, or somehow disclaim its payments.

Many city employees, who have planned their retirement around this expected money, argue that pensions are protected under the Michigan Constitution. Indeed, Article 24 of the Michigan Constitution states that public pensions “shall not be diminished or impaired…and the state must help to make sure pensioners are paid in full.”

A poll commissioned in late September by The Detroit Free Press and WXYZ-TV found that while 78% of Detroit respondents opposed selling DIA art to pay creditors, 75% of respondents also opposed cuts in city workers’ pensions to pay off debts.

Something’s gotta give.

Museum officials hope to reach what they are calling “The Grand Bargain” with the city: in return for helping Detroit pay off some of its pension obligations, they want the city to relinquish ownership of the DIA to a nonprofit organization. This handover would shield the museum from future financial responsibility related to Detroit’s debts.

In January, the DIA announced that it would raise $100 million for pensioners, joining private philanthropic foundations, including The Ford Foundation and the John S. and James L. Knight Foundation, which had already pledged $370 million towards the effort. Governor Snyder also asked his State Legislature to provide an additional $350 million. The hope is that this combination of state and private money, totaling a fund of $800 million, could both protect the art collection and help the city pay off its pension obligations.

Politically, the last thing any politician, especially a Republican facing re-election, wants to be portrayed as is “bailing out” Detroit. “This is not a bailout of banks and other creditors. This is focused on helping reduce and mitigate the impact on retirees. It’s focused on protecting assets,” said Snyder in a press conference. But money is fungible, and thus it is unclear exactly what money will go where, and when. Many organizing workers groups allege that investors, bankers and international businessmen will indeed be repaid handsomely as they continue to lose their promised retirement benefits.

This “Grand Bargain” was proposed by mediators in the bankruptcy, led by Chief Judge Gerald Rosen of the U.S. District Court for the Eastern District of Michigan. In a press release, the DIA calls the deal, “a win/win/win strategy”, saying it provides for a quick exit from years of costly litigation, gives money to pensioners, and protects the museum’s valuable art.

However, it is uncertain whether this “Grand Bargain” could actually prevent creditors in bankruptcy court from demanding the art to be sold. The fact is that Detroit has relatively few assets beyond its valuable art collection and the city remains in massive debt.

But as Tom Campbell, Director of New York’s Metropolitan Museum, put it, “Even in the darkest days of New York City’s fiscal crisis of 1975, and the national economic meltdown of 2008, the cultural treasures closely identified with our own city were never on the table — never considered an asset that might be cashed-in during a crunch to bridge a negative balance sheet.”

Many argue over the impact that selling the art would even have for the city of Detroit. Some say it would be a shortsighted betrayal, hurting Detroit’s ability ever to revive itself economically. Others argue that it is a move precisely for Detroit’s economic revival. Museum officials warn that selling off its precious art would hurt future donor prospects, sending a clear signal that Detroit is a failed urban experiment which cannot sustain serious investments or investors.

At the end of February the city filed a blueprint for what their plan to emerge from bankruptcy might look like, which included the Grand Bargain. The plan largely rested on steep cuts to city workers’ pensions and retiree health benefits as well as decreased payments to bondholders. It called for police, firefighters and those departments’ retirees to take a 10% cut to their current pension payment while all other city employees and retirees to accept pension cuts of 34%. Orr, in an effort to resolve this crisis as fast as possible, said that if unions drop their objections quickly, then police and firefighters would get a 4% pension cut rather than 10%, and city employees would get a 26% cut, not 34%.

“The plan is unfair and unacceptable,” Al Garrett, president of the Michigan branch of the American Federation of State and Municipal Employees, responded in a statement. “Retirees cannot survive these drastic cuts.”

By mid-April, city officials were already offering considerably greater concessions. Six more weeks of negotiations yielded a new proposal where the city offered to reduce municipal retirees’ pensions by 4.5%, down from 34%. Retired police officers and firefighters would see no cuts to their pensions. The new plan also includes the elimination of cost of living increases to municipal workers, although retired police and firefighters would continue to receive them, albeit reduced.

It remains unclear how labor unions and the committee representing retired workers will respond to the new offer. No doubt, the city and the DIA want to resolve this issue as quickly and painlessly as possible. But with many groups of creditors—with varying degrees of power—seeking retribution, Detroit’s litigious future, and its politics of art, are anything but over.

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