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Detroit demo review finds $7.3M in billing issues

Christine Ferretti
The Detroit News

Detroit — Scrutiny continues for the city’s federally funded demolition effort in the wake of new claims the Detroit Land Bank Authority improperly billed millions.

Mayor Mike Duggan on Tuesday revealed an ongoing state review of the program’s billing practices turned up $7.3 million in what the state contends are “inappropriate” or “inaccurate” costs — the vast majority were in connection with a controversial set-price bid pilot in 2014 designed to quickly bring down big bundles of houses.

But a defiant Duggan was quick to defend the program, saying he rejects the state’s assertion that about $6 million tied to costs of the pilot were inappropriate. The mayor said the city will pay back $1.3 million of the $7.3 million — about $1.2 million of which is tied to costs previously flagged as ineligible last year in an independent audit commissioned by the land bank, which jointly oversees the program with the Detroit Building Authority.

The dispute with the Michigan Homeowner Assistance Nonprofit Housing Corp., which paid the funds, is associated with the bulk demolition effort that emerged after city officials met with a group of contractors to establish a set price. The matter will be resolved by a three-judge panel in arbitration and whatever the outcome, Duggan said, “we will honor that opinion.”

The set-price effort was based on the city’s average pricing of all of its competitive demolition bids and sought contractors with the capacity to raze 800 houses in two months. The pricing for bulk demolitions — 52 cents per cubic square foot — was crafted to increase production and attract large national contractors.

Three of the four local contractors participating in negotiations — Detroit-based Adamo Group, Carleton headquartered Homrich and MCM of Bloomfield Hills — were the sole bidders after the project was publicly offered. They were awarded the work. The fourth company, Bierlein of Midland, did not bid.

However, as demolitions ramped up, Duggan said, so did the costs amid shortages of asbestos abatement workers, dirt to fill holes and truckers.

The land bank could have canceled the unit price contract and gone back to smaller packages, but at the time, change orders for the large-unit bundles were more cost effective, he said.

“Whether that was the right decision or the wrong decision, I’m confident that the land bank at the time did it openly, they did it in good faith. I believe they did it within the rules, and I believe it was reasonable and necessary to complete the project,” Duggan said. “MSHDA is taking the position that those change orders should not have been approved and that these expenses are ineligible.”

Ultimately, the pilot paid Homrich about $8.3 million; Adamo, $8.1 million; and MCM, $3.5 million, plus other costs tied to change orders, including about $1.9 million for Adamo, $1.7 million for Homrich and $21,000 for MCM. The average cost per house under the unit pricing pilot, inclusive of change orders, was $13,784, the city’s building authority has said.

No Trump effect concerns

Duggan addressed the media about the land bank Tuesday for the second time since October, when he announced federally funded demolition efforts in Detroit had resumed following a two-month suspension in August after an ongoing review by the MHA, in conjunction with Michigan State Housing Development Authority turned up “mistakes” and “errors.”

Katie Bach, a spokeswoman for MSHDA, said Tuesday that MHA did not participate in the city’s Tuesday announcement “because the investigation remains open through arbitration.”

Last year, in light of the ongoing MSHDA review, the U.S. Treasury Department temporarily suspended federally funded demolition in Detroit while the city and land bank met with state housing and Treasury officials to resolve issues. As a result, state housing authority employees are now embedded at the land bank and building authority to provide compliance support.

Duggan on Tuesday said he isn’t concerned about the new presidential administration in Washington, D.C., having an impact on blight funding.

The money, he said, had already been contracted to individual states and he doesn’t believe it could be undone.

The land bank — which administers the city’s Hardest Hit Fund demolitions — also established a $5 million escrow fund for any demolition costs not eligible for the federal funding. On Tuesday, officials said $5 million more has been added to the fund, which was requested in a Jan. 26 letter from state officials. The account is funded with a portion of $40 million from the city’s general fund allocated annually for blight removal.

In a Tuesday response to the state’s letter, Land Bank Executive Director Carrie Lewand-Monroe noted charges related to the unit-price contracts were the result of “reasonable and necessary decisions” and “we do not believe those decisions violated any federal or state rules.”

Touting compliance

The housing authority on Tuesday reiterated its position and said it has appreciated the land bank’s “full cooperation” throughout the investigation. With new protocols and procedures, “program compliance is now being achieved and will continue,” MSHDA Acting Director Brian Mills said in a statement.

Treasury allowed the state housing authority to resume blight activities in Detroit that use Hardest Hit funds in October. At the same time, it released another $42 million for the city’s fourth round of the program. Detroit has been awarded more than $258 million to date.

The demolition program in Detroit also remains at the center of a criminal investigation being conducted by the Special Inspector General for the Troubled Asset Relief Program.

The city’s land bank and building authority have turned over more than 250,000 pages of emails and attachments to the federal agency in response to subpoenas received in May. Also in the spring, the FBI’s Detroit office acknowledged it was investigating the program.

Detroit’s auditor general released preliminary findings in April from an audit of the demolition program at the request of Detroit’s City Council. The audit flagged potential conflicts of interest between the city and executive leadership of the Detroit Building Authority. Meanwhile, a separate investigation into an aspect of the program by the city’s Office of Inspector General remains pending.

Detroit has taken down nearly 11,000 homes since spring 2014, primarily with federal funds. The city expects to get about 5,000 more down this year.

Duggan addressed the latest developments with the program just days before he’s expected to announce his re-election campaign. The mayor admitted city agencies “made mistakes” early on by failing to build a strong enough compliance team to manage the demolitions. But those mistakes have been fixed.

“I feel like I’ve lost an awful lot of sleep on this. But voters of this city will decide whether the speed with which we’ve been taking houses out of these neighborhoods justifies the mistakes that were made,” he said. “We made mistakes trying to do the right thing and the people of Detroit will judge whether that’s excusable or not.”