Conflict of interest in $4 billion government minority program

A $4 billion minority contracting program that places advocates for minority businesses in charge of regulating them is a clear conflict of interest, federal and state audits found, but one state has announced plans to expand its version to one of the most aggressive in the nation.

The conflict in the federal Department of Transportation’s program, which is administered by each of the states, occurs because civil rights personnel with an explicit mission to expand the number of minority contractors and the amount of taxpayer dollars awarded to them are the same people tasked with policing and banishing the bad actors.

“There’s no question, they are activists. They regard it as an important part of their job to expand the number” of certified disadvantaged businesses, said University of Maryland Baltimore County Professor George Lanoue.

As a Transportation Department inspector general’s report put it last month, states “place more emphasis on getting firms certified as” disadvantaged rather than keeping track of the work they do. The report said the Office of Civil Rights is responsible for certification, appeals and coordination of enforcement.

In Maryland, the same office that oversees federal minority contracts also runs a parallel program with even laxer restrictions to disburse state money to contractors. Last month, the governor’s office announced it was raising that percentage from 25 percent to 29 percent, one of the highest in the nation.

Maryland’s minority contracting program differs from comparable programs in that it would rather give a contract to a black businessman from out of state than a taxpaying resident, with no requirement that participants in its preference program be based in the jurisdiction. One in five firms receiving a leg up in Maryland contracting competition is based outside Maryland, The Times’ analysis showed.

Harry Alfred, president of the Black Chamber of Commerce, said the civil rights offices let scofflaws run loose — but to call them advocates would overstate their usefulness.

“They don’t advocate, and they don’t police. It’s rife with corruption to the core,” he said. “I sent front companies to the DOT, and they rejected every one of my claims. What they should do is have a true police entity there.”

The federal report said the civil rights offices regularly failed to sanction wrongdoers — which critics noted would have put egg on their faces as those firms’ early advocates.

An audit last month of Minnesota’s program by state investigators illustrates the typical setup.

“One task of the Office of Civil Rights is to monitor the companies in the [Disadvantaged Business Enterprise] pool for those firms who no longer qualify as a DBE company. The other task of this office is to grow the pool and increase participation within the pool. This clearly is a conflict of interest,” the audit said. Companies “eventually earn enough money to be eliminated from the DBE pool.”

“However, it is those companies that aid MnDOT in reaching its participation goal. Audit has found several companies that no longer meet the DBE requirements.”

Further, the minority office’s specialists had neither the “technical knowledge” nor “level of effort” to properly set goals, and they could provide no documentation for the percentage of contracting dollars it said were given to minority firms, or duplicate its calculations. And “our review found little to no monitoring or enforcement mechanisms to ensure compliance.”

When the owner of a trucking company sent in documentation showing he had a personal net worth in excess of the $1.34 million limit, the director of civil rights intervened to ensure that, despite the rules, the company remained eligible for contracts, the audit found.

In New York, one minority contractor’s personal net worth ballooned to nearly $2 million, yet he refused to pay taxes and listed his tax debt as a liability on his disclosures, bringing his net worth below the $1.34 million required to continue to get government contracts. Overseers approved that reasoning, federal investigators found.

At Maryland’s Office of Minority Business Enterprise (MBE), no one answered the phone during dozens of calls during business hours, and numerous emails went unreturned. When The Times sought three weeks of email records from a small group of employees to determine if they had bothered to take any action, it said it would charge the newspaper $8,000.

Faced with questions about oversight and enforcement in what the federal report faulted for being a “fragmented” program that lacked accountability, the governor’s Office of Minority Affairs passed the buck to the MBE office, which in turn said it was merely following the bidding of the state Legislature — which found rampant problems with the office’s workforce in two separate audits over the last decade.

In fact, the Maryland General Assembly passed legislation last year ceding authority to those two departments to set the percentage of contracting dollars to be directed to the very businesses for which they advocate.

Instead, the governor’s office sent a statement attributed to Gov. Martin O’Malley: “We are raising the bar … both the lieutenant governor and I want to see the MBE Program grow … Long considered one of the country’s foremost programs for minority inclusion, Maryland’s new aspirational goal will offer more opportunities for minority- and women-owned businesses.”

In Maryland, the idea that a person is disadvantaged because of his race even if he has $1.3 million in his personal account did not go far enough: Lawmakers established an even higher limit of $1.6 million for minority contractors benefiting from state funds.

“Personal net worth calculations for the MBE Program do not include the applicant’s personal residence, the value of the applicant’s business or any other business owned by the applicant that is certified as an MBE, or $500,000 of qualified retirement savings,” the guidelines state.

In Maryland and seven other states, DBEs in the federal program received more than 50 percent of the dollars awarded to all subcontractors, although their average availability was only about 10 percent in those states, an analysis by Mr. Lanoue found.

Maryland’s program disproportionately assists blacks over other minority and preferred groups, which in that state include females. Less than a quarter of state-based contractors are on the list because they are owned by white woman, even though that group makes up 42 percent of the Maryland population eligible for the contracts. Most go to blacks, who make up 41 percent of the eligible population, leaving Hispanics under-represented.

Alison Tavik of the Maryland Governor’s Office of Minority Affairs said it was difficult for the MBE office to root out fraud that occurs after a firm is certified because the actual contracts are overseen by the various offices that put them out to bid and that are not tasked with policing minority contracting issues.

“They do just the certification, not the administration,” she said of the MBE office. But “there’s a difference between saying there’s not a problem and saying there is and we’re working to fix it.”

Robert Ashby, who recently retired as the federal Transportation Department’s lead minority contracting official, said that “my sense is that’s not a conflict of interest. The mindset of certification people is program integrity. They are the people who are most likely to be zealous about certification.”

Still, he added, the ultimate test of whether the program is working well is how many minority contractors are registered.

“The macro measure of success is there are goals set … based on pretty much a statistical analysis of relative availability, then on how far up the relative participation of DBEs has gone.”