Just Court ADR by Susan M. Yates,Jennifer Shack, Heather Scheiwe Kulp, and Jessica Glowinski.
The story of the Detroit bankruptcy mediation’s emerging “Grand Bargain” (as it has been dubbed in the media) is a fascinating case of many different groups working to protect their chosen interests. The bargain demonstrates how mediation allows parties to consider what they are willing to give in order to secure the things that matter most to them, and how traditional rivals may collaborate for a shared goal. Where litigation must have winners and losers, the proposed mediated bargain seeks to avoid that. Instead, it involves a complex balancing act in which many parties give a little to get a little — if “a little” is the right way to describe the potential movement of hundreds of millions of dollars.
Federal mediators, including chief mediator U.S. District Judge Gerald Rosen, the appointed chief mediator of the Detroit bankruptcy, have been involved in the negotiations with many of the groups who have come forward to participate in the bargain.
The Grand Bargain is an effort to preserve at least two major, competing city interests. First and foremost, it is an attempt to preserve the retirement pensions of city employees by securing $800 million from various sources over a 20-year period. Second, the bargain hopes to preserve the world-class art collection at the Detroit Institute of Arts (DIA) and save its assets from being sold off to repay creditors.
Over the past few months, an increasing number of groups who support one or both of these interests have agreed to participate in the mediated bargain. Foundations with local interests were the first to contribute, including $125 million from the Kresge Foundation. Meanwhile, in order to preserve the city-owned art at the DIA from creditors (1600 pieces appraised at up to $860 million), the Detroit City Council unanimously agreed to transfer these assets to a charitable trust. This transfer would shield the museum’s assets from sale.
However, this decision made the DIA a major player in the effort to raise funds to pay for city pensions. In essence, if the DIA wanted to keep its art, it needed to contribute to the city’s financial efforts in some other way. While the DIA had already pledged a large amount to the pension effort through various foundations, with the Grand Bargain, the museum’s foundation needs to provide $100 million more over 20 years. So far, the DIA says it has secured 70% of this money.
With facilitation from the federal mediators, the cause inspired commitments from different groups, for different reasons. Many groups with Michigan interests have contributed, including $26 million from the Big Three auto makers’ foundations. However, the DIA also received $10 million from the NY-based Mellon Foundation, and $3 million from the LA-based Getty Foundation. These outside groups perceived an interest in keeping this internationally elite museum collection in Detroit.
Other stakeholders around the state have joined the Grand Bargain, but made their participation conditional on another group joining. Several unions have agreed to contribute, but expect the State of Michigan to participate as well. Meanwhile, some legislators expressed reluctance to participate without the unions. However, the state legislature has recently voted to contribute almost $200 million. One reason given was that state officials believed that the fortunes of the state are leashed to those of Detroit; allowing Detroit to founder could only harm other Michigan interests.
At the heart of this mediation are the pensioners who would keep a substantial share of their pensions – but still at a price. If the Grand Bargain is approved, pensioners stand to lose 4.5% of their payments, cost of living increases, or both. However, this must be weighed against the projected 27% drop in payments if the agreement is not approved.
The pensioners themselves must vote to approve the Grand Bargain in mid-July. As in any mediation, both practical and emotional interests are in play. Supporters say that the plan is the best way to preserve the greatest amount of money, and to avoid the risk of losing much more. However, others argue that the pensioners are the only individuals who would be required to sacrifice their personal interests for the benefit of the city.
One final group stands outside the proposed Grand Bargain. Many creditors besides the pensioners stand to lose considerable money if the Grand Bargain is approved. The largest insurance group alone could lose as much as $1.1 billion. These groups object to the way that the bargain would give the pensioners a protected status as creditors, and have also pushed to appraise the entire DIA collection, not just the small percentage of pieces the city owns outright, without encumbrances from donors.
Despite all of the groups who have agreed to work together, the Grand Bargain is not yet complete and it may yet fail. However, the attempt stands as a remarkable model of using mediation, rather than litigation, to select and promote certain values that the participants hold dear.
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