Detroit’s Grand Bargain: A Conversation on Bold Leadership

March 1, 2017

By Susan Wampler

The USC Center on Philanthropy & Public Policy (The Center) welcomed Judge Gerald E. Rosen for an enlightening account of Detroit’s bankruptcy – the largest of its kind in U.S. history – for the inaugural case discussion presented through The Center’s Irene Hirano Inouye Philanthropic Leadership Fund. Appointed by Bankruptcy Judge Stephen Rhodes, Judge Rosen was charged with trying to mediate Detroit out of bankruptcy.  He had a firsthand view of the bold leadership required, and the catalytic role that philanthropy played in what became known as “Detroit’s Grand Bargain.”

“Judge Rosen’s vision and powers of persuasion were critical to resolving Detroit’s bankruptcy,” said James Ferris, director of The Center and Emery Evans Olson Chair in Nonprofit Entrepreneurship and Public Policy at the USC Sol Price School of Public Policy. “He was able to mobilize different players and sectors to act on behalf of the city and its residents.”

Both Rip Rapson, CEO and president of The Kresge Foundation, and Darren Walker, president of the Ford Foundation, also participated in the discussion, sharing their insights as key players in Detroit’s Grand Bargain and the city’s rebirth.

Rosen’s ingenuity was necessitated by Detroit’s dire straits. “Beneath the staggering eighteen-and-a-half billion dollars in total debt were the human costs,” Rosen said. “The city had stopped making pension contributions for retirees who had given their working lives to the city.”

Decades of financial decline, made worse by corruption and neglect, had left the city so bereft that it faced having to sell off the creative treasures held by the Detroit Institute of Arts (DIA) to even scratch the surface of solvency.

“On the day of the bankruptcy filing, the city had less than eight weeks of operating cash on hand, resulting in the imminent prospect of payless paydays for its employees,” Rosen said. Reporters nationwide busied themselves writing Detroit’s obituary.

Rosen, however, took pen in hand for a different purpose. He started doodling on the cardboard back of an empty legal pad. “I drew a diagram,” he recalled. It included a circle on the left in which he wrote “state” and one on the right that read “pensions.” In the center, he wrote “art.” He then drew arrows between the circles — but added a box around “art” to indicate it would be blocked off from creditors.

With a few strokes of the pen, Rosen had determined Detroit would “give all of the revenues that we were able to raise to the pensions and create a public trust out of the museum.” This meant the DIA would remain safe, but it also required more funds to be raised, as the museum’s artistic holdings were the city’s only saleable asset.

“I thought that liquidating this incredible treasure that Detroit had would be like dropping a hydrogen bomb in the middle of the city,” Rosen said. “The DIA drew almost 600,000 people to midtown, which was one of the few areas at the time that was really beginning to thrive.”

The diagram Rosen drew may have lacked the artistry of the works in the DIA — although it is now displayed among them — but it led to a profoundly creative, and complex, strategy. The results would pay off with nearly $820 million in “new money” that, in just 16 months, lifted the city out of bankruptcy and onto a course for a brighter future.

First, however, Rosen — who was nominated by President George H.W. Bush to the Eastern Michigan district court and would go on to serve as its chief judge — had to confront certain political realities. The Obama administration was unwilling to bailout the city, and his longtime friend Gov. Rick Snyder could offer little encouragement about the prospects of a state bailout, given conservative Republicans crying ‘no bailouts for Detroit!’”

A chance meeting with another friend in a local coffee shop, Community Foundation for Southeast Michigan President Mariam Noland, led Rosen along another path. “Let me know if I can help,” Noland said. A couple of days later, Rosen spun out the idea of having foundations kick start the funding, which might ease the process of attracting government dollars.

Given the ticking clock, Noland cautioned him that foundations are not accustomed to acting quickly or at the behest of outside pressure.  Still, she offered help in setting up meetings with fellow foundation leaders and provided Rosen with key email addresses.

“I thought it would take two or three weeks” to get responses, Rosen said. But the first, from Darren Walker, came within 14 minutes, who pledged that the Ford Foundation would be present for the discussion. Other replies quickly followed.

The first meeting gathered 13 foundation heads. Rosen expected it to take perhaps 90 minutes, but everyone became so engaged that “three and a half hours later, we were still going,” he recalled.

Following the meeting, after some difficult conversations with their boards and the development of terms stipulating philanthropic funds were contingent on a match from the state, Ford, Kresge, and other foundations with strong ties to the city, answered the call and made significant commitments to the deal.

Bolstered by significant media coverage of the “new money” raised from philanthropy and their required match from the state, Rosen found Gov. Snyder more willing to lend support. “I said, ‘Rick, if the state gives us $350 million, and we get $350 million from the foundations, we’re still going to have to get another $100 million from DIA and private sources. But if we do that, we’ll make it work.”

The DIA ultimately hit its fundraising target, and the foundations involved ended up raising $370 million. “I would have asked for 20 million dollars more had I known,” Rosen quipped.

Yet, there was one more crucial part left to play. Rosen had to convince the city’s retirees of a plan of adjustment that included significant cuts to their pensions. After considering their options, the unions ultimately agreed to a new deal and relinquished their right to sue the city, which, in turn, allowed for the consensual resolution to take hold. To this end, Darren Walker made clear that the “real heroes” of the Grand Bargain were the retirees who had to give up parts of their pensions and made it all possible.

The bargain had been struck. “It became known as the Grand Bargain Express, and we started getting deals with the creditors,” Rosen said. “Eventually we had a fully consensual plan of adjustment.” Detroit’s bond rating became investment grade, the DIA was saved, and Rosen started getting interview requests. He is writing a book about his experiences shepherding the Detroit bankruptcy.

However, he said, “we wouldn’t be here today but for the role that Rip and Darren and their colleagues played. Detroit would still be in bankruptcy, because there was no other way out. The mayor would be fighting with his employees, with his unions, with his retirees, and with his financial creditors.”

Walker explained that the foundations were able to come together relatively quickly “because there was a degree of trust among us, and social capital that existed before we walked in the door.” In addition, the national foundations relied heavily on The Kresge Foundation and other local foundations for their “authentic understanding of what was happening on the ground in real time.”

Even more crucial to the Grand Bargain’s success, according to Rapson, was that “we had been working very closely to try to help municipal government improve its functions.”

Walker discussed the risks that may have been created by Detroit’s success, “which is the expectation that it’s the role of private philanthropy to solve these huge public problems.” He added, “It’s not the role of foundations to solve the fact that a city has committed a grave malfeasance over decades upon its citizens, its workers, its pensioners.”

Rapson agreed. “We felt it was really important to make this extraordinary — a one- time event,” he said.

While Detroit still faces a multitude of challenges, including badly needed education reform, Rosen said that at least the groundwork is laid for the city to move forward.

“Detroit didn’t get to where it was overnight,” he noted. “It took five or maybe even six decades to slip to the brink of oblivion. And it’s going to take time to get Detroit fully back.”

He added, “I’m a lifetime Detroiter, and I cannot remember a more optimistic time in the city’s history than now.”

A case study currently being developed by The Center – “Detroit’s Grand Bargain: Philanthropy as a Catalyst for a Brighter Future” – as well as the discussion were made possible by the recently launched Irene Hirano Inouye Philanthropic Leadership Fund. The fund elevates and amplifies the important role that philanthropic leadership plays in strategies for scaling impact, bringing greater attention to the issues of shared governance between foundation boards and executives. The creation of cases and applied research will be shared with foundation boards to stimulate conversations about their roles and responsibilities, enabling them to provide bold leadership in addressing critical problems. The fund is named in honor of USC Price alumna Irene Hirano Inouye, who serves as president of the U.S.-Japan Council and is past board chair of both The Kresge Foundation and Ford Foundation. In addition to Inouye’s support, the fund’s work is supported by the Ford Foundation, The Leonetti/O’Connell Family Foundation, The David and Lucile Packard Foundation, The Weingart Foundation, The Conrad N. Hilton Foundation, and The California Endowment.

You can watch the presentation in its entirety here.

The Center on Philanthropy & Public Policy promotes more effective philanthropy and strengthens the nonprofit sector through research that informs philanthropic decision-making and public policy to advance community problem solving. The Center is a part of the USC Sol Price School of Public Policy, which works to improve the quality of life for people and their communities, here and abroad.

For more information: Please contact Gregg Millward, Senior Director of Development, The Center on Philanthropy & Public Policy at [email protected] or 213-740-1776.