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Detroit demolition program hid costs, audit finds

Christine Ferretti
The Detroit News

Detroit — An audit of Detroit’s recently suspended demolition program revealed excessive demolition costs were hidden by spreading them over hundreds of properties so it appeared no demolition exceeded cost limits set by the state.

The practice — which kept each property under a $25,000 required cap — was authorized within the city program by an individual whom officials refused to name Thursday.

“We believe that there was a staff member that did authorize it, and we’ve made appropriate personnel changes,” said Erica Ward Gerson, chairwoman of the Detroit Land Bank Authority, at a Thursday news conference.

She declined to talk further about personnel matters or disclose any staff involved. In August, the building authority announced a new manager for the program amid the abrupt resignation of one of its top-ranking officials, Jim Wright, who could not be reached Thursday.

The audit of the federally funded program — disclosed Thursday and commissioned this summer by the land bank, which oversees the demolition program along with the Detroit Building Authority — turned up mistakes over a nine-month period between June 2015 and February, including inadequate record keeping, bid mistakes and about $1 million improperly billed to the state. The city has used about $100 million in federal funding for its anti-blight work.

The investigation flagged 100 demolitions out of approximately 8,000 that had excessive costs that were ineligible for the federal funding but were billed to the Michigan State Housing Development Authority, which administers reimbursements from the federal Hardest Hit funds for Detroit’s blight elimination program.

“Staff should have billed the overages to City of Detroit demolition funds, but instead, redistributed those costs to 350 other properties to ensure each property appeared to meet the federal HHF demolition cap of $25,000,” a summary of the report findings says.

When asked if the practice of spreading demolition costs was intentional or an inadvertent violation of procedures, Gerson, acknowledged other investigations are underway and said: “I’m actually glad that Treasury and MSHDA are continuing their investigations because if I could answer that question I could sleep better at night. I don’t understand how anyone could have authorized it and yet it appears they did. Someone on our team.”

The special audit further found:

■Potential ineligible costs involving 11 contracts totaling $824,491.56 in which individual parcel bids appeared to have been decreased to meet or move closer to the program cost limit. The decreases were then redistributed as increases to other parcels.

■ The land bank and Detroit Building Authority did not maintain adequate records relating to the bid process, which resulted in one instance of $78,404 in change orders involving three contracts that were not supported by documentation.

■In another contract, Detroit-based firm Adamo Group bid $264,132 for a single parcel. Ultimately, $225,155 of the costs were redistributed to other Adamo properties within the contract. Officials said the issue appeared to stem from a bid tabulation error.

Christian Hauser, an attorney for Adamo, said Thursday that he hadn’t reviewed all of the documents and wasn’t in a position to comment.

Gerson said none of the mistakes noted in the newly discussed audit resulted in contractors receiving extra money.

The issues, she said, were tied to a “lack of controls, lack of documentation and lack of double checking.” The issues, she said, were discovered and stopped by staff in February. The land bank’s board later hired the management consulting firm Experis-Finance in June to perform audits on how to improve procedures.

When asked if any firms involved in bids with improper allocations will face any penalties, Gerson responded: “It’s hard to argue that when someone on my own team authorized it.”

She also said redistribution of the funds “is not a violation of the law, it’s an issue of regulations.”

Demolition funded by the program shut down Aug. 15 while the city and land bank met with officials from U.S. Treasury and the state housing authority to come up with a new set of practices after a separate review. It’s unclear what led to the decision to halt the program as officials haven’t fully disclosed a reason, citing the ongoing investigation. The state housing authority did say it involved questions over “certain prior transactions.” Treasury accepted the new procedures Oct. 14 and work has resumed.

Mayor Mike Duggan has said the new procedures were developed following a “vigorous review” by the state housing authority that concluded the land bank “didn’t have sufficient controls to assure Treasury would not be charged for ineligible expenses.”

Duggan admitted earlier this month the program has had “mistakes” and “errors.” His office Thursday said the mayor had no additional comment.

Thursday’s developments come amid several ongoing reviews, including probes by the state housing authority and U.S. Treasury that “may be addressing broader issues,” the land bank said Thursday.

“I want to be absolutely clear that both MSHDA and (Department of) Justice are continuing their investigations, and I can’t speak at all about what issues they may be addressing,” Gerson said. “What we are sharing today is our own independent report prepared by an independent audit firm.”

State housing authority spokeswoman Katie Bach issued a statement Thursday, declining to address the land bank’s audit or the state’s investigation, saying: “It has been and continues to be our practice not to discuss ongoing investigations.”

Earlier this month, the review conducted by the Michigan Homeowner Assistance Nonprofit Housing Corp. in conjunction with the state prompted state housing authority employees to be embedded at the land bank and building authority to prove compliance support and on-site assurance “that all contracts are bid appropriately.”

The land bank also established a $5 million escrow fund for demolition costs not eligible for Hardest Hit funding. Craig Fahle, a land bank spokesman, said money for the escrow account is “from funds previously approved by City Council for blight.”

The demolition program, Duggan’s key initiative, has taken down nearly 10,700 blighted homes since May 2014. It first came under scrutiny last fall amid concerns over soaring costs and bidding practices.

The controversy was sparked by a 2014 pilot program designed to rapidly take down larger bundles of homes after a WJBK-TV report accused city building officials of improperly meeting with contractors to set prices for the bulk demolition work before requests for bids were official.

The Duggan administration has said there was nothing unusual or improper about the set-price contract initiative, which was discontinued after when it failed to attract national players.

Gerson on Thursday said findings from the newly released audit excludes the large unit contract program.

Federal dollars have continued to come in to help continue the program that’s received about $258 million to date and expand it.

But council President Brenda Jones this week said she won’t be supporting any city-funded demolition contracts brought to the panel for approval.

“Until I know what is going on and until I know what is happening with the investigation and how things are happening with demolition, I will continue to be a no vote,” she said.

cferretti@detroitnews.com