A vintage postcard of the Detroit Institute of Arts (via the Boston Public Library's Flickrstream)

A vintage postcard of the Detroit Institute of Arts (via the Boston Public Library’s Flickrstream)

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.

CAPTION: William Hogarth, "A Rake's Progress," Plate 7: The Prison Scene (1735) (via Wikimedia)

William Hogarth, “A Rake’s Progress,” Plate 7: The Prison
Scene (1735) (via Wikimedia)

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.

Mostafa Heddaya is the former managing editor of Hyperallergic.

9 replies on “Soak the Insurers and Save Detroit’s Pensioners”

  1. I hate to be that jerk, but a few months ago when it was first mentioned here that this might be a possibility I asked why this was a bad thing. Detroit for all intents and purposes is a city that is dissolving. The city has shrunk by 2/3 since it’s peak, and shows zero signs of economic life.

    Why is it such a travesty to have the artworks move to areas that will be able to better preserve and appreciate it?

      1. Point me in the direction of any meaningful growth that hasn’t been artificially supported by Federal stimulation. There isn’t any. Detroits housing market never recovered, the general population knew that the gains made were a temporary result of reflationary efforts, otherwise you would see a rebound in housing like we saw in almost every other market (there are exceptions like Vegas and parts of Cali, but vibrant economic areas like NY and DC are at or above pre crash levels). People aren’t moving to Detroit and making the permanent investment in the community because deep down we know financially it’s a bad decision, temporary contractors are another story, but the unemployment rate is still 3-4% higher than the national rate, crime is rampant, politicians are incredibly corrupt etc..

        Detroit is relapsing hence the continued credit downgrades ( from C to CC in July), tax revenue is in decline and spending will continue to outpace it.

        But screw all that noise.

        You still didn’t answer my question about why it would be such a travesty to have the artworks moved to a areas better able to preserve and appreciate it?

        1. Now that investment bankers have exported 2/3rds of US manufacturing base under the bullshit guise of open markets, sucking the life out of cities like Detroit, you think some of those same NY and London bankers should be natural heirs to the works based on their abilities to “appreciate” and “preserve?” No problem with moral hazard, eh?

          1. Wow. Not only did I never say anything like that, but it wasn’t even implied.

            It would be a great opportunity for smaller communities to acquire artworks, for museums in the ‘middle of America’ to expand their collections. Or for just about anywhere else that does receive tourists and has a sustainable economy to increase the depth of their cultural relevance.

            Perhaps leasing the works en masse and putting together a travelling exhibition to raise money to help Detroit would even be smart.

            But keeping them where they are is the equivalent of throwing the baby out with the bath water. This is an opportunity to pull off something smart. Have curators come in and bring ‘big city’ shows to small towns in Oklahoma, Kansas, Colorado, Nebraska etc. give it a little bit of fanfare. The idea is to reach as far and as wide as you can with great work and right now they are under lock and key in a city being neglected that people would rather leave if they could afford to. Keeping the art there because it’s always been there is foolish, wasteful and insulting to those who do want to better themselves but are unable.

          2. Wow. I’m saying think about you implication: move Detroit’s art where it can be better “appreciated” and “preserved,” some seriously shitty code words. You know for some Detroit isn’t a statistic, but a hometown. Media discussion has been about the sale of the city’s works, not some whitewash on-loan program to bring big-city enlightenment to dusty mid-western towns . Who do you think the buyers will be at that sale? Exxon on behalf of tom and tiffany’s trinkets in Rapid City? Perhaps you don’t realzie but your sort of caviar-to-pigs rationale has ugly precedence ala the third Reich;).
            Yeah, Detroit’s on a death sprial, but so was NYC a few decades back. Does that mean the rest of the big-apple-bailout-paying country should have auctioned and dismantled the city’s crown jewels?
            Rather than trying to figure out ways to drive the last nail in Motor City’s coffin by stripping it of its history, maybe you’d consider visiting, if only so you can give a boot to a guy standing in line at a soup kitchen, sheesh….

          3. Nobody is speaking in code, quit being paranoid.

            Why are you being selfish with the culture? The people are leaving for greener pastures, the art should go where it can be preserved and presented to an audience that thirsts for it. Art is a necessity as much as it is a luxury, but those are two different types of art. Necessity art is the drive for self expression, creativity, expanding boundaries. Luxury art is art that sits behind velvet ropes as aspirational examples for the world.

            I’m going to venture that when the general population in the D gets to choose between funding the arts in Detroit or another pension paycheck, they’re going to the pension. It’s only a matter of time before the citizens turn their backs on the art and it falls into a state of decay, or disrepair like other enclaves of the city. Art sits very high on the Maslow pyramid; Detroit is a city that is sinking. +40% don’t pay property tax in their own homes! Art is the least of their concerns, eating, not being evicted, not being attacked are concerns.

            Please recognize that just because something has ‘always been here’ doesn’t mean it is the best place for it now.

          4. Let’s get concrete:
            1. language is a code. 2. The selfishness I see is your proposition to take away a community’s cultural treasures with the gross assumption that they can’t/won’t take care of them. 3. Let’s be clear, art is a nessity EVEN for poor Detroit people.4. Whatever figures you wish to bandy about, Detroit will not be abandoned. Like NY in the 70s, it is experiencing decay. With the right leaders and actions it will rebuild. 5. This high-minded notion of preserving Detroit’s art by taking it is, for me, a form of cultural graverobbing, not noble, but despicable.

  2. “Once you realize that the pension-related moneys represent only a quarter of the total debt pie, the problem becomes significantly more interesting…”

    How do you get a “quarter of the total debt” from the breakout numbers? As I read them, $1.43bn is pension related certificates, $3.5bn is pension liabilities, and 5.7bn is ‘other post-employment benefits’ i.e. health care benefits that are part of those pensions. That’s $10.63bn, which is ~57% of the liabilities.

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