Thursday, June 13th, 2013
One of the major controversies following the appointment of Kevyn Orr as emergency financial manager for the city of Detroit has been the exploration of whether or not the art at the city-owned Detroit Institute of the Arts can or should be sold to satisfy creditors in the event of a bankruptcy filing. This obviously sent shock waves of indignation through the community.
Following on from that, the Detroit Free Press took a look at what other assets could be on the auction block. In addition to extremely valuable masterpieces by the likes of Van Gogh and Matisse at the DIA, there are also classic cars at the city history museum, the animals at the zoo (estimated price of a female breeding giraffe: $80,000) and Belle Isle Park.
Obviously with $15-17 billion in long term debt and no way to pay it off, Detroiters are delusional if they don’t think they are going to face painful sacrifices. This is the day of reckoning for a region that has failed in its basic duties.
On the other hand, having an asset fire sale is not a good idea. Cities are not companies, where you can file Chapter 7 and liquidate. Indeed, cities can’t be forced to sell assets at all under bankruptcy, though certainly pressure can be brought to bear.
This reminds me of the approach that has too often be taken regarding privatization. Mayor Daley in Chicago seems to have selected assets for privatization not based on any public interest criteria, but based on where he thought he could generate cash. This seems to be common. What public assets have positive market value? Sell them off! Similarly, the Orr seems to be looking at Detroit’s assets merely as sources of cash.
NYT Economist Paul Romer presciently told me that better handling of assets in bankruptcy is a key issue for cities and something on which private sector restructurings might shed some light. Corporate bankruptcies not only restructure debts, they ensure assets are allocated productively. But municipal bankruptcy today is almost entirely about paying what is owed. “How can we make sure that civic assets end up used more efficiently in municipal bankruptcy?” Romer asked.
I think it’s a good question, and one that deserves thought well before bankruptcy emerges. Cities accumulate assets over time but often fail to manage them. Corporations suffer from the same issue, but there’s generally a more rigorous asset management approach. For example, when I was working in corporate technology, we held quarterly asset impairment reviews to ensure we fairly valued any capitalized assets on our balance sheet. We also performed application portfolio reviews to classify systems in terms of things like “invest and enhance”, “maintain”, or “retire” and formalized these in our annual SLAs with user groups.
Retiring assets is a hugely contentious issue anywhere. I’ve yet to not find a corporate software application that someone somewhere didn’t scream bloody murder about getting ride of. A common tactic for things like reports is for IT departments to simply stop producing one to see if anyone screams. (I one time launched a new system where the legacy environment that was being replaced had over 1,000 reports. We managed to go live on the new system with 15. Given that it has been in production for a long time now, I suspect they are back up to a thousand).
I really haven’t seen much in the way of analogous processes for government. But I think there should be. That is, there ought to be some type of criteria developed to articulate the public interest and policy goals with regards to assets, and then the existing asset based managed according to that. The idea is to invest limited resources wisely and make sure that the asset base of a city is being utilized properly. And when assets are to be disposed of, it’s not some emergency cash raising exercise.
When it comes to asset disposals, perhaps cities should in fact look to museums. They are organizations that hold precious assets in trust with the idea that they will be cared for in perpetuity. However, there’s also a recognition that disposing of artwork can sometimes be appropriate, if safeguards are put in place.
As one example of how to do it right, the Indianapolis Museum of Art developed a formal deaccessioning policy that includes reasons for disposing of art work, the process for doing it, and restrictions on the use of proceeds. They also maintain a deaccessioning database where the public can review and comment on artwork that is proposed to be disposed of, and see which works were sold and where the proceeds actually went.
Something analogous for cities, along with an actively managed process for asset review and management, might help help avert these frantic searches through the attic looking for heirlooms to sell and such. It would also provide a robust framework for saying No to privatizations and/or asset sales. Otherwise there will be no way to separate the signal from the noise because some group of people will always complain loudly when you want to do something.
It might be too late for Detroit to do something like this at this point, but other cities should look to develop more rigorous asset management policies and procedures.