News and analysis
January 14, 2014

Proposed Detroit Grants Test Limits of Philanthropic Aid to Cities

Note: This story has been updated to include the exact pledges made by the Ford Foundation and the Kresge Foundation.

The foundations that agreed to pool more than $330-million to smooth the way for a bankruptcy settlement in Detroit are proposing to use philanthropy in an unprecedented way to shore up a troubled city, going beyond traditional grant making to help cover municipal debts.

Nine local and national grant makers said on Monday they had pledged the money to protect the Detroit Institute of Arts collection from the city’s creditors and to help pay for city retiree pensions—all as part of a broader package being negotiated to reorganize Detroit’s finances.

The move raises the stakes in the perennial question about how much philanthropy should step in to cover functions normally undertaken by public bodies. If this effort succeeds, some experts ask, will other cities with financial problems ask foundations to bail them out?

“Have we now crossed a line where foundations are in fact picking up the slack for government?” asks William Schambra, a Chronicle columnist and director of the Bradley Center for Philanthropy and Civic Renewal at the Hudson Institute.

Unique Circumstances

Several foundation leaders who pledged money to the fund say they  grappled with questions like that but in the end decided that unique circumstances in Detroit justified extraordinary action.

“This is in no way meant to set a precedent,” says Darren Walker, the new president of the Ford Foundation, who played a leading role in organizing the collaboration. “It’s simply to make a statement that we are committed to the city’s future.” He says the foundation, which has pledged $125-million to the effort, would not have stepped up just to save city pensions but did that as part of a broader effort to help restore the city’s fiscal health in a creative way.

Gerald Rosen, a U.S. district judge who is serving as a bankruptcy mediator, has been working for several months to entice foundations to contribute up to $500-million to help ensure that the art museum’s city-owned treasures are not sold off to help satisfy Detroit’s creditors. Kevyn Orr, Detroit’s emergency manager, has said he wants to find a way to “monetize” the collection­ and asked Christie’s auction house to value a portion of the 65,000-piece collection.

The foundation money would be used to help cover a shortfall in the city’s pension obligations, thus blunting cuts in payments to retired city workers. In exchange, the foundations want the city to yield control of the art museum to a nonprofit.

“Helping to protect the hard-earned pensions of city workers while also preserving the DIA’s collection for all the people of Southeastern Michigan are worthy components of a balanced overall settlement that will help ignite Detroit’s renewal,” they said in a statement.

Deal Not Finished Yet

Foundation leaders say the plan is not yet a done deal. For one thing, they have placed some conditions on their aid: For example, the state must contribute to the fund, and the property-tax increases that three Detroit-area counties enacted to help the museum operate for 10 years while building up its endowment must remain intact.

“Any number of things if not satisfied would cause us to call back on our commitments,” says Rip Rapson, president of the Kresge Foundation, in suburban Troy, Mich., the biggest grant maker to Detroit.

Gov. Rick Snyder’s office issued a statement praising the philanthropic effort as a positive step but said it would be inappropriate to comment beyond that because bankruptcy discussions were confidential. “Any additional significant participation from the state would be in partnership with the Legislature,” it said.

The plan also has to win the vote of Mr. Orr, who is hoping to present a “plan of adjustment” soon that will try to balance the demands of a variety of creditors. He praised the foundation pledges in a statement but said, “There is still much work to do.” The promised aid would cover only a portion of what Mr. Orr describes as a $3.5-billion pension-funding shortfall.

Other Grantees Concerned

Some local arts groups have expressed concern that the new fund would come at the expense of their own grants, although the foundations say their contributions would not replace existing philanthropy.

“Many of the other cultural organizations have called me,” says Mariam Noland, president of the Community Foundation for Southeast Michigan, another key player in the philanthropic effort. “They’re worried. If I were them, I would probably be calling me too.”

However, she says, the foundation does not intend to pull back on its traditional giving. She declined to say how much it will contribute to the new fund but says, “We are definitely going to stretch.” She adds: “Keeping the DIA whole is important for the entire cultural community.”

The foundation payments will be made in installments over a period of years, lessening the impact on any one budget year.

The John S. and James L. Knight Foundation—which has a strong commitment to cities, including Detroit, which once hosted Knight-Ridder newspapers—plans to contribute $30-million over 20 years, the largest financial commitment in its history, says Alberto Ibargüen, Knight’s president.

Mr. Ibargüen says the foundation effort could help nudge other parties involved in bankruptcy talks to make concessions, speeding things along “so Detroit can get out of bankruptcy, can get restructured in a way that makes more sense, and get on with the rest of life.”

Giving From Endowment

Mr. Rapson says Kresge, which has offered to contribute $100-million, may have to dip into its endowment since it does not want to disrupt existing grant programs. He says the new fund would most likely be administered by an intermediary organization that would be attached to the community foundation and cut checks each year to a city pension board.

Mr. Schambra says he is “conflicted” about the philanthropic effort. “On the one hand, you have to applaud the foundations for being willing to step into something of a vacuum in public leadership,” he says. “On the other hand, have we really arrived at this point where foundations can dictate terms and conditions to state and city government?” He also questioned whether the new fund would cut into other giving to Detroit, at least over time.

Joel Fleishman, a professor of law and public policy at Duke University who has written extensively about foundations, says that in principle, foundations should not spend their money to prop up ailing city governments. “It’s going to open the door to various groups in cities and towns to ask foundations to save them from similar circumstances,” he says.

However, he says, in this case it may be appropriate because of the long involvement that foundations like Kresge have had in working to revitalize Detroit. “It’s not a one-off, ad hoc decision to bail out a city,” he says.

More Grants Possible

Other grant makers that have pledged money to the Detroit fund include the William Davidson Foundation, the Fred A. and Barbara M. Erb Family Foundation, the Hudson-Webber Foundation, the McGregor Fund, and the Charles Stewart Mott Foundation. Both the Max M. and Marjorie S. Fisher Foundation and the W.K. Kellogg Foundation are still considering whether to contribute to the fund.

The Skillman Foundation, a prominent local grant maker, was involved in early discussions with Judge Rosen but has decided to opt out of the plan. Skillman enthusiastically supports the effort, but “our chief goal is to significantly improve high-school graduations in Detroit, and we want to stay focused on that,” says William Hanson, the communications director.

Foundation leaders say they are hoping to attract money from other grant makers and individuals.

The community foundation in December set up a fund to house donations after local philanthropist A. Paul Schaap contributed $5-million to support the bankruptcy-related philanthropic efforts. Ms. Noland says more than 130 people from as far away as Scotland have contributed $33,000 to that fund.

Send an e-mail to Suzanne Perry.