CHICAGO – Some version of Detroit's so-called "grand bargain" that leveraged civic foundation support to form a relief package for the bankrupt city could be replicated to help other fiscally struggling Rust Belt cities like Chicago.
That's the position the Manhattan Institute for Policy Research organization takes
"Detroit had a particular model and I'm not saying that's the only way to do it," said the report's author Howard Husock. "Every city is going to have to work out what's politically acceptable."
Detroit's agreement was forged in its historic Chapter 9 bankruptcy, helping it exit in late 2014 with $7 billion less debt through a deal that included corporate, state, and pensioner contributions.
The institute doesn't advocate that any of the cities pursue Chapter 9, but rather to look at the outline of the "grand bargain" as a path to cut pension debt and save services without the stigma and disruption of bankruptcy.
The report also steers clear of involving bondholders in any agreement, although Husock says large institutional holders might see the benefit in having a seat at the table as it's a better alternative to a potential future bankruptcy.
"Once you get into a bankruptcy you are really rolling the dice," he said. In Detroit, pensioners agreed to cuts, but they were far more modest than the steep bondholder haircuts.
Husock, vice president for research and publications and director of the institute's social-entrepreneurship initiative, said Chicago and the attention its fiscal and pension ills have received nationally provided the impetus for the report.
The Illinois Supreme Court's voiding of Chicago and state government pension reforms due to strong state constitutional provisions that protect against benefit cuts show "how boxed in the city is around the pension issue" with no clear path out, he said.
"This is a framework that might allow you to break out the impasse," he said.
Each of the cities examined in the report faces debts that are consuming more revenue, driving up taxes and crowding out services. The goal of turning to a "grand bargain"-like fix is to preserve and improve services while holding taxes steady or lowering them, providing a better draw for business and residents.
In Detroit, a philanthropic consortium collectively pledged $366 million to offset the city's massive pension burden and avert any move to sell off the assets of the city-owned Detroit Art Institute museum.
The funds leveraged support from corporations and the state to bring the package to more than $800 million and in turn brought the city's public unions to the table to agree to concessions. The funds are to be aside over a 20-year period and handled by special entity that will direct them to pay benefits.
The report says the four cities it examined may have some stark differences from Detroit but in some areas they resemble one another. Pension liabilities strain their balance sheets and each has high rates of poverty – ranging from 22% to 39% -- with stagnant property tax revenues.
At the same time, all enjoy "robust" local philanthropic communities with significant wealth relative to municipal expenses and the sources of foundation endowments are often connected to the historical sources of wealth in their respective cities.
"These and many other U.S. cities face a simmering crisis that threatens to upend their ability to pay pensions and keep streets clean and safe. While philanthropy should not, as a general rule, be expected to fill the role historically associated with local government, a 'grand bargain' like the one modeled in Detroit holds immense promise as an innovative way out of a profoundly difficult situation," the report says.
Husock adds that the benefit of foundations stepping up to lead a stakeholder discussion – even if it comes at the urging of political leadership – is that the perception of their neutrality is "hard for other parties to dismiss."
Foundation support helped trim Detroit trim its unfunded liabilities to $1.1 billion from $2.9 billion. If that same level of support occurred in Chicago, its unfunded liabilities could be cut to $7.5 billion from $19 billion. St. Louis' would fall to $167 million from $431 million; Cleveland's would fall to $278 million from $719 million; and Buffalo's would drop to $54 million from $141 million.
That level of support would amount to less than 2% of local foundations' assets and shouldn't impact their other grant work, according to the report, which looked at public data published by foundations.
While the model could provide a potential path for the four cities, any such agreement outside of bankruptcy in Buffalo and Chicago faces a rougher road due to state constitutional protections of pension benefits, the report acknowledges. But those hurdles shouldn't prevent the cities from pursuing the option.
The institute said one avenue to consider is a constitutional amendment. In Illinois, such a ballot initiative has been floated but it's not evolved into legislation. In Illinois, state legislature supermajorities of three-fifths are required for constitutional change. The alternative, a state constitutional convention, also requires a three-fifths general-election vote.
In New York, simple majorities are required in the state legislature to initiate constitutional change, followed by a general-election vote also requiring a majority. Alternatively, constitutional change, via a state convention, would have to be part of New York's constitutional convention process, which itself requires authorization through a voter referendum.
The Illinois Supreme Court has left the door open to pension reductions if pension fund members are offered some alternative benefit in exchange for the cut and suggested an agreement could be reached through collective bargaining. Husock said civic foundation involvement could help broker such an agreement.
