January 14, 2014 at 11:32 am

Daniel Howes

DIA-pension deal may turn on Michigan's role

A coalition of national and regional foundations is prepared to commit as much as $330 million to bolster underfunded pensions for city retirees and to shield city-owned pieces in the Detroit Institute of Arts from liquidation.

Now it’s the state of Michigan’s turn.

The unprecedented effort, considered crucial to speeding the city’s exit from Chapter 9 bankruptcy, hinges on whether federal mediators can persuade the state of Michigan and DIA donors to also contribute to a fund expected to total at least $500 million, a foundation executive close to the process told The Detroit News.

“There are a lot of pieces up in the air,” the foundation executive said Monday, calling the complicated pension-DIA negotiation “the linchpin to settle the entire bankruptcy. $500 million is a floor, actually. The most difficult piece is probably at the state level.”

For months, Gov. Rick Snyder and state officials have downplayed suggestions that taxpayer money would be pledged to finance Detroit’s exit from municipal bankruptcy. In recent weeks, as mediation talks intensified, the governor has signaled that a state role could be possible if it would close an otherwise difficult deal.

What that might be, and how, is not yet clear. The governor’s office remains noncommittal, citing the confidentiality of the mediation process and the political reality that any commitment of state funding or backing of bonds would be done in partnership with the Republican-controlled Legislature.

The situation remains fluid. The New York-based Ford Foundation, no longer affiliated with the Dearborn automaker following an acrimonious split with descendants of its founder, Edsel B. Ford, has pledged $125 million to the effort. And the Kresge Foundation, headquartered in Troy, is prepared to put $100 million toward the campaign in a multi-year commitment.

Of the remaining foundations — the Community Foundation for Southeast Michigan, William Davidson Foundation, Fred A. and Barbara M. Erb Family Foundation, Hudson-Webber Foundation, John S. and James L. Knight Foundation, McGregor Fund, and Charles Stewart Mott Foundation — none has pledged more than $30 million, with most committing $10 million or less that would be paid over installments, in some cases as long as 20 years.

The mediators, led by Chief U.S. District Judge Gerald Rosen, would prefer the contributions be front-loaded. In a statement issued amid the first press day of the North American International Auto Show, the Detroit bankruptcy mediators hailed “the extraordinary and unprecedented effort to help resolve two very challenging sets of issues” whose resolution would facilitate “the revitalization of the City in the aftermath of the bankruptcy.”

Maybe so, if the efforts to raise private money to pay public obligations survives the scrutiny of creditors, U.S. Bankruptcy Judge Stephen Rhodes, a federal bankruptcy code that generally requires creditors to be treated equitably and conditions set by the foundations.

“Under the terms of the agreement,” the heads of the Knight, Ford, Kresge and Community Foundation of Southeast Michigan wrote in an op-ed to be published today in The News, “the City will transfer the museum’s collection and facilities to the DIA, the nonprofit organization that currently runs the museum, for hundreds of millions of dollars to be paid over a number of years.

“This will prevent the museum’s world class collection from any potential sale to satisfy the City’s creditors now or at any time in the future. The funds paid to the City by foundations and other funders will then be directed exclusively to the pensions owed to retired city employees — a down payment on a hard-earned promise from Detroit to its workers.”

The impetus for confirmation of the talks, two sources close to the process told The News, were national media inquiries over the weekend that mediators feared would produce potentially contradictory stories while 5,000 journalists from around the world work the auto show inside Cobo Center.

Still, serious questions remain. Because bankruptcy requires that creditors in the same class be treated equally, it’s not clear how the court could justify a deal that would award city pensioners with a premium on any proposed settlement.

Secondly, because the foundation-led deal appears to be the only deal advanced to rescue the DIA’s city-owned holdings from a potential sale, would the proposed transaction be the best and only offer? Hard to know if other would-be buyers from Russia or China, Singapore or the Gulf states, aren’t given an opportunity to field a proposal.

Finally, would transfer of the DIA and its holdings to the nonprofit that currently runs the museum or the injection of taxpayer money through a state appropriation or state-backed bonds imperil the tricounty millage that pumps an estimated $22.6 million annually into the DIA’s operations?

Those issues, and more, are likely to be aired in Rhodes’ courtroom over the coming weeks and months. That wouldn’t change the fact that an extraordinary coalition of philanthropies are combining to preserve the DIA and help honor pension obligations they did not make.

More, the participation of the Ford Foundation is a remarkable turn for the world’s No. 2 foundation by assets, a philanthropy that owes its riches to Ford Motor Co. but lost its connection to the founding family and its ancestral home when Henry Ford II severed ties and walked away.

Now the Ford Foundation, spearheaded by President Darren Walker, is assuming a leading role in efforts to protect a priceless cultural icon needed for Detroit’s fresh start and to protect pensioners from the predations of a bankruptcy they did not seek.

daniel.howes@detroitnews.com
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Daniel Howes’ column runs Tuesdays, Thursdays and Friday