Detroit’s land bank to pay $5M over invoice dispute

Christine Ferretti
The Detroit News

Detroit — The city’s land bank has reached a settlement with state housing officials that will have them pay $5 million to resolve a dispute over invoices the state says were improperly submitted for repayment in Detroit’s demolition program.

But the city won’t be out those funds because the state has agreed in return, it will make another $5 million available to Detroit for tearing down houses, Mayor Mike Duggan said Thursday.

Mayor Mike Duggan held a briefing on the demolition invoice settlement Thursday morning at City Hall.

The agreement unveiled Thursday concludes a state review of the city’s billing practices and serves as a full settlement of “any alleged inaccurate or inappropriate billings” submitted to Michigan Homeowner Assistance Nonprofit Housing Corp. through Jan. 26, 2017, officials said.

“We’re going to pay $5 million and the people of the city of Detroit are going to get an additional $5 million in demolitions,” Duggan said during a news conference at City Hall. “We’ve learned a lot of lessons. But everything has started fresh again and I feel good about where it is.”

The housing corp. — created by the Michigan State Housing Development Authority to administer funds from the U.S. Department of Treasury under the Hardest Hit Fund program — and the land bank reached the agreement that covers a total reimbursement of $6.37 million.

The forthcoming $5 million payment comes in addition to $1.37 million that the land bank repaid earlier this year to address improper expenses identified by auditors, state officials said. The city, as part of the deal, will reimburse the state about $2.4 million for its six-month forensic investigation of the program.

“I am pleased both parties were able to reach a resolution without incurring the added costs of an arbitrator,” MSHDA Executive Director Earl Poleski said in a released statement. “The new protocols and procedures put in place over the past several months have improved programmatic operations, allowing us to move forward in a business-like fashion to support the new direction of the land bank and the important work being done to reduce foreclosure and revitalize neighborhoods in the city.”

The settlement was approved last week by the MHA board and the land bank signed off during a special meeting on Thursday.

Katie Bach, a spokeswoman for MSHDA, said in an email to The News that the authority believed returning the money to city taxpayers was the “right thing to do.”

“We believed strongly that it was important for the money to be used to fund more demolitions in Detroit, because it would not be fair to hold the citizens of Detroit accountable for the mistakes of the land bank,” Bach wrote. “The money for the settlement came from the city taxpayers and we believed it was the right thing to do to return it to a use that benefits them.”

Last summer, the federally funded program shut down for two months after an ongoing review by the MHA, in conjunction with MSHDA turned up “mistakes” and “errors.”

Since then, several controls have been strengthened. Among them, state housing authority employees are now embedded at the land bank and building authority to provide compliance support.

“With this settlement and the recent new protocols and procedures we have put in place, those dollars will be able to be stretched further and used more effectively for the benefit of citizens,” Bach said.

The settlement concludes months of investigation by MHA, its independent auditors and legal counsel. But it does not affect any other investigations into the city’s demolition program that remain ongoing, the state added.

The mayor first revealed in February that the state’s ongoing review of the program’s billing practices had turned up a total of $7.3 million in what MSHDA argued were “inappropriate” or “inaccurate” costs. The vast majority are in connection with a controversial set-price bid pilot in 2014 that’s among the early hangups in the program at the center of a federal criminal investigation and is being reviewed by a federal grand jury.

Duggan rejected the state’s assertion that about $6 million tied to costs of the pilot — designed to quickly bring down large bundles of houses — was improper. But he said he would honor the outcome of the arbitration.

“I didn’t believe then and I don’t believe now there was anything inappropriate about that $6 million,” Duggan said. “But we’ve reached a settlement that’s worked for both of us.”

Of the $1.37 million previously paid back, about $1.2 million was tied to costs flagged as ineligible last year in an independent audit commissioned by the land bank, which jointly oversees the program with the Detroit Building Authority. Duggan on Thursday agreed the money paid so far was owed and “we had no excuse for those mistakes.”

The dispute with MHA was associated with the bulk demolition effort that emerged after city officials met with a group of contractors to establish a set price.

The 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.

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.

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.

Duggan noted Thursday that in October, the city got “a fresh start” operationally in partnership with MSHDA. At the same time, an additional $42 million was released by the state for the program. In May, the city got another $88 million. The continued release of funding, he noted, shows the land bank and state partnership is working.

“What everybody in Detroit can know is this; with the last $88 million dollar release and the $5 million we’re discussing today, the demolition program in Detroit is moving ahead, full speed, and we have the funding to take down 7,000 to 8,000 additional houses by the end of 2018,” Duggan said.

The land bank — which administers the city’s Hardest Hit Fund demolitions — established a $5 million escrow fund for demolition costs not eligible for the federal funding. The account was funded with city dollars appropriated for blight.

Meanwhile, the program, which came under scrutiny over bidding concerns and rising costs, remains the focus 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 2016. Around the same time, the FBI’s Detroit office acknowledged it was investigating the program.

Last week, The Detroit News learned a federal grand jury was empaneled to focus on the blight fighting program and whether federal money was misappropriated.

The grand jury is weighing potential violations of federal wire fraud and antitrust laws that prevent bid-rigging and unfair competition for federal funds, according to a source familiar with the investigation.

The target of the investigation is unclear, but Duggan said nobody from his office has been questioned or subpoenaed.

As of May 31, MHA had disbursed more than $119 million to the land bank for demolition and related activities on 7,488 abandoned, blighted properties. More than $139 million remains from the more than $258 million awarded to Detroit’s program since 2013.