Detroit, Emergency Manager Law, Emergency Managers — November 23, 2013 at 12:17 pm

“A half billion dollars or the art gets it” – The looting of Detroit and why bankruptcy may be the best course


A rock on one side and a hard place on the other

Last year, the Detroit Institute of Arts had over a half million visitors. The museum is a huge tourist draw and an anchor for the area of Detroit that surrounds it. The cost to the city of Detroit for this priceless collection of art is exactly zero dollars. It is run by a non-profit and receives funding, in part, from a tri-county millage designed to ensure that it will forever be there as a cultural hub for southeast Michigan.

For Detroit Emergency Manager Kevyn Orr, it’s a plum too juicy not to pick. He has resorted to what can only be described as blackmail to get the DIA to come up with a half billion dollars that he can use to resolve the city’s financial crisis.

An unwitting pawn in Detroit’s bankruptcy saga, the DIA has been told by Orr’s office that the museum must monetize its collection — squeeze cash out of the art so the city can use it to strike a deal with creditors and forge a plan that will pass muster with Rhodes. How much? Orr’s deputies have told the DIA he expects $500 million, but Nowling said Wednesday the figure remains in flux and would be contingent to some degree on the Christie’s estimate.

“A higher number would argue for a higher price,” Nowling said.

Here’s what Annmarie Erickson, executive vice president and chief operating officer of the DIA has to say about it:

Responding to a question, Orr said again that if the Detroit Institute of Arts can’t come up with a way to “help” Detroit, he will force the issue. His implication was that somehow the DIA is holding out.

How much help would the emergency manager like from the DIA? The number we have heard is $500 million. And how is the DIA to come up with a half-billion dollars? Rent art. Ask your donors. Sell some art. The DIA has carefully explored those suggestions, and none will satisfy the city’s hunger for cash without dismantling the museum. […]

The biggest irony of all is that our incredible art museum doesn’t cost the city of Detroit a dime. The museum is managed by a nonprofit, responsible for all operations. Unlike Detroit, the DIA changed its retiree health care plan years ago. We reduced our work force, eliminated an expensive pension plan, and did all this in cooperation with our unionized staff. All this work keeps $31 million off Detroit’s books every year and brings hundreds of thousands of visitors to Midtown. Orr touts the Belle Isle deal for saving Detroit $6 million. Somehow, he has missed that the DIA provides more than five times as much value to Detroit as the Belle Isle deal.

There are 20,000 pensioners in Detroit, my mother is among them, and they deserve to be defended. There are more than 60,000 schoolchildren who experience the DIA every year, and they deserve a museum. There are hundreds of thousands of people who voted for the DIA millage despite a shaky economy. There are dozens of restructuring experts involved in the bankruptcy. Surely, together, we can devise a plan that protects all of those people and the art collection that is a source of pride in a city that doesn’t have much to brag about. The DIA has worked for years to take a financially challenged museum to fiscal health without compromising our commitment to this community.

I have hoped that Kevyn Orr was going to be the sort of Emergency Manager that could see the long-term picture, who could understand that eating our seed corn is going to ensure the future financial failure of our state’s largest city. He is a Democrat, after all. What’s becoming more and more apparent is that he is a bankruptcy lawyer above all else and that his concern is not about the future of the city or about the importance of culture to the economic future of Detroit. Like nearly every other Emergency Manager in Michigan, he is interested only in cutting and rearranging so that the books are balanced when he leaves. What happens after that doesn’t appear to be part of the equation.

I have never wanted to believe that Kevyn Orr was interested in the looting of Detroit but, more and more, that looks exactly like what he’s doing. In 2011, staff at Jones Day published an article in the Emory Bankruptcy Developments Journal titled, “Pensions and Chapter 9: Can Municipalities Use Bankruptcy to Solve Their Pension Woes?”. In it, they discuss using the bankruptcy process to eliminate municipalities’ obligations to their retirees.

Underfunded pension obligations constitute one of the most significant problems facing municipalities across the country. Restructuring pension benefits is a challenge because they often enjoy significant protection under state law. Although it remains unclear whether municipalities will elect to pursue the protections and benefits of chapter 9 of the Bankruptcy Code in large numbers, chapter 9 offers tools to municipalities wishing to pursue a fundamental restructuring of pension obligations… [I]n jurisdictions where it is available, chapter 9 of the Bankruptcy Code at a minimum may provide a municipal debtor with helpful tools to significantly improve its negotiating position with respect to its pension obligations. […]

At the end of the day, wherever they have a choice, municipalities very well may decide that practical and political considerations outweigh the potential for cutting pension liabilities in chapter 9. Where there are alternatives, municipalities may be loath to face the negative media attention, labor upheaval, and political fallout of cutting pension entitlements for active employees or retirees. Chapter 9, however, is intended to be a forum of last resort for municipalities that have run out of options. For such municipalities that are crippled by overwhelming pension obligations, the tools of chapter 9 may offer some needed relief.

These glib words refer to the livelihood of tens of thousands of retired Detroit workers as a sort of inconvenient distraction rather than the seeing them as the only income these aging retirees have. The words were written by staff from the law firm that Kevyn Orr worked for prior to taking his position in Detroit and a company that has already been paid $11 million by Kevyn Orr for their consulting work after being hired by their former attorney. Jones Day stands to make another $7 million from the city’s crisis before their contract expires.

When you take the 10,000 foot view of all of this — the potential looting of city pension funds and the priceless art collection of the DIA along with the privatization of the city’s water and sewer department — this so-called “partnership” between the city and the state begins to increasingly resemble an outright theft by businesses and banks, a robbery occurring in broad daylight and reported on every day in our news media. It’s portrayed as a painful yet benevolent series of actions that are necessary to get Detroit back on its feet and rarely discussed publicly as a transfer of wealth from the residents of Detroit and the state as a whole into the coffers of Wall Street banks and the for-profit corporations that are paid in tax dollars for work once done by city employees.

If Detroit does go through a chapter 9 bankruptcy, something that I still reluctantly believe is the best course, whether or not this theft will be allowed will be in the hands of federal bankruptcy judge Steven Rhodes. Thankfully, so far, he very much appears to have the welfare of Detroit residents and retirees firmly in his mind.

There’s also some comfort in the fact that the section 904 of chapter 9 bankruptcy regulations specifically protects the city’s assets:

Notwithstanding any power of the court, unless the debtor consents or the plan so provides, the court may not, by any stay, order, or decree, in the case or otherwise, interfere with—
(1) any of the political or governmental powers of the debtor;
(2) any of the property or revenues of the debtor; or
(3) the debtor’s use or enjoyment of any income-producing property.

So, on one hand, the bankruptcy may harm retirees if their pensions are cut, something that the federal court may be able to do despite the state’s constitution that forbids it. It may also eviscerate our city workers unions, leaving them victims of a problem they didn’t cause.

On the other hand, the bankruptcy process may, in fact, be the only thing to protect the city of Detroit’s assets from being looted by the Emergency Manger to pay off the banks and others that hold Detroit’s debt. Those who fight against the bankruptcy should keep that in mind.

Michiganders are, it seems, cursed to be living in “interesting times”.

[DIA “Thinker” image modified from CC photo by Michael Barera | Wikimedia Commons]