Detroit Bankruptcy Requires Life Support

Should Detroit Sell Its Art?

Apr 11, 2014 • 326 Views

During 2009, a still life painted by Henri Matisse was sold at a Christie’s auction for $46 million. The Detroit Institute of Arts owns Poppies, also a Matisse oil on canvas but a bit larger.

Municipal Bankruptcy dilemmas

From: the DIA

A municipal bankruptcy like Detroit’s creates so many obvious and less evident dilemmas. Most simply, the state, the city and a federal judge are making decisions about the city’s obligations to its citizens, to the people it pays salaries and to those who have loaned it money. They also have to decide whether to sell a few paintings.

On the spending side…

We hear a lot, for example, about Detroit’s underfunded pensions. Teachers and policemen explain how they have worked for a lifetime in giving, relatively lower paying, professions. The one thing they depended on and planned for was the retirement income they were promised. Now, that money could disappear because of bankruptcy decisions.

The city has salaries to pay. It has schools to maintain. It has roads to repair, streetlights to turn on, buses to run. Now, with less available and minimal if any borrowing capability to compensate for a shortfall, city services have to contract.

On the revenue side…

We have the people who purchased the bonds that Detroit sold to fund its expenses. As with any bond, Detroit got the money, and the buyer got the bond and the promise of interest and principle repayment. A retired couple could have purchased Detroit’s bonds. Like the teachers and policemen, that couple also could need the revenue that relates to the bankruptcy settlement but might get close to 75% of what they invested.

We also have institutional investors. Banks, investment banking firms, hedge funds all could be owners of Detroit’s debt. Their willingness to loan Detroit money at least partially related to their expectation that they would be paid back. While they do not have the personal heart tugging stories of individuals, their willingness to loan money to municipalities has a very personal impact when you think of the services it funds. Buyers of municipal debt need to know their contracts will be enforced. Otherwise, cities and towns and states will have to pay a lot more to borrow in the future.

And finally, there are the paintings.

If you could get $50 million for a painting, you would longer have it as your city’s treasure. You would no longer have it for school children to see, for tourists to visit and as a source of pride. Are those intangibles worth more than the dollars you could get for those unfunded pensions and bondholders?

Bankruptcy is indeed an example of the basic problem of economic scarcity that every society, rich and poor, has to solve. When there is not enough for everyone to have all they want and need, who should get what and how much?

Sources and Resources: Because of the DIA paintings debate, Detroit’s bankruptcy is again in the news. For the focus on the museum, articles I read were from WSJ and the New Yorker, both potentially paywalled. However, Reuters gave some good facts about the potential for casino revenue and here is more background at econlife. Also, I totally recommend going to the DIA website to see the magnificent artwork they own.

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