Detroit’s Grand Bargain: The Role of Philanthropy in Tough Budget Times

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization. 

By Emily Rosenman
June 16, 2019



In 2014, the City of Detroit closed the largest municipal bankruptcy deal in United States history. Referred to as the Grand Bargain, it may set a new precedent for the role of philanthropic foundations in society. Other cities, which have dauntingly large unfunded pension liabilities— like Chicago and Philadelphia, should take note of the Detroit experience. They should take note especially as the nonprofit sector takes on a larger role in the governance of cities with the advent of public sector austerity.

What, exactly was the bargain? Simply, it is a catchy shorthand reference to an agreement in which private philanthropic foundations used their immense wealth and influence, outside of normal democratic channels, to re-start operations in a broken municipality whose governing apparatus was ineffective. The final linchpin of the deal’s approval was the commitment of 11 philanthropic foundations to give $366 million to bail out the city’s unfunded pensions. Eighteen other corporate and family foundations pledged an additional $75.9 million.

Through this move, the foundations saved the art of the Detroit Institute of Arts (DIA). One proposal for paying the city’s creditors had been to auction off the DIA’s assets. Nobody was particularly happy about that prospect, but Detroit was against a fiscal wall, with creditors pushing for the city to repay its debts by any means possible. 

The deal that emerged entangled foundations with urban governance in an especially direct way. It bailed the city out of obligations the government had taken on, rather than taking their more typical role of funding neighborhood redevelopment or economic growth initiatives.  The DIA was removed from city ownership and set up as an independent charitable trust.

This was also a bargain made by retired city workers. As a paper by The Center on Philanthropy & Public Policy from the University of Southern California explains, police and firefighter retirees took a cost-of-living adjustment, while other city retirees agreed to bigger cuts: 4.5 percent reduction in monthly benefits and the elimination of cost-of-living adjustments.  Some were even required to give back a share of the annuity bonuses they received in the ten years before Detroit’s bankruptcy. 

The logistics of the Grand Bargain involved the Community Foundation for Southeast Michigan collecting the philanthropic funds and disbursing them to the City of Detroit for the payment of pensions. The Community Foundation also monitors the city’s compliance with donor grant requirements, including investment committee oversight of the pension fund and sending status reports to the contributing foundations.

As was mentioned in a presentation before the Government Finance Research Center at the University of Illinois-Chicago in early May, philanthropic foundations are taking an increasingly visible role in policy leadership and public finance in post-recession jurisdictions, as well as cities facing economic distress, unemployment, population loss, distressed property values, declines in state revenue sharing and pension crises. 

This kind of direct intervention in urban economies by the, “Third sector,”—voluntary organizations, NGOs, and nonprofits—has been discussed in some circles as a pragmatic way to use the resources available to a city without financial resources.  Foundations, after all, cannot perform their more traditional charitable functions in a city lacking basic capacity to provide services to its citizens.  Tonya Allen, President and CEO of the Skillman Foundation, recently remarked that, “In some cases, I’m extraordinarily proud of the role that philanthropy played in holding the city together.”

But the Detroit Grand Bargain also reflects an increasingly blurred boundary between the role of the Third Sector, public finance, private creditors and citizen participation.  While the Grand Bargain is an extreme case of fiscal intervention by philanthropic actors, it raises basic questions about the relationship between the philanthropic sector and public finance.  Many other cities across the country have pension crises and are seeking solutions.  When philanthropy steps up to pay for basic services, will philanthropic actors also exert more power over policy decisions?  In Detroit, the relationship between the city and philanthropic actors is now complicated as the public sector regains capacity but lacks the direct connections to community channels that are claimed by philanthropic foundations.

It is worth noting that budget holes faced by many cities across the country exist in part because of depleted tax rolls, and that philanthropic foundations exist, in part, due to tax deductions that subsidize the system of private philanthropic dollars that rallied to bail out Detroit.  A lack of accountability to voters, acknowledged by many of the philanthropies involved in the Grand Bargain, points to the potential complications of using philanthropy to pay for basic services and other types of public goods. 

As Allen notes, “If I were to critique us, there were some places we began to believe that we were government.  And I think that in some cases we began to believe that because we had an outsized influence and we had good intent, that that was good enough.” 

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Author:
Emily Rosenman
Assistant Professor of Urbanization
Department of Geography
Penn State University

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