Municipal Bankruptcies Loom: Will Foundations Step Up for the Next Detroit?

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July 1, 2014; Stateline

Which city in the nation is the next Detroit? Or, in what may be a more accurate question, which is the next San Bernardino, California, or the next Jefferson County, Alabama, or the next Central Falls, Rhode Island—all cities that have declared bankruptcy?

Stateline is reporting on state governments intervening to help financially troubled cities, including the efforts of the state of Illinois to help Chicago out of its public pension crisis. Chicago’s public pension challenges in some ways dwarf Detroit’s, but the city and the state are taking preemptive action. “We’re not Detroit,” observed Christopher Mooney, head of the Institute of Government and Public Affairs at the University of Illinois, commenting on the state’s and city’s actions. “This state has an interest in making the City of Chicago a viable economic place, because it’s the engine of our whole state economy. If people think we’re another Detroit, they might avoid it.”

Stateline’s Elaine S. Povich noted that there were only four municipal or county bankruptcies between 1970 and 2009 (as opposed to bankrupt school districts or other local government entities). However, municipalities that have teetered on the edge of bankruptcy or threatened to declare bankruptcy are much more numerous. San Bernardino’s 2012 Chapter 9 declaration was a rarity, but it isn’t hard to imagine that other cities will be facing financial problems like San Bernardino’s.

Detroit was able to leverage the resources and commitments of Michigan foundations, several with strong Detroit roots, in a plan to convert the city-owned Detroit Institute of Arts into a nonprofit, with the foundations’ and the state’s money combined in a so-called “Grand Bargain” to help the city deal with its $3.5 billion pension system shortfall. Alan Mallach, the urban development expert and senior fellow at the Center for Community Progress, says that states cannot simply tell financially stressed cities that they “misbehaved” and have to go it alone. “It is the state’s problem,” Mallach says, “because, in part, it’s in the state’s interests to have strong healthy cities.”

As true as that might be, Povich points out that in Pennsylvania, legislators are cutting back on the state’s role in helping financially distressed municipalities by capping at five years the time in which municipalities could stay in the state’s fiscal assistance program. (According to Povich, 10 Pennsylvania cities have been in the program for 10 or more years.)

As states cut back and reduce their commitments to fiscally stressed cities, there will be a demand for creative financial approaches to help cities dig out from their crises. In Detroit, a handful of major foundations deployed as much creativity as capital to the city, tied to the linchpin of the DIA. But where are the foundations that will help the small communities of Alabama? Jefferson County contains Birmingham, the state’s largest city, but indigenous Alabama funders that might step up to work with the state to craft Detroit-like strategies are scarce. Of the top 50 grantmakers to recipients in Alabama, only four are actually even located in Alabama, with the Community Foundation of Greater Birmingham as the largest grantmaker awarding only $8.87 million in grants to Alabama nonprofits in 2011, according to data from the Foundation Center

Among Pennsylvania’s severely stressed cities are Scranton, Harrisburg (which actually tried to declare bankruptcy), Aliquippa, and the desperately poverty-stricken Reading. Having met with and interviewed foundations in Detroit that have been engaged for years to revive that struggling city, this newswire writer understands the level of creative effort that foundations have devoted to Detroit. Some collaborative efforts of Detroit foundations worked while others fell apart, but they added up to a philanthropic partner to aid city and state governments. Where are the foundations that will do for Reading and Aliquippa what foundations were able to conceive and implement for Detroit?—Rick Cohen

  • Michael Wyland

    Speaking from a rural and frontier state, I have seen the decline of many small towns. Usually, this decline is greeted with both a nostalgic sadness and a realization of inevitability. Although not usually discussed explicitly in these terms, one key consideration is that of organizational sustainability; i.e., can the town survive without ongoing extraordinary effort?

    Community foundations and other philanthropies, in order to fulfill their own fiduciary duty under the law, will have to ask and demand good answers to that same sustainability question when faced with supporting communities facing municipal bankruptcy. To avoid asking these tough sustainability questions does a disservice to the grantees, the donors, and the broader philanthropic community. The alternative is for philanthropy to be used for stopgap purposes, with the stated goals different from those of community revitalization and sustainability.

  • Mark White

    Detroit’s DIA collection has a total value estimated as high as low to mid tens of billions of dollars, while the Grand Bargain only raises a half-billion dollars of present value for pensioners. Of course, mediators taking the lead for Detroit on its DIA assets only asked foundations for a half-billion dollars. In fact, having a long-time DIA Corporation director’s spouse — DIA Corporation is the city contractor that has run DIA operations since 1998 and the non-profit that will own city assets transferred by the Grand Bargain — as a mediator makes the mediation process look more like a rigged bid than an open competition. It’s no wonder objecting creditors have called the Grand Bargain a fraudulent transfer — a Grand Theft Art! If Detroit art assets are indeed worth low to mid tens of billions of dollars, the city wasn’t bankrupt in the first place, it was just choosing not to monetize assets to pay obligations. Syncora’s discovery asked Detroit for a ranked list of the top 300 DIA artworks by value plus all other DIA artworks worth more than one million dollars. Last Thursday, Judge Rhodes found, on the record, that “the City doesn’t know the answer.” Readers should hope that the municipal bankruptcy process ultimately finds the value of non-essential assets in this case and others. Foundations should invest strategically to make communities viable, rather than bail out failing city governments.