The assembly of an $820 million fund to end city ownership of the Detroit Institute of Arts, protect its collection from creditors and bolster city pensions isn’t the end of tough negotiations so much as a beginning.
Creation of the fund, capped this week by the DIA’s pledge to raise $100 million toward the effort, means the next move belongs to the city’s unions and pension funds. Their choice: seriously consider the deal proffered on behalf of the city or risk the uncertainty of bankruptcy court and a chance to endure a painful “cramdown.”
It’s not an easy choice, chiefly because none of the sides in the multi-front talks can agree on the numbers — not on city cash-flow over the next decade or the prospective performance of any fund that would supplement pensions. And certainly not the unfunded liabilities of the pensions themselves, which Emergency Manager Kevyn Orr pegs at $3.5 billion for Detroit’s two pension funds.
“We appreciate the work that has been done in the public and private sectors to potentially mitigate cuts to pensioners in the city’s bankruptcy,” Bruce Babiarz, spokesman for the police and fire pension fund, said in a statement Thursday. “This is a highly complex matter, with many still unanswered questions and subject to court-ordered mediation. We believe that all alternatives need to continue to be explored which will minimize any cuts to pensions.”
Whatever the alternatives, the numbers and what they portend matter most. The largest municipal bankruptcy in American history, besetting the city with total liabilities of roughly $18 billion, essentially is a cashless workout for a cash-poor Detroit. Recoveries are expected to be a fraction of what creditors, including pension funds, are owed.
There is no coalition of banks standing ready to finance the city’s bankruptcy with “debtor-in-possession” financing common in a corporate Chapter 11. The punishing timeline tied to Orr’s tenure, the details of Public Act 436 and U.S. Bankruptcy Judge Steven Rhodes’ style is driving a pace of decision-making discomforting to many of the participants.
And hard as creditors might try, publicly owned assets like the DIA and the city’s Water and Sewerage Department are not easily converted to cash that can be divvied among pension funds, unions, banks, bondholders and their insurers. That’s partly a quirk of Chapter 9, which reserves to the city — not creditors — any decision to liquidate assets and invite political backlash.
With creditors now in possession of the city’s draft 99-page Plan of Adjustment, a source close to the process said this week, the judicial clock is ticking on an official filing on or about Feb. 14. That would be accompanied by a so-called Disclosure Statement running more than 160 pages, a precursor to another round of litigation.
The public-private effort — funded by $370 million from 10 foundations, $350 million from state tobacco money and $100 million from the DIA’s individual and corporate donors — is intended to settle at least one major point of contention: an art vs. people tradeoff that would sacrifice the city’s future cultural heritage to fulfill its legacy obligations.
But it hasn’t settled anything yet. Chief U.S. District Judge Gerald Rosen, the top federal mediator, hopes the cash hoard, and its growth prospects if managed well, would be deemed enough to buy the DIA’s freedom, protect its collection and buttress pension obligations sufficiently over time.
“Enough,” of course, is in the eye of the beholder. The spectacle of Rosen rallying foundations, a reluctant Lansing and an even more reluctant DIA leadership around a cause that has so far elicited commitments totaling $820 million risks creating false confidence among union and pension fund brass:
Namely, their calculation might go, if the One-Percenters can raise that much, they can raise more. Don’t bet on it. Even if the pot could somehow grow closer to $1 billion (an astonishing feat, considering that the pension obligations belong to the city, not the funders), that’s still less than one-third of Orr’s estimated unfunded pension liability.
Employing the trademark slow walk and playing for more, a time-honored tradition in Detroit labor relations, risks a sterner confrontation with Rhodes that arguably would not benefit pensioners or union members (even if it gives their leaders cover to blame the judge and keep their jobs).
Time is on no one’s side in the Detroit bankruptcy, as Rhodes already has signaled from the bench. The fundraising effort that finally enlisted the DIA in its own cause gives the unions and pension funds decisions to make — or risk consequences in a process they do not control.
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays.