Federal watchdog finds $13M in 'unsubstantiated costs' in Detroit demo effort
Detroit — Citing $13 million in "unsubstantiated costs" over a two-year span in the city's federally funded demolition effort, a watchdog agency for the Hardest Hit Fund program is pressing the U.S. Department of the Treasury to require states to prove all fees before any blight funds are released.
The Office of the Special Inspector General for the Troubled Asset Relief Program, or SIGTARP, said Monday that its request to Treasury is borne out of an audit of 100 reimbursements submitted from contractors in Detroit's program between 2017 and 2019. SIGTARP said it found none of the submissions contained invoices that showed the actual amount contractors paid for backfill dirt.
“Our recommendations stem from a review of reimbursement files for the HHF blight demolition program in Detroit from 2017 through 2019, where SIGTARP found that Michigan state paid approximately $13 million in unsubstantiated costs,” Principal Deputy Special Inspector General Vince Micone said in a Monday statement. “Requiring states to substantiate material costs before reimbursing the contractors is critical to ensuring that TARP funds are spent on costs that are both reasonable and necessary to achieving the blight elimination program’s goals.”
SIGTARP said the observations demonstrate the need for additional protections to protect taxpayer funds spent in HHF and prevent fraud and waste. Currently, five states have open blight demolition programs, which are projected to continue through at least Dec. 31, 2021.
The Detroit Land Bank Authority jointly oversaw the federal demolition work with the Detroit Building Authority. Demolition in Detroit has since transitioned back to a city-run effort.
On Monday, Alyssa Strickland, a spokeswoman for the land bank, stressed that the land bank "complied fully" with all state and federal rules and it provided all required documentation.
“The DLBA sees no basis for a claim of improper payments," she said. "Detroit’s HHF demolition program successfully removed more than 15,000 dangerous, blighted structures from the City’s neighborhoods.”
Detroit's federally funded blight initiative first fell under scrutiny in the fall of 2015 amid concern over bidding practices and spiraling costs.
A 2019 investigation by The Detroit News found contractors charged the federal government whatever they wanted for more than two years for dirt used to fill holes left behind from thousands of torn-down houses in the city. The unrestricted charges took place because no rules were in place to limit dirt costs, eventually prompting state officials to worry about overbilling.
Overall, Detroit received about $265 million in federal funding since spring 2014 over multiple rounds of the program to take down more than 15,000 properties.
The Michigan State Housing Development Authority, which administered the federal Hardest Hit Funds through its Michigan Homeowner Assistance Nonprofit Housing Corp., is reviewing the SIGTARP letter, said spokeswoman Katie Bach.
"Because the U.S. Department of the Treasury has oversight over the Hardest Hit Fund (HHF) program, we will seek their guidance first about whether any responsive actions are warranted," Bach said in an email, adding the nonprofit housing corporation "has had successful U.S. Treasury compliance reviews from the beginning of the program to present."
A spokeswoman for Treasury did not immediately respond to a request for comment on Monday.
In a June 24 letter, Gabriele Tonsil, SIGTARP's assistant deputy special inspector general, detailed to Danielle Christensen, director of the office of financial stability for the Treasury Department, the concerns over Detroit's records.
"...SIGTARP determined that the Michigan state agency paid approximately $13 million in backfill (i.e., dirt) costs to contractors without documentation to substantiate those costs," Tonsil wrote.
"Although some portion of the $13 million was likely spent on legitimate backfill costs, it is unclear how much due to the lack of sufficient documentation," Tonsil added. "Absent this important information, the Michigan and other state agencies cannot verify the accuracy of contractors’ reimbursement claims, and taxpayers have no assurance that contractors are not inflating reimbursement requests for demolition materials
to exceed their actual costs."
The letter notes that SIGTARP had raised concern in June 2016 that the federal blight program was vulnerable to contractors charging excessive fees. That December, in response to SIGTARP's report, the Treasury Department distributed instructions to state agencies to only reimburse partners for costs that are both "necessary and reasonable."
In early 2017, Michigan’s state agency alerted the land bank that the state agency believed local contractors had requested excessive payments, specifically relating to backfill fees for blighted properties, Tonsil's letter reads.
As a result, the land bank committed to “substantiate” its contractors’ backfill payment requests and added language to its service contracts awarded starting in May 2017, requiring load tickets and other invoices.
Tonsil noted that the audit of Detroit's reimbursements "raises questions about how thoroughly the partner reviewed the contractors’ submissions."
As a result, an indeterminate amount of the $13 million might have resulted from "inflated" payment requests.
"Furthermore, by extension, taxpayers have no assurance that the Michigan state agency did not overpay contractors for blight demolition costs," she wrote.
Mary Townley, president of the Michigan Homeowner Assistance Nonprofit Housing Corp., previously told The Detroit News she could not say with authority if something had been inappropriate but that she questioned costs that were "out of line."
The News has reported that cost reasonableness for dirt wasn't officially added to the state's blight manual until July 2017, requiring contractors to turn in dirt invoices, load tickets and other documents to substantiate costs. This essentially made a paper trail from contractors to prove what "they really paid" for the dirt, according to emails obtained under the Freedom of Information Act.
It's unclear to the state what the average dirt cost per house was in the early stages of the program because officials have admitted that they weren't tracking it.
The state in 2016 launched a review of the city's demolition program in tandem with a two-month suspension imposed by the Treasury Department to address improper billing and misallocation of funds
The state concluded its review of Detroit's billing practices in early 2017 with a $5 million settlement with the land bank to resolve a dispute over invoices the state said were improperly submitted for repayment. In return, the state agreed to make that same amount available to Detroit for tearing down more houses.