Is Art the Answer for Detroit's Bankruptcy?

"The court finds that Detroit was and is insolvent." That was the determination of Judge Steven Rhodes earlier this week. The city can now proceed with its Chapter 9 bankruptcy.

Detroit's emergency manager Kevyn Orr will soon propose cutting pensions and selling valuable assets. Of the latter, the possibility of auctioning off all or part of the city's collections at the Detroit Institute of Arts (DIA) has been extremely controversial. With long-term debt between $18 billion and $20 billion, Detroit faces some impossibly difficult financial choices. Does it make sense for the city to sell its art in order to get its finances under control?

At first glance, my answer to that question is no. The Detroit Institute of Arts, which houses paintings by van Gogh, Rembrandt, and Matisse, is one of the finest museums in America, and its treasures are part of the city's rich cultural heritage. On a personal note, one of my favorite paintings – Jan van Eyck's "Saint Jerome in his Study" – is part of the museum's collection.

St. Jerome in his study, Jan van Eyck, c. 1435

On further reflection, however, I must admit that this issue is more complicated than my gut reaction implies. What if selling the art results in smaller cuts for the city's pensioners, who are already struggling to get by? Why wouldn't a city with disastrous finances want to obtain funds from one of its most valuable assets? These questions intrigued me, so I set out to investigate them further.

How much is priceless worth?
The Detroit Institute of Arts was founded in 1885, and is one of the top six collections in the United States. Among the museum's remarkable pieces are Diego Rivera's Detroit Industry and Vincent van Gogh's Self Portrait. Earlier this year, art dealers estimated the market value of the museum's top 38 pieces to be worth approximately $2.5 billion, according to the Detroit Free Press.

Just this week, the auction house Christie's provided its appraisal of 2,781 of the DIA's 66,000 works, which represents roughly 5% of the total collection. The appraised works were those that were classified as "City of Detroit" purchases, and were valued by Christie's at $452 million to $866 million. Emergency manager Orr decided to appraise just the city-bought pieces for now, as opposed to those works that were donated to the museum. Legally, though, the city owns the entire collection.

Where we are right now
In allowing Detroit's bankruptcy to go forward, Judge Rhodes was cryptic in his remarks relating to the art. He did note that a one-time sale of the collection would not have allowed Detroit to avoid bankruptcy. On the other hand, he did appear to open the door to a possible sale of some of the collection in the future, as long the city took "extreme care that the asset is truly unnecessary in carrying out its mission." That line, however, appears to be open to differences of opinion.

Soon after Rhodes' ruling, Orr told the Detroit Free Press that "we will try to get some value from the art in some fashion." According to press reports, Orr's office is hoping to get at least $500 million in revenue from the museum's collections.

Nicholas O'Donnell, a legal expert in this area, told me that Orr has been pretty coy so far about the art. The emergency manager may propose a partial sale or he may recommend leasing the art to a partner museum. O'Donnell believes that Orr may also be hoping that the mere threat of a sale might result in additional money to the city from foundations.

The case against selling
The DIA is adamant in its opposition to selling any of the art from its collection. Soon after Judge Rhodes issued his ruling this week, the DIA wrote that it hopes that Orr "will recognize the City's fiduciary duty to protect the museum art collection for future generations." It further noted its belief that the city cannot use the art to satisfy its obligations, and said it would take action to protect the art if necessary.

O'Donnell told me that the issue of deaccessioning -- which means selling art -- is very controversial in the art world. Many professionals in the museum community are opposed to selling art in principle, and believe that the proceeds if a sale does occur should only go toward buying more art. The DIA believes the art is a public trust, and is extremely skeptical of the various ideas to "monetize" the collection. Its position is very clear: it wants the city to leave the art alone. Period.

The case in favor of selling
One of the city's creditor's succinctly made the case for selling the art when he told the Detroit Free Press that "art is not an essential asset and especially not one that is essential to the delivery of services in the city." Orr seems somewhat sympathetic to that view, telling the newspaper recently, "Let's be clear. That's a city asset."

Orr's position is somewhat understandable, even if you don't agree with it. According to Judge Rhodes' written ruling, the city faces negative cash flows of $346 million in 2017 in addition to its long-term debt of $18 billion-$20 billion. With very few revenue sources at his disposal, Orr doesn't have a lot of options. And with the city already failing to meet the basic needs of its residents, his choices on the cost-cutting front are equally unpromising.

Finally, the average pensioner in the city receives about $19,000 per year. Orr has made it clear that pensions will be cut, so anything that can minimize the size of those cuts will be welcomed by city pensioners.

Fighting for civilization
Lytton Strachey, an English writer and member of the famous Bloomsbury Set, was once asked during the First World War why he wasn't in France fighting for civilization. Strachey responded drily, "Madam, I am the civilization for which they are fighting."

In the case of Detroit, the aim of the bankruptcy is to revitalize the city and improve the quality of life for its residents. Judge Rhodes stated that before selling an asset the city should make sure that it "is truly unnecessary in carrying out its mission." A healthy and vibrant Detroit Institute of Arts feels like a very necessary part of that mission to me.

After considering both sides of this issue, I believe the city should do everything in its power to preserve the collection as it is. Civilization is worth fighting for.

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Read/Post Comments (20) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 07, 2013, at 10:13 AM, jondaly wrote:

    Well, how much real economic activity does the museum generate for the city? how much MONEY will the city lose annually if it guts the museum. at this point, that's the real question.

  • Report this Comment On December 07, 2013, at 4:22 PM, jstrate wrote:

    I'd hope that whatever happens to the DIA's art, that the public retain access to it. It should be sold off or leased to other museums, not privatized. It's doubtful that previous generations of Detroit taxpayers and museum donors ever thought that public access to the art would be endangered because of bankruptcy. The Ford Foundation in particular has a special moral obligation to the metro Detroit area. It should not hide in the shadows and ignore the donor and the area that gave birth to it.

  • Report this Comment On December 07, 2013, at 9:23 PM, cindyrest wrote:

    My husband worked for the City for 19 years as a professional accountant in the Auditor General's office. He receives a pension of approximately $9000 a year. Really! Can his pension be cut further to enable a standard of living that's not at the poverty level? The City needs to go after the Fat Cats first!!!

  • Report this Comment On December 08, 2013, at 12:08 AM, tbarbar90 wrote:

    It is an asset. They should be sold to pay off creditors. Period. If art was donated with the condition that it not be sold, then that should not be sold. Everything else is fair game.

    City has to pay for its irresponsibility. Why should creditors get shafted any more than they are when there is a valuable asset that can be sold?

  • Report this Comment On December 08, 2013, at 1:55 AM, Stef412 wrote:

    It's irritating when people that have no specific knowledge of the situation decide that they know what is best.

  • Report this Comment On December 08, 2013, at 1:26 PM, Thylbanus wrote:

    Well jondaly, here are about 400,000 visitors to the DIA annually. So the impact not only to the museum, but the surrounding businesses could be significant. Detroit hasn't been a tourist destination in over 60 years, but one point that people DO visit, is the DIA when they visit relatives. Being the third largest museum collection in the US, it is the one place that people do go when they HAVE to visit Detroit. Securing Detroit's financial future will not gain anything from selling off the works, but may hurt it in the long run. The sale of even the valued works done by Christie's, will only run the city for a year. The pensioners and creditors, who are the $1.8 billion, will still be owed.

  • Report this Comment On December 08, 2013, at 8:53 PM, segreto wrote:

    Why is the city buying art when it has pension obligations? Obviously, the contracts it had with its workers meant nothing, and the politicians took the pension payment holidays as a free coupon to buy things not everyone wanted. It's a shame.

  • Report this Comment On December 09, 2013, at 12:55 AM, dwduke wrote:

    Sell the art. Do not take taxpayer money to fix Detroit. Detroit has to learn that liberalism will not fix bankruptcy. Getting off government dependency and leaching off corporations is not the answer. Being like the rest of America and living frugally is the answer. No more living off others thinking it is free or that the bill will never come in.

  • Report this Comment On December 09, 2013, at 4:36 PM, gskinner75006 wrote:

    Every stone should be turned over before those of us who have never lived or been to Detroit are asked to pay for this.

  • Report this Comment On December 09, 2013, at 7:26 PM, Kiffit wrote:

    When you are bankrupt, all the options are bad ones.

    Art collections, whether private or public, are representative of the accumulated wealth of a person or place.

    If the wealth is gone, then the art is just another capital asset that has to be disposed of to people or places that do have the wealth.

    I am sure there are Chinese cities that would be interested in some collecting.

    Cities like Florence and Venice may have economically declined, but they never went bankrupt, because they did whatever was necessary not to.

    Let the fire sale of Detroit's art treasures be a warning to others as to what happens when finances are mismanaged long term. It was not as if the city didn't get fair warning of what was coming, sooner or later.

  • Report this Comment On December 09, 2013, at 7:30 PM, cmalek wrote:

    Detroit did not go bankrupt because of the pensions or because it bought art. It went bankrupt because the self-serving, corrupt politicians ran it into the ground. Before any pensions are cut or any art is sold, the politicians have to be eradicated.

    From what I have read, there are 23,000-25,000 retirees on the Detroit rolls. At an average of $19,000 per pension, if ALL the pensions were completly eliminated, that would generate less $500 million. If ALL the artworks were sold, that would generate $5 billion (I am being generous here). That money would scarcely put a dent in the $18-$20 billion debt. Yes, every little bit helps but where will Mr. Orr come up with the restof the money to retire the debt if Detroit has no income?!

    Speaking of income, Detroit has four professional sports teams. Are they paying fair market rent on their stadiums and arenas? Or did get their arenas built at taxpayers expense and, like the majority of professional sports teams across the United States, did they get sweetheart low rent deals from Detroit's past administrations? If the Tigers, Pistons, Red Wings and Lions started paying market rate for their digs, it would generate some income for the city.

  • Report this Comment On December 10, 2013, at 5:03 PM, Rileysdtr wrote:

    cmalek, the Tigers and Lions stadiums are owned by a regional sports authority (both publicly and privately financed through bond sales etc.) - the Red Wings are getting their new stadium built at partial taxpayer expense which is adding fuel to the discussion fires. The Pistons don't play in the city.

  • Report this Comment On December 11, 2013, at 8:35 AM, pondee619 wrote:

    "The DIA believes the art is a public trust" and

    Pensions are a contract accepted by workers who accepted lower current wages with the promise of a more secure retirement. Without the pension, workers would have demanded, and received, a higher wage to fund their retirement. Pensions are deferred wages!

    " The Detroit Institute of Arts,.. is one of the finest museums in America, and its treasures are part of the city's rich cultural heritage."

    Should a city that can't keep the lights on be allowed to keep a "rich cultural heritage" at the expense of its laborers?

    BTW, how are "paintings by van Gogh, Rembrandt, and Matisse" part of Detroits "rich cultural heritage"? Perhaps the home countries of these Masters would like their "heritage" returned.

    "market value of the museum's top 38 pieces to be worth approximately $2.5 billion" What is Detroits pension shortfall?

    " DIA wrote that it hopes that Orr "will recognize the City's fiduciary duty to protect the museum art collection for future generations"". You have to see the humor in this. Detroit NOW should recognize its fiduciary duty for the benefit of art. It hasn't recognized that duty for the benefit of its citizens and workers for decades. Art, however, is now more important than people?

    Detroit is bankrupt. All income and resources, from any and all sources, must be used to pay current essential services and obligations made to PEOPLE. The City lost its right to collect art when it failed in its obligation to run its affairs.

  • Report this Comment On December 11, 2013, at 9:58 AM, TXObjectivist75 wrote:

    How can they expect to protect the museum, when they can't even afford to keep stoplights functioning. That quote from Lytton Strachey perfectly illustrates the elitist attitude. The unessential must be protected at the expense of the necessary because a small minority think it's important and don't want to sacrifice.

  • Report this Comment On December 11, 2013, at 10:04 AM, damilkman wrote:

    I would rather the art collection be protected as there is not near enough money to satisfy all the creditors be it bond holders or pension holders. A few more cents on the dollar is not going to change much. However, the law is the law and the law says it is an asset that can be sold to make obligations, even if it is just a nickel on the dollar.

  • Report this Comment On December 11, 2013, at 10:17 AM, cbernard73 wrote:

    It the art is only receiving 400,000 visitors a year, then it is a poor return for both the civic minded and the financial minded.

    Would civilisation not receive greater benefit if the art collection was somewhere where it could receive 4m visitors per year like New York or Washington? And at the same time achieve a greater financial return for Detroit?

  • Report this Comment On December 11, 2013, at 10:18 AM, TMFBane wrote:

    Thanks everyone for your comments so far!

    I actually welcome criticisms of my take on this, because I really do see strong arguments on both sides of this issue.

    In fact, I'd say this debate defies our traditional right/left (conservative/liberal) framework for understanding big issues. For example, the right traditionally advocates a tougher stance on deficits, yet conservatives are often big promoters of the Western tradition in our museums and universities.

    The "Liberals" on the other hand tend to favor established cultural programs, but in this case, might be expected to do whatever it takes to honor obligations to pensioners.

    Finally, I can also understand why Detroiters may not want "outsiders" weighing in on such a local issue.

    Ultimately though, this feels like an important issue -- affecting a great American city -- that is well worth debating.

    Foolishly,

    John Reeves

    PS. Completely agree that Lytton Strachey's remark was elitist and obnoxious (he was a great writer, though). He would have thrived in our current online line world of clever provocations! I quoted him to illustrate the point that sometimes you need to preserve that which you are fighting for.

  • Report this Comment On December 11, 2013, at 10:54 AM, mdk0611 wrote:

    If the DIA has 66,000 works in it's collection, clearly some can be sold without having a major impact on the institution. My guess is a lot of these works haven't been exhibited in years if not decades. You don't have to gut the collection, but when the alternative is a further cut in pensions I favor the sale of works that effectively will be in "storage" for the indefinite future.

  • Report this Comment On December 12, 2013, at 3:54 PM, wcmMFool wrote:

    Love Detroit's hustle and bustle when I lived there before it was gutted with the recession. But when one spends heartily, one must pay heartily. This is the nature of capitalistic society. We still have free enterprise. No one caused Detroit to overspend. Eventually the party was over and the cleanup/payup task has to take place. If we overspend, then we sell assets to pay our bills. This is the painful lesson that all cities in the USA need to learn well. It is not true that you can eat the cake and have it too. What you have after the party is long over is the bill for the cake and everything else. Ah, yes those who made good faith dealing with the city need to be reimbursed. If the city fathers that have deep pockets want to keep the art, then let them help pay off the cities debts by buying said art. Roads, schools, hospitals, libraries, art museums and ect. are expensive. There were those who came before this generation that gave generously to museums and other groups so that Detroit could own what it owns now. Detroit needs some persons to step up and do what must be done. This would be a great example for many cities in the US. Big business used the roads and all the other city services. If this was poker, it would be time to ante up. But alas Detroit is like a jilted bride... left with her memories of better times.

  • Report this Comment On December 12, 2013, at 4:25 PM, KBOKSOFT wrote:

    @Kiffit said it best: "When you are bankrupt, all the options are bad ones."

    It would be nice if bankruptcy could specifically punish the legion of corrupt and inept politicians who made this mess but, alas, that's not how it works. Money doesn't care that the paintings are lovely or the pensioners are hungry or that Detroit used to be a wonderful, vibrant place. People care, but Money just wants the bills paid -- and bankruptcy is all about what Money wants.

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