News and analysis
November 04, 2014

Foundation Support Is Crucial in Plan to Save Detroit’s Art and Pensions

Joshua Lott/Reuters/Newscom

Visitors at Detroit Institute of Arts

A federal bankruptcy judge today approved a financial reorganization plan for Detroit that relies on nearly a half-billion dollars in philanthropic support to shore up the city’s pension system, protect its world-class art museum, and help lift the city from insolvency.

As Detroit emerges from what is America’s largest municipal bankruptcy, some big names in philanthropy will now put their dollars to work in unprecedented fashion—providing a cash infusion to a government pension system. Ten foundations—including the national giants Ford and the John S. and James L. Knight foundations—are moving forward on their pledges to contribute $366-million over 20 years to an $816-million fund that will help the city pay the pensions of its workers and retirees.

The museum itself, the Detroit Institute of Arts, will pay $100-million to that fund—money it has raised in less than a year from a host of sources, including the J. Paul Getty Trust, the Andrew W. Mellon Foundation, several local family foundations, the Big Three automakers, various Michigan companies, and individual donors. Altogether, support from foundations and museum donors will total $466-million, with the state’s contribution covering the remaining $350-million to be paid to the city pension system over the 20-year life of the deal.

‘Grand Bargain’

The framework of what’s become known as the "grand bargain" was crafted by federal bankruptcy mediators last fall and announced in February. In return for the philanthropic support, Detroit will transfer ownership of the museum’s collection and facilities to the nonprofit that runs it. Before its $18-billion Chapter 9 bankruptcy petition in September 2013, the city had set off alarms throughout the country with talk that it might be forced to sell the museum’s collection.

In the past nine months, the museum has raised more than 80 percent of its $100-million pledge to the deal and expects to pull in the remaining dollars by the end of the year. With local foundations already committed to the bargain, it reached out to the Michigan business community with a civic-minded message of "be a part of history, save Detroit, and help the pensioners," according to Eugene Gargaro Jr., chairman of the museum’s board. Ford, General Motors, and Chrysler stepped up last spring with $26-million.

The J. Paul Getty Trust pledged another $3-million, while the Andrew W. Mellon Foundation promised $5-million, with an additional $5-million contingent on the museum reaching a certain level of commitment. Mr. Gargaro credited these gifts to the stature of the museum’s longtime director, Graham Beal. "They came to us; we didn’t go to them," he says.

Crucial Support

As word spread in recent days of the judge’s likely approval of Detroit’s reorganization plan, local leaders describe the support of foundations as key. "Without them, I can’t imagine where Detroit would be," says Anne Parsons, CEO of the Detroit Symphony Orchestra. "We’re very lucky."

Though foundation leaders acknowledge that supporting a city’s pension system is an unusual form of philanthropy, they say they felt compelled to act to lessen the blow of pension-benefit cuts on Detroit workers and safeguard the museum’s remarkable collection. They also hoped to save Detroit from years of protracted bankruptcy litigation that they believe would have stalled the city’s revitalization efforts just as there were signs of progress.

"In Chapter 9, where the hell is Detroit going to go? Nowhere," says Alberto Ibargüen, president of the Knight Foundation, which contributed $30-million to the deal.

Ford Foundation Steps Up

The Ford Foundation will make the largest contribution to the fund, pledging $125-million. Its president, Darren Walker, and Mr. Ibargüen say they came to an agreement to join the deal during a car ride together one night after a dinner in Detroit—Ford to the tune of $100-million, Knight with $20-million. But Mr. Ibargüen says that when he presented the number to the Knight board, it voted to up the commitment to $30-million, a record for the foundation.

He remembers: "I called Darren and said, ‘Listen, you piker: We’re in for $30-million. What are you going to do?’ "

Mr. Walker says he was intrigued at the chance to do something that was "outside the box."

"Philanthropy will not be in the business of bailing out cities," he says. "But the work of philanthropy is to problem solve, and this is an example of how when we push ourselves we can find solutions that philanthropy is uniquely suited to provide."

Dale Thomson, chairman of the department of social sciences at the University of Michigan at Dearborn, says such a public-philanthropic deal is not likely to be repeated elsewhere, chiefly because no other city has a similarly deep roster of foundations. He noted that foundations have worked with Detroit increasingly in the past decade on strategic economic efforts.

The bankruptcy deal "is definitely an extension of what foundations have been doing here," says Mr. Thomson, who has studied philanthropic support of government revitalization efforts in Detroit and other cities. "It wouldn’t have happened without that extensive collaboration over the past decade."

Beth Gazley, an associate professor at Indiana University’s School of Public and Environmental Affairs who studies philanthropic support of government, says grant makers involved in the grand bargain deserve praise for coming to Detroit’s rescue. But she worries that governments are increasingly going hat in hand to philanthropy to pay for basic services.

"If philanthropies step up like this, good for them," Ms. Gazley says. "But if that becomes public policy or the expectation of government that they will step in, then that’s a problem." She says potentially harmful consequences include an erosion of trust in government and an increase in the power of philanthropists, who are not accountable to the voters.

Send an e-mail to Drew Lindsay.