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Federal report: Potential for serious waste, fraud in blight elimination program

Jun 16, 2016

A new Special Inspector General’s report says a federal program that funds blight removal lacks key safeguards against waste and corruption.

Michigan has received more than $381 million in blight removal funds from the US Treasury’s Hardest Hit Fund – by far the most of any state.

The HHF was originally intended to help homeowners facing foreclosure. Starting in 2013, Treasury allowed some of the funds to be diverted to blight removal, mostly in the form of demolitions.

But the report from the Special Inspector General for the Troubled Asset Relief Fund, which includes HHF, found the program “lacks important federal protections against fraud, waste, and abuse.”

The program lacks clear requirements to ensure a competitive bidding process for demolition projects, making HHF funds “vulnerable to the risk of unfair competitive practices such as bid rigging, contract steering, and other closed door contracting processes,” the report stated.

It also found the program is “vulnerable to the risk of overcharging and fraud” because “it has no requirement that federal funds will only cover blight elimination costs that are necessary and reasonable.” Rather, the program sets a “worst case” maximum price of $25-$35,000 per project, which is far more costly than the average demolition.

Mary Townley, who oversees the state’s HHF program for the Michigan State Housing Development Authority, says the agency feels it’s “in good shape” when it comes to controls on blight elimination funds.

Townley says MSHDA reviews competitive bids for demolition projects to make sure low bidders are awarded contracts.

“If they aren’t, then we require justification about why they did not,” Townley said. “So we feel very comfortable with the work that’s being done here in Michigan.”

But the report says Michigan lacks clear guidelines to ensure its competitive bid process is fair and effective.

“Missing…is any federal or state requirement for full and open competition and basic, minimum contract solicitation requirements that, for example, dictate the manner in which offers from potential contractors should be solicited and the ways in which such contracts should be bid,” the report stated, noting that “Michigan provides a general timeline for creating and publishing 'bid packets,' with no requirements that address competition.”

As for cost controls, Townley says MSHDA specifies which costs will be reimbursed, and requires its local partners to submit invoices for all costs on each property.

“We analyze and clearly audit every one of those invoices,” Townley said.

However, the report noted that due to a lack of federal guidelines, state agencies are forced to rely heavily on local partners to determine what are “necessary and reasonable demolition costs.”

The report comes at a time when Detroit, which has undertaken an unprecedented demolition campaign under Mayor Mike Duggan, is being investigated by both city and federal authorities in the wake of rising demolition costs.

The SIGTARP report recommends a number of new measures to protect against potential waste and fraud in the HHF program.

Townley said MSHDA will review the report “line by line,” and consider its recommendations.