Detroit exited bankruptcy in December 2014. The largest U.S. city to enter municipal bankruptcy had about $7 billion in debt restructured or canceled. Another $1.7 billion was set aside to improve city services.
Former chief U.S. District Judge Gerald Rosen served as the chief mediator for Detroit’s bankruptcy proceedings. His new book is titled Grand Bargain: The Inside Story of Detroit’s Dramatic Journey from Bankruptcy to Rebirth.
He spoke with Michigan Public Morning Edition host Doug Tribou.
Doug Tribou: When the process started, the city of Detroit was in a massive amount of debt. The total value of the bankruptcy was in the neighborhood of $18 billion. Basic functions in the city had suffered. Kevyn Orr was the state emergency manager appointed to oversee Detroit’s finances. In one of your early meetings with Orr, he told you about how badly residents’ services had suffered. What were some of the biggest problems he outlined for you?
Gerald Rosen: Well, you know, bankruptcy experts refer to this as being "service delivery insolvent." There were 150,000 blighted properties and lots. Snow wasn't being plowed. Police response time was over an hour. The national average was 11 minutes. City workers had no collective bargaining agreements. So, these are just some of the things. And of course, the only asset that the city had to be monetized — and I hate that word, it is such a sanitary word — the Detroit Institute of Arts, was under threat of liquidation.
DT: Some people saw that as a quick way to help solve some financial problems by selling [the DIA]. But the loss to the city would be really hurtful in terms of culture and pride. And you, like many others, were opposed to selling it. Tell us about the doodle you drew that became the basic concept behind the Grand Bargain.
GR: I tried very hard to think of a way to leverage the value of the DIA without liquidating it. I had this idea that the bankruptcy was bookended by the art — as the only asset that the city had — on the one hand and the retirees on the other hand. You know, the retirees' pensions were very much at risk. So between the retiree health care and the pension debt, they were the largest single creditor.
And I just sat down one morning and I had been taking notes on a legal pad. And I just doodled this idea that maybe we could get the state to kick-start funding, put the art in a trust, lock it off from all of the city's creditors other than the retirees, and then use the trust to flow money through — any money we could raise — to flow that through the trust to the pensions.
And that was basically the idea of the Grand Bargain. And quite remarkably, that little doodle on the cardboard backing of a legal pad is now hanging in the Detroit Institute of Arts.
DT: Another component that came into play was funding from private foundations. The list of organizations that put up money to back pensions, health care costs, and other city needs is long. And the dollar amounts are huge, $380 million total. How difficult was it to convince those foundations to get involved when the city had been losing so much money for years and years?
GR: I was striking out with the state as the entity to kick-start the funding. And I ran into Mariam Noland, who then was the president of the Community Foundation of Southeast Michigan. But much more than that, she was a true national player in the philanthropic community. I told her about this crazy idea I had of leveraging the art to mitigate the pension losses for the retirees. And she set up a meeting with the major foundations.
They came in on November 5. And a month later, they started making commitments. And when we got to $291 million, I had a very, as the diplomats would say, full, frank, and candid conversation with [Governor Rick Snyder] and said, "We can't leave this money on the table," because all of the foundation's commitments, all of them, were conditioned on the state also being a major player and the DIA itself having some skin in the game.
DT: Well, the list of positive changes in Detroit since the city emerged from bankruptcy is long. But as you acknowledge in your book, not everyone got what they hoped for in the Grand Bargain — notably the municipal employees still saw cuts to their pensions. What was your biggest disappointment from the final agreement, despite all of its successes?
GR: Well, you know, Doug, I think the first thing we have to realize is that in bankruptcies, contracts are impaired all the time. People lose money. And if you think about that as sort of the threshold, it could have been so much worse. Not that I don't feel the pain. There was pain. But the pensions were $3.5 billion underfunded. Now the pensions are in extremely solid financial footing. And that's one of the major reasons why Detroit's credit rating has received ten increases in the past ten years.
DT: I’d like to circle back to Kevyn Orr, the state emergency manager who was appointed to help clean up Detroit’s finances at the time of the bankruptcy. He was appointed by then-Gov. Rick Snyder, who you’ve had a long friendship with. Snyder’s use of state emergency managers has gotten some fierce criticism both in Detroit and — even more so — in Flint where an emergency manager was in place at the time of that city’s disastrous water switch.
You credit many people for their roles in the Grand Bargain, from local to state officials. Given your unique view of the whole process, how do you view that push-pull of local control versus state help in that unusual situation Detroit was in?
GR: I would never argue in favor of emergency managers as a matter of routine or course. But Detroit's situation was just so desperate, and I really doubt that we could have done what we did in the bankruptcy without having the emergency manager powers that Kevyn had, because as the mediators, we were able to use that to leverage a lot of the settlements we got.
You know, it worked in Detroit. It didn't work in other cities, as you pointed out. Flint, and I could also point out Pontiac and other cities around the state where it didn't work, but in Detroit, it did work. And part of that was we had the political will of everybody. Not just Kevyn Orr, but the governor. City council came along, ultimately, with a lot of the things we did. And then when Mike Duggan became mayor, he and Kevyn worked together. And then Mike kind of took the baton when Kevyn's emergency manager term ended and and really has done an almost a miraculous job.
Editor's note: Quotes in this article have been edited for length and clarity. You can hear the full interview near the top of this page.
Further reading: “Grand Bargain: The Inside Story of Detroit’s Dramatic Journey from Bankruptcy to Rebirth" by Gerald Rosen
