Large Contracts, Bid Rigging, and Pension Boards in Detroit

Anonymous

Wed, 12/22/2010 - 05:30

City Related

What can local government ethics professionals learn from what has come out in <a href="http://www.freep.com/assets/freep/pdf/C41679911215.PDF" target="”_blank”">the
recent indictments</a> of former Detroit mayor Kwame Kilpatrick, his
father, the city's
director of water and sewerage, Kilpatrick's CAO and CIO, and a city
contractor?

According to <a href="http://www.freep.com/apps/pbcs.dll/article?AID=/20101215/NEWS01/1012150…; target="”_blank”">the
Detroit Free Press's time line</a>, it all started unraveling way back
in 2001, when Kilpatrick was a state rep running for mayor. The Free Press learned that he had solicited a $50,000 contribution to his
charity from the president of a homeless shelter. Then Kilpatrick urged
the Detroit-Wayne County Mental Health Board to award the homeless
shelter a $22.7-million contract. Kilpatrick had already mastered the
ways around ethics and bribery laws, involving two charities and a
board he didn't even sit on or have any authority over. 
 
In a city government with a good ethics environment, this would have
finished Kilpatrick for good. But Detroit was clearly not that sort of
place. And it took the IRS five years to indict the homeless shelter
president for income tax evasion. That takes us to 2006. The president
pleaded guilty, but has still not yet been sentenced. 
 
Large Contracts 
In June 2007, the feds tapped phones in an investigation of bidding on
a $1.2-billion sludge disposal contract. In a poor ethics environment,
large contracts bring out the worst, and they also get the cowboys to
circle their wagons. In a good ethics environment, large contracts are handled extremely carefully and publicly. 
 
A year later, the chief of staff for the council
president resigned after taking $4,000 in bribes from a sludge disposal
bidder's local representative. In a good ethics environment, the
council president or mayor would have taken charge at this point,
bringing in an external professional to make sure there was no bid
rigging or other problems. 
 
Detroit's Pension Boards 
The very next month, one of the city's pension fund boards came into
the picture. According to <a href="http://www.freep.com/apps/pbcs.dll/article?AID=/20090614/NEWS05/9061404…; target="”_blank”">another
Free Press article</a>, the pension boards were spending inordinate
amounts of money on travel, making <a href="http://www.cityethics.org/content/gift-exception-undermines-rule">the
Baltimore pension board</a> look like a bunch of couch potatoes. They
also apparently were accepting gifts for their travel, to top off what
they took from their funds. But that wasn't the issue here. It was a
large investment in a local restaurant complex that quickly failed. 
 
Bribery charges started appearing in 2008 and continued through 2009,
but it wasn't until 2010 that there were bid-rigging charges, relating
to a public housing demolition project. 
 
In November a former Kilpatrick assistant pleaded guilty to paying a
$15,000 bribe to a relative of a city official for supporting a
$30-million investment by city pension funds. Conduct like high travel
costs and the acceptance of gifts from those doing business with the
pension board are good indicators that there was a poor ethics
environment in the pension boards. It was not dealt with before it led
to criminal conduct. 
 
What to Do with the Contractors Who Pay Up 
<a href="http://www.freep.com/apps/pbcs.dll/article?AID=/20101219/NEWS01/1219058…; target="”_blank”">The
most interesting of the Free Press articles</a> in the week since the
big indictments concerned the fact that charges are not being brought
against those who gave the gifts. The local U.S. Attorney told the Free
Press, "Sometimes it's hard for us to assess — when you've got these
companies who are involved in bribes and extortions — where they fall
on the spectrum of victim to co-conspirator." In other words, are
we talking bribery or pay-to-play? 
 
Another factor is the need for witnesses. The feds interviewed hundreds
of witnesses. This means that hundreds of people knew what was going
on, and none of them (or perhaps almost none) said a word. There is far
more loyalty and fear of retribution than there is moral courage to
stop unethical and criminal conduct. 
 
Peter Henning, a Wayne State University law professor and former
federal prosecutor, described how this works. He said that the law does
not require extortion victims to contact authorities. "It's hard to
describe them as acting in an improper way. If you want to stay in
business, you have to make the payments." When federal agents find out
about the crime and come calling, the companies and individuals usually
cooperate. 
 
If the law were to require those doing business with the city to
report unethical and criminal conduct, then if they did not, they would
face the possible loss of their present and future contracts. In such a
situation, pay-to-play could not work. Contractors could say they had
no choice. But if they did pay up, it might be difficult to get
witnesses, and the witnesses could be attacked by the defense as trying
to protect themselves from losing their contracts. This is a very tough issue to deal with. 
 
One city council member wants to sue contractors who gave money to
officials, or ban them for getting more work from the city. It would be
interesting to see how successful the city would be if it tried to do
this. The better approach is to have these remedies in the law, in
fact, right in every RFP, contract, and approval. 
 
The Charges 
Here is a list of the charges, as <a href="http://www.freep.com/apps/pbcs.dll/article?AID=/20101215/NEWS01/1012150…; target="”_blank”">summarized
by the Free Press in an article last week</a>. They give a valuable
look at games that can be played in the bidding process. But first the
players: 
 
Kilpatrick - mayor 
Miller - aide to the mayor 
Ferguson - a city contractor 
Mercado - water and sewerage chief 
 
• Kwame Kilpatrick with the help of Miller and his father, held up a
$50-million sewer lining contract until the winning bidder agreed to
pay Ferguson, who wound up getting $24.7 million in revenue when the
contract was increased to $138 million.
• Kwame Kilpatrick and Mercado canceled a $10-million sewer repair
contract because the winning bidder refused Ferguson's demand for a 25%
cut of the contract, and then awarded the work to another contractor
who agreed to include Ferguson.
• Kwame Kilpatrick with the help of Miller, held up a $12-million
amendment to a sewer lining contract until a contractor agreed to pay
Ferguson $350,000 for work Ferguson wanted at a large sewer collapse at
15 Mile Road in Sterling Heights, even though Ferguson did no work on
the projects.
• Ferguson extorted a contractor to give him $1.7 million from a
$28-million sewer contract, even though Ferguson did no work for the
project.
• Kwame Kilpatrick, Ferguson, Miller and Mercado schemed together to
steer subcontracts and emergency orders to Ferguson in connection with
a $19.8-million downtown water main replacement contract. They also
gave Ferguson downtown work originally assigned to the lowest bidder,
resulting in Ferguson getting over $4 million on contract revenue.
• Kwame Kilpatrick and Mercado rigged a water main contract for the
east side so Ferguson's team would win the contract. Afterward,
Ferguson extorted more than $12.9 million from the other team members.
• Ferguson extorted a contractor for $5.2 million in sewer repair
work on the east side. He also extorted a contractor for $5.2 million
in work on a sewer repair contract on the city's west side.
• Ferguson, aided by Mercado and Miller, extorted a company for $5
million on a contract to build a combined sewer overflow and
recreational facility.
• Kwame Kilpatrick and Mercado, with Miller's help, rigged the award
of a $21-million security contract to make sure Ferguson's company
would win. Ferguson netted $1.2 million in the scheme. Mercado helped
conceal the scheme by funneling more work on the contract into an
unrelated project and then misled authorities about what he had done.
• Ferguson, with the help of Kwame Kilpatrick and Mercado, tried to
extort a company to give Ferguson a substantial portion of a
$140-million pump station contract.
• Kwame Kilpatrick and Ferguson lobbied an official with the city's
Department of Buildings and Safety Engineering to take a job as head of
the Department of Water and Sewer Department even though he wasn't
qualified for the job. The goal was for Ferguson and the new director
to work together to make money for Kwame Kilpatrick.
• Kwame Kilpatrick tried to force an official overseeing the
demolition of Tiger Stadium to give the contract to Ferguson, even
though he wasn't low bidder. When that failed, Kwame Kilpatrick tried
to retaliate against the official by having him fired.
• Kwame Kilpatrick tried to get Ferguson demolition work at the Book
Cadillac Hotel by pressuring the construction manager of the renovation
project to hire Ferguson.
• The indictment said Kilpatrick and his father solicited and
accepted bribes and property valued at more than $1.2 million from
people seeking business with the city or its two pension systems. Among
other things, indicted Cobo Center contractor Karl Kado paid
Kilpatrick, his father and former mayoral aide Derrick Miller at least
$360,000 in cash to get and keep cleaning and electrical contracts.
 
Robert Wechsler 
Director of Research-Retired, City Ethics 
 
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