Probe: Detroit demolition program didn't violate rules but wasn't transparent

Christine Ferretti
The Detroit News
The city's demolition program, a centerpiece of the Duggan administration, came under scrutiny in fall 2015 amid concerns over bidding practices and spiraling costs. It's since been under the scrutiny of state and local probes as well as a federal grand jury.

Detroit — Controversial meetings between city officials and specific contractors to discuss federally funded demolition work before public bidding didn't violate written rules, but they weren't transparent and gave the impression of "preferential treatment," an independent investigation has ruled.

The findings from an investigation of Detroit's Office of the Inspector General, which spanned more than three years, are detailed in a 26-page report published Wednesday regarding the program that's currently the focus of a federal criminal investigation. 

The city's program, a centerpiece of the Duggan administration, came under scrutiny in fall 2015 amid concerns over bidding practices and spiraling costs. It's since been under the scrutiny of state and local probes as well as a federal grand jury.

"Based on our review of documents and interviews conducted for this particular matter, we conclude the large-unit contractor meeting did not violate any existing (Detroit Land Bank Authority) policies pertaining to the use of the Hardest Hit Funds," the report issued by the office of Detroit Inspector General Ellen Ha reads. "However, engaging in a meeting that was not open to all contractors unnecessarily gave the appearance to the public that an improper activity was taking place behind the closed door."

The report goes on: "Therefore, while we find no evidence of waste, abuse, fraud or corruption in the demolition procurement process for the large-unit contractors, we find that the large-unit contractor meeting was improperly limited to select contractors, as we have a duty to conduct our business in the most open and transparent manner possible."

The city's Office of Inspector General is an independent agency set up under the 2012 charter to ensure honesty and integrity in city government and investigating allegations of waste, abuse, fraud and corruption.  The office opened the case on Oct. 24, 2015, to "examine certain aspects of the demolition procurement process" led by the Detroit Land Bank Authority and the Detroit Building Authority.

The investigation was initiated by the city's prior inspector general, James Heath, and completed by Ellen Ha, who formerly worked in the city's Law Department and took office earlier this year. 

During the course of its investigation, the office reviewed 4,767 pages of emails containing about 1,146 messages from city officials and personal email accounts.

At issue was a 2014 set-price pilot program for bulk demolitions. Three of the four local contractors participating in negotiations — Adamo Group, Homrich and MCM — were the sole bidders after the project was publicly offered. They were awarded the work.

Mayor Mike Duggan has said the move was designed to attract firms able to handle big bundles of demolitions as the city moved with urgency to raze homes and meet a deadline to draw down federal dollars earmarked for the program. The effort was discontinued shortly after.

Demolition officials have said the set-price contract 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.

The inspector general's office, in its investigation, sought to determine whether the land bank had engaged in waste, fraud, abuse or corruption by holding the large-unit contractor meetings prior to the official release of the request for qualifications. 

The investigation found there was no evidence of an "unfair awarding" of the contracts, nor evidence of "kickback," but all city business should be conducted transparently.

"Based on the evidence gathered, the OIG concludes that the large-unit contractor meeting lacked fairness, openness and transparency. Though the authorities did not violate any of their written policies, this process unnecessarily gave the impression that Adamo, Bierlein, Homrich and MCM were given preferential treatment," it reads. "Because we (the City of Detroit) have endured a history in which select contractors were being favored and contracts were issued without a competitive bidding process, it is all the more important now that we, as a public body, have an open and transparent contracting process."

Adamo representatives were unavailable for comment Wednesday. MCM and Homrich officials could not be immediately reached.

Alexis Wiley, Duggan's chief of staff, in a statement provided to The Detroit News on behalf of the city and land bank, said the report was "very thorough and professional" and "we fully support its conclusion."

"We were pleased to see the report confirmed there was no evidence of waste, fraud, abuse or corruption in the unit price procurement they reviewed," Wiley said. "In cooperation with the U.S. Department of Treasury and MSHDA, we implemented corrections on these issues in 2016, and we will be working with the OIG to fully implement the recommendations made in its report.”

U.S. Treasury, through its Troubled Asset Relief Program, approved blight elimination funding in June 2013 that allowed Hardest Hit Funding to be used for demolition.

Under the effort, the Michigan State Housing Development Authority was approved to allocate funds under the state's Homeowner Assistance Non-Profit Housing Corp. to eligible Michigan cities. 

Since spring of 2014, Detroit has torn down 16,400 blighted homes and has been awarded about $258 million.

On Oct. 7, 2013, Detroit and the state entered into an agreement under, which MHA allocated its first round of federal funding — $52.3 million — to be used for blight elimination. 

Between October 2013 and September 2014, Detroit's City Council transferred about 27,000 parcels with residential structures to the land bank to carry out the program during the first round of federal funding, the report notes.

Under the transfer agreement, the land bank was responsible for the demolition or rehabilitation of the properties. 

The land bank adopted a policy in May 2014 that required it to use a competitive procurement process for the purchase of goods and services exceeding $100,000. It also required the land bank to issue a request for proposals to at least three qualified sources and provide adequate public notice, the report notes. 

However, on Oct. 1, 2013, prior to the adoption of the revised policy, the land bank's board passed a resolution that allowed its executive director to execute contracts and agreements under the Hardest Hit Fund program, the report notes. 

As a result, none of the actual contracts awarded under (the RFQ in question) were brought before the board," it reads.

Thereafter, on June 17, 2014, DLBA board members approved a rule allowing the director to "enter into unit-priced contracts for all activities associated with the Hardest Hit Fund Demolition Program, including but not limited to demolition, asbestos survey, asbestos remediation, and any other related contract for the activities required to successfully complete the program." 

Prior to the resolution, the report notes, "the DLBA had discussions with MSHDA regarding the question of whether the contemplated request for qualifications complied with program regulations."

The report notes that DLBA worked with the state and treasury to create a unit price system of large volume contracts with a price per square foot based on the competitively bid houses. MSHDA and treasury approved the unit price system. 

Mary Townley, the president of the Michigan Homeowner Assistance Nonprofit Housing Corp., the entity created by MSHDA to administer Hardest Hit Funds, issued a statement Wednesday on the report.

"We respect the inspector general's ruling. The decision to offer fixed-rate pricing and related discussions were had with a prior Michigan Land Bank executive team," she said. "The Michigan Homeowner Assistance Nonprofit Housing Corporation (MHA) was not involved. However, MHA did discover this activity during its investigation into the DLB in 2016/2017. New policies have been in place since that time that require full review of all RFPs and signed contracts, so this situation can be prevented from reoccurring."

The report notes officials involved in the process, including former director Carrie Lewand-Monroe, deputy director of the building authority Jim Wright and DBA Director David Manardo, who have all since departed or been assigned to different divisions. 

It's not clear, the inspector general's report said, when authorities first began discussing the idea of the large unit request for qualifications. 

There's no evidence, the report notes, that the city contacted any large regional or national contractors to alert them of the opportunity to bid on the large unit contract.

The report notes the average cost per demolition under the large-unit contract was $13,748. The average price of traditionally bid demolitions was $14,543 during that same time frame. 

Under the large-unit contract, 1,453 structures were torn down. Adamo demolished 607 properties for $8.1 million; Homrich took down 593 properties for about $8.4 million, and MCM was paid about $3.6 million for taking down 253 blighted homes.

The program was discontinued in October 2014. The pilot, Wright told the OIG, was never intended to be a long-term program and, it failed to attract regional and national partners.

Nearly two years later, U.S. Treasury temporarily suspended the federally funded program in summer 2016 to address "mistakes" and "errors." Officials then developed a new set of practices, which were adopted by treasury in October of that year.

The involved companies had communications with numerous employees and the talks were "atypical" and could have been "perceived as lacking openness and transparency as well as giving these contractors an unfair advantage," according to findings. 

The report findings, the OIG stressed, "are limited only to the large-unit contractor meeting and are based solely on the evidence collected ... during the course of this particular investigation."

Staff writer Mark Hicks contributed.