A plan that captured the imagination of a city in the throes of bankruptcy
(Editor’s Note: The evolution of “The Grand Bargain” plan, which helped ensure the future of the Detroit Institute of Arts while also preserving pensions for city retirees, is detailed in Chapter 9 of Nathan Bomey’s book “Detroit Resurrected: To Bankruptcy and Back.” An excerpt from that chapter, titled “You Can’t Eat Principles,” appears below.)
A few weeks after Detroit filed for bankruptcy, Chief Judge Gerald Rosen of the U.S. District Court for the Eastern District of Michigan headed to Ponte Vedra Beach, Florida, for a golf vacation. Each day, the newly appointed chief mediator in Detroit’s bankruptcy crawled out of bed before dawn for a sobering read: Kevyn Orr’s initial proposal to Detroit’s creditors.
Bonds, pensions, and retiree health care obligations already sucked up about four out of ten of the city’s general-fund dollars, and that number was expected to skyrocket to seven out of ten within a few years. Without drastic cuts to the city’s liabilities, impoverished neighborhoods would continue to wither under the crushing weight of violent crime, abandoned homes, and unreliable mass transit.
But Orr’s proposal, left untouched, would trigger pension cuts of more than 50 percent and massive reductions to retiree health care benefits, not to mention a potential liquidation of the Detroit Institute of Arts.
Once he finished absorbing the gravity of the crisis, Rosen picked up the phone and began calling attorneys for the city’s major creditors to gauge the state of the case. After those conversations, Rosen concluded that the fates of two crucial parties in the bankruptcy—the group of more than thirty-two thousand pensioners and the city-owned DIA—were inextricably linked.
The bankruptcy was already shaping up to pit retirees against the museum. Pensioners were ready to duel over Orr’s plan to slash their benefits, and the DIA was similarly girding for a battle over Orr’s decision to consider auctioning art. When Rosen called to discuss the case after his appointment, Mike Nicholson, general counsel for the United Auto Workers union, suggested that the State of Michigan buy the DIA and give the money to pensioners.
Rosen liked the concept, but he believed it needed to be bigger. He grabbed a yellow legal pad and flipped it over. On the cardboard back, he jotted down notes from his conversations. Then, he started doodling.
He wrote the word “art” and drew a box around it, symbolically representing a lockbox around the DIA and protecting it from financial creditors. On the left side of the box, he wrote “state” and on the right side he wrote “pensions.” Then he drew short arrows, with dollar signs above each, connecting the art box with the state and pensions.
To resolve the bankruptcy, he theorized, you must transform a previously binary equation—art versus pensions—into a holistic formula. Rosen theorized that an injection of outside money would be necessary to prevent a fire sale, shield pensioners, and reach a viable bankruptcy blueprint. On the back of the Ampad legal pad, he jotted down his thoughts: “How much?” “Timeline?” “Protect art—how?” “What about fed gov’t?” “State?” “State museum?” “Other sources?” “Private donors?” “Foundations?” “DIA?” He labeled the budding concept, “Art Trust.”
David Heiman, the lead Jones Day bankruptcy attorney representing Detroit, was skeptical when Rosen told him he wanted to secure external funds to help resolve the case by protecting the museum and shoring up pensions.
“I said, ‘God bless,’ but did I believe it was going to happen? Uh, I wanted it to happen, but it wasn’t something I spent a lot of time wishing for because it seemed so unusual,” Heiman said.
Rosen knew he needed help. One of his first calls was to Eugene Driker, a longtime friend. A statesman in the Detroit legal community during the last half century, Driker was a lifelong resident of Detroit and a partner in the downtown law firm Barris, Sott, Denn & Driker. His calm demeanor, approachability, and reputation for fairness made him a common choice when warring parties needed an arbitrator to resolve their disputes.
Driker was riding his bicycle near his condominium in Glen Arbor, a town tucked in the northwestern corner of Michigan near Traverse City, when his cell phone rang. He pulled to the side of the road. It was Rosen.
“I don’t generally [take] cell phone calls while I’m on the bike,” Driker said. But he knew about Rosen’s mammoth assignment and was deeply concerned about the fate of his hometown.
He quickly agreed to serve on Rosen’s mediation team and began reading up on Chapter 9 bankruptcy. With an undergraduate degree in mathematics and deep experience with actuarial issues, Driker headed negotiations with the city’s pensioners. He was joined by U.S. District judge Victoria Roberts of the Eastern District of Michigan, a native Detroiter who led negotiations with unions in coordination with Driker.
Rosen also added former Detroit resident and senior U.S. District Court judge Wiley Daniel of the District of Colorado to his team, as well as U.S. Bankruptcy Court judge Elizabeth Perris of the District of Oregon, who had mediated disputes in three municipal bankruptcies in California.
The chief mediator also eventually convinced several others to join his team: former U.S. Bankruptcy and U.S. District Court judge David Coar; U.S. District judge Sean Cox of the Eastern District of Michigan, who had provided oversight for the Detroit Water and Sewerage Department; U.S. District judge David Lawson of the Eastern District of Michigan; and Cooley Law School professor Gina Torielli.
Arguably the first question Rosen needed to answer was whether a federal bailout was possible for Detroit. One big check from Washington could make a lot of debt go away.
But in the immediate months after his appointment as emergency manager, Orr had tried and failed to persuade the White House to deliver cash for Detroit. His former University of Michigan Law School classmate, Valerie Jarrett, a close friend and senior advisor to President Barack Obama, turned Orr down.
U.S. Senator Carl Levin, a Democrat representing Michigan and a former member of the Detroit City Council, had told the city privately that a bailout for Detroit was politically impossible on Capitol Hill. But he compiled a list of federal money that the city might be able to tap to boost services, including foreclosure-fallout funds that could be converted into blight-removal dollars.
After he became the lead mediator, Rosen tried Jarrett himself, believing the president might take pity on the Motor City. Detroit is an intensely Democratic town, a bastion of liberalism with a fierce loyalty to union causes and to the president. But the Obama administration had no interest in pursuing a bailout for Detroit. Jarrett said no for a second time.
Rosen turned, instead, to the governor. Rick Snyder was a longtime friend. In 1982, shortly after joining the accounting firm Coopers & Lybrand, Snyder got an apartment in Southfield near Rosen’s congressional campaign headquarters. One day, he stopped by.
“You guys could use some help,” the future governor told Rosen.
“I was his data analysis person, looking at the history of who voted Republican, Democrat in prior elections,” Snyder recalled. “So I had these cool maps showing where he should go walk and where he should try to get votes.”
Rosen got trounced. But the campaign sparked a casual friendship between the two. By the fall of 2013, Rosen needed Snyder’s help again. Rosen approached with a big request. He told the governor about his nascent concept for deploying state cash to help mitigate pension cuts and save the DIA. Could the governor convince the state Legislature to contribute money to Detroit?
Snyder had bet his political legacy on Detroit’s bankruptcy, describing it as tough love that would provide the city a fresh start. But he had already publicly disavowed a bailout—a combustible concept among fellow Republicans in Lansing.
The governor’s advisors made it clear to Rosen that the answer was no. Snyder already had his hands full fending off the Tea Party movement in the state’s Republican Party and was preparing for a reelection fight in 2014. Convincing the Republican-dominated state Legislature to bail out Detroit would require political capital the governor’s team did not believe he could expend.
“I told him [I was] happy to have him come back and have a dialogue as he found information on how we could be helpful,” Snyder said later.
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SEVERAL WEEKS AFTER Detroit filed for bankruptcy, Mariam Noland was standing in line at the Gateway Deli across the corner from the federal courthouse in downtown Detroit, when she spotted Rosen.
Noland, a soft-spoken visionary who wields considerable influence in the local philanthropic community as president of the Community Foundation for Southeast Michigan, always felt out of her element when interacting with the judiciary. Her foundation managed a philanthropic fund for the court, so periodically she would have to descend twenty floors of her Fort Street office tower, walk one block to the courthouse, snake through security lines, and make presentations to the judges.
“I was always scared to death of those guys,” she said.
She exchanged pleasantries with Rosen, simply acknowledging the judge’s new assignment as chief mediator in Detroit’s bankruptcy.
“Geez, it’s really nice you’re handling this,” she told the judge. “And if there’s anything I can do, let me know.”
She didn’t mean anything by it. “It was just a throwaway,” Noland said later. That is, she would love to help but didn’t envision any role for a small nonprofit in a municipal bankruptcy involving $18 billion in liabilities.
She grabbed her takeout order, and they parted ways. Soon after the chance encounter, Rosen called. “Can you come see me sometime?” he asked.
“Sure,” she replied.
“How about today?” the judge implored.
That afternoon, Noland traipsed up to the judge’s chambers on the seventh floor of the courthouse. Beautiful wooden bookcases, strewn with souvenirs from the judge’s legal career and personal pursuits, dominated the sides of the room. On one shelf sat Winston Churchill memorabilia.
As she entered the room, she saw Rosen and then, next to him, his friend and fellow mediator, Eugene Driker. “It’s like, OK, this is going to be serious,” Noland recalled.
Rosen and Driker spelled out their proposal. They wanted to raise hundreds of millions of dollars from foundations to help resolve the bankruptcy by reducing pension cuts and saving the DIA from a sell-off.
“They knew that a lot of money would help,” she said. “They also made it clear that they needed this money very fast.”
Noland pondered the moment. “Foundations don’t move fast,” she was thinking. “They don’t fund things that have already happened. They never fund public agencies, like paying pensions. If that’s been done anywhere, I don’t know.”
She thought the judge’s idea was categorically implausible. “Are you crazy?” she thought.
“I did not say that,” she remembered. “I thought that. So I said, ‘Sure.’?”
Back at her office, Noland followed through on her promise. She plunged through her Rolodex, firing off calls to the leaders of about a dozen nonprofit foundations, including notable philanthropic groups with Detroit connections, such as the Ford Foundation, the Kresge Foundation, the Knight Foundation, and the Mott Foundation. With Detroit’s bankruptcy occupying national headlines, she figured it wouldn’t be difficult to at least intrigue her fellow nonprofit leaders with the prospect of helping the city in some capacity.
“I said, ‘Would you be willing to come listen to the judge?’ To a person they said either, ‘Yes I can come,’ or they said, ‘I can’t, but we’ll have our board chair there.’ Everyone said, ‘Yes,’” she recalled.
They set a date to meet with the judge: Tuesday, November 5, 2013.
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AS THE MEETING with foundation leaders approached, Rosen set up a dinner at his home with Rip Rapson, his doubles tennis partner in the 1970s while they were both congressional aides in Washington, D.C.
Rapson was CEO of the Michigan-based Kresge Foundation, whose $3.5 billion endowment and commitment to philanthropy in Detroit made it a prime candidate to contribute to the Art Trust. Over the last several years, Rapson had directed a philanthropic funding blitz in Detroit, plunging money into the Detroit Future City project to explore new land use opportunities and backing the construction of a new streetcar line on Woodward Avenue.
Rosen tested his idea on Rapson, saying he wanted to raise $500 million from foundations but needed to identify any potential land mines in his approach. Rapson laughed.
“Judge, that’s a huge amount of capital to ask on such short notice with so relatively few actors,” Rapson said.
“Well what do you mean?” Rosen responded.
“At the end of the day you only have two or three foundations that are capable of making the kind of contributions you need to get to this number,” Rapson responded. “This is a very difficult sell to smaller organizations for whom this will be seen as outside their scope of authority and expertise.”
Rapson told the judge that he would need the Ford Foundation and the Kresge Foundation to make major contributions to keep his proposal alive.
“The judge was really fixated on the art,” Rapson recalled later. “He said, ‘I really just have to take the art off the table because otherwise it’s going to be litigated.’ I said, ‘Well, with all due respect, that optic will not be helpful to you. It’s got to be seen as somehow playing into your argument that it expedites the bankruptcy.’?”
That was Rosen’s mission.
“So it’s really important that you don’t put the foundations in the position of seeming to come to the rescue of the art institute,” Rapson told Rosen. “And, similarly, it’s probably going to be a fine line you’re going to walk because we also can’t be seen as coming to the rescue of the pensioners.”
Rosen absorbed his friend’s advice. “Are you willing to keep an open mind?” Rosen asked.
Rapson, agreeing to send two colleagues to Rosen’s upcoming meeting as he headed to South Africa on a previously scheduled trip, said, “Of course.”
But “I assume what you’ll get from your meeting is a lot of polite silence,” Rapson told Rosen.
(Excerpted from “Detroit Resurrected: To Bankruptcy and Back” by Nathan Bomey. Copyright © 2016 by Nathan Bomey. With permission of the publisher, W. W. Norton & Company, Inc. All rights reserved.)
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