May 2013

(This post is a guest blog post from John Sullivan, Esquire.  John specializes in DBE issues and disparity studies.  His website is www.crosonlegalservices.com and his he can be reached via email at jcharlessullivan@yahoo.com)

The title of the recent USDOT Inspector General’s audit is blandly bureaucratic – “Weaknesses in the Department’s Disadvantaged Business Enterprise Program Limit Achievement of its Objectives” — but the report’s message is scathing: the DBE program is failing.

The United States Department of Transportation Disadvantaged Business Enterprise (DBE) program was created in 1982. The program is designed to help socially and economically disadvantaged small business owners contract with the Department of Transportation. The program is huge, awarding around $4 billion in federal transportation contracts to DBEs each year. Most of this work is construction. Virtually all the DBEs are owned by minorities and women.

One of the fundamental goals of the program is to assist “in the development of DBE firms so that they can compete outside the DBE program.” The program is supposed to bootstrap small firms from the DBE program into the economic mainstream. Then, the theory goes, these firms can compete in the marketplace on their own merits, without the need for a contracting preference based on race, ethnicity, or gender.

Exactly the opposite is happening. The Inspector General’s report concludes that the DBE program does not encourage DBEs to enter the marketplace. In fact, the program is so enticing that business owners will actually turn down work if necessary, so their business stays small enough to qualify as a DBE.

What has gone wrong?

The USDOT DBE program has no term limit on participation, leaving little incentive to exit the program. The biggest federal preference program, the Small Business Administration 8(a) program, limits businesses to a nine year term. The USDOT has no such limit. The Inspector General’s audit randomly studied 121 DBEs. Of these, nearly half had been in the program more than a decade.

None of this is new. As far back as 1994 the Government Accountability Office recommended to the Secretary of Transportation that the DOT develop performance measures to evaluate whether the DBE program was actually helping to develop firms to compete outside the program. Clearly, it isn’t.

Not only are businesses staying indefinitely in the program, few are getting work while in the program. In Maryland , for example, there are almost 5000 DBEs but only 12% have ever received federally funded work as a prime or subcontractor. The USDOT does not even require state DOTs to track how many DBEs are getting work.

Nor is the problem surprising. The Inspector General’s report slammed USDOT for failing to establish “a single line of accountability.” The report characterized this management style as a “fragmented approach,” one which yields the unfortunate result that, “officials for all 15 states we spoke to say that they have limited or no communication with DOT Headquarters about the DBE program.”

Currently there are court challenges, filed by construction firms, to the constitutionality of the DBE programs in Montana and Illinois. The Inspector General’s audit makes these challenges more likely to succeed and may inspire challenges elsewhere.

 

Prescription drugs are an interesting paradox.  When taken in the right dosage, prescription medicine can save your life.  However, if you take too large of a dosage you risk killing yourself.  Civic Associations that posit an similar paradox.  On one hand, these associations give a voice to citizens who are rightfully concerned with the type and location of development in their neighborhood.  On the other hand, these Associations can easily become a means to promote the personal – often anti-development – agendas of their leadership.

A story in the Philadelphia Daily News about the disbanding of the Old City Civic Association because of mounting legal fees underscores the problems with this paradox.  According to the story, the well known – or infamous – Old City Civic Association has voted to disband because of mounting legal fees from suits brought by developers who drew the ire of the OCCA.   Supporters of the OCCA fear that “deep pocketed” developers will now run rough shot of their neighborhood.  Opponents of the OCCA are no doubt cheering the news of the demise of their meddlesome foe.

According to the story, civic groups are asking for legislative action granting them immunity from lawsuits for their actions.    The problem with this “solution” is that civic associations and their leaders are not accountable to anyone.   At least with elected officials the public can hold them accountable at the ballot box and their are actions in office are regulated by constitutional controls and ethics rules.   Furthermore, judicial review of their legislative actions is available.  Not so with civic groups, who are both un-elected and who have no real constitutional or legislative authority. Therefore, if they are immune from lawsuits what can the frustrated public or a wronged developer do?    This is especially true when, unfortunately as is often the case, the association becomes a vehicle for the personal agendas of their board members.

What should be happening is the power granted to civic associations should be regulated and codified.  By doing this, the community can be assured that its voice is maintained and developers can be assured of the integrity and fairness of the group.

The City of Philadelphia flagged eleven (yes this one goes to eleven) prime contractors for flaunting the City of Philadelphia’s DBE rules according to the City of Philadelphia Office of Inspector General.  According to the news release, the chief offender, William H. Betz, Inc., may have gotten off easy.  According to the OIG, Betz facilitated contracts between JHS & Sons Supply Company and ten prime contractors whereby:

providing JHS’ minority business certification and the supplies necessary to complete the job. As a result, Betz received more than $640,000 worth of business that was intended for legitimate minority-owned companies. JHS received at least $70,000 for acting as a pass-through.

As a result of a settlement agreement with the City, Betz agreed to repay the City $128,000 and is ineligible for City contracts for two years.  Why is this getting off easy?  Because the arrangement alleged by the OIG could have easily led to federal prosecution of Betz officials involved with the scheme.  For you to be indicted for DBE fraud, there is no requirement the project be owned by the federal government or be funded by it.  There is no actual crime known as “DBE fraud” and DBE regulations to not prescribe criminal penalties for violation of DBE rules.  Rather, DBE fraud almost invariable involves the federal crimes of mail fraud and wire fraud, which are the crimes that DBE fraudsters are prosecuted for.