The Bankruptcy: Art, Pensions, and the Grand Bargain

On July eighteenth, twenty thirteen, the city of Detroit filed for Chapter Nine bankruptcy protection. It was the largest municipal bankruptcy in United States history. The city listed liabilities of between eighteen and twenty billion dollars. Among those liabilities were pension obligations to roughly twenty thousand retired city workers, people who had spent careers as police officers, bus drivers, firefighters, and clerks, and who had been promised defined-benefit pensions as part of their compensation.

The bankruptcy proceeding immediately raised a question that had not previously been tested in this form: could a city's pension obligations be reduced in bankruptcy the way corporate debts could? The Michigan state constitution said pensions for public employees could not be diminished. Federal bankruptcy law said debts could be restructured. The conflict between state and federal law was real, and it fell to federal bankruptcy judge Steven Rhodes to work through it.

The Detroit Institute of Arts entered the conversation because someone did the arithmetic. The DIA's collection had been appraised by Christie's auction house at a value somewhere between four hundred fifty million and eight hundred fifty million dollars. The city legally owned the collection. If the collection could be liquidated to pay debts, the math on pension cuts changed considerably.

The solution that emerged, called the Grand Bargain, was negotiated over several months in late twenty thirteen and early twenty fourteen. A coalition of foundations, led by the Kresge Foundation and the Ford Foundation, contributed roughly three hundred sixty-six million dollars. The state of Michigan contributed one hundred ninety-five million dollars. In exchange, pensioners accepted cuts averaging somewhere between four and a half and fourteen percent, depending on the fund, and the DIA collection was transferred to an independent trust permanently beyond the reach of future creditors.

The pensioners who had to vote on whether to accept the Grand Bargain were accepting cuts to income they had been promised would be untouchable. Many of them were in their seventies. The alternative, a full liquidation proceeding, carried the risk of deeper cuts and the loss of the museum that had been a civic institution in Detroit for more than a century. Most of them voted yes. Detroit emerged from bankruptcy in December of twenty fourteen.