The City of Detroit’s 2015 municipal bankruptcy was unusual for many reasons.
It’s rare for American cities to be placed in bankruptcy in the first place; Detroit was the largest city ever to have gone through the process as a means of putting its troubled financial house in order and restoring essential city services that had been dangerously curtailed. But the way in which Detroit successfully emerged from bankruptcy was itself unprecedented — both for the city and for its robust philanthropic institutions.
“Other important cities... share the same financial problem faced by Detroit: owing so much to retired employees that it is difficult to pay for current — vital city services, from education to public safety.”
As the city’s crippling obligations to pay pensions to retired workers hung over bankruptcy negotiations, a daring move by a dozen foundations broke the logjam. Led by a $125 million pledge by the Ford Foundation — whose history, of course, led back to Detroit — a dozen grant makers pledged some $366 million toward the city’s pension liability on the proviso that those contributions would be combined with donations from private corporations, state government, and public employee unions, which would forgo such benefits as cost-of-living adjustments. The Ford-led gambit worked. Federal courts approved the plan, and Detroit began slowly, and literally, turning the (street) lights back on.
It’s tempting to see the Detroit bankruptcy and the leadership role of the city’s foundations as limited in relevance to other places. After all, the foundations’ contributions were made ostensibly for an unusual purpose: to "purchase" the valuable collection of paintings held by the Detroit Institute of the Arts, a city-owned art museum, and turn it into a freestanding nonprofit. The foundation action meant the paintings would not have to be sold at fire-sale prices to raise emergency funds.
But the effect of the deal makes clear why Detroit’s "grand bargain" is relevant to other cities: what ultimately happened was a transfer of private philanthropic dollars to a city government. As Mariam Noland, president of the Community Foundation for Southeast Michigan — and leader of the Detroit foundation group — puts it, "This was a chance for philanthropy to save a city."
No other city, of course, is quite like Detroit, whose steep decline has led to housing abandonment and population loss on a scale not seen elsewhere. But other important cities, especially in the industrial Midwest, share the same financial problem faced by Detroit: owing so much to retired employees that it is difficult to pay for current — vital city services, from education to public safety. What’s more, it’s also the case that other cities in the same region are facing the same type of "legacy costs" — and also boast important local foundations with deep roots in their cities.
In a forthcoming new study for the Manhattan Institute, "The Pension Grand Bargain: A New Reform Model for Cities," I’ve found that in at least four other cities — Buffalo, Chicago, Cleveland, and St. Louis — pension liabilities are similar to or greater than those in Detroit, that they threaten the provision of essential city services, and that local foundations have sufficient assets to follow the Detroit "grand bargain" example and point their cities on the road to financial recovery, while preserving those key public services.
Moreover, the sources of the foundation wealth are very much connected to the historic sources of economic wealth specific to the cities. Just as the Ford Foundation can trace its wealth to Detroit’s legendary automaker, so, too, can Chicago’s foundation wealth be traced to such famous Chicago firms central to the city’s economic growth as Bankers Trust (the MacArthur Foundation), the Chicago Tribune (Robert R. McCormick Foundation), its building supply industry (Arie and Ida Crown Memorial), railway boxcars, and a host of small manufacturers (the Pritzker Foundation), as well as more recent wealth (the Oprah Winfrey Foundation).
The story is similar in Cleveland (whose manufacturing history includes the industrial-parts fortune of its Mandel family foundations); in St. Louis (the Mississippi River city that spawned the Stupp Brothers Bridge and Iron Co. Foundation); manufacturing in Buffalo (whose leading foundation, the John R. Oishei Foundation, traces its wealth to the invention and manufacture of automobile windshield wipers).
These are cities today characterized by high levels of household poverty and low median household incomes as well as stagnant property-tax revenues, making it difficult for their municipal budgets to support both high retiree costs and current city services. Indeed, key city services are arguably being crowded out by crippling legacy costs.
The report found, for instance, that in Chicago, spending on public safety at a time when the city faces horrendous gang violence has declined as a percentage of the city budget (from 32 percent in 2013 to 28 percent in 2014). In Cleveland, local spending on both public safety and public works was lower in 2014 (as a percentage of the city’s budget) than it was in 2011. In Buffalo, spending on public education has similarly declined. In St. Louis, the overall budget, in actual dollars, decreased, making tradeoffs between an increasing annual pension obligation (up $1 million for 2015) and core services inevitable.
At the same time, in many cases, property tax rates have increased, even as the revenues realized from the tax are growing slowly, if at all — and the threat looms of property-tax increases, which could create a vicious, downward economic cycle.
Local foundations can, as they did in Detroit, help break this cycle. My analysis shows that local philanthropic assets are so healthy that the relevant foundations would not be required to disburse all their remaining assets to provide the help that is needed. Indeed, in all cases the grand bargain-related grants would total less than 2 percent of foundation assets for the top 15 foundations in each of the four cities.
In Chicago, for instance, the net assets of the leading foundations total some $13 billion, while the city faces an annual required pension contribution of some $1.7 billion. In Cleveland, leading foundation assets total more than $6 billion, while the city’s required yearly pension-fund contribution is some $64 million.
The foundation money, in other words, is there (although, in the case of community foundations, individual donor-advisers, rather than a program staff or board, would have to agree to the grants). Nor would the support have to take the form of grants; other approaches, such as a program-related investment that would return a small percentage gain, could also be considered.
It’s important to note that many of those foundations have already been trying, in effect, to compensate for the poor quality of such local services as education or housing. But, as Mariam Noland of the Southeast Michigan Community Foundation puts it, such efforts would "make no difference if you don’t have the city itself functioning."
Not that such a grand bargain approach would be easy to pull off. It is crucial to note that Detroit’s ability to drastically reduce the pension contributions the city government now has to pay depended on public-employee unions willing to agree to pension reductions estimated at 4.65 percent. They did so, moreover, at a time when they faced unusual pressures.
“The financial problems of America’s older cities are such that following Detroit’s example makes sense... to help put cities back on the path to the sort of prosperity that produced those great foundations' fortunes in the first place.”
The fact of Detroit’s bankruptcy gave the federal court unusual and significant oversight authority — even to set aside contractual obligations to retired public employees — power that, in addition to the hundreds of millions in new funds provided by the foundations, helped bring employee unions to the bargaining table and offer to "claw back" benefits. In Illinois, in contrast, employee pensions enjoy a state constitutional guarantee. One would have to hope that the good-faith effort of public-spirited philanthropy would help to break what has been a long and bitter stalemate, one that threatens what are in many ways the Chicago’s otherwise bright prospects. But there can be no grand bargain without all parties coming to agreement.
This is not to suggest that Detroit’s grand bargain should be a precedent for philanthropy to routinely support basic public services. That’s not the role of philanthropy — which should be the place where experiments and innovations get a chance. But the financial problems of America’s older cities are such that following Detroit’s example makes sense under present conditions — to help put cities back on the path to the sort of prosperity that produced those great foundations' fortunes in the first place.
This piece originally appeared in The Chronicle of Philanthropy
This piece originally appeared in The Chronicle of Philanthropy