Detroit Brings Bankruptcy Plan to Court With Billionaires in Tow

Tuesday, 02 Sep 2014 10:13 AM

 

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Detroit’s plan to fix its finances with hundreds of millions of dollars in private donations comes years after the U.S. automotive capital got hooked on philanthropy to rebuild its blighted neighborhoods, revamp its riverfront and lure new businesses.

Since at least 2003, few big-city governments in the U.S. have leaned as heavily as Detroit on charity for community redevelopment, a habit that won’t change as it seeks to shed about $7.4 billion of debt and end court oversight of its finances.

U.S. Bankruptcy Judge Steven Rhodes is to start a trial Tuesday in Detroit on whether to approve the city’s plan to exit its record $18 billion municipal bankruptcy with handouts from some of the richest foundations in the world.

Under a deal with state lawmakers and wealthy donors, the foundations offered to shore up Detroit pension funds as long as the city didn’t use its art collection to pay debts. The city may call billionaire Dan Gilbert, the founder of Quicken Loans Inc., and Penske Corp. founder Roger Penske as witnesses to testify in support of the plan.

“There is a growing concern about who is controlling the decision-making here,” said Dale Thomson, director of the Institute for Local Government at the University of Michigan at Dearborn. “The scale and length of commitment in Detroit is unique,” according to Thomson, who’s writing a book about the role of foundations in urban revitalization.

More Help

Per capita, only one large U.S. city got more help than Detroit from philanthropic foundations and the rich who dominate their boards, according to data collected by the New York-based Foundation Center, which tracks such giving. It exemplifies a trend of local officials, pressured to cut spending, looking to charity for help.

“Governments used to lead and now they can’t,” said Joel Kotkin, director of the Center for Demographics and Policy at Chapman University in Orange, California. “They are bogged down, in large part, by the pensions and debt they can’t handle.”

In the decade before the city went bankrupt, charities spent more per person on community projects in Detroit than in any other big U.S. city except San Francisco, which has access to Silicon Valley megadonors like Google Inc. Detroit’s fiscal woes make it far more dependent on charity than San Francisco, where the median income is almost three times higher.

Private foundations poured $421.5 million into community development grants in Detroit from 2003 to 2012, according to the Foundation Center data.

$600 Each

That equals about $600 for each of the city’s almost 700,000 residents. The money replaced government spending on matters including economic revitalization, neighborhood development and public-policy planning. The Foundation Center figures don’t include hundreds of millions of dollars pledged to help the city exit bankruptcy.

The linchpin of Detroit’s plan to address its liabilities is cash from a group of foundations, and the state of Michigan, to shore up public pensions. In return for $466 million from the foundations and $350 million from the state, the city agreed not to sell its art collection to pay off its debts.

Only three other big American cities got more private money from 2003 to 2012: New York with $1.6 billion, San Francisco with $582 million and Chicago with $430 million.

The groups doing the most work in Detroit include the Kresge Foundation, Ford Foundation, John S. & James L. Knight Foundation and Skillman Foundation. They were among the charities that rebuilt, beginning about 2002, the city’s riverfront park through a nonprofit. The park is maintained by a $50 million endowment from Kresge.

Housing Subsidies

Foundations supplied housing subsidies to attract workers to the Midtown area, with $5 million set aside to draw 15,000 new residents by 2015. Even an effort to plan and build a commuter light-rail system is being led by foundations, which have pledged $100 million toward the effort.

Such projects are typically put together by government agencies, mainly using local taxpayer money supplemented with public and private grants.

“We’re in a very dangerous situation, where you have very small groups of people not arguing about policy, but implementing policy,” said Kotkin, author of “The New Class Conflict.”

City officials don’t agree that the increased influence of private money is necessarily harmful.

“You are seeing this across the country,” Bill Nowling, a spokesman for Detroit’s emergency manager, Kevyn Orr, said in an interview. “There is much greater cooperation between the public and private sectors when it comes to planning.”

Detroit Future

The city’s blueprint to rebuild after bankruptcy, called the Detroit Future City project, was inspired by and funded, and remains dominated, by a group of foundations. That plan lays out where future development should take place.

When a conflict arose between city officials and the foundations over how to involve residents, the effort was split, according to a paper by Thomson. City officials took the lead on short-term blight removal, while the foundations continued to develop the long-term development plan.

The group in charge of implementing Detroit Future was housed “beyond the control of the city’s Planning and Development Department,” Thomson said in his paper.

So far, the foundations have had a positive influence on the city and have been vital to turning around its neighborhoods and economy, said Thomson.

Many of those pushing to help Detroit, including Gilbert, have a stake in seeing the city succeed, according to Eric Scorsone, an economist at Michigan State University who specializes in local finance.

‘Best Interest’

“These people see it’s in their best interest to get the city out of bankruptcy,” he said, adding that philanthropy alone won’t work. “It can only go so far, honestly. Once the bankruptcy is over I’m not really sure how much they can do.”

Because of its industrial history, Detroit more than most other U.S. cities has deeper ties to well-endowed foundations, including Kresge, the $3 billion nonprofit that started in 1924, and the $10 billion Ford Foundation. Both were begun by Detroit- area industrialists.

In the mid-2000s those foundations began to change the way they spent money in Detroit, Thomson said, putting more money into specific neighborhoods and demanding more say over how the cash would be spent.

Although the foundations have committed to waiting years for results in Detroit, their patience won’t last if conditions don’t improve, Thomson said. That means schools have to get better, jobs have to appear and neighborhoods need to become more attractive to middle-class homebuyers, he said.

Plan Opponents

Opponents of the city’s debt-reduction proposal include bond insurer Syncora Guarantee Inc., which would be obliged to cover some investor losses imposed by the plan. Syncora said the mediators who helped arrange the grand bargain were biased against bondholders.

During the trial, the bond insurer may argue that any money coming into the city should be shared among all creditors, not restricted to the pension systems, as the foundations required. Critics claim the plan violates the general rule in bankruptcy that creditors with the same repayment priority get similar treatment.

Current and former city employees, as well as investors, would be forced to take less than the $10.4 billion they are owed if Rhodes approves the plan, while some bondholders would recover as little as 11 percent of their claims.

Billionaires Gilbert, 52, and Penske, 77, both on the city’s witness list for the bankruptcy trial, have put millions into the city and volunteered on revitalization boards.

60 Buildings

Gilbert-affiliated ventures own more than 60 buildings in downtown Detroit with more than 9 million square feet of space, including the building that houses the city’s two main newspapers and the one they’re moving into.

“It is well-documented that Dan is supportive of the bankruptcy process, and that is why he voluntarily agreed to testify,” said Jennifer Kulczycki, a spokeswoman for the main, for-profit company Gilbert is using to buy downtown property. “His testimony is not for personal benefit, but rather in hopes that the city successfully exits bankruptcy.”

Josh Greenwood, 43, the owner of the downtown coffee shop Urban Bean, has lived in the city for 22 years.

“There is an energy that Gilbert brought down here,” Greenwood said.

When he first opened his shop in 2008, Greenwood said, he had so few customers that he closed about 18 months later.

Dilapidated Properties

After Gilbert bought some dilapidated properties nearby and began redeveloping them, Greenwood reopened in 2013. Many of his regulars live in surrounding high rises that Gilbert revamped.

Penske started his business in 1965 with a Chevrolet dealership in Philadelphia after he retired from auto racing, and his connection to the car industry has made him an influential booster in Detroit.

Last year, Penske, General Motors Co., Ford Motor Co. and Chrysler Group LLC said they would donate $8 million to provide 23 ambulances and 100 new patrol cars to Detroit’s fire and police departments.

Penske led successful campaigns to bring the National Football League’s Super Bowl to Detroit in 2006 and to return Formula 1 racing to the city.

Penske, who sponsors Nascar and Indianapolis 500 teams, was mobbed by fans at the Detroit Grand Prix this year. There were more people seeking to shake his hand than trying to meet Kid Rock, said David Blaszkiewicz, president of Invest Detroit, a civic group that helps provide private loans and grants for development projects.

“Roger Penske is an absolute rock star here,” Blaszkiewicz said.

© Copyright 2014 Bloomberg News. All rights reserved.

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