Feds: Demolition costs ‘skyrocketing’ in Mich., Ohio

Christine Ferretti
The Detroit News

The head of a federal watchdog agency is flagging several years of “skyrocketing” costs for federal blight demolition in Michigan and Ohio and is working to find out why.

Christy Goldsmith Romero, Special Inspector General for the Troubled Asset Relief Program, in a quarterly report to Congress on Wednesday noted program costs continued to climb prior to an audit her agency released last summer that warned the anti-blight effort was vulnerable to fraud and recommended stronger controls. But the state agency overseeing Michigan’s program is disputing the calculations used in the newly released findings.

In Michigan, which accounts for nearly half of all committed federal funds for blight demolition, the average cost paid with federal dollars increased by 90 percent in less than three years — from $9,266 per house at the start of 2014 to $17,643 in the second quarter of 2016.

For Detroit, costs soared from $11,515 per property in early 2014 to a peak of $18,118 in the first quarter of 2016. But by the second quarter of that year, they had dropped to $17,622. In the fourth quarter of 2016, costs were down to $13,516 per property, the report notes.

Ohio’s average cost went up 63 percent from $9,293 to $15,019 per house in the same time period, Goldsmith Romero noted.

“The average cost of demolitions paid with TARP dollars in Michigan and Ohio, which account for more than three quarters of spending in the $800 million program, have skyrocketed in the last few years,” Goldsmith Romero said in a provided statement. “These increases in cost significantly impact federal taxpayers, as these two states account for a combined 76 percent of the $811 million in TARP dollars for this program.”

Katie Bach, a spokeswoman for the Michigan State Housing Development Authority, said the state closely monitors demolitions funded through the federal Hardest Hit Fund — and the methodology used in the federal agency’s report doesn’t match its own.

While costs have fluctuated since the program’s inception, she noted, the cumulative increase in Hardest Hit demolition costs is “significantly less than that cited in the report.”

Bach said according to data reported to U.S. Treasury, the median cost of demolition funded through the state’s Hardest Hit Fund program has increased from $9,440 per property in the fourth quarter of 2014 to $10,861 per property in the fourth quarter of 2016, “an increase of 15 percent over two years,” Bach wrote.

Those figures, she said, are based on the median demolition costs per property, rather than the mean demolition costs per property, which appears to be the method SIGTARP used.

“U.S. Treasury has consistently monitored trends by tracking median demolition costs quarter over quarter, which is the method Michigan uses for consistency in reporting,” Bach wrote in an email. “We and Treasury have found that this calculation is more useful than tracking the mean.”

Rob Sholars, a spokesman for SIGTARP, countered Wednesday the agency stands by its report. Cost numbers in SIGTARP’s report, he said, reflect the total cost to taxpayers to demolish a home, including pre- and post-demolition work such as asbestos inspection and lot maintenance. Bach said the state’s numbers also cover all associated costs.

In total, $761 million in TARP funds has gone to Michigan, with $381 million carved out for demolition.

SIGTARP’s Wednesday report notes that for Michigan and its largest city, costs began to decline in the wake of a June 2016 audit released by the agency that warned lax contracting requirements for the federal Hardest Hit Fund were creating a risk that could lead to “overcharging” and “fraud.”

“In Michigan, the average cost of demolition immediately began to decrease after SIGTARP issued a program wide audit warning of the risk of fraudulent overcharging that led Treasury to implement stronger requirements,” Goldsmith Romero said. “With costs in Michigan now 38 percent lower than its peak, SIGTARP will save taxpayers more than $3.6 million.”

The agency’s two top recommendations from last summer — limiting TARP dollars to only necessary and reasonable costs, and requiring competition — were already implemented by Treasury following last summer’s audit, the report said.

The report makes no conclusion on why the costs increased, but the agency wrote it will be “conducting oversight to determine why costs in Michigan and Ohio rose.”

The agency said it will be conducting oversight of the Hardest Hit Fund, including the blight elimination program and rising demolition costs, “until federal taxpayer funds are exhausted.”

Priority areas include vulnerabilities to fraud in the demolition program, possible fraud, waste or abuse by contractors, city or state agencies or local partners as well as wasteful spending, mismanagement or inefficiency. SIGTARP also will work to identify potential cost savings and make recommendations.

Detroit has been at the center of a criminal investigation into its demolition activities that’s being conducted by the federal agency after concerns were raised over bidding practices and rising costs.

Goldsmith Romero acknowledged the probe in court filings last year. Sholars said Wednesday the agency does not “publicly confirm or deny the existence of investigations.”

Last month, the agency announced an audit into demolition costs in Flint, the second largest city receiving federal dollars for demolition. The review remains ongoing, he said.

Detroit has been awarded more than $258 million in federal funds for demolition. The city’s average cost of demolition per house had risen 57 percent during the period examined in the review.

Treasury had temporarily suspended all federally funded demolitions in the city last August to address “mistakes” and “errors” tied to paperwork, improper billing and misallocation of funds.

The city and land bank met with Treasury and the Michigan State Housing and Development Authority to come up with a new set of practices that were accepted by Treasury in October.

Unlike Michigan, the report notes rising demolition costs in Ohio have not stopped and in Indiana, another state participating program, they have remained relatively constant.

Detroit Land Bank Authority Chairwoman Erica Ward Gerson said the “most striking aspect” of the Wednesday report is the land bank is demolishing houses at a lower cost than Ohio and Indiana.

“There is always more we can do to improve efficiency and accountability, but I’m pleased to see the SIGTARP data showing that, in the last year, the Detroit Land Bank has gone from the highest per-house demolition cost to the lowest per-house demolition cost in the SIGTARP reported HHF (Hardest Hit Fund) areas,” Gerson said in a released statement.

Goldsmith Romero’s report suggests even stronger action from Treasury and state agencies to further ensure protection from overcharging.

For Michigan, efforts are “better than the lax controls before,” the report says. “However, this methodology still relies too heavily on contractors submitting invoices.”

Bach said the Michigan Homeowner Assistance Nonprofit Housing Corp., which administers the program in the state, has welcomed the federal agency’s oversight and suggestions to improve its program and “this report is no exception.”

“Our team strives to provide tight control of these vital federal funds while working closely with local partners to balance their needs to assess and react to their own unique challenges,” she said. “MHA will continue to monitor all program requirements and expenditures and will work with our partners at the federal, state and local level to ensure compliance until the successful conclusion of this program.”