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Last night, a suburban board in Detroit signaled its intent to pass a resolution discontinuing the collection of the special tax voted in to support the Detroit Institute of Arts should the institution’s art or assets be liquidated. There remains a great deal of anxiety over whether or not Detroit will have to liquidate at least some works in the Detroit Institute of Art collection, a fear which has also culminated in today’s collective action in art media — a day of solidarity. Which is all fine and well (this publication’s Tumblr presence, Hyperallergic LABS, will be participating), but what might be of greater interest to those concerned about the fate of the DIA is a more thorough understanding of how the defaults on the city’s various financial obligations actually affect the Detroit Institute of Arts’s “assets.”
The short answer is that none of the City of Detroit bonds — of which there are well over 124 issuances outstanding — have recourse to the vast majority of the City’s assets, the DIA and its art included. Secured bonds might have recourse to specific, named entities in the event of default, and the contractual language there explicitly names those entities, such as this clause taken from a $304 million sewage treatment revenue bond:
If there is a default in the payment of the principal (and premium, if any) of and interest on any Sewage System Bonds, any court having jurisdiction in any proper action may appoint a receiver to administer and operate the Sewage Disposal System on behalf of the City…
In other words, the city’s assets writ large are never bound up in a bond default. Furthermore, in any event of default different types of obligations are prioritized according to their position in the hierarchy of debt. In these scenarios, certain types of senior obligations, like swap agreements with investment banks are prioritized, as is any secured debt, like the revenue bonds of the type mentioned above, though each security has recourse only to the specific assets (if any) it is linked to. Any “general obligation” debt — debt that is backed purely by the taxing ability of the municipality — then sits in a pool with public pensioners, who are, for reasons too complex to get into in this piece, left out to dry. Why? Because even though federal law mandates that private pensions be insured (so that retirees don’t get hosed if the company paying their pension goes under) no such stricture exists for public pensions.
But what of all the middle class Americans invested in municipal bonds, wouldn’t those people be affected by an aggressive default? Hardly. As the Detroit Free Press reported two months ago, it would be bond insurers who stand to lose the most from such a default, as the vast majority of Detroit’s bonds have been insured through those firms. So there we have it — will it be the industry that spent $77 million on lobbyists this year that will take the hit, or the city’s pensioners? These are the financial compromises at play, and they should appall a priori, well before an appeal to the emotional value of the city’s priceless collection comes into play.
The total quoted figure of $18.5 billion dollars of liabilities becomes less scary when it’s broken out into its constituent elements, which Reuters did a few months ago. Giving credence to the ribald histrionics of creditors (and their proxies) who have no claim to the artwork has less to do with the actual mechanics of bankruptcy and everything to do with the grotesque power enjoyed by financial interests in framing the boundaries these discussions. Once you realize that the pension-related moneys represent only a quarter of the total debt pie, the problem becomes significantly more interesting — after all, the emotional appeal of helping pensioners has been the clarion call for those who would sooner put America’s first Van Gogh on the block than let a handful of financial firms suffer non-catastrophic losses.