When William White, president of the Charles Stew Mott Foundation, presented a plan to his board in December that would help smooth the way to a bankruptcy settlement in Detroit, he expected it to be a tough sell.
He says that even some of his program staff had reservations about the plan, which called for Mott to contribute to a fund that would help pay the pensions of city retirees and protect the collection of the Detroit Institute of Arts from the city’s creditors. One obvious question arose, he says. The foundation’s home city of Flint is also in dire financial straits, for many of the same reasons as Detroit, including the loss of automobile jobs and a shrinking population. Would it soon come knocking for similar help?
Mr. White invited U.S. District Judge Gerald Rosen, a bankruptcy mediator who was soliciting contributions for the bankruptcy fund, to the board meeting—and he made a case that won the trustees over: The deal would protect Detroit’s treasures, help pensioners in a humanitarian way, and give the city some breathing room to reinvent itself.
“If Detroit can figure out a way to come out of this bankruptcy and these financial times a healthier city and begin to reestablish itself as one of the great cities in the country, in the world—that’s very important,” Mr. White says.
That philosophy guided the decision of Mott and nine other local and national foundations that agreed last month to pool a total of $370-million to help cover the pension obligations—an unprecedented effort to shore up a troubled city by paying municipal debts.
The move won mostly praise, but also raised some questions about whether it was a good use of philanthropic dollars.
“So often foundations are criticized for not taking risks, not acting boldly,” says James Ferris, director of the Center of Philanthropy and Public Policy at the University of Southern California. “They’re sort of sticking their necks out and they should be applauded for that, not chastised.”
But Beth Gazley, an associate professor at Indiana University’s School of Environmental and Public Affairs who specializes in nonprofit issues, was ready to chastise. “It strikes me as a perverted use of philanthropy,” she says, adding that it rewards the city’s incompetence. “There’s no good reason for foundations to bail the city out.”
She sees the move as an example of what she considers a disturbing trend of public bodies expecting philanthropy to pay for things that should be covered by taxpayers and approved by voters.
Still Pending
The foundation support is one part of an intricate plan that Kevyn Orr, Detroit’s emergency manager, is drafting to help Detroit reorganize its finances, which are an estimated $18-billion in the hole, and get the city past the largest municipal bankruptcy in U.S. history.
The grant makers—including powerhouses like the Ford and Kresge foundations—were roped in by mediators who are trying to resolve disputes with creditors to avoid years of costly legal challenges.
Some key pieces still need to fall into place before the foundation fund is a go. For example, the legislature still has to approve the $350-million in state money that Gov. Rick Snyder has proposed to chip in. The foundations set a number of conditions for providing their aid, including a state contribution, but some lawmakers are balking.
City retirees and other creditors also have to accept the plan, which covers just a fraction of what Mr. Orr describes as a $3.5-billion pension-funding shortfall.
If the plan succeeds, the city would, in exchange for the pension contributions, yield control of the Detroit Institute of Arts to a nonprofit organization.
That arrangement would ensure that the museum’s city-owned treasures—which include pieces by Van Gogh and Rembrandt—are not sold off or otherwise “monetized” to help pay Detroit’s debts, a threat that emerged after Mr. Orr asked Christie’s auction house to value a portion of the institute’s collection.
The institute has agreed to raise $100-million from corporations and individuals for the pension fund, an effort that its board chairman at first told the Detroit News was unrealistic.
The fundraising drive to support the pension obligations will come on top of the museum’s existing campaign to build up its endowment, something it promised to do when three Detroit-area counties approved a property-tax increase in 2012 to help the museum operate for 10 years.
Bad Precedent?
While other American cities may not be quite as bad off as Detroit, many are experiencing financial difficulties, including big unfunded pension obligations. The situation in Detroit raises the question of whether that pension-fund plan sets a precedent for philanthropic rescues.
But several experts say they don’t expect other cities to follow suit because the foundation effort is so tied to Detroit’s ownership of the works—a highly unusual situation.
“If that was already under the control of a nonprofit, would philanthropy be jumping in simply to put money into the pension problem?,” says Robert Gallucci, president of the MacArthur Foundation, in Chicago.
Illinois and Chicago are both facing major pension crises, but Mr. Gallucci says MacArthur has no plans to go beyond its current role of paying for research and analysis of the fiscal problems facing states and cities.
Philanthropy’s resources are nowhere near those of government when it comes to solving such problems, he adds.
Of course, every penny spent for Detroit pensions is a penny that the foundations could be allocating elsewhere, which has led some arts groups to worry about their own grants after the foundation plan in Detroit was announced.
“Many of the other cultural organizations have called me,” says Mariam Noland, president of the Community Foundation for Southeast Michigan, a key player in the philanthropic effort. “They’re worried. If I were them, I would probably be calling me too.” However, she and other grant makers say they do not intend to pull back on their existing philanthropy.
Tapping Other Funds
The foundation payments would be made in installments over a period of up to 20 years, lessening the impact on any one budget year.
The Kresge Foundation, in Troy, Mich., may dip into its endowment to pay its contribution of $100-million since it doesn’t want to disrupt existing grant programs, says Rip Rapson, the organization’s president.
The biggest pledge, $125-million, came from the Ford Foundation, which has stepped up its spending on Detroit after a period of little activity in the area that gave birth to its founders’ automobile company. The dollars will come from a pot of money in the budget for unprogrammed activities, says Darren Walker, Ford’s president.
Other organizations that have pledged money include the W.K. Kellogg Foundation and the John S. and James L. Knight Foundation, national grant makers, and local grant makers including the William Davidson Foundation, the Fred A. and Barbara M. Erb Family Foundation, the Hudson-Webber Foundation, and the McGregor Fund.
Ismael Ahmed, a longtime community activist in Detroit who is now an associate provost at the University of Michigan at Dearborn, says he has not heard complaints from nonprofits about the pension fund diverting money away from their causes. He says that’s largely because they believe there’s a strong moral argument that allowing people to lose their retirement money is “unconscionable.”
“The focus is on regular people on the streets who’ve worked all their lives being protected,” he says.
Once Detroit exits bankruptcy, foundations will be able to focus more on their traditional grant making in Detroit. Ford, Kresge, Kellogg, and others have pumped hundreds of millions of dollars into projects to help revitalize the city over the past decade. Those efforts include the New Economy Initiative, a collaboration of 11 foundations to promote entrepreneurship.
Lori Villarosa, executive director of the Philanthropic Initiative for Racial Equity, a group that encourages foundation giving to anti-racism projects, says that while she welcomes the pension contributions, she hopes the grant makers will also increase their support for local and national advocacy groups that are addressing some of the structural problems that led to the fiscal problems faced by Detroit and other Michigan cities.
As examples, she suggests pushing the state to increase its revenue sharing and working to close the “racial disconnect” that pits the majority-white suburbs against the majority-black cities.
Ms. Villarosa, a Detroit-area native who has worked with many Michigan foundations and nonprofits, says she hopes grant makers will not reduce future giving to more “community driven” causes.
“Regardless of the intent today,” she says, “it will take consistent and broad commitments from these foundations and future boards to ensure there isn’t some growing view that we already have it covered because of that pot of money when it comes to other Detroit issues.”
