Detroit — Mayor Mike Duggan on Monday disclosed the city’s controversial demolition program had been suspended by the U.S. Treasury Department this summer to address “mistakes” and “errors.”
The federally funded program, Duggan said, had been at a standstill since Aug. 15 while the city and Detroit Land Bank Authority met with officials from Treasury and the Michigan State Housing and Development Authority to come up with a new set of practices. Treasury accepted the new procedures on Friday and work was allowed to resume, he said.
Duggan declined to give specific examples of what went wrong, but noted some concern over paperwork, improper billing and misallocation of funds. The program is supported by federal Hardest Hit funds.
“No amount of error in the rules is tolerable,” Duggan said during a Monday news conference at City Hall. “We’re going to eliminate those mistakes with these new controls.”
News of the retooled practices comes as Detroit’s demolition program is at the center of a federal criminal investigation. The program first came under scrutiny last fall after concerns were raised over bidding practices and soaring costs, prompting audits and reviews.
With its approval of new rules, Treasury on Friday also officially released $42 million allocated for the city’s fourth round of the program.
“They didn’t do it casually,” said Duggan, noting the new procedures were developed following a “vigorous review” by MSHDA that concluded “the land bank did not have sufficient procedures in place to make sure we had proper documentation for all the bills and didn’t have sufficient controls to assure Treasury would not be charged for ineligible expenses.”
Among the changes, state housing authority employees will now be embedded at the land bank and Detroit Building Authority to provide compliance support, input and on-site assurance “that all contracts are bid appropriately.”
The housing authority will also conduct quality control audits to assure ongoing compliance. Additionally, the land bank has established a $5 million escrow fund for any demolition costs not eligible for Hardest Hit funding.
Duggan said he was “very disappointed” by some of the things he learned during the review, but said federal and state officials will disclose those “when they are ready.”
“It’s a question of whether eligible expenses were all charged in appropriate ways. With these processes, we’ll make sure that no ineligible expenses are submitted,” he said.
MSHDA Executive Director Kevin Elsenheimer said in a provided statement that the housing authority has been conducting a review of Detroit’s Hardest Hit-funded demolition program in conjunction with the Michigan Homeowner Assistance Nonprofit Housing Corp.
“The state’s initial review raised questions about certain prior transactions and indicated that certain controls needed to be strengthened in connection with the HHF blight elimination program,” said Elsenheimer, adding Duggan and land bank staff “cooperated fully throughout the process.”
Treasury, which funds the program, issued a response Tuesday, saying: “Treasury was briefed in August on the details of an ongoing review of Hardest Hit Fund expenditures in Detroit by Michigan’s housing finance authority (MSHDA). In light of this review, Treasury directed MSHDA to temporarily suspend HHF-blight-related activities in Detroit. Treasury coordinated closely with MSHDA to establish stronger controls for the program, and we have allowed Michigan to resume HHF-blight-related activities to support Detroit’s important foreclosure prevention efforts.”
Several other new policies will apply to all city demolition programs across Michigan, not just Detroit. Those include restricting individual demolition bid packages to no more than 50 houses. Contracts will be required to disclose the names of all subcontractors. Also, contractors are required to limit markup work performed by subcontractors by no more than 10 percent and must attest to their compliance.
Treasury in August instructed housing authority officials to suspend disbursement of TARP funds to Detroit for blight elimination, including payment of invoices received from the land bank with the state’s second and third funding allocations under the program. It also asked the housing authority to halt approval of demolition and other blight elimination activities by Detroit or its affiliates.
The city has been awarded more than $258 million under the federal program. Detroit has taken down more than 10,000 homes under the effort since spring 2014. The $42 million released Friday is part of $130 million awarded to the city in recent months.
“We fully support the changes that treasury and MSDHA have outlined here and today we have a fresh start,” Duggan said.
The new rules, Duggan said, are in response to concerns over practices as well as Detroit’s volume of demolitions.
“It’s a far more intense review because we are handing far more demolitions,” he said. “The speed at which we went outstripped the controls that we had in place.”
The city’s auditor general launched an audit last year of the city’s demolition activities at the request of Detroit’s City Council prompted by concerns of soaring costs and bidding. In April, Detroit Auditor General Mark Lockridge confirmed his office received a federal subpoena after releasing preliminary findings from the months-long audit.
Adamo Group, one of the program’s largest contractors, later said it too had complied with a subpoena request from the Office of the Special Inspector General for the Troubled Asset Relief Program, or SIGTARP. The land bank and Detroit’s Building Authority also received federal subpoenas.
In May, the FBI’s Detroit office confirmed it was also investigating the program and Detroit’s Office of Inspector General has been conducting a review of its own into an aspect of the program. The city has said its cooperating fully with all investigations.
Duggan on Monday noted he’s seen “no evidence of criminal activity” but has declined to comment on the federal probe. The city, officials added, has paid about $81,000 in legal fees for the investigation.
The city came under scrutiny last fall over a pilot program aimed at attracting larger players to rapidly take down larger bundles of homes. At the time, a WJBK-TV report accused city building officials of improperly meeting with contractors in 2014 to set prices for the bulk demolition work before requests for bids were official.
The administration has said there was nothing improper about the set-price contract initiative, which was discontinued shortly after it didn’t attract national players.
Last October, the Michigan State Housing Development Authority reviewed the land bank’s bid selection process related to Hardest Hit funds and didn’t uncover any significant issues. The agency, which distributes the federal funding once invoices are reviewed, did however require changes to “further strengthen their selection of contractors.”
Detroit’s demolition costs went from an average of about $13,600 per house in 2014 to about $16,400 in 2015. The city said the rising prices were tied in part to new environmental safeguards. Today, the average residential demolition is $12,575 per house, according to estimates listed on the city’s website.
Detroit only stopped its federally funded demolition over the last two months. It has continued doing 25-30 city funded demolitions per week, Duggan said.