The Detroit Deal Is a Model for How Foundations Can Solve Dire Problems

This month, the city of Detroit’s bankruptcy settlement was approved in federal court in large part because of the innovation and generous contribution of some of America’s biggest foundations.

Foundations committed nearly half a billion of the $816-million deal to place the collection of the Detroit Institute of Arts in a trust secure from creditors and to fund pensions for city workers, minimizing benefits cuts for retirees post-bankruptcy. Such a role for foundations in municipal bankruptcy is unprecedented and has drawn significant attention, and some criticism. Some have been surprised at the size and scope of the contribution and have questioned whether foundations ought to be funding municipal pensions.

But instead, the real question should be this: How can foundations use Detroit as a model for collaborative action to persuade diverse forces in other parts of the country and the world to act to solve urgent problems?

The contribution for Detroit was noteworthy not for the amount of the money spent, but for the way it forced action at a time when inaction was threatening the future of Detroit.

A sustainable Detroit requires multiple entities—government, institutional creditors, taxpayers, and retirees—to sacrifice financially in order to place the city back on firm financial footing. Nonetheless, individual stakeholders have every incentive to shirk their responsibilities and shift the burden to others.

But foundations said that was not acceptable and offered a deal that created an incentive for every key player to make a relatively small financial sacrifice to ensure the future of Detroit.

Contributing foundations like Ford, Kresge, and Knight were guided by a desire to aid retirees and patrons of the Detroit Art Institute, who were bearing a significant burden for Detroit’s problems despite bearing little responsibility for them.

This approach should be repeated elsewhere. There are many expensive challenges around the world where lots of key players have contributed to problems but have little incentive to assume the full financial responsibility for a solution.

Government, which traditionally distributes financial burdens among stakeholders, is often unable or unwilling to direct a solution, leaving collective action at the whim of private organizations and individuals. When this occurs, foundations can use their resources to encourage key players to join forces to promote change.

One example is the threat to the health and safety of garment workers in Bangladesh. Eighteen months after the collapse of Rana Plaza, conditions in garment factories remain poor. Persistent threats to worker safety in the garment industry are the responsibility of many stakeholders, including governments, foreign brands and retailers, factory owners, and trade unions. All of these players need to contribute financially to create sustainable improvement in working conditions in garment factories.

Even as foreign companies and retailers and Bangladeshi factory owners have undertaken separate efforts to identify safety risks to workers, they have avoided assuming liability for improvements. The government of Bangladesh will not step into the breach because it has limited capacity and resources to regulate and is unwilling to impose cost-raising regulations that could push manufacturers to seek to move production elsewhere.

Foundations have the opportunity to break this stalemate to aid workers, who are not responsible for poor working conditions, but who suffer most of the consequences of inaction.

Foundations can pledge significant resources to upgrade safety in Bangladeshi factories with the condition that other players make similarly significant contributions. Such an approach has the potential to draw out contributions from foreign brands and retailers and Bangladeshi manufacturers to multiply the effect of foundation dollars. Foreign brands and retailers will be more willing to contribute to a Bangladesh-wide effort to raise factory conditions than to take liability for conditions in all factories where their clothes are produced.

For Bangladeshi manufacturers, sharing repair costs reduces incentives to hide threats to safety and increases the likelihood repairs will be made.

Of course, large foundation contributions to physical or social infrastructure repair means less money will be available for traditional grant making. Foundations are limited in the number of priorities they can undertake. But the multiplier effect created in Detroit demonstrates that this approach can be cost effective. The foundations that gave money to the Detroit deal achieved a goal typically beyond the means of institutional giving by catalyzing contributions from others with deep pockets.

In adopting the Detroit approach, foundations must also be careful not to give incentives or reward to businesses, governments, or others that shirk their responsibilities.

Critics of the Detroit settlement worry that foundations could come to be seen as guarantors of last resort for municipal pension funds, encouraging even riskier behavior by local officials and managers of pension funds.

While this concern is real, foundations can avoid it becoming reality by making clear they are acting only to protect people who didn’t contribute to the problem, and that they won’t give unless those who are responsible make an appropriate donation. In the case of Bangladesh, for example, foundations should insist that foreign brands and retailers and wealthy Bangladeshi manufacturers all contribute to help otherwise helpless workers.

While the contributions in Detroit were unorthodox, they saved a city. Now let’s hope we’ll see foundations emulate that approach to solve some of the world’s thorniest and most vexing problems.