Detroit’s demolition program suspended by U.S. Treasury

Detroit's demolition program suspended by U.S. Treasury

U.S. Treasury orders audit of Detroit’s demolition program

Detrioit, Michigan: The state investigation that prompted a recent two-month suspension of Detroit’s demolition program can be traced back to an audit that began a year ago that questioned low bids being passed over for higher ones and lax documentation, among other issues.

The audit came the day after Detroit Mayor Mike Duggan defended his demolition program in a appearance before the Detroit City Council.

Detroit's demolition program suspended by U.S. Treasury

Facing revelations that demolition costs had increased more than 60%,  Duggan explained that higher standards to protect the environment created more work, driving up prices.

On Oct. 14, 2015, three staff members of the Michigan State Housing Development Authority, which oversees federal funding for the city’s demolition program, arrived in Detroit for an on-site audit that lasted two days.

The audit is likely one of multiple factors that contributed to the U.S. Department of the Treasury’s suspension of the program funded through the federal Hardest Hit Fund. Federal dollars have paid for about 75% of the more than 10,600 demolitions in Detroit since Duggan took office.

The Treasury Department’s suspension was kept under wraps until last week,  when Duggan announced it was being lifted because new procedures were implemented to evaluate bids and pay contractors.

The state housing authority’s audit in 2015  exposed several flaws in Detroit’s program:

  • inconsistent bid scoring,
  • incomplete documentation
  • routinely awarded demolition contracts to companies that did not have the lowest bid.
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The DLB (Detroit Land Bank) must document and explain deviations of 30% or more of the bid selected compared to the lowest bid. One bid that was reviewed had a deviation of $828,571, or 46%, from the winning bid compared to the lowest bid.

The audit did not specify which company was awarded the contract, but the company Homrich was awarded a $2.6-million contract in October 2014 to tear down 145 homes even though three other companies had lower bids and Homrich’s offer was $828,571 higher than the lowest bid. The other bids were passed over for a variety of reasons: One company had other contracts; another had environmental violations, according to land bank records.

When it came to documentation, the state could not always verify why companies were given certain contracts. There is  documentation to support the bid selection, however, the documentation must be enhanced to better support the bid selection decision.

Despite those flaws, the state housing authority had already released millions of federal dollars to reimburse the Detroit Land Bank Authority for demolitions its contractors performed.

In late April, a federal criminal investigation into the program was made public. On top of that, the housing authority and Detroit’s Auditor General’s Office are investigating Detroit’s demolition activities.

The Special Inspector General for the Troubled Asset Relief Program (TARP), a law enforcement agency known as SIGTARP, is leading the criminal investigation. The federal agency is a watchdog for TARP spending, including the funds that pay for Detroit’s demolition program.

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The green light from the feds last week to resume the program released $42 million from the Hardest Hit Fund that had been previously earmarked for Detroit but held back during the suspension. Altogether, Detroit has been allocated more than $250 million from the fund, which is part of TARP.

It’s unclear what role SIGTARP had in the suspension. Generally, however, SIGTARP can make recommendations to the Treasury Department. The department’s office of financial stability considers each SIGTARP recommendation carefully but makes independent decisions.

Whether due to speed or other reasons, the state housing authority’s audit last October identified several issues the Detroit Land Bank was expected to correct.

In reviewing the first round of federal funding, which amounted to about $50 million, the housing authority found that 40 out of 59 low bids reviewed, or 68%, were not awarded contracts.

Oftentimes, when the low bidder wasn’t picked, that audit found, Detroit demolition officials decided the company didn’t have the “capacity” for the job — meaning it didn’t have the resources to complete the work on time. But the authority found that this rationale was not always applied in a way that made sense.

For example, the bid package was for 16 properties and the scoring committee gave points based on the contractor indicating they can demo 40, therefore they gave that bidder more points.

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The premium Detroit officials placed a company’s ability to work fast resulted in the majority of contracts being awarded to larger companies such as Adamo and Homrich. Together, they received 53% of the first $116 million in demolition contracts reimbursed with federal dollars, according to a Free Press analysis.

The housing authority requested that the Detroit Land Bank respond to the audit by late November last year. Neither the authority nor the Detroit Land Bank would provide a copy of the response Friday.

Housing authority spokeswoman Katie Bach, citing the agency’s ongoing investigation, declined to answer questions about exactly what problems led to the suspension of demolition activities in Detroit.

“The state’s initial review raised questions about certain prior transactions and indicated that certain controls needed to be strengthened in connection with the HHF (Hardest Hit Fund) blight-elimination program,” Bach said Monday in a statement issued after Duggan’s news conference.

Detroit demolition officials met privately Wednesday with contractors involved with the program to discuss the new controls put in place.

Brian Farkas, special projects director for the Detroit Building Authority, which helps manage the demolition program, prevented the Free Press from attending the meeting at Detroit public safety headquarters.

 

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