Audit: Treasury should reform blight program

Christine Ferretti
The Detroit News

A new federal audit is calling on the U.S. Treasury Department to reform its blight elimination program on claims it is operating without safeguards that leave it open to waste, fraud and abuse.

The Thursday report, prepared by Christy Goldsmith Romero, the special inspector general who monitors the Troubled Asset Relief Program, contends Treasury’s $622 million Hardest Hit Fund program does not require full and open competition for blight contracts nor does it have rules that ensure federal dollars are only used for “necessary and reasonable” costs.

“Treasury’s Hardest Hit Fund program is significantly vulnerable to the substantial risks of unfair competitive practices and overcharging, either of which could lead to fraud, waste, and abuse,” the audit reads. “Favoritism, undue influence, contract steering, bid-rigging, and other closed-door contracting processes, can result from a lack of federal requirements on competition and federal oversight to ensure compliance with those requirements.”

The audit holds up federal requirements followed by the U.S. Department of Housing and Urban Development Neighborhood Stabilization Program as a model. The HUD rules, it says, protect against “substantial risks inherent in contracting for demolition work.” Treasury’s Hardest Hit Fund, it contends, does not.

The lack of regulation, Romero says, creates “an open invitation” for abuse of federal dollars.

“But it can and should immediately be shut,” Romero said in a provided statement. “There’s even a roadmap to do it: the sole other federal blight program (HUD) has requirements compelling competition while offering significant flexibility for states to use the fund. Now, with hundreds of millions still to be disbursed, it is time for Treasury to act.”

The federal program was initiated in 2010 to provide funding to states “hardest hit” by the aftermath of the housing crisis. In mid-2013, Treasury approved Hardest Hit funds to demolish blighted properties, the audit says.

The report covered the seven-state Housing Finance Agencies participating in HHF that Treasury approved for the program: Alabama, Michigan, Ohio, Illinois, Indiana, South Carolina and Tennessee.

Nearly 280 local partners award work under the program including a varied group of individuals, nonprofits, for-profits, and land banks, as well as public agencies and municipalities, the audit notes.

Michigan has received more than $381 million for blight elimination under HHF, with about $258 million allocated for work in Detroit.

The audit comes as Detroit’s demolition program is undergoing a separate SIGTARP review in the wake of soaring costs last fall and questions over bidding practices. The SIGTARP investigation is among several ongoing audits and probes of the program.

In October, the city’s Auditor General began an audit of the city’s demolition activities at the request of Detroit’s City Council and Detroit’s Office of Inspector General is conducting its own investigation into an aspect of the program. The FBI’s Detroit office has also confirmed its investigating the program.

Mayor Mike Duggan has said SIGTARP is doing its job and the city will cooperate fully with any investigations.

Right now, Treasury caps costs at $25,000 or $35,000 per property, a move that’s reflective of worst-case scenarios and far exceeds the average cost of demolition, the audit says.

The report also lays out numerous recommendations for Treasury to strengthen HHF oversight.

In a June 15 response to the report, Treasury’s Office of Financial Stability noted each housing finance agency designs, administers and monitors their own HHF programs, subject to requirements laid out in contracts they’ve signed with Treasury.

“Blight elimination programs under the Hardest Hit Fund have already helped stabilize neighborhoods in these hard hit markets like Detroit and Toledo, Ohio. The housing finance agencies have controls in place to limit costs,” Mark McArdle, deputy assistant secretary for Financial Stability said in a statement provided Thursday. “The program is structurally different than the Neighborhood Stabilization Program HUD operates, and Treasury’s compliance team visits every blight program on a regular basis to determine that each state has a sound system of internal controls and assess the effectiveness of those controls. Treasury will carefully review SIGTARP’s recommendations.”

SIGTARP conducted the audit from March 2015 through June 2016 in Washington, D.C., Detroit, Lansing and Flint, Indianapolis, Indiana, as well as Columbus and Cleveland, Ohio.

The three state housing finance agencies currently review costs only after invoices come in. SIGTARP also found that supporting documentation “was lacking in some instances.” The state housing finance agencies, the report contends, do not ensure those costs are necessary and reasonable, and rely on the local partners to minimize costs.

SIGTARP has covered the HHF program in its quarterly reports since January 2015 and in two audit reports. Last spring, it issued an audit that raised similar oversight concerns in the program. Separately, an alert letter to Treasury Secretary Jack Lew in December, noted in Evansville, Indiana, the program was being “abused” to demolish lived-in homes, rather than abandoned.

In April, Treasury announced additional funding for certain states under the fifth round of HHF funding. In total, Michigan was awarded $188.1 million for blight removal and foreclosure prevention. Detroit got $88 million for demolition, while Flint was awarded $17.6 million.

The Michigan State Housing Development Authority oversees the state’s HHF programs and distributes the federal funds. The office “takes the integrity of this and all programs seriously,” MSHDA spokeswoman Katie Bach wrote in an email Thursday.

The authority, she said, considers all associated demolition program costs reasonable and it reviews invoices for each address to ensure the work and costs are proper.

“We continuously look at existing guidelines and amend them when necessary to ensure full compliance of our Hardest Hit Fund blight partners and the program as a whole,” wrote Bach, noting best practices that go beyond federal requirements. “U.S. Treasury has completed five blight elimination compliance audits in Michigan, with no significant findings.”