• August 20, 2014

Foundations Offering to Bail Out Detroit May Regret Their Decision

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Photo by Kaleidico/Flickr/Creative Commons

When nine American foundations this month pledged $330-million to help Detroit emerge from municipal bankruptcy, they took an unprecedented plunge into the give and take of the city’s deeply contentious politics.

The extraordinary “give” is the commitment of private funds to sustain public pensions, the sort of grant making that foundations have resolutely refused to do in the past. This may come back to haunt them, with so many other American cities facing financial difficulties every bit as daunting as Detroit’s.

The equally unusual “take” is the insistence that the funds will not be forthcoming unless a broad range of private and public institutions meet certain conditions. This crosses a line between merely seeking and blatantly demanding responses from potential grantees, including public agencies that should be answerable only to the voters. Such philanthropic coercion may not sit well with the American people.

Although the philanthropies, including the Kresge, Ford, Charles Stewart Mott, and John S. and James L. Knight foundations, have been patting themselves on the back for the bold initiative, in fact it came in response to a solicitation from Gerald Rosen, the federal judge mediating the city’s bankruptcy case.

According to The New York Times, this past fall Judge Rosen called Mariam Noland, president of the Community Foundation for Southeast Michigan.

“We have an idea,” she recalls him saying. “What do you think about raising $500-million?”

The funds were to bolster the city’s hard-pressed public pension funds, estimated by Kevyn Orr, Detroit’s emergency manager, to be underfunded by $3.5-billion.

Ms. Noland’s initial, albeit unvoiced, reaction—“Are you crazy?”—was no doubt inspired by her deep acquaintance with the giving habits of American foundations.

In the past, as the Times understatedly noted, philanthropy “has not been a source of money to shore up public-sector pensions.”

Indeed, foundations have spent decades insisting that they must not be treated as merely passive, reactive pools of cash available to “shore up” public institutions running short of funds or to meet other immediate social needs.

That disclaimer has become more strident as governments at all levels have begun to reduce spending in the face of mounting deficits, while casting covetous glances at bulging foundation endowments. Philanthropy maintains that its dollars are reserved for higher purposes, creating social change by developing innovative public-policy reforms and promoting their adoption. Loath to concede any government claim on philanthropy, foundations nonetheless freely press their claims on government.

In Detroit, for instance, the kind of policy engagement prized by foundations is exemplified by the 347-page Detroit Future City plan, launched with great fanfare in January 2013 by the Ford, Kellogg, Kresge and other foundations.

It is a grand, complex, 50-year scheme designed to replace the city’s faltering neighborhoods with parks, farms, forests, lakes, and ponds, while building new communities around high-tech businesses, edgy artists, and tony housing developments. It loftily summons all other concerned parties in Detroit to collaborate, coordinate, and cooperate with the plan—that is, to get in line if there is to be any hope of foundation support.

But in his call to Ms. Nolan, the federal official in charge of helping Detroit resolve its most important problem was essentially saying to philanthropy: “Thanks very much for your 50-year strategies and your grand plans and your terrific ideas. But right now what we really need from you is a check for $500-million.” 

The foundations were approached not as the leading agents for social change that they flatter themselves to be but rather as passive pools of dollars waiting to be tapped for immediate, short-term needs—precisely the long-standing public image that they have been struggling so long and hard to overcome.

The foundations recognize that they may have set a dangerous precedent, since four of their presidents insisted in a Chronicle of Philanthropy opinion piece that their action “does not mark the start of philanthropy as a solution to public insolvency.” 

But at a time when so many other American cities face equally severe public-pension shortfalls, it’s doubtful that this will deflect a wave of applications from officials seeking the same sort of deal they gave Detroit. (See “Proposed Detroit Grants Test Limits of Philanthropic Aid to Cities,” January 14.)

In fairness, the foundations planning to support the pension funds have insisted that they are by no means writing a blank check. As they put it, “funding will only be made available by the foundations through this arrangement if the principal beneficiaries of the funding—the city, its retirees and employees, and the DIA [Detroit Institute of Arts]—reach agreements” that will resolve the bankruptcy situation.

The foundations, then, are insisting on a “take” in exchange for their “give.” They have established conditions for their grant making, perhaps as many as 27, according to Daniel Howes of The Detroit News.

We don’t know what they are, though, since all parties are observing a confidentiality agreement.

That itself is an interesting development in the much-ballyhooed new era of philanthropic accountability and transparency.

“Foundation CEOs negotiating the future of Detroit behind closed doors with an unelected federal judge and a state-appointed emergency manager­­: That is hardly a recipe for a democratic or accountable process,” notes Rick Cohen, a writer for Nonprofit Quarterly.

Some of the conditions we do know about may seem unobjectionable. The world-class collection of the Detroit Institute of Arts, for instance, would be removed from city ownership and placed in nonprofit hands, thus putting it out of reach of the city’s creditors. But some creditors have already protested that the art—perhaps the most valuable remaining disposable asset of the city—is being snatched out of their grasp at bargain-basement prices by the pension-relief funders.

Some observers estimate that the art could fetch several billion dollars at auction, rather than the comparatively paltry $330-million pledged by the foundations, plus whatever can be raised from others. A stiff legal challenge to the settlement might still be appealing to city pensioners facing the truly draconian cuts proposed by the emergency manager, cuts that even the most generous philanthropic outpouring can only marginally relieve.

What started out for the foundations as a humanitarian rescue mission could easily be recast as a typically self-serving plutocratic maneuver—surreptitiously spiriting away from city ownership an elite cultural institution, leaving the unwashed masses a fraction of its true value.

Other conditions discussed in the press will prove far more difficult to meet. It is rumored, for instance, that the Detroit Institute of Arts itself will be expected to contribute $100-million over 20 years to the pension fund. The Institute’s operating finances are relatively healthy right now, since it enjoys revenue from a millage tax passed in August 2012 by the three Detroit metropolitan counties providing most of the museum’s visitors.

But that is only a 10-year tax, initially sold to the voters as a way to give the Institute time to raise $200-million privately for its notoriously feeble endowment. That deficiency, as Jeffrey Abt notes in A Museum on the Verge, has been a primary source of the Institute’s often severe financial difficulties throughout its 139-year history.

With the damage a sudden $100-million diversion would likely do to the endowment drive, no wonder Eugene Gargaro, the institute’s chairman, insists that this would be “not doable given our business model. ... I can say that categorically.”

Perhaps the most daunting condition, however, is the demand that the State of Michigan match the foundations’ donations. Giving the foundations a “big shout-out” for their commitment at a news conference last week, Michigan’s Governor Rick Snyder announced his intention to meet that condition by seeking a $350-million contribution from the state over 20 years.

Legislative leaders have agreed to take up the governor’s request. They concede, though, that securing so much money in a recession-bound state facing long-postponed public investments outside Detroit will “not be easy.” 

Michael LaFaive of Michigan’s Mackinac Center for Public Policy, an influential conservative state think tank, captures the likely reaction of many upstate legislators to the foundations’ offer: While at first it “sounded like great news,” imposing the condition that the state contribute “would convert voluntary private generosity into a coerced taxpayer bailout.”

The reference to coercion suggests that a well-accepted strategy in the esoteric and cloistered world of philanthropy may not seem so benign when brought suddenly into public view.

It has become a “best practice” for philanthropy not only to lobby government for the adoption of its policy recommendations but to be ever more overt and aggressive in doing so. In education reform, for instance, foundations are no longer content simply to influence its general direction but have gone so far as to insist on the continued tenure of a specific administrator, no matter the preferences of city government or voters.

So far, this has largely proceeded beneath the radar, with little notice beyond the trade press.

But at a moment of highly public drama in Detroit, the foundations are flexing their political muscles to the limit. They are not just lobbying for, they rather are making their grants contingent upon, certain outcomes, from elected and appointed public officials as well as private groups.

If by chance the foundations’ demands are not met, then their bluff will have been called. To maintain credibility, they will have to take back their pledge to Detroit’s pensioners and art museum, even though they had already made clear that the funds were available and their pens were poised to write the checks.

One way or the other, though, it is difficult to escape the impression that conditional grant making on such a grand scale amounts to philanthropic coercion rather than generosity.

Some of America’s leading foundations are now deeply engaged in Detroit politics, “giving” and “taking” like any other municipal power broker, meeting requests they never before would have considered, and making demands they never would have dared. Although they deny they are setting precedents, they clearly are. They may live to regret them.

William Schambra directs the Hudson Institute’s Bradley Center for Philanthropy and Civic Renewal and is a regular contributor to The Chronicle’s opinion section.

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