DIA joins talks to protect its art in bankruptcy, free it from city ownership

Story originally appeared on Freep.

The Detroit Institute of Arts has joined behind-the-scenes federally mediated talks to shield the museum from creditors in Detroit’s bankruptcy and bolster at-risk municipal pensions.

The museum’s direct involvement in the talks, which also include leaders from at least 10 national and local charitable foundations, signals that the parties are moving closer to a grand bargainbrokered by U.S. Chief District Judge Gerald Rosen. The plan would funnel about $500 million into pensions, thereby buying the DIA its independence from city ownership and freeing up more money for city services.

Two sources with detailed knowledge of the talks but not authorized to speak on the record confirmed that museum leaders had joined the negotiations, which began in Rosen’s chambers a month ago with a gathering of foundation heads — without the DIA at the table. One source said there have been at least one meeting and multiple phone calls between DIA representatives and Rosen.

The source said that the talks had not yet addressed such specifics as how much money — or in what form — the DIA might contribute financially to the plan, but described the talks as moving “swiftly.” The source said the details of the museum’s contribution likely would be discussed next week.

DIA Chief Operating Officer Annmarie Erickson said Friday that the museum would have no official comment about participating in the talks, but added: “We feel optimistic about the direction in which things are moving.”

Rosen’s deal is an attempt to prevent the city-owned DIA from being forced to sell some of its irreplaceable masterpieces to appease creditors in bankruptcy court. But if the plan were also to remove the DIA from city ownership and establish it as an independent nonprofit, it would mark a radical resetting of the museum’s structure and operations.

For the first time in 95 years, the DIA — a world-class museum many champion as an anchor of a post-bankruptcy Detroit — would not be subjected to the boom-and-bust cycles of Detroit’s finances and the sometimes capricious whims of city politics. Wayne State University art historian Jeffrey Abt pointed to a strikingly ironic turn of history.

“When the museum was taken over by the city in 1919, it was a time of tremendous prosperity and the ability of the city to support the museum seemed boundless,” said Abt. “But then came the depression, and, for the most part, the museum hasn’t prospered. Now with the city at its lowest point, you might have the museum ejected from city control. The historical symmetry is quite remarkable.”

Rosen has been trying to convince the foundations, which control more than $25 billion in assets, to contribute hundreds of millions of dollars to a rescue plan aimed at simultaneously resolving two of the most contentious conflicts in the bankruptcy drama — the battle over the DIA and the fight over potentially steep cuts to pensions for 23,000 retirees.

The foundations include some of the country’s largest, including the New York-based Ford Foundation and the Troy-based Kresge Foundation, as well as smaller local organizations like Detroit’s Hudson-Webber Foundation.

A Rosen-brokered deal could provide Detroit emergency manager Kevyn Orr — and U.S. Bankruptcy Judge Steven Rhodes — with a politically expedient way of removing the DIA from the table and providing unions a $500-million incentive to reduce the size of pension cuts in Orr’s upcoming plan of adjustment. Ultimately, Rhodes will have to approve any restructuring plan submitted by Orr.

But bankruptcy experts cautioned that whatever plan emerges from Rosen’s mediation will still be just a component of an overall solution. Detroit bankruptcy attorney Doug Bernstein said a key will be whether other unsecured creditors object to pensioners receiving what could be perceived as a $500-million bonus. At the same time, many creditors are sure to fiercely contest a plan they believe leaves the DIA collection beyond their reach.

“The key to Rosen’s proposal will be how it plays out in the grander scheme of the entire plan of adjustment,” said Doug Bernstein of the Plunkett Cooney law firm.

Rosen’s proposal still faces significant hurdles before a deal could be reached. Although some sources have told the Free Press that larger foundations, including the Ford Foundation, have expressed support for Rosen’s rescue fund, some of the smaller foundations are wary of committing a proportionately larger percentage of their resources to bailing out Detroit. The boards of directors of all of the foundations will have to decide whether diverting funds to municipal pensions on behalf of the DIA is consistent with their missions.

The DIA’s endorsement is not a slam dunk either. Museum leaders have steadfastly maintained that any plan to monetize its collection has to pass muster on three counts: No art can be sold. The survival of the tri-county property tax has to be guaranteed, because without the roughly $22 million in annual funds, the museum effectively would be forced to shut down. And whatever financial contribution the museum might make, its ability to raise endowment funds can’t be unduly impaired.

As part of its drive to pass the millage, DIA leaders pledged to raise hundreds of millions of dollars for the endowment — its nest egg — so that when the millage expires in a decade, the museum will be able to make up the difference with investment income. The DIA could balk if Rosen’s plan required tapping out its major donors, leaving them unable or unwilling to support the endowment.

Another potential stumbling block regarding a plan to spin off the DIA from city ownership would be a potential outcry among some Detroiters than the city is being stripped of its most prized assets.

In the best-case scenario for the deal moving forward, Rosen would be able to forge a deal within the next few weeks, before Orr submits his blueprint for restructuring city finances and creating a pathway out of bankruptcy.

In the wake of Rhodes’ ruling this week that Detroit is eligible for Chapter 9 protection, the next two months are expected to be a whirlwind of hardball talks, shifting alliances and legal posturing as Orr negotiates with bondholders, pensioners and other creditors while preparing his plan.

Orr, who regards the DIA as a city asset he can tap for cash, believes he can’t make a deal Rhodes will approve without money from the museum. Orr has strongly hinted that his initial plan will include a revenue stream from the DIA amounting to about $500 million — the same amount that multiple sources have said is driving Rosen’s negotiations. Orr’s plan, which is expected by early January, will almost assuredly spark howls of protest from creditors pushing for a greater recovery of their losses.

Orr’s office has told the museum repeatedly for months that it must monetize its collection — squeeze money out of the art either by selling it or some other form of leveraging. DIA leaders have pledged to fight in court any plan that puts its collection at risk.

Also at the table in talks with Rosen have been leaders from the John S. and James L. Knight Foundation, W.K. Kellogg Foundation, Charles Stewart Mott Foundation, Skillman Foundation, Community Foundation for Southeastern Michigan, McGregor Fund and Fred A. and Barbara M. Erb Foundation.