Update, Jan. 8: This story has been updated throughout with clarification about total funding for the Motor City Match program and additional information from Donald Rencher, Detroit director of housing and revitalization.
If you’re not up to speed on the latest controversy over Detroit’s Motor City Match program, don’t worry. We’ll walk you through the (frankly, astounding) details in the Monday report from Detroit Inspector General Ellen Ha.
Backing up for a sec: Motor City Match (MCM) is a signature grant program for brick-and-mortar businesses, launched in 2015 by Mayor Mike Duggan and pitched as an engine for development in neighborhoods across the city. Help cash-poor entrepreneurs start businesses, create jobs, cultivate retail corridors and mitigate commercial vacancy all at once? Sounds like a win-win-win-win.
Administered by the Detroit Economic Development Corp. with federal Housing and Urban Development (HUD) community development block grants (CDBG), city general funds and philanthropic funding, the program offers grants and services to small businesses at different stages of their launch process. There is a separate track for building owners looking to rehab their spaces for commercial tenants. A complementary program, Motor City Re-Store (MCR), for existing businesses to improve their storefronts.
You’ve probably heard of some of the MCM awardees: successful businesses like Mama Coo’s Boutique, Bamboo Detroit and Batch Brewing. Those are a few of more than 1,000 winners in the cash, design, space and business plan tracks. But there are many more names you wouldn’t know, because the businesses never opened.
That’s just one of the issues raised in the Office of the Inspector General (OIG) report released this week, the result of an investigation into a complaint from former city employee Kennedy Shannon that alleged mismanagement and wasteful spending. Ha’s report gets into the weeds of the two programs’ federally funded operations and expenditures through April of 2018.
If this sounds vaguely familiar, keep in mind that Monday’s report is separate from an open probe by the Michigan Attorney General’s office and an ongoing review by HUD. The federal agency in 2018 first released findings questioning the program’s record-keeping and whether MCM funds were being used to support low- and moderate-income individuals as stipulated. The city was barred from using federal funds for the grant program for about a year, and the suspension was lifted in June after new policies were put in place.
How many Motor City Match winners opened their doors?
Of the grants awarded during the four-year period covered in the report, about 214 businesses that met program guidelines were or are still open — but that’s out of more than 1,000 that received funds, according to the OIG report, which classified the other businesses as failures. The city disputes this tally, noting that many businesses are still in the process of opening. To be fair, a large portion of the awardees got help with their business plans, which can come years before opening.
“We even see it as a slap in the face to call them failures when they just haven’t opened yet, especially at a time when we’re facing a pandemic,” said Detroit Director of Housing and Revitalization Donald Rencher.
From all years of the program, 110 MCM-supported commercial storefronts are currently open, according to Rencher.
How does the funding break down for Motor City Match?
The program’s funding, just over $21 million, has come from the city general fund ($6.2 million), philanthropic support ($5.85 million) and the federal dollars ($9.1 million).
Of that, $8.9 million was awarded to MCM winners as cash grants. The OIG report looks specifically at the federal funding (over that four-year period), which is what’s broken down below.
How much of the HUD funding went to staffing Motor City Match?
The OIG calculates that $2.07 million went to DEGC staffing.
How much HUD funding went to vendors of Motor City Match?
The OIG tabulated over $4 million in contracts to plan, facilitate and promote the grant program, including more than $1.08 million for advertising, marketing and communication. These contractors supported the program as a whole, as opposed to technical assistance providers that gave services directly to grant recipients (aka, business plans, bookkeeping, design, etc).
How much of the HUD funding went to that latter category, which the OIG characterizes as funding for the “direct benefit of the businesses assisted under the program”?
About $1.46 million, or 18.2% of the total. According to the report, “the MCM and MCR programs, which were intended to benefit business owners, provided minimal direct assistance to the business owners as compared to what was paid out to the program delivery vendors and DEGC staff.”
The city disputes that characterization. Rencher noted that the federal dollars don’t cover the cash grants and that vendors and DEGC staff were working to support awardees with services that they needed to start their businesses and didn’t have to pay for. Looking at overhead costs, “we find it not to be unreasonable, because it takes that many resources to actually get someone to open their shop,” Rencher said.
One of the major issues raised by the OIG?
The DEGC let City of Detroit employees apply for the programs, which was not allowed per their own guidelines. Not only is that a conflict of interest, but those funds are therefore not reimbursable. Rencher said that no employees who won had influence over the grants.
Who has won the grants?
In direct contradiction to MCM and MCR’s goals, a staggering amount of funds were granted to businesses outside the city that never opened, based everywhere from the suburbs to California and France. Rencher said many of those are still working with the program towards opening. According to the OIG report, $976,430 of MCM funds went to support 180 businesses that intended to relocate their business to the city, but failed to do so. Another $1.05 million in Motor City Match funds went to 177 businesses located outside the city that did not become or are no longer operational. (The report notes that the city proposed remitting these funds back to HUD, meaning that Detroiters may ultimately incur these costs.)
Altogether, 64% of MCM awardees have been Detroiters and 36% were non Detroiters, Rencher said.
How is the program being managed?
In several instances, the OIG report found issues with how expenses were charged and how payments were made, finding a “continued lack of oversight with regards to the management of the program and proper reporting of program expenditures.”
Rencher acknowledged that the program has had ongoing issues with documentation, first identified by HUD in 2018, but said it’s “unfortunate” that OIG assessed a snapshot in time without full subject matter knowledge as MCM administrators work with HUD to get the program in compliance.
“It’s hard, because there are programs that we run, just like every year, for the past 30 years,” Rencher said. “This was new and inventive and no one really gave a direct roadmap on how to really do the paperwork documentation… I guarantee there have been times where somebody received the funding late, or they’re behind, and it has issues like any program, but overall, as far as stimulating small businesses and neighborhoods, I think it’s been very, very positive.”
What are the major takeaways?
The MCM program was meant to help Detroit entrepreneurs kick start their businesses while revitalizing commercial districts. Instead, the report paints a picture of a system where the bulk of the federal funds went to running the program, not the business owners themselves. In the end, MCM spent less than a fifth of its HUD funding to directly benefit small businesses, per the OIG analysis.
What’s more, the program racked up large, avoidable expenses that likely can’t be reimbursed by the feds: “The OIG’s primary concern is the amount of money that has been deemed ineligible. The bulk of the loss, as calculated by the OIG, could have been prevented with proper oversight.”
You could argue that there are now more than 100 new businesses, with diverse ownership and in areas of the city that typically receive less investment, that may never have opened without this program — and likely many more that received valuable support and are in the process of opening. In five years, that’s nothing to sneeze at.
“We’re talking about a program where [there are] a majority of African Americans who are opening businesses, a majority of women who are opening businesses, that would not have started without this program,” Rencher said.
But it’s hard to deny the OIG’s comparison between MCM’s “excessive” business failure rate of 76.5% and the national stat that 50% of small businesses survive their first five years, even if the failures include businesses that could open in the future. Why did these do worse despite receiving business coaching, legal, design and architectural services, assistance securing physical locations and public relations support?
And with the incredible amount of need among entrepreneurs located in the city of Detroit itself, why did the DEGC devote so many resources to serving non-local businesses that did not ultimately relocate or expand their businesses to the city? Funding that could have been spent to support Detroit business owners seems to have been used in a way that looks a lot like the business attraction strategies that were already part of the DEGC’s core function.
The city has pushed back on specific MCM criticisms with vigor (see more in the full report), while pointing to new training and updated policies, created while working closely with HUD. Crucially, the OIG report doesn’t reveal any intentional violations of program guidelines or federal requirements. Considering the open HUD investigation, however, this likely isn’t the last we’ll be hearing about Motor City Match. And given similar concerns over spending and management practices in other flagship Duggan programs (aka, demolitions and Make Your Date), not to mention the mayoral race, it’s not Detour’s last look, either.
Written with Ashley Woods Branch.