Bankruptcy and beyond for Detroit
It was time to see the governor.
For the past month, Chief U.S. District Judge Gerald Rosen had been fielding commitments from charitable foundations to fund his audacious idea: a "grand bargain" in the city's historic bankruptcy that would raise cash to bolster city pensions and shield the Detroit Institute of Arts and its collection from creditors.
On Dec. 13, he walked into the governor's office in the George Romney Building, took a seat and laid out $282 million in private contributions. The Ford Foundation in New York was in for $125 million; Troy-based Kresge Foundation committed $100 million; the Knight Foundation of Miami pledged $30 million; and more — Mott, Davidson, Hudson-Webber among the original 10.
"Really?" the governor said. "So what are you asking for?"
"I think we'll get to $350" million "and I think you should match it," Rosen replied, warning the alternative would be rising safety-net costs and massive hardship for Detroit pensioners. "If the foundations are betting this big on Detroit, you can't do anything less."
They shook hands, forging a public-private partnership that grew to the equivalent of $816 million — and more. The unprecedented deal, according to principals involved in the case, proved the key to unlocking the contentious bankruptcy, leveraging consensual settlements, supporting city pensions and ending protracted legal challenges likely destined for the U.S. Supreme Court.
Rosen's initiative, shaped by mediators, foundation leaders, attorneys, the governor, the Legislature and eventually leadership of the DIA, changed the course of the largest municipal bankruptcy in American history and sped it to an unexpectedly quick conclusion. It produced new money in an essentially asset-less proceeding, reduced cuts to pensions and conveyed city-owned art to a charitable nonprofit trust.
"It was absolutely a turning point," Gov. Rick Snyder said in an interview, gesturing to the chair to his right. "He was sitting there and I was sitting here. The outcome was ... a partnership."
But it was neither guaranteed nor pre-ordained. Republican leaders in Lansing initially resisted. DIA leaders remained publicly non-committal. And five days earlier, the governor publicly reiterated his determination to avoid pumping state money into anything like a Detroit bailout — unless facts changed.
Detroit's collapse into bankruptcy did not begin on July 18, the day of its historic filing.
"It was out of neglect over 40 or 50 years," Mayor Dave Bing said earlier in 2013. "The bottom line is we must stop fighting each other. We must start working together."
Decades of dysfunction, marked by a long record of political corruption, fiscal mismanagement and population flight, worsened the hollowing out of public schools and accelerated a steady exodus of business, industry and jobs. Tax revenue declined, property values slumped, paying property taxes became a voluntary exercise, and people left — a population decline of roughly one third in the decade beginning in 2000.
Detroit was a municipal basket case, the nation's poorest major city. Exacerbating its plight were the near-collapse of two hometown automakers, a global financial meltdown that tipped the country into recession and the chronic inability of City Hall to deliver residents basic city services despite having the highest tax rates in the state. People who could leave did.
As a candidate for governor in 2009 and 2010, Snyder was dismayed by the decaying conditions in Detroit, its poor political leadership, the appalling lack of services. As a candidate, he campaigned in the city, drawing hoots of derision from fellow Republicans saying he was wasting his time. A month before he took office on Jan. 1, 2011, his pick for state treasurer, former House Speaker Andy Dillon, asked investment bankers to begin assessing the city's financial health.
"No one wanted to confront reality, both city leadership and union leadership," said Charles Moore, managing director of Conway MacKenzie, a Birmingham-based corporate restructuring firm hired to help restructure city operations. "No one's dealing in reality."
Dillon, a former investment banker, pushed Treasury Department officials to scrutinize Detroit's finances, quietly hiring a major accounting firm, Ernst & Young, to study the city's books. A preliminary report in May 2011 predicted Detroit's cash on hand would be $13 million by July 1. That's enough to run the city for just four days.
By December, Dillon ordered a financial review of the city's books under Public Act 4, a revised emergency manager law that unions and their allies in the Democratic Party vowed to repeal in the 2012 election. The results were sobering:
The city had run annual budget deficits ranging from $155 million to $331 million for seven consecutive fiscal years. Worse, the review concluded, Detroit's liability for retiree health insurance approached $5 billion, a large chunk of long-term unsecured debt totaled $12 billion, and the city held $33 in debt for every dollar of assets.
Four months later, Bing and a 5-4 majority of the City Council grudgingly agreed to a consent agreement with the state Treasury obligating Detroit to make reforms. The city mostly failed to deliver over the next 11 months, underscoring chronic infighting and its delusional leadership.
A year after ordering the city's first financial review, and eight months into the consent decree, little had improved. A financial consultant hired by the city met with Dillon privately to show him two "very chunky" bills for pension and employee health care that would dip the city's cash reserves below a $50 million threshold Dillon considered a financial tripwire.
"I thought that was game over at that point — and the governor agreed, and that's when we started the second review," Dillon said in an interview. "I didn't think that they could avoid emergency status at that point."
They couldn't. They needed help, and under pressure the city agreed to hire the Jones Day law firm based in Cleveland to lead its restructuring efforts.
A leader of the pitch was a guy named Kevyn Orr, a member of the firm's Washington-based bankruptcy unit and veteran of Chrysler LLC's historic bankruptcy. He attended the University of Michigan Law School at the same time as Snyder and Mike Duggan, then considering a run for mayor.
Orr was uniquely positioned, an African-American who would be spearheading the firm's efforts to help the majority African-American city restructure its operations and debt-laden balance sheet. More, he was a lifelong Democrat whose three decades at the bankruptcy bar enabled him to work effectively with business-minded Republicans.
"There are diversity-related issues," Corinne Ball, the head of Jones Day's restructuring practice, wrote Orr in an email, clearly referencing the fact that he also happened to be African-American. "You have to be the star on this stuff and be able to discuss what we can provide."
A star he turned out to be. Jones Day got the business. And the governor's confidant and hand-picked talent scout, Rich Baird, found an ideal candidate to become Detroit's emergency manager — the expected quarterback of an increasingly likely Chapter 9 bankruptcy filing.
Baird called Orr the next day, arranging an interview with the governor within two weeks. On March 14, Snyder introduced Orr, who agreed to resign from Jones Day and take a massive pay cut to engineer the mother of all restructurings. Next to him stood a sober-looking Mayor Bing. He publicly opposed the appointment but privately understood the inescapable reasons behind it.
"I'm prepared to be the most hated man (in Detroit) for a period of time," Orr said, flashing the grin that would become familiar over the next 18 months. "But some of that vitriol will abate."
He had no idea, as he later conceded. Often.
Three months before the city filed Chapter 9, and roughly a month after Orr arrived as emergency manager, restructuring consultant Ken Buckfire delivered the message the DIA didn't want to hear.
The city-owned museum and its 66,000 pieces represented one of the few city-owned assets that could be converted to cash. He proposed several options: explore the sale of art; establish lending programs that would make DIA pieces available to other museums; or reach a long-term lease agreement obligating the DIA to make annual payments over 20 or 30 years to the city, creating a new municipal revenue stream.
All of it was anathema in the clubby art museum world, outraged that Detroit's management or grubby creditors would propose to liquidate art to pay debt. Repeatedly, public statements from DIA leaders dismissed alternatives that did not hew to the museum's strategy, self-image or industry standards.
"The idea that we could raise hundreds of millions of dollars doing that would be unwise," DIA Chief Operating Officer Annmarie Erickson said in May 2013, contributing to the impression that the museum leadership proved "an unwilling partner," as one participant described it, in a race to save itself from creditors.
To the managing director of Miller Buckfire, a New York investment banking firm, the DIA represented just another potential deal. To the leaders of the DIA, any such proposal would culminate in a cultural disaster that effectively would destroy the museum and the accumulated centuries of heritage inside its walls.
And for the governor, weighing a calculated risk that would culminate in Chapter 9, Dillon warned Buckfire that messing with the art is "a lose-lose" for Snyder. "Let the creditors go after the art," the treasurer said.
Selling or "monetizing" the art would imperil a three-county millage that generates more than $23 million annually for the museum; would savage the museum's reputation and cement Detroit's image as a cultural backwater; would all but guarantee that masterpieces from Bruegel and Van Gogh, Rembrandt and Rodin would end up in the hands of foreign collectors never to be seen again by the public.
The alternative — refusing to sell art or raise money with it as collateral — also sparked predictable controversy. Community leaders expressed outrage at the prospect of city employees and pensioners being forced to endure deeper cuts while suburban patrons of an art museum save their art. The optics, much less the reality, would be difficult to justify: in a choice between art and people, the art would lose.
"Things were going to get difficult," Gene Gargaro, chairman of the DIA, remembers thinking after his first meeting with Buckfire, held in mid-April 2013. "We should be prepared for any contingency."
A Detroit native and University of Michigan alum, Buckfire earned a reputation in Detroit's bankruptcy for being difficult and tone-deaf. An understanding of the political sensitivities and longstanding mutual suspicion coursing through the case eluded him, according to multiple sources, chiefly those surrounding the DIA and the prospective roles of suburban political leaders in Detroit's restructuring.
His push to hire Christie's, the international auction house — more than three months before the bankruptcy filing — backfired when word leaked, sparking a furious backlash in art circles. Still, the emergency manager's team continued probing for options to wring cash from the museum's collection.
Could the DIA "go back to the three counties, 10 counties, to see whether they would be another source of revenue," Gargaro says he was asked. He did; predictably, it proved a political nonstarter. "We were looking at everything they asked us to do."
Nearly two months from a likely Chapter 9 filing, Orr and his team grew increasingly frustrated with what they perceived to be an intransigence bordering on cluelessness coming from DIA leadership. In an email written just after Memorial Day, Orr's communications director detailed the reality facing the museum should the city file for bankruptcy.
"Our job is not to protect art, but to save Detroit," Bill Nowling, a former Republican operative and member of Snyder's 2010 campaign team, wrote to Orr. "We have said ALL options are on the table and being considered. We meant it. This is a financial emergency and financial emergencies require extraordinary measures, including, maybe, selling art.
"I don't want to pack up the art, but I wasn't hired to protect it and neither were you. We have a job to do and we can't afford to get bogged down with side issues that are essentially moot. Our responsibility is to statute and the citizens of Detroit. If Al Taubman, Keith Crain don't like it, they can buy the art and gift it back to the DIA or they can roll the dice and take their chances."
The spat went public at the Detroit Regional Chamber's annual Mackinac Policy Conference, requiring high-level meetings to calm the situation. With the threat of bankruptcy growing more real by the week, the vulnerability of the DIA collection dominated the unofficial agenda. Even the governor, when pressed by The Detroit News in late May, acknowledged the DIA's holdings could be a target for creditors.
Two weeks later, representatives for the city's unions, pension funds and financial creditors learned just how dire Detroit's predicament was. The city would default on bond payments and declare its intent to treat all unsecured creditors equally, offering them just pennies on the dollar.
"We're tapped out," Orr told the assembled representatives of financial creditors, the city's unions and its two pension funds on June 14. There, on the lower level of the Westin Detroit Metropolitan Airport, the contours of his radical prescription for what ailed the city became clear for the first time.
The emergency manager and his restructuring team proposed redirecting savings from reduced employee benefits to buy new police cars and firetrucks, to replace broken streetlights, to tear down burned-out homes. Unsecured creditors would receive roughly 10 cents on the dollar, an arbitrary figure that would change regularly as negotiations unspooled over the coming months.
In effect, Orr proposed a choice: keep paying the full freight of legacy costs, including health care, to the city's retirees and those who would be. Or restructure the city's balance sheet and invest in improving the lives of the city's 680,000 residents.
Stunned silence commingled with outrage. Steve Kreisberg, national director of collective bargaining for the American Federation of State, County and Municipal Employees, came from Washington for the meeting. He walked away thinking it wasn't a serious proposal.
"They put it out there because they wanted to go into bankruptcy court and negotiate in bankruptcy court," he said. He turned out to be right, mostly because the harsh reality of Orr's numbers failed to move constituencies in labor and on Wall Street well-schooled in the art of brinksmanship.
To make his point and to preserve cash, Orr confirmed the city would default on a $39 million payment due the same day for pension-related debt. The city was beyond crisis: a few days earlier, Orr had learned a city employee's paycheck had bounced at the bank in the morning, but had been cashed by day's end.
The view is magnificent from the porch of Richard Manoogian's home, called The Pines, on Mackinac Island. The straits flow under the trademark bridge connecting Michigan's two peninsulas, past an island partially frozen in time.
Orr wanted his wife and their two young children to see it over the July Fourth holiday, to experience the Grand Hotel down Lake Shore Drive from the summer home belonging to the chairman emeritus of the DIA. He also wanted the chance to chat with one of the museum's most influential living benefactors and to send a message: The museum's assets could become targeted by creditors and could, in theory, be sold by the city.
Manoogian, the 77-year-old chairman emeritus of Masco Corp., greeted Orr and his family warmly, steering the emergency manager's son and daughter toward a prized model train set. The two men climbed into a carriage and headed off on a tour of the island.
A month had passed since the contentious meetings inside the Grand between DIA officials and Orr's aide, Nowling. Orr told Manoogian he hoped leaders of the DIA and its benefactors could find a solution to the undeniable facts that the museum's art is city-owned and the city's assets would need to be valued should the city file Chapter 9 bankruptcy.
"Well, you know," Orr recalls Manoogian saying, "that may be difficult if it's some form of absolute cash."
"Well, I understand more or less," Orr responded. "But I've got to do something because that's my duty, that's my obligation."
The meeting ended amicably, less than two weeks before a municipal bankruptcy in the nation's poorest major city would focus intently on the DIA. Orr's keepsake of the visit: a picture of his 6-year-old daughter, Alexis, peering at the straits from the widow's peak of Manoogian's home.
The top Democrat in Snyder's administration objected to what increasingly looked like a rush to bankruptcy.
"I don't think we are making a case why we are giving up so soon to reach an out-of-court settlement," Dillon, the treasurer, wrote in a July 10 email to Snyder and his team. "Looks premeditated."
The city's talks with creditors, following Orr's June 14 bombshell at the airport Westin, yielded no progress. Financial creditors believed the power of the $3.7 trillion municipal finance market would discipline Orr and his team with the threat of sharply higher borrowing costs for other Michigan localities; city unions and pension funds drew solace from the state constitution's protections for vested pensions.
Lawsuits mounted, a signal that the need for an automatic stay to block litigation would precipitate a Chapter 9 filing. Retiree groups and the city's two retirement systems, in similar lawsuits, argued a bankruptcy authorization would be a direct threat to the sanctity of earned pension benefits and asked the court to prevent a filing by the city.
Orr was losing control of the process. "All I'm getting is lawsuits," he recalled in an interview, "so I'm not getting anywhere."
On July 17, Orr and his legal team wrote Snyder for permission to file bankruptcy on Friday, July 19. On the morning of July 18, the governor sent his authorization to Orr at the state's Cadillac Place office in Detroit, placing no restrictions on the actions his emergency manager could take.
Just after noon, Orr called David Heiman, the city's lead attorney at Jones Day, to order the filing of the largest municipal bankruptcy petition in U.S. history. Detroit's debts totaled $18 billion, its elected officials had been sidelined (but paid) by Orr, its police took nearly an hour to respond to 911 calls.
As rumors swirled in Detroit and Lansing that afternoon of an imminent bankruptcy filing, attorneys representing the city's pension boards and a group of UAW retirees filed a motion at 3:37 p.m. in Ingham County Circuit Court. They wanted a restraining order blocking Snyder and Orr from filing for bankruptcy — and raced to the county courthouse in downtown Lansing for an emergency hearing.
In Detroit, the city's legal team hit a snag. At 3:46 p.m., the federal court system's computer server, called PACER, crashed as city attorneys attempted to file a 16-page petition for bankruptcy. Twenty minutes later, the document got through.
The Chapter 9 petition for bankruptcy was loaded on the federal court docket at 4:06 p.m. A reporter for The Detroit News turned to creditor attorneys in the Lansing courtroom and told them of the breaking news: Detroit had just declared bankruptcy, Case No. 13-53846.
Minutes later, Ingham County Circuit Judge Rosemarie Aquilina emerged from her chambers. She intended "to grant you your request completely," she told visibly disappointed lawyers for Detroit's pension funds. Too late.
"It's war," declared George Orzech, then-chairman of the Detroit Police & Fire Retirement System.
Alice Batchelder, chief judge of the 6th U.S. Circuit Court of Appeals, was in Scotland on vacation when the email came from Rosen.
Detroit was headed for Chapter 9 bankruptcy, the largest such case in U.S. history. Bachelder would appoint the judge for a likely Detroit case, but Rosen wanted to recommend U.S. Bankruptcy Judge Steven Rhodes, a seasoned judge nearing retirement, for the job, according to a court filing.
A graduate of the University of Michigan Law School, Rhodes was a veteran Detroit jurist with experience overseeing complex bankruptcies. He had a reputation for efficiency and diplomacy from the bench, as well being the only bankruptcy judge in Michigan to have handled a rare Chapter 9 case — the bankruptcy of a small public hospital authority in Lenawee County.
It also was no secret among Detroit's tight-knit bankruptcy bar that Rhodes craved a big case to cap his career. Or that he bridled at the fact that Chapter 11 bankruptcies of local corporate heavyweights — General Motors Corp. and Delphi Corp., to name two — had been adjudicated in New York bankruptcy courts.
In a court filing, Rosen wrote that Rhodes had "outstanding administrative and management skills, which of course will be necessary in handling a case of this magnitude."
Rhodes set a no-nonsense tone for the case in the first two hearings on July 24 and Aug. 2, enforcing the automatic stay to shield the city from an onslaught of lawsuits. He set an aggressive trial timetable and appointed Rosen lead mediator — a move met with some skepticism.
Rhodes would later call it one of the best decisions he made in the historic bankruptcy. Rosen quickly concluded he would need help mediating the complex issues ahead; he pushed to assemble a team of mediators that would prove innovative in municipal bankruptcy and necessary to crafting deals between the city and myriad constituencies.
Roughly a month after the Chapter 9 filing, Rosen named David H. Coar, a retired federal judge; Wiley Daniel, a senior U.S. District Judge from Colorado; Elizabeth Perris, a U.S. bankruptcy judge from Oregon who mediated several California bankruptcies; Victoria Roberts, a U.S. district judge and native Detroiter; and Eugene Driker, a co-founder of Barris, Sott, Denn & Driker. U.S. District judges David Lawson and Sean Cox would join later, along with Gina Torielli, a municipal tax consultant.
"Mediation in Detroit?" Kenneth Klee, a Los Angeles bankruptcy attorney, said at a conference in late October also attended by Rhodes. "I just cannot imagine this is going to be anything but a waste of resources."
In early October, two months before Rhodes ruled the city eligible for Chapter 9 bankruptcy protection, Orr used his emergency manager powers to impose new retiree health insurance benefits.
They proved dramatically less generous than the existing lifetime plans that left the city on the hook for a $5.7 billion liability — including some plans that could not be altered outside federal bankruptcy.
Instead of paying a "platinum" insurance premium for some 23,500 retirees and their spouses, Orr said the city would send them a $125 monthly check to partially subsidize the purchase of private insurance on the new glitch-prone federal exchange just being launched.
For city retirees and their survivors, Orr's move proved an early indicator of the swift and unexpected change bankruptcy could bring. Reality was setting in: health care benefits they were promised would not be provided by the city for their rest of their lives.
"We're all panicking because we look at this as the beginning of the cuts," said Michael Wells, 66, of Detroit. The retired librarian draws a $37,000 annual pension.
The steep cuts to retiree health coverage underscored a major question looming over the bankruptcy case, just 3 months old: What about the pensions, explicitly protected in the state constitution? Behind the scenes, unions and retiree groups used the health care cuts to show city officials and mediators the bottom-line impact pensions cut could have on retirees.
"You've got to treat these people fairly," Sharon Levine, an attorney for AFSCME, said in an interview. "They're not disposable."
"How can I help?" Mariam Noland, president of the Community Foundation of Southeast Michigan, asked Rosen at a chance meeting at the Gateway Deli. The favorite lunch spot for judges and their staffers sits across Fort Street from Theodore Levin U.S. Courthouse, epicenter of the city's epic Chapter 9 case.
Detroit had been in bankruptcy nearly three months. Rosen, the mediator appointed by Judge Rhodes, urged creditors to "open your minds to areas where we can reach agreement." His mediation team, culled largely from U.S. district courts from as far away as Denver and Portland, Ore., would prove critical to reaching consensual settlements in the case.
The DIA's continuing insistence that its art could neither be sold, monetized nor comprehensively valued by outsiders increasingly disappointed some museum supporters and aggravated Orr. It also confirmed for Rosen that the path from bankruptcy must include a complicated solution that bolstered city pensions, rescued the DIA collection and secured its independence.
The DIA was moving slowly. Under pressure from his Jones Day bankruptcy team to value the museum's assets, the emergency manager used an Oct. 3 meeting of the Detroit Economic Club to publicly challenge DIA trustees to "come up with a proposal" to leverage its collection to help resolve Detroit's debt — or he would, because he could.
Rosen was two months ahead of him. During a mid-August golf vacation with his teenage son, Jake, the judge studied Orr's June 14 "Proposal to Creditors," distributed to appalled creditors, union leaders and pension funds at the airport Westin meeting little more than a month before the city filed Chapter 9.
It was grim reading. Each new page testified to the dismal financial shape of the city, to gross financial mismanagement and ineffective political leadership. "Legacy costs" associated with debt, pensions and retiree health care costs were on track to consume 64.6 percent of annual city revenue by 2017 if the trend was not arrested. For every dollar in assets, Detroit carried a crushing $33 in liabilities.
Worse, two legal issues threatened to mire the city in litigation for years, likely ending before the U.S. Supreme Court: Section 24 of Article 9 of the Michigan Constitution protecting vested public pensions as "a contractual obligation," and state Attorney General Bill Schuette's opinion declaring the DIA's holdings a "public trust" that cannot be sold.
Settling the two issues, presumably in mediation, would settle the case. Litigating them, as Rosen subsequently warned funders of the grand bargain, "would ensure that the city" has "very little of Detroit upon which to rebuild, devastating not just the city but the region and state," according to notes compiled by one participant in the deal.
The judge grabbed a legal pad, drew a box, labeled it "ART," wrote "State" to the left, "Pensions" to the right, say people who have seen the sketch. Could the state of Michigan somehow acquire the DIA, wall off the collection from creditors and help offset the deep pension cuts contemplated by Orr's plan?
No, Snyder told DIA supporters — including A. Alfred Taubman, a DIA mega-donor and major art collector — privately arguing that "something needed to be done to protect the DIA," the governor recalls. "But I have a responsibility as governor to look at the big picture, look at what's in the best interest of the city, the state, of all our citizens."
Sessions led by Rosen and his hand-selected team of mediators already were underway. They needed leverage — cash, to put it crudely — in an otherwise asset-less bankruptcy to offer a credible alternative to Draconian cuts. The judge invited Noland to visit him in his chambers.
Rosen got straight to the point.
"I need a lot of money fast," Noland recalls him saying. "Do you think the foundations could do that?"
How much do you know about foundations, she asked. "I said, well, look, I'll get on the phone and we'll see."
She reached nearly a dozen foundations, from the heavyweights named Ford and Kresge to the city's smaller ones with tightly focused missions. The "ask," she explained, would be intended to benefit city pensions and protect the art at the DIA, the intense focus of the city's creditors.
The meeting was set for 4 p.m. Nov. 5, in Rosen's chambers. Rip Rapson, president of Kresge, would be unable to attend because he was scheduled to be in South Africa on foundation business. Would Rapson and his wife, Gail, be free to meet the judge and his wife for dinner at Bacco in Southfield before the planned meeting?
The two men are not strangers. Rapson and Rosen first met at the Capitol Hill Tennis Club in early 1970s Washington, where both worked as young congressional staffers — Rapson for Minnesota Democrat Don Fraser, Rosen for Michigan Republican Robert Griffin. Would the foundations consider financing a $500 million fund to bolster pensions and rescue the DIA?
The foundation leaders arrived on time at Rosen's chambers to find his full mediation team of four federal judges, his municipal finance and tax consultant and Driker, an influential attorney deeply involved in grand bargain. Officials from a dozen foundations and the Jewish Federation of Metropolitan Detroit attended, according to notes compiled by one of the participants.
The potential for a historic turn in the case did not escape many in the room, especially Rosen, a Winston Churchill buff and member of the Churchill Centre. Atop the agenda he'd prepared read a fitting aphorism attributed to the British statesman: "A pessimist sees difficulty in every opportunity; an optimist sees opportunity in every difficulty."
The same page carried a quote from Buddha that Rosen is prone to share with law students: "There are only two mistakes one can make along the path of truth — not going all the way, and not starting at all."
Detailed introductions took more than 15 minutes. A tour of the chief judge's stately courtroom on the seventh floor was "a magisterial experience," says one foundation head, that "put the judge's ambition and his capacity to think big on display."
The mediators each described their roles and the complexity of the case. Rosen then took more than an hour to deliver a simple message about what he called "The Bookends": If the pivotal issues surrounding the pensions and the DIA could not be settled through mediation, the bankruptcy likely would be mired in contentious, high-profile litigation for years to come, undermining the foundations' efforts in the city.
"People were so taken aback," says Darren Walker, president of the Ford Foundation, who canceled a meeting in New York to attend. "It was overwhelming to see how the foundations could intervene." Still, he told the room "this is a very big idea," another foundation head recalls, "and we need to take it very seriously."
The ask quickly focused on funding a $500 million "Art Trust," according to several participants in the room, all of it to come from private foundations with neither an official connection nor a legal obligation to the case. Walker, head of the $10.3 billion foundation seeded 78 years ago with wealth generated by Ford Motor Co., balked.
"What I reiterated to him is there was no way the foundations would go ahead without a public commitment" from the state of Michigan, he told Rosen over breakfast in New York nine days later. "It was non-negotiable. Otherwise what confidence would we have that the public was committed?"
A clear line had been drawn that would shape the course of the bankruptcy, pension payouts for 30,000 city retirees and the independence of the DIA. Any hope of a bargain, grand or not, rested on the ability to persuade Snyder, the Republican leadership in the Legislature and the DIA to collaborate on a partnership that would, by definition, be public-private.
Foundations controlled the money and set the terms. Their leaders, backed by their respective boards, would not pursue a deal financed solely by their private dollars because it would set a dangerous precedent and would embroil the philanthropic sector in a politically charged process they habitually try to avoid. The state, and the DIA, had to be involved meaningfully, or no deal.
Rosen's job would be to make it happen. The meeting ended around 7:30, late enough for Noland to worry the catered dinner at her Grosse Pointe Farms home would go cold. She was having the judge and a few colleagues over to continue a discussion that would yield preliminary commitments of $120 million before the night was out.
The chairman of the DIA did not attend Rosen's meeting. Nor did any representative of the museum. Behind the scenes, the DIA wasn't stalling so much as preparing to go to war with a federal lawsuit that would make the museum, its leadership and its art a party to the city's bankruptcy — and likely a bitter adversary.
The museum's weapon would come in the form of June 13, 2013, opinion by Schuette that the DIA likely could take all the way to the Supreme Court. "The art collection of the Detroit Institute of Arts is held by the City of Detroit in charitable trust for the people of Michigan," Schuette wrote, "and no piece in the collection may thus be sold, conveyed, or transferred to satisfy City debts or obligations."
"I knew we were preparing for a defense of the DIA for three years, five years, whatever it took," recalled Gargaro, head of the museum's board for the past dozen years. The strategy mystified Rosen and Driker, who met several times with the DIA lawyers — Alan S. Schwartz of Honigman Miller Schwartz and Cohn LLP in Detroit and Richard Levin of Cravath Swaine & Moore LLP in New York — to discuss the museum's options.
Rosen and Driker pressed. Where would the litigation strategy lead? What impact would it have on the DIA, its reputation and its leadership? How would the time and expense adversely impact the museum's relationship with its donors, the suburban counties funding its operations, its relationship with foundations and other players in Detroit's cultural space? What would be left of the DIA?
Gargaro waited. Once a partner at Dykema Gossett PLLC, he knew filing a lawsuit would dramatically alter the dynamics, essentially making the museum and its supporters antagonists of the city. It owned their building, their collection and a management contract with a nonprofit entity officially called The DIA Inc. It could be canceled unilaterally by the emergency manager or in bankruptcy.
"The decision not to litigate was simply to provide additional time to see where this was headed," Gargaro said. He called Alberto Ibargüen, president of the John S. and James L. Knight Foundation, to ask a favor. Could he broker a meeting with Walker, the head of the Ford Foundation? Ibargüen delivered: 30 minutes starting at 3:30 p.m., Oct. 21, in New York.
In walked Gargaro, accompanied by DIA Director Graham Beal and Erickson, the chief operating officer. For 20 minutes, they detailed their plan to keep the DIA viable, its collection intact. "We need help," Gargaro says they told Walker. "This is a crisis."
They reminded Walker, a relative newcomer to the top job, of the foundation's legacy — to the hometown of founders Henry and Edsel Ford, to the institutions they endowed during their lifetimes, to Edsel Ford's abiding commitment to the DIA and its art. He listened and expressed his appreciation of the DIA.
"He said, 'I can't give you money,'" Gargaro recalled, "'but I can give you advocacy.' I thanked him and said, 'Darren, we'll take it.'"
The dinner by Canapé Cart of Ferndale was served on the round Saarinen table in the dining room of Noland's home, designed by the famed Cranbrook Educational Community architect Eliel Saarinen and his son, Eero. Food could wait.
Rosen was concluding the marathon Nov. 5 meeting in his chambers that would prove pivotal to unlocking Detroit's historic bankruptcy. The out-of-towners invited to join Rosen, Driker and Noland for what she describes as a get-acquainted dinner included Walker of Ford in New York, Ibargüen of Knight in Miami and Bill White, president of the C.S. Mott Foundation in Flint.
They talked baseball, Flint and Churchill. They talked bankruptcy and what it meant for Detroit. Most of all, they talked about how to build a mechanism that could address simultaneously the goals identified by Rosen: shape a settlement that raises new money to bolster city pensions, shields the DIA from creditors and establishes the museum's independence.
"I left that night thinking, holy cow, this actually could work if you created some kind of independent entity, if you had significant foundation money, and if you could get the state to match it," Ibargüen said in an interview. "This was a completely new concept."
He shared a cab with Walker back to their separate downtown hotels. Ibargüen asked the question generally avoided that day, in part because he knew an answer from the Ford Foundation would influence whether and how smaller foundations with fewer assets would commit, if at all: how much from Ford?
"Fifty or 100," Walker replied, the word "million" implied among two foundation heads commanding combined assets of $12.7 billion. "If you do that, I have to do 20," the Knight CEO said. "And based on asset size, you're getting away with murder."
That night, in the backseat of a Detroit cab, a $120 million cornerstone was laid unofficially for what would become the grand bargain. So had a challenge that would guide mediators, the governor and the DIA over the next few months.
Securing foundation money would require state participation, a heavy lift for a governor who'd spent the past six months rebuffing calls for state intervention and a House speaker whose first reaction said it all: "no way, no how."
The foundations had to move. The eligibility phase of the bankruptcy trial likely would be culminating in a ruling expected in early December, unleashing intensifying rounds of mediated negotiations should Judge Rhodes rule, as expected, that Detroit was eligible for Chapter 9 bankruptcy. The mediators would need the cash, quickly, to leverage settlements.
A week after the Rosen meeting, Kresge's Rapson called Walker in New York. They agreed it would be "philanthropic malfeasance," in Walker's words, not to pursue the judge's proposal — and the leaders of the two largest foundations in that room were the ones to do it.
Word of the judge's confab leaked to The Detroit News on Nov. 14, the same day Rapson, Walker and Ibargüen at the Knight Foundation received a "term sheet" outlining Rosen's concept. The News first reported that Rosen "is exploring whether regional and national foundations could create a fund that would protect the Detroit Institute of Arts' city-owned collection by helping to support retiree pensions."
Undeterred by the publicity, Rapson, Walker and Ibargüen, the former publisher of the Miami Herald, pressed ahead. A Nov. 20 strategy session was organized at Kresge; repeatedly, participants stressed the need for public participation in the effort "kick-started by philanthropy," according to Rapson's notes. "The rest of the community will quickly need to be drawn in."
"Darren and I agreed that the only way that this was going to move forward was if both of us — Ford and Kresge — considered it seriously," Rapson said in an interview. "Kresge couldn't move forward without Ford and Ford couldn't move without Kresge."
On Nov. 22, Rapson invited the foundation heads to a Dec. 4 lunch meeting at its Troy headquarters, beginning at 11:30 a.m. because the foundation's board was set to meet at 1 p.m. The day before, Rapson updated his board following a conversation with Walker that essentially confirmed each was prepared to go big for Rosen's idea:
"He agreed with my (your) sense that the number from Ford and Kresge needs to be large if it is to shake a solution loose and leverage others in," Rapson wrote his trustees. "I asked whether he thought $100 million apiece was too ambitious. He replied that that is exactly where he is."
The strategy was straightforward: pending financial and legal due diligence and authority from their respective boards, expected in just days, the Ford and Kresge foundations would signal their plans to pledge large amounts to leverage contributions from smaller, but vitally important, industry colleagues.
Bill White, the Mott CEO, set the tone. "I'll start the bidding at $3 million," Rapson recalls him saying. Hudson-Webber and Noland's Community Foundation could do $10 million each. Ford and Kresge would pledge somewhere between $50 million and $100 million each. The William Davidson Foundation, the Max and Majorie Fisher Foundation and the Kellogg Foundation, among others, would pledge, too.
Over dinner that night, Kresge's board unanimously authorized Rapson to pledge $100 million — a critical step toward the grand bargain that got a big assist the day before from the presiding bankruptcy judge.
Public pensions thought protected by the state constitution, Rhodes ruled, could be diminished in federal bankruptcy court. The grand bargain, still in its infancy, would be the only alternative.
It's there, in black and white:
"The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof and shall not be diminished or impaired thereby," reads Section 24 of Article 9 of the state constitution.
Not so in federal bankruptcy court, Judge Rhodes ruled on Dec. 3, shocking lawyers for the city's unions and its pension funds with a decision carrying national implications for public pension funds in municipal bankruptcy. In a single ruling, the judge overturned a 50-year belief that vested public pensions are protected by the state constitution.
"Pension rights are contract rights under the Michigan constitution," Rhodes said from the bench, declaring the city insolvent and eligible for bankruptcy. "It has long been understood that bankruptcy law entails the impairment of contracts.
"Resolving the issue now will likely expedite the resolution of this bankruptcy case," he continued, adding a caution aimed clearly at Orr and his legal team: "The court emphasizes that it will not lightly or casually exercise federal bankruptcy law to impair pensions."
What Rhodes didn't say, but became apparent as talks with the foundations and the state intensified, is that the unexpected ruling provided Rosen additional leverage in his effort to assemble disparate pieces of what became the grand bargain.
In theory, the mediators could position the assembled cash hoard as a credible alternative to a forced settlement imposed by the judge. They also could use the threat of appeal to push the city toward a settlement.
Without the alternative represented by the grand bargain, the unions, pensions funds, retirees, even the city itself, would have less incentive to settle and would increase the chance of an imposed settlement known as a "cramdown." Rhodes' ruling helped make the bargain possible because it confirmed the state constitutional protections for pensions could be breached in federal bankruptcy.
Orzech, then-chairman of the police and fire pension system and a battalion chief in the fire department, was sitting in the back of the courtroom that day. After the judge's ruling, a man he didn't know stood to leave.
"'The fix is in, kid,'" the man told Orzech, 59, who nodded. "I knew right then it was going to be a long, long process."
Ibargüen would make the pitch himself.
Three months earlier, he'd led the Knight Foundation's board on a trip to bankrupt Detroit. They saw the downtown revitalization spearheaded by mortgage impresario Dan Gilbert and his Quicken Loans Inc. empire. They met with the emergency manager, learning first-hand the challenges of the coming restructuring and resolving to help the city where it could.
This was Detroit, a cornerstone of the Knight newspaper empire swallowed by merger, acquisition, the march of technology and the passing of time. The foundation's trustees gathered for their quarterly meeting on Dec. 8 and 9, four days after Ford and Kresge telegraphed their intentions.
The CEO got to the point: the foundation's trustees should consider a $20 million grant to a fund that would be used to offset pension cuts, shield the DIA from creditors and grant it independence. It would be Knight's largest grant ever approved, a major statement about Detroit, and they needed to move.
"It was really about taking risks," Ibargüen recalls saying. He finished, and one by one the trustees voiced their opinions on his ask. Then it came to Beverly Knight Olson, the daughter of Jim Knight and then one of two Knight descendants sitting on the board.
"Beverly, when her turn comes, with tears in her eyes, said, 'Uncle Jack really loved Detroit. The Detroit Free Press was his newspaper. I think we should do more. I think we should do $30'" million.
Done, unanimous. The next day, Ibargüen calls Walker at Ford: "Listen, you piker," he recalled, chuckling, "I'm in for 30. You've got to go higher."
"I'm inspired," Walker replied. "I'm inspired."
Rosen and Snyder go back more than 30 years. As a student at the University of Michigan, Snyder worked as a volunteer on Rosen's unsuccessful bid for Congress in 1982. They talk frequently, seldom more so than in the months before the bargain became a possibility.
Each time, the governor's answer was the same: no direct state money for the Detroit bankruptcy, nothing that could be construed (on the eve of an election year) as a bailout for Michigan's largest city. Rosen's ask changed everything, starting with $350 million in new money that could be doubled by the state Legislature if the accountant-turned-governor could make the business case to his fellow Republicans.
"It was a great constructive framework to put in front of us," Snyder said, referring to Rosen. "It was absolutely a turning point because the people had a solution to work on."
The governor burrowed in, personally doing net-present value calculations he would use to lobby lawmakers and satisfy himself that this was a risk worth taking. He asked his staff to confirm how many Detroit retirees lived in the city, how many lived across the state and where.
He pushed to understand how cuts as deep as 34 percent for general retirees could burden the state's social safety net, and just how many would fall below the poverty line if the bargain failed to materialize and the foundation money disappeared because conditions had not been met.
He understood the pile of cash offered a potential opportunity to settle litigation over the apparent constitutional protections for pensions. He saw the cultural upside to protecting the DIA collection, conveying it to an independent nonprofit and averting an ugly dismemberment that carried implications for Detroit's post-bankruptcy image and state tourism.
Rosen had more work to do. Just before Thanksgiving, he held separate meetings in his chambers with House Speaker Jase Bolger and Senate Majority Leader Randy Richardville to make a pitch for state tax dollars to aid pensions and protect the art.
Bolger resisted. Why bail out Detroit after years giving it legal advantages other cities didn't enjoy — a higher proportion of state revenue sharing, a separate tax on utilities and the highest municipal income tax of any city in Michigan?
"No way, no how," Bolger said. "We're not going to write another check to continue business as usual."
Rosen pressed his case, citing the prospect of pensioners plunged into poverty, the city's future imperiled, the obligation of the state shirked. Most of all, Bolger recalls, "because Detroit needs it" — a piece of the pitch that may have been necessary, but was not sufficient for a legislator from Calhoun County.
Snyder's staff changed that. Following its own financial and legal analysis, the governor's team raised the possibility that the state may be on the hook for all of Detroit's unfunded pension liability — a disputed number that ranged from $1 billion to $3.5 billion, 10 times the $350 million proposed by Rosen.
For the Republican-controlled Legislature, one "major weakness" remained in the effort to aid 32,000 city pensioners and secure the DIA, Bolger said: Labor unions had no skin in the game. He attributed the city's multi-billion dollar legacy costs to union leaders using their power over the years to leverage benefits for city workers that Detroit could not really afford.
Christie's settled it — sort of.
Six days after the governor's meeting with Rosen, the international auction house Orr enlisted to appraise the DIA's most valued pieces delivered its estimate. Nearly 2,800 city-purchased works were valued between $454 million and $867 million, giving Rosen a target for Snyder, the Legislature and, ultimately, the DIA itself.
The same day, Snyder tacitly endorsed the concept of a grand bargain, signaling he was seeking a way to avoid a protracted legal battle — namely, one that likely would still be raging on the eve of his re-election 11 months later if a solution "people could live with" was not found soon.
It won't be easy, said state Sen. Roger Kahn, the Saginaw County Republican who chairs the Senate Appropriations Committee. "Don't you think that's a Hail Mary?" he said, adding a note of sarcasm: "There aren't a hell of lot of moderates out there who are willing to send money down to the evil people of Detroit. That's just the way it is."
In theory, maybe. And in the context of Michigan's contentious past, a running battle pitting outstate Republicans against the labor-Democratic cabal that ruled Detroit uninterrupted since 1962. But conditions change, and leaders change conditions.
Besides the labor contribution sought by Bolger — a tribute that would come in the form of $5 million from the Michigan Building and Construction Trades Council union — the final piece of the grand bargain had to come from the DIA, a beneficiary of a deal that would bolster city pensions in exchange for unions and pension funds relinquishing claims against the museum by way of the city.
For weeks, Rosen and Driker met periodically with the DIA chairman and his lawyers. Would they file their threatened lawsuit, complicating an already intricate series of interrelated negotiations? Would they contribute to a fund that would, simply put, buy their freedom?
They would, Gargaro assured them, pegging the contribution from individual and corporate donors at $50 million. He just couldn't say so publicly, lest it neuter any leverage exerted with the threat of litigation still in play.
"It's not doable given our business model," Gargaro told The News, two days after the newspaper first reported that the DIA would be asked to contribute $100 million to what likely would be a $700 million pot should Snyder deliver. "I could not commit the future of the DIA leadership to another $5 million (per year) in fundraising over 20 years.
"I can say that categorically. Which organization raises $17 million a year just to stay open? That doesn't work in reality, and it doesn't work on paper. Am I saying we're not going to participate? I'm not saying that at all. There has been no dollar amount mentioned."
But there had been. In December and January, the DIA leadership had quietly been wrestling with how much it could commit to raise, how much the effort would detract from its long-term plan to bolster its endowment and which donors might be the most likely to help.
In the first half of January, the DIA's board authorized Gargaro to make a $50 million commitment. The amount would soon double.
Bolger was satisfied.
On Jan. 22, the governor and the Republican leadership announced the state would commit $350 million in taxpayer money over 20 years to ease pension cuts proposed by Orr and his bankruptcy team, a stunning breakthrough for party leaders routinely vilified for their seeming indifference to Detroit.
They could understand a cost-benefit analysis. They knew the potential financial exposure to the Treasury and to taxpayers far outweighed the cost of matching the combined foundation pledges. They realized new money would disappear if the state and the DIA didn't participate in the foundation-funded mechanism identified to generate cash.
"This is a settlement," Snyder said at the time. "This is not a bailout. This is not about paying debts of the city. This is focused on reducing and mitigating the impact on retirees and is focused on protecting assets."
It was Snyder's turn to do the asking. The next afternoon, the governor waited to board Delta flight 2062 to Washington — a plane that would carry Gargaro, too. On Jan. 24, Snyder would receive an Americans for the Arts Award at a U.S. Conference of Mayors meeting; the DIA chairman would be sitting at Snyder's table, at the request of the governor's office.
Former Detroit Mayor Dennis Archer stopped to say hello. Snyder accepted the award, touting the importance of the arts in communities. The symbolism was unmistakable: foundations, Snyder, the Legislature had "skin in the game," as Gargaro put it later, and the DIA would be expected to play.
The two slipped into a nearby room inside the Capital Hilton. Snyder was prepared. He spent the previous evening, among other times, poring over the DIA's financial statements, familiarizing himself with the scope of DIA and its capacity to generate a contribution.
"It's simple," the governor said in an interview. "I asked him for $100 million. We needed more dollars to make it work. It would be a strong signal to the people of Michigan that the DIA is invested in this. I thought that was a feasible thing to do."
A consummate diplomat, Gargaro told the governor of "the significant stretch we were making." But he understood the museum needed to make a "meaningful contribution." He confirmed to Snyder that he had authorization to commit to $50 million — not more.
"Then he explained to me what he was doing with (Bolger) and (Richardville) and what it would take to make people say the museum is stretching hard to be a real participant," Gargaro said. "It became obvious to me we were going to have to do more."
Over the weekend, Gargaro talked with senior leaders and key trustees in preparation for a board meeting the following Wednesday. He left with unanimous authorization to commit the DIA and its donors to raising $100 million for the grand bargain.
The birthplace of the modern labor movement had never seen anything like it.
Here, in one proceeding, Detroit's unions faced an emergency manager's dictatorial control operating inside the context of federal bankruptcy. The confluence of power was staggering in a town accustomed to seeing its unions try to impose their will in bargaining sessions or get their way in arbitration.
Not in bankruptcy. Not when the de facto head of the city, the emergency manager, can impose contract terms. Not when Chapter 9 enables a municipality to reject and rewrite contracts — harsh realities that took months for union leaders to understand as Rosen's bargain fell into place pending what would be resounding legislative approval.
That was a problem, Judge Victoria Roberts came to realize. A native of Detroit, she grew up in a union household; her mother was a Teamster, her father a member of the United Steelworkers. She understood the lopsided dynamics labor faced with the state's emergency manager law and bankruptcy, how the evolving details of the grand bargain strongly influenced her mediation efforts.
As Rosen's mediator for labor and pension fund issues, Roberts grew increasingly concerned that the unfolding grand bargain, awaiting a vote in the state Legislature, was creating hesitation among union leaders and making it "impossible to reach agreement without knowing what the final number is going to be."
She also worried that union leaders nursed false expectations of the bankruptcy process, how it worked, what Judge Rhodes could do and what he could not do in the Detroit case. She had an idea that she vetted with the city's bankruptcy counsel at Jones Day:
Could she invite Judge Rhodes to meet privately with union leaders to provide a primer on Chapter 9 and his powers, answering questions and concerns? The city agreed, mindful that continued delay benefited no one.
On April 16, Rhodes walked into the judges conference room on the seventh floor. For two hours, Roberts confirmed, he described Chapter 9, quashing any notion that he could excise individual labor contracts from a restructuring plan he might otherwise confirm.
It helped. The day before, the Retired Detroit Police and Fire Fighters Association reached agreement with the city. Others soon would follow, buoyed by the prospect of new money to support pensions and mindful that any alternative could be worse.
"Nobody is happy," said Donald Taylor, president of the 6,500-member retiree group. "Obviously, everyone deserved all of their benefits. But sooner or later reality sinks in."
Not only did the foundations, led by Ford and Kresge, tie their contributions to participation by the state and the DIA; they required that the unions and pension funds endorse the deal in majority votes of those they represented, Classes 10 and 11 in Detroit's bankruptcy.
The foundations would not fund a deal imposed forcibly by the court. Snyder did not sign legislation funding the grand bargain until early June, midway through the 60-day voting period that fueled anxiety among those unaware that largely silent super-majorities in both classes would ratify the grand bargain.
The mediators were not done. Major chasms remained between the city and two financial heavyweights — Syncora Guarantee Inc. and Financial Guaranty Insurance Co. — and talks to broker a regional water authority collapsed into acrimony and threats.
Enter the mayor, a seasoned negotiator and former CEO of Detroit Medical Center. With the grand bargain assured by the affirmative votes, the three remaining potential deals offered Duggan the opportunity to use bankruptcy to the city's advantage and turn adversaries into partners.
Under mediation by two Detroit-based federal judges, Sean Cox and David Lawson, Duggan jettisoned Orr's strategy to press Wayne, Oakland and Macomb counties to pay $50 million a year into the city's general fund. Instead, he pushed a plan that would trade governing control of the Great Lakes Water Authority for funneling that same $50 million into repairs of the beleaguered system serving more than 40 percent of the state's population.
He traded leases on downtown property and redevelopment rights on the Joe Louis Arena site to Syncora and FGIC, respectively. The separate deals removed the final major impediments to the largely consensual bankruptcy plan Rhodes confirmed Friday, a testament to dogged mediation, risk-taking led by foundations and a process that spread sacrifice.
The city cut $7 billion from total debt of $18 billion; established a fund to invest $1.4 billion over the next decade in city services; persuaded creditors to redevelop downtown real estate; created new regional water authority with suburban counties that will reinvest in the broken system; reached new five-year collective bargaining units with its major unions.
The plan delivered the bargain first sketched on the back of a legal pad. In exchange for sparing the DIA and its collection from liquidation, insuring the museum's future independence, basic pension payouts to police and fire would not be cut and general retirees would see cuts of 4 percent — far less than proposed in the run up to bankruptcy.
"The cornerstone of the plan is the grand bargain," Rhodes said in a 50-page opinion he read from the bench. The pension settlement funded by the foundations, the state and the DIA "borders on the miraculous," the distinguishing feature of a bankruptcy that "must never happen again."
"Never before have bankruptcy mediators proactively sought to marshal the community's financial resources to solve a community problem," Rhodes continued. "Thanks must go to the foundations and the DIA for their generous and unprecedented charitable commitments in this case. It is unimaginable what the resolution ... would have looked like without them."
Daniel.Howes@detroitnews.com | email@example.com | firstname.lastname@example.org
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