I think what's happened is he's placed the characters/concept/design etc into the public domain, but NOT his copywritten work product.

IP vs Concrete Creation using that IP

No, it's the whole thing. Under his contract he retained ownership of all the material, and presumably nothing about his contract actually bars him from releasing it as public domain.

Does he own the rights to the art though? All the penciling and coloring was done by people under contract, not him.

Depending on how the contracts are written, they may be works for hire, with the copyright owner getting the copyright for the art as well.

His FAQ in the follow up post makes it clear he believes that he's released to the public domain every part of it that he owns. That would include all of his writing over the years.

There's certainly a lot of gray area left on the artwork, especially. DC probably owns most of it? It might take a lot of work to track down the original artists and find their thoughts on all this.

At face value based on what Willingham seems to believe, you could probably remix the early comics, use the dialog word for word, maybe even panel for panel. But you'd probably need to use entirely new artwork and be very careful that the artwork is entirely new with fresh concepts.

But there's a fun twist there given how much of Fables is itself based on older public domain works and arguments that many of the core concepts of the characters have always been public domain and even very close artwork may be entitled to some interesting fair use judgments.

(I'm not a lawyer of course, and neither is Willingham. If I had one suggestion for Willingham it might be to talk to Creative Commons lawyers and get something like the CC0 involved, including legally binding descriptions of the parts of the series that Willingham now thinks are dedicated to the public domain.)

They still have to honor their contract with him, and if there's an exit clause, that means he gets to exit it as well, which I believe he would like.

A contract like that covers a lot more than just the material itself: there's branding, use of the author's name and likeness, editorial rights of both parties, etc. There's no particular reason to assume it would be tied to the copyright status of the work itself, and plenty of reasons to assume it wouldn't (after all, you don't want to have to pull the author branding just because something entered the public domain over time).