For bankrupt Detroit, is $350 million just a drop in the bucket?

Michigan Gov. Rick Snyder wants to spend $350 million in state money to help shield pensioners and Detroit's art collection from the city's bankruptcy. But details are sparse.

Michigan Gov. Rick Snyder's new proposal to spend $350 million of taxpayer money to help protect retirees and Detroit's famous art collection amid the city's bankruptcy is so far only raising questions – and anger.

Detroit’s looming bankruptcy crisis is threatening retired public workers, who worry that they will ultimately see cuts to their pensions, while officials at the city’s art museum are concerned that the state will seize or monetize masterworks, diluting what is considered one of the greatest public art collections in the world.

To address those concerns, Governor Snyder (R) wants to put $350 million into a special fund. The money would be added to the $330 million pledged by nine national charitable foundations to help the Detroit Institute of Arts Museum (DIA) remove itself from city control by creating its own independent nonprofit.

The immediate reaction, however, has mostly ranged from confusion to criticism. Considering that Detroit's unfunded pension liabilities are estimated to be $3.5 billion – and city-owned art at DIA is appraised at $875 million – it's unclear what $350 million could accomplish. Moreover, in a state where the federal bailout of the auto industry was widely criticized by Republicans, Snyder risks alienating his own party by using state money for his plan.

Announcing the proposal Wednesday, Snyder tried to stem fears that this was the first step of a state bailout of Detroit.

“This is not a bailout of paying the debts directly of the city of Detroit. This is not a bailout of banks and other creditors. This is focused on helping reduce and mitigate the impact on retirees,” he said. “A bailout is just contributing dollars and paying debt without getting anything in return. This is to help people in our state.”

Snyder proposes drawing the money from tobacco settlement funds and stretching it over 20 years. He suggests the plan will save taxpayers money, paying a lump sum up front as opposed to payments over a number of years slowly accumulating.

But the terms of the settlement are vague, and Snyder declined to go into detail how it might affect the pension cuts of the city’s 21,000 current retirees. Those details will likely emerge when Snyder’s emergency management team files its restructuring plan by a court-ordered March 1 deadline.

Already, pension advocates are complaining that Snyder’s commitment is not enough.

“While workers and retirees appreciate that he is wiling to come to the table, the amount proposed is far too little to avoid unconstitutional cuts in benefits for retirees who, on average, earn less than $30,000 per year,” said Jordan Marks, executive director of the National Public Pension Coalition.

Experts have similar questions. Snyder’s proposal “certainly has the potential to help” but the many unknowns throw doubt on how much it can help, says Eric Scorsone, an economist at Michigan State University in East Lansing.

“I’m sure there’s going to be strings attached,” he says. “If the $3.5 billion number is right, the governor’s offer is nice, but it’s not enough.”

Also unclear is the relationship between the charitable foundations and the state. “It’s hard for me to believe that the foundations want to be in the business of subsidizing government pensions." Professor Scarsone says. "I don’t think that’s what they are interested in doing. I have a feeling this is going to get a lot more complicated because everyone has different perspectives about what they’re actually doing.”

Early last year, Snyder was adamant that Detroit’s bankruptcy would not involve taxpayer money. His reversal is causing critics, especially the city’s creditors, to balk. They say the DIA collection is a valuable city asset and should remain on the table. Christie’s auction house appraised the city-owned pieces – representing 5 percent of the total collection – as worth up to $867 million. Outside estimates calculate the total DIA collection is worth up to $8 billion.

On the other side, critics are accusing the governor of putting art above people's pensions. “[I am] troubled by the policy implications of the state favoring art ahead of the economic realities and recovery interests of the city’s pensioners, bondholders and other unsecured creditors," says Steve Spencer, a financial adviser for Financial Guaranty Insurance Co., one of Detroit’s creditors, said in a statement. "We find it incredible that the city is being allowed to leave such a valuable art collection untouched when it can’t provide basic services and is proposing to essentially walk away from its debt obligations.”

Likewise, members of Snyder’s party are grumbling, which suggests the governor could get significant pushback in trying to get it passed through the legislature.

“I’m not prepared to vote for mid-Michigan tax dollars to go to Detroit. I represent mid-Michigan, and my taxpayers want money to go to our roads and our schools and our cities and townships,” Sen. Rick Jones (R) told the Detroit News.

This is an election year for Snyder, and he faces opposition from Detroit, where he is perceived as staging a state takeover of the majority black city, no matter how hard he tries to say he wants the city to flourish because it ultimately helps the state thrive.

Criticism from members of his party, who are already characterizing his proposal as a bailout, portrays a “culture war” emerging in Michigan that will ultimately make exiting bankruptcy very difficult, says Ed Sidlow, a political scientist at Eastern Michigan University in Ypsilanti.

The proposal is ultimately “the responsible thing to try and do” because it offers immediacy in lifting “a considerable amount of stress off the shoulder of retirees who are fearful their pensions are gone,” Professor Sidlow says.

If the governor were “to turn his back on Detroit and say, ‘Drop dead, you made your bed, you sleep in it’ – that’s a bit simplistic and hard-hearted. This is an attempt to fix it,” Sidlow says. “Any politician has to be thinking about their legacy and what they’re leaving behind.”