making local government more ethical

Large Contracts, Bid Rigging, and Pension Boards in Detroit

What can local government ethics professionals learn from what has come out in the recent indictments 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 the Detroit Free Press's time line, 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 another Free Press article, the pension boards were spending inordinate amounts of money on travel, making the Baltimore pension board 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
The most interesting of the Free Press articles 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 summarized by the Free Press in an article last week. 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, City Ethics