DETROIT — “The greatness of America lies not in being more enlightened than any other nation, but rather in her ability to repair her faults,” wrote Alexis de Tocqueville. The US is great because it can roll up its sleeves and fix its problems. On December 3, US Bankruptcy Judge Steven Rhodes ruled that the City of Detroit was eligible for Chapter 9 bankruptcy protection.
Some of the coverage and rhetoric surrounding the City’s use of bankruptcy protection has focused on a simple narrative: “The City owes its pensioners money, the City owns valuable artwork through the Detroit Institute of Arts, and so the City should sell its art to pay its pensioners.” This naive narrative ignores the complexities and ultimate goal of the largest municipal bankruptcy in history. The City of Detroit has taken a critical step towards repairing its faults — in a municipal bankruptcy, yesterday marked what is often the most contentious and important step. This ruling is important because the City’s eligibility is really the only time when a lot of the players — the judge, the creditors, and the debtor (the City) — are on equal footing. Based on the interplay of the rights and powers of states versus the federal government, the City now has a lot of power to move forward with its plan to adjust its debts (the court has limited power over the debtor and the debtor’s operations). The ability for the City to do this after decades of financial mismanagement is something to be celebrated.
My takeaway from Judge Rhodes’s ruling from the bench (which I will expand on once his opinion is issued) is that he recognizes this bankruptcy for what it is: an exceptionally unique and complex government that needs to balance a slew of interests to become a healthy entity that can fulfill its social contract with its citizens. In other words, this is not the liquidation of a corporation. The idea of selling a few items to generate funds to pay a select group of creditors does nothing to restructure a municipality and allow it to continue as a viable government to meet the needs of its current and future citizens.
Certain creditors have tried to simplify the issue and even prematurely filed a motion to force the City to consider selling art held by the Detroit Institute of Arts (the Motion was likely premature in order to get it before the Court prior to the eligibility hearing). In response to the rhetoric about selling the City’s assets — in particular the DIA’s artwork — Rhodes noted that Detroit “must take extreme care that the asset is truly unnecessary in carrying out its mission.” Again, looking beyond the political posturing and side issues designed to do nothing except grab headlines, the end goal is to have a viable City that can meet the wants and needs of its citizens.
Creditors’ arguments to sell the DIA art collection go against the ultimate goal of this bankruptcy. Of course, the face of the City of Detroit is Kevyn Orr, and he has also, through his representative, fanned the flames of citizen fear that valuable paintings will be sold. This posturing, however, is in line with the actual nature of bankruptcy procedures. Namely, debtors seek leverage to negotiate deals. Unlike the creditors that seek to force the issue and cause a fire sale, a debtor can use the threat to reach a resolution where the debtor is able to create an income stream. The debtor can do this even while knowing that the economic realities (which include litigation risk) will never justify the threat. Orr just released the numbers of Christie’s valuation of the art: not even $2 billion, which is far less than initial estimates. He continues to insist that the museum financially contribute in some way to the city’s restructuring plan. He might try to use the not-quite $2 billion number to negotiate and then get court approval for a fund initially seeded by some of the DIA’s institutional supporters, with a yearly contribution from the museum, but I suspect he’ll stay away from anything resembling a sale.
The DIA’s COO gave the best argument against Orr’s efforts to leverage the museum’s collection in an op-ed piece in the Free Press. A couple takeaways are: 1) if we sell art, it could kill the millage passed last year in a tri-county vote, and that would kill the DIA; 2) the DIA does not cost the City of Detroit anything. So, any plans to gut the DIA would ultimately hurt the City going forward, by making it a less attractive environment for citizens and businesses and destroying the direct and ancillary financial benefits that surround a world-class cultural institution. Orr likely recognizes this, and he likely recognizes that any effort would spur a long legal battle — a legal battle that may ultimately depend on how state law views the status of the artwork. Over the summer, the Michigan Attorney General issued an opinion that under state law the DIA’s art collection is held by the City through a charitable trust for the people of Michigan, and therefore cannot be “sold, conveyed, or transferred to satisfy City debts or obligations.”
The City and creditors will continue to bring up the prospect of selling the DIA’s art collection; the rhetoric, however, will likely have little impact on the actual outcome of the City’s bankruptcy. Rather, the outcome will have a greater impact on the DIA, and all of Detroit’s cultural institutions. Those institutions have tried for decades to distance themselves from the City’s fiscal problems — as noted, the DIA’s current business model costs the City nothing. The bankruptcy will give the City a fresh start: it can now (pending appeals) move forward almost untethered from the court and the creditors to implement its plan about how it will be a viable and attractive city, ultimately allowing Detroit to build a solid foundation and actually assist the DIA in the future. After all the noise quiets down, the museum will have a healthy partner with which to implement its and the City’s social contract with the citizens of Detroit. The City finally has a base to do what it (and the US) does best — roll up its sleeves and repair its faults.