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Friday, August 19, 2016

The art of the protest - Procurement controversy series, Miami, Florida

Art dealer files protest in Miami Dade College project
Miami art dealer Gary Nader has filed a bid protest against Miami Dade College after losing out on a multi-million dollar development project on campus, according to paperwork obtained by FloridaPolitics.com on Sunday. The college, which wouldn’t front any money, would give away the development rights and later get to operate the “cultural centers.”

The idea for the project began as Nader’s own unsolicited pitch to the school last May: To build a world-class Latin American art museum with his family’s name on it, which he would start up with $60 million worth of pieces from his own collection. The project has since grown into a mélange of uses because the college soon grew more interested in having a theater and conference center. Related’s plan more than halves the size of the museum that Nader had first proposed. All of the proposals include luxury residential condo towers to be sold to offset the costs of the cultural parts of the development.

Among its many allegations, the 49-page protest says winning bidder and Nader’s nemesis—developer Jorge Pérez, CEO of Related Group—lowballed the college more than $100 million in an “exceedingly low valuation” of the eventual development, which would be a public-private partnership. Nader’s protest also says the college has so far failed to respond to his lawyers’ public records requests for documents related to the review and selection process.

The protest also alleges a conflict of interest by attorney Al Dotson with the South Florida law firm of Bilzin Sumberg. Dotson, it says, advised Miami Dade College during the development bidding process but also worked for Related on a separate affordable housing project before the Miami-Dade County Commission.

The document also complains of inappropriate contacts between a Related executive and a lawyer advising the college despite a communications blackout between bidders and school officials, known as a “cone of silence.” “The evidence shows that the college promoted favoritism throughout the solicitation process,” it says. “…The ‘cone of silence’ was a moving target that continued to change, for no other reason, than to support favoritism.”

The protest document asks that all action toward the project stop until the dispute is resolved. It seeks a re-evaluation of all proposals by an “impartial evaluation committee.”
Fight over Miami Dade College’s cultural center takes more legal twists
Friday’s challenge came after weeks of legal wrangling over the price of a required protest bond and public records related to an internal college investigation.

(See prior post)
Art Dealer Gary Nader Butts Heads With ‘Condo King’ Jorge Perez Over Bid for New Miami Museum
It's a heated and highly personal battle.

It’s safe to assume that Miami art dealer Gary Nader thought his pitch to Miami Dade College for a multi-million-dollar campus development, including a 90,000-square-foot museum of Latin American art with $60 million worth of work from his own collection, would be welcomed with open arms. The proposal reportedly didn’t even require the school to put up any money; it would take ownership of the culture center in exchange for giving over a parking lot.

But when college officials—citing their status as a public institution—opened up the potential development to other proposals, and then gave top ranking to a rival bid from real estate firm Related, run by Miami “condo king” Jorge Perez of the Perez Art Museum Miami, Nader struck back. His limited partnership Nader + Museu filed a detailed 49-page formal “protest bid” on August 12, which contains nearly 400 pages of accompanying exhibits directed at Miami Dade College purchasing department, opposing an agreement with Related.

The papers claim that the agreement “failed to comply with requirements for a public-private partnership, repeatedly violated the express terms and conditions of this solicitation and offered an exceeding low valuation for the right to develop private improvements on College owned land…” It notes a $158.5 million difference between “the first and second highest ranked proposers,” calling it “astounding.” (See, Abnormally low vs unreasonably low bid)

William Riley, an attorney for Nader, told artnet News via email that there is “a statutorily prescribed opportunity to resolve the protest by mutual agreement between the parties within 7 business days after receipt of the formal written protest” filed on August 12. “We have notified the college that we are available to speak and/or meet within this timeframe. They have not responded to us.”




Monday, August 15, 2016

Need to post a $2.3 million bond in order to file a bid protest??

Fight over Miami Dade College’s cultural center takes more legal twists
a development team led by art dealer Gary Nader filed an official protest Friday challenging a recommendation that Miami Dade College’s board of trustees partner with condo king Related Group on a project to build a cultural center and residential towers downtown, perhaps foreshadowing a long legal battle over the project.

Nader’s attorneys notified the college three weeks ago of their plans to protest a college committee’s decision to score Related Group the highest among three competitors, including Nader. But unexpectedly, Friday’s challenge came after weeks of legal wrangling over the price of a required protest bond and public records related to an internal college investigation.

Last month, Nader + Museu LLP fended off the college’s arguments that the development team would need to post a $2.3 million bond in order to file a bid protest. A Miami-Dade judge allowed Nader’s team to move forward, at least temporarily, with the posting of a $100,000 injunction bond. Then on Thursday, Judge Monica Gordo rejected the college’s request to dissolve the emergency injunction
Hmmmm. The headline to this story may have been a smidgen misleading. This case, which may have begun as a protest, made its way to court where an injunction was sought. Evidently, there was no continuing automatic or other administrative stay in place.

It is common practice, when seeking injunctive relief, for a court to require posting of a bond to compensate a defendant for delay damages IF the plaintiff does not prevail on its underlying claim for damages or relief. Characterizing such a bond as a "protest bond" is perhaps misleading.

But the mere thought of a $2.3 million, let alone a $100,000 bond requirement to lodge a bid protest certainly woke me up this morning.

Friday, August 12, 2016

Outsourcing pre-judicial review of administrative processing

The following article, and the case which it reports, is not exactly about procurement. It does, though, inform the discussion about how to determine which activities of a government are legislatively determined to be governmental functions that must be performed by the government. The function in controversy here is the initial review of a contested parking ticket.

The article bringing this to light was flagged by the State Bar of California's Daily News Digest August 12, 2016, and appeared on NBC Los Angeles News online.

City of Los Angeles Ordered to Change Parking Ticket Dispute Process
The California Court of Appeal has ordered the City of Los Angeles to change the way it handles parking ticket disputes. A three-judge panel said the city can no longer outsource the handling of the initial reviews of parking tickets requested by motorists, but must do those reviews themselves. The appeals court’s decision, handed down this week, says the state vehicle code requires cities, not outside contractors, to conduct all initial reviews of parking tickets.
The case is Weiss v. City of Los Angeles. Pieces of the case reflected below are my own editorializing, and cut, rearranged, left out, paraphrased and otherwise altered and (mis)construed, as is my practice in this blawg. Thus, you are better served by reading the case in its entirely at the link.
In this appeal by the City of Los Angeles (City) and Xerox Business Services, Inc. (Xerox,) we consider whether the City, as the “issuing agency” for notice of parking violations in the City, must conduct the “initial review” of challenged citations, or whether it may delegate that duty to Xerox, its “processing agency”. [The decision in the case required interpretation of the complex statutory scheme, which had evolved over time. As is the case with many such statutory evolutions, some genes change, some stay the same and some just disappear, making the interpretation process more complex than a simple reading of a single statute might suggest.]

Weiss got a parking ticket, which he contested. After an initial review performed by Xerox, Weiss received a letter advising him that an initial review had been performed and the citation would not be cancelled. [There followed a round-about means of getting the issue before the court, interesting for those studying writs of mandate, standing and the like, but not germane to this post, which is more about the question, how to determine if a particular governmental function can to delegated to a private contractor. Thus, I limit the discussion here to:"Weiss’ claim that the initial review process, as currently constituted, did not comply with the statutory obligations of the initial review under the Vehicle Code".] Since 1985, the City has contracted with Xerox to act as its processing agency. As part of Xerox’s processing duties, the City delegates the duty to conduct the initial review of contested citations. Xerox is paid based on the number of parking citations processed per month, but does not receive additional compensation to conduct initial reviews. Xerox performs the initial reviews through its Parking Violations Bureau (Bureau), which is staffed by a subcontractor. In fiscal year 2013, Xerox conducted 135,291 initial reviews [constituting about 5% of citations processed].

The initial review is conducted by Bureau clerks, who must adhere to 46 Business Processing Rules (BPR), drafted by the City (or by Xerox and approved by the City). When considering a contested citation, the Bureau clerk refers to the applicable BPR, if any; if that BPR permits dismissal of a citation, the clerk dismisses it. If no BPR addresses the particular challenge, but a motorist has presented sufficient evidence to overcome a citation, clerks are instructed to refer the matter to a supervisor for a decision. The motorist learns the result of the initial review through one of 97 form letters drafted and approved by the City, on City letterhead, sent to the motorist by Xerox.

The trial court below concluded that, setting aside the issue whether Xerox was authorized to conduct the initial review, the City’s system of initial review complied with the Vehicle Code requirements in the scope of the review, in the fairness of its procedure to the motorist, and in the fairness of its substantive decision-making process.

The question at issue in this appeal [and this post] is whether the state vehicle code requires that the City, as the issuing agency, conduct the initial review, rather than its processing agency, Xerox. In its ruling, the court below reviewed the statutory framework, its legislative history (including pertinent existing, amended and repealed Vehicle Code sections), and case law. Conceding that the question was close, the court concluded that legislative changes in 1995 to the statutory scheme reflected the Legislature’s intent to place a nondelegable duty to perform the initial review on the City, the public agency that issues parking citations.

The 1993 revision maintained the prior definition of a “processing agency”; ‘processing agency’ means the contracting party responsible for the processing of the notices of parking violations and notices of delinquent parking violations. It also contained an amended version of section 40200.5, which preserved the issuing agency’s authority to contract with a processing agency (“an issuing agency may elect to contract with the county, with a private vendor, or [others] . . . for the processing of notices of parking violations and notices of delinquent parking violations....

Prior to the 1995 revisions, the legislation allowed an issuing agency to contract with a processing agency for the processing of notices of parking violations, including investigating the circumstances of the citation and conducting the initial review as well as giving the processing agency the authority to make the decision whether to cancel the citation.

The 1995 revisions repealed the previous statutes which had expressly provided that the processing agency may conduct initial reviews, and gave the processing agency the authority to investigate challenged citations. It enacted a new provisions assigning responsibility for conducting the initial review to the “issuing agency,” giving that agency the authority to determine whether to cancel the citation, and requiring it to inform the processing agency of its decision, further eliminating any reference to the authority of the “processing agency” to conduct the initial review.

Legislative deletion of an express statutory provision “‘is presumed to effect a substantial change in the law’ [citation].” (Barajas v. City of Anaheim (1993) 15 Cal.App.4th 1808, 1814.) Considered in their entirety, the 1995 changes strongly suggest that by repealing section 40200.7 and former section 40215, and replacing them with a new section 40215, the Legislature intended to give sole authority to conduct the initial review to the issuing agency, and to preclude delegation of that duty to the processing agency. No other rational explanation comports with the breadth of the modifications eliminating references to the processing agency’s authority.

But, the 1995 revisions did not amend section 40200.5 to directly reflect the elimination of the processing agency’s authority to conduct the initial review. Thus it remains that the issuing agency could contract with a processing agency “for the processing of notices of parking violations and notices of delinquent parking violations, prior to filing with the court...." This might be read in isolation, without considering the 1995 changes, as suggesting that the issuing agency may contract with the processing agency to conduct the initial review because that review occurs before the judicial review.

However, given the history of the relevant statutes as we have traced them, it is unreasonable to assume that by failing to amend section 40200.5, the Legislature intended to retain the authority of the processing agency to conduct the initial review and undo the changes it so clearly made in the 1995 amendments.

The 1995 changes deleting any reference to the processing agency’s authority to conduct the initial review, compel the conclusion that the issuing agency (here, the City) must conduct the initial review, and cannot delegate that duty by contract to the processing agency (here, Xerox).

There are, at least, a couple of procurement questions that jumped out at me from the case. First, recall that Since 1985, the City has contracted with Xerox to act as its processing agency, and is paid based on the number of parking citations processed per month, but does not receive additional compensation to conduct initial reviews. I cannot believe that if another contractor held the contract for processing parking citations, that Xerox (or any other contractor) would conduct the initial reviews "for free", recalling again there were 135,291 such initial reviews conducted in 2013. I wonder what the cost of doing that "free" work would be if contracted out to another party, and if that "free" work is actually paid by inflated prices or costs in the "processing" portion of the work.

Second there is an aspect of Guam Procurement Ethics law that stands out. This "free work" is given as part and parcel of getting actual paid work. It is not a gratuity as typically defined because there is nothing paid to a particular person, and no particular person is benefited. But under Guam Procurement Ethics law (5 GCA § 5630(d)):
It shall be a breach of ethical standards for any person who is or may become a contractor ... to offer, give or agree to give any employee or agent of the Territory or for any employee or agent of the Territory to solicit or accept from any such person or entity or agent thereof, a favor or gratuity on behalf of the Territory whether or not such favor or gratuity may be considered a reimbursable expense of the Territory, during the pendency of any matter related to procurement, including contract performance warranty periods.

For purposes of this Section, a favor is anything, including raffle tickets, of more than deminimus value and whether intended for the personal enjoyment of the receiver or for the department or organization in which they are employed or for any person, association, club or organization associated therewith or sponsored thereby.
Guam legislators are (most of the time, on whole) sensitive to "buy in" and bundling and other evils that diminish competition and stain the integrity of the procurement system and undermine the peoples' trust in government.



Tuesday, August 9, 2016

Texas Supreme Court allows price information in procured government lease to remain confidential

Excerpts from an Editorial in Dallas Morning News: Texas court ruling lets government keep contracts secret, inviting corruption to fester (Aug 10, 2016)
A linchpin to government accountability lies in the old admonition to "follow the money." But that's an impossible task when the law says the government -- and companies doing business with government -- can legally hide the trail.

The fallout from a June 2015 ruling by the Texas Supreme Court is becoming painfully clear as key details of government contracts, once routine items of public disclosure, are instead being withheld as guarded state secrets. (To be clear: This is not a matter of protecting business trade secrets from unfair exposure. Provisions for protecting proprietary information existed in the Texas Public Information Act prior to the Boeing decision.)

A random sampling: Costs of a Kaufman County school district's food service contract. The number of Uber drivers ferrying passengers around Houston. And, amusingly, in an anxiety-inducing sort of way, the amount the city of McAllen paid singer Enrique Iglesias for an hour-long outdoor concert to lead off its annual holiday parade last December.

All result from from a 7-1 opinion by the state's highest court, made over the objections of Attorney General Ken Paxton's office. The decision expanded the acceptable reasons for withholding information about contracts between government and private businesses.

Public accountability matters, and transparency is where accountability starts.
The withheld, non-public information in this case was certain financial terms of a 20 year lease of government property to Boeing. The Texas Public Information Act contains an exception to disclosure which applies to information "that, if released, would give advantage to a competitor or bidder.”

The Texas Attorney General had long held that this exception applies only to procurement information, and is meant to protect government interests, not private ones. The Texas Supreme Court rejected both ideas, based on the unqualified simple language of the particular code section. It also rejected the Attorney General's assertion that someone objecting to disclosure must prove substantial advantage to a competitor; the Court said "substantial" was asking too much. The Court accepted Boeing's employee's assertion that competitors would obtain an advantage by using that information to allow them to obtain better lease terms at another location, and, overruling the Attorney General's determination and the findings of the trial court, made the factual determination that disclosure of the information "would give advantage to a competitor" of Boeing.

The Court seemed particularly persuaded that
The information, which the court of appeals ordered disclosed, could not be disclosed by the Air Force under the federal Freedom of Information Act. The D.C. Circuit has rejected three such requests in the last sixteen years. See Canadian Commercial Corp. v. Dep’t of the Air Force, 514 F.3d 37, 38 (D.C. Cir. 2008) ... While disclosing bids after a contract award may rarely give competitors any advantage, the federal cases indicate that the aerospace industry is different because the disclosure of current contract prices gives competitors a distinct advantage by telling them precisely how to undercut the current contractor when contracts are re-bid. Canadian Commercial Corp., 514 F.3d at 42.
Thus, the Court comes awfully close to saying, without actually saying it, that a lease of aerospace industry lands, as a matter of law, contains information which give competitors an advantage. Perhaps, not a significant advantage, but a distinct one.

The Canadian Commercial Corp case is good authority for the Court's holding, at least in part. That case held that "line item pricing" in a government contract is commercial confidential information that fits within the exception to disclosure requirements of federal FOIA and Trade Secrets law. But, the case also said there was a requirement of a showing of substantial competitive disadvantage.
"Commercial or financial information obtained from a person involuntarily "is `confidential' for purposes of the exemption if disclosure [would either] ... impair the Government's ability to obtain necessary information in the future; or... cause substantial harm to the competitive position of the person from whom the information was obtained.""
But there is another issue, and one which is not addressed by the Canadian Commercial case, but was pointed out in its concurring opinion. If essential terms of a contract need not be disclosed because of the "specter of competition" (see this case, following Canadian Commercial), then the exception would swallow the generally recognized rule that government contracts are essentially elements of a procurement record, and public information.
TATEL, Circuit Judge, concurring (citations, etc. omitted):
I agree with my colleagues that under our reverse-FOIA case law, the Exemption 4 test applies to line-item government contract prices like the ones at issue here. Because the Air Force has merely renewed arguments we have already rejected, I join the court's decision.

That said, I believe Judge Garland had it right in his McDonnell Douglas v. Air Force dissent. Not only did he persuasively critique how the court there applied the
National Parks competitive harm test to facts closely resembling the record here, but he also rightly questioned "whether it makes sense to regard prices actually paid by the government as trade secrets `of any person' under the Trade Secrets Act or as confidential commercial or financial information `obtained from a person' under Exemption Four of FOIA." After all, given that FOIA's primary purpose is to inform citizens about "what their government is up to, it seems quite unlikely that Congress intended to prevent the public from learning how much the government pays for goods and services. Moreover, the Air Force, as its position in this case well demonstrates, would prefer to disclose contract line-item and option prices because in a competitive bidding environment such information may well save money for the government and the taxpayers who fund it. By contrast, entities whose interests lie in charging government agencies as much as possible, or in preventing others from charging less for the same services, would prefer to keep such data confidential.

Thus, applying the National Parks competitive harm test to agreed-upon prices in government contracts "may bar disclosure of such prices in the very situation in which the public interest in disclosure is at its apogee." Like Judge Garland, I find that result troubling and inconsistent with FOIA's fundamental objective. But believing the question settled in this circuit, I am compelled to join the court's conclusion that the Air Force must keep the requested pricing information free from public scrutiny.
And there's one more objection I have, if, as Canadian Commercial asserts, for information to be considered confidential, it must be involuntarily disclosed. No one holds a gun to a bidder's head making him or her compete for government business. Choosing to take part in bidding is a voluntary act. 

I note that the regulations adopted on Guam, based on the ABA Model Procurement Code, specifically say that prices, in an IFB, are not to be withheld from public inspection.


Procurement controversy - North Carolina Dept of Health & Human Services

Audit outlines shortcomings in DHHS contracting
A new audit has found that many no-bid contracts within the N.C. Department of Health and Human Services lacked proper review or documentation, and didn’t have adequate written justification to waive competition, putting taxpayer dollars at risk. State Auditor Beth Wood said that agency officials are supposed to provide justification before waiving the bid process. Many contracts had no waiver justification, and others were assigned justifications that didn’t add up, she said.

The deficiencies were found under both Democratic and Republican administrations.

On several occasions, Wood said, officials said bidding was waived because there was an immediate need for the contract, even though the state “had this person on contract for 10 years.”

The report found three contracts with a value of $6.1 million lacked the required review from the Attorney General’s office. “When the A.G. does not review no-bid contracts, a greater risk exists that these contracts are not in proper legal form, do not contain all clauses required by law, are not legally enforceable, and do not accomplish the intended purposes of the proposed contract.”

The State Auditor’s Office recommended that DHHS evaluate and monitor its contracting processes to ensure that its personnel are applying state laws and department policies and procedures effectively and efficiently. It also recommended that the department incorporate best practices when negotiating no-bid contracts. In addition, it recommended that DHHS ensure its contract personnel provided more specific documentation when it waived competitive bidding.

The audit quotes from author William Sims Curry’s book, Contracting for Services in State and Local Government Agencies. Curry has been a member of the National Contract Management Association for more than 30 years and has held procurement or contract positions in federal, state, and local governments.
“Contractors that are well aware of their status as the sole source provider for a particular service have a tendency to propose higher pricing than they would in a competitive environment,” Curry writes. “Sole source contractors involved in service delivery over the long term also tend to increase their pricing at a rate higher than increases to their costs or the applicable rate of inflation. This tendency for higher initial pricing and excessive price escalation from sole source contractors is intuitive and well understood.”

The report noted, by way of background,
The North Carolina Administrative Code states “North Carolina’s purchasing program shall be built on the principle of competition.” The competitive bidding process is designed to prevent collusion and favoritism in the award of contracts, and to generate better pricing, quality or value to conserve public funds. However, the Administrative Code allows competition to be waived when contracting under certain circumstances. When a contract is awarded without competition, NC regulations, and contracting best practices require it to be sufficiently justified, negotiated when feasible, and supported by documentation.
It found that "data in DHHS’ contract database, Open Window, had approximately 2,500 non-competitively bid contracts with a value of approximately $2.4 billion between state fiscal year 2012 through 2014. The value of the no-bid contracts accounts for more than 32% of all contracts during the same period."

Its key findings were:
• Many no-bid contracts lacked required review and approval to protect state interests
• Many no-bid contracts lacked documentation of negotiations to improve pricing or terms
• Many no-bid contracts lacked adequate written justification to waive competition, which increases the risk of favoritism, unfavorable terms, and poor performance

Friday, April 22, 2016

Exceptionalism

The procurement manifestation of NIMBY-ism is exceptionalism: I'm a unique critter and too precious to be subjected to the procurement rules.

I have previously posts concerning the expression of exceptionalism in the esteemed halls of academia, e.g., here.

This article is about the precious IT industry. Read the article at the link for fullness and accuracy and to avoid my editing for my own purposes. (FITARA is the acronym for the Federal Information Technology Acquisition Reform Act.)

National labs' FITARA exemption nixed in Senate funding bill
The Energy Department's national laboratories will likely lose their exemption to procurement rules in the Federal IT Acquisition Reform Act after just one year.

Under FITARA's enhanced CIO authorities, Cabinet-level IT chiefs typically have budget authority and some influence over hiring when it comes to the activities of their bureaus and agencies. The Senate's fiscal 2017 energy and water development appropriations bill would not renew a provision from last year's funding bill that allowed the national labs to conduct IT procurement without the involvement of DOE's CIO.

The labs and its contractors had sought the exemption because they believed their supercomputing programs should not be treated like garden-variety IT. They had a well-placed advocate on the Senate Appropriations Committee.

"Our national laboratories are building the fastest research supercomputers in the world and developing next-generation exascale machines," Sen. Lamar Alexander (R-Tenn.), chairman of the Appropriations Committee's Energy and Water Development Subcommittee, told FCW in June 2015. "One-size-fits-all models don't work well, and I am concerned that this well-intentioned law could make it more difficult to develop the technology we need to support the Department of Energy's research and national security missions."

In its budget request for fiscal 2017, the Obama administration advocated a rescission of the language that authorized the exemption.

In a June 2, 2015, letter to Senate Appropriations Committee Chairman Thad Cochran (R-Miss.), Director of the Office of Management and Budget Shaun Donovan called the exemption "highly problematic." He wrote that, if passed, the provision would "eliminate the administration's ability to ensure information technology resources effectively support the department's mission by reducing duplicative IT systems, implementing a comprehensive cybersecurity solution and addressing other IT management issues that support the president's goal to deliver a government that is more effective, efficient and accountable."

Office of Federal Procurement Policy Administrator Anne Rung echoed that sentiment during a House hearing that same month, saying, "It's our viewpoint that FITARA is a tremendous management tool for the agencies, and we are not carving out the Department of Energy labs."

Although the White House appears to have won the fight, there is a catch: If the government is funded on the basis of a continuing resolution for 2017, rather than by new appropriations bills, the exemption will likely remain in force. Given that the appropriations process for fiscal 2017 is taking place against the backdrop of a presidential election, a continuing resolution is a strong possibility.

Of legs up, hand outs, and ... fingers crossed, eyes shut?

Government contracting staff have it hard enough making sure the public fisc is prudentially targeted to acquiring satisfaction of minimum needs with maximum value and efficiency. When social welfare schemes, or other political aims, let alone nefarious criminal schemes, are interjected into the process, acquisition staff and resources quickly get distracted from the primary purpose of the acquisition process. Putting responsibility on the acquisition process to account for such incidental matters is a step too far, a straw that may break the camel's back.

Responsibility for the smooth handling of those extraneous non-acquistition issues should be shouldered by other instrumentalities with the expertise required for those matters and dealing with the controversies that come with those activities. But someone must be saddled with that responsibility. Because, as we all know, government contracting money is a significant part of any government's budget, and unaccountable diversion of acquisition funds to non-acquisition activities taints public perception of the acquisition process, and reduces the government's purchasing power.

But when everyone is made responsible, no one is.

Note that you should read the article in its original at the link. I tend to cut, paste, delete, paraphrase and otherwise alter the story line to fit in the educational theme and space of this blog.

Governments Struggle to Root Out Fake Minority Contractors
Like many cities and states, Portland, Ord. has a program allowing it to give special consideration to women- and minority-owned companies when handing out government contracts. The goal, of course, is to help support traditionally disadvantaged companies by giving them a leg up. But as Margie Sollinger, the city's ombudsman, began to discover, the city wasn’t necessarily helping the firms it thought it was.

As the city’s ombudsman, Sollinger had for some time been hearing from business owners about fraud in the city’s minority- and women-owned contracting program. According to state law, the city of Portland wasn’t allowed to take action against minority-owned firms it believed to be fraudulent; those complaints had to be referred to the state. But Sollinger says the state Office of Minority, Women and Emerging Small Businesses initially shrugged her off.

So she referred the case to the Oregon Department of Justice, where the investigation continued for nearly two years. Simple city inspections to make sure the awarded company is showing up to perform the job would have caught past violators. But cities and states across the country are struggling to provide sufficient oversight when it comes to minority- and women-owned firms, also known as disadvantaged business enterprises, or DBEs. As a result, much of the money that’s targeted to help these businesses doesn’t really go where governments want it to.

State legislators took an interest in the issue, and last year passed legislation allowing all public agencies in the state to conduct their own investigations into future allegations of minority contract fraud.

It’s a problem that’s shown up all over the place. In Louisville, Ky., the metro sewer district banned two minority businesses from receiving future contracts after it was discovered that they were subcontracting with nonminority-owned businesses. An audit in Pittsburgh found the city didn’t even have a way to track how much work was going to DBEs. The city of Denver has also been dealt a blow by contracting scandals in recent years. In 2014, the city proudly touted a new contract for mechanical work at Denver International Airport that had been awarded to a company owned by an African-American woman; at $39.6 million, it was the city’s largest-ever minority contract. But it later became clear that the company was subcontracting more than $23 million of the work to a different firm, one that didn’t qualify as a minority contractor.

Nationwide data on DBE contracting programs is spotty; states’ efforts vary widely. The National Association of State Procurement Officials doesn’t monitor them. The US GAO has published a smattering of reports over the past 25 years on women- and minority-owned contracting programs with two main conclusions: More information was needed, and the contracting world in general lacks women and minorities.

Wendell Stemley, president of the board of the National Association of Minority Contractors believes states owe it to their residents to help minority firms. He says, "the faces of these businesses should reflect how diverse the locality actually is. And if a state has lax compliance standards, then of course there are going to be firms willing and able to game the system.”

Ensuring that a minority contracting program is functioning properly takes a lot of work. A 2013 internal audit by the Minnesota Department of Transportation found extensive problems with its DBE program, ranging from mismanagement and weak oversight to outright fraud. “We just weren’t seeing a lot of success, and we were even having protests outside the state Department of Transportation office,” says Minnesota state Sen. Scott Dibble, chairman of the Transportation and Public Safety Committee. The scathing audit highlighted millions of dollars that had been passed through to non-DBEs and a consistent failure to meet the state’s own DBE goals. But the key finding, says Dibble, was from the state Office of Civil Rights. “There were some serious concerns within that office that numbers were fudged,” he says.

This year a consortium of state agencies will be working together to develop more objective criteria for what really qualifies as a disadvantaged business. Perhaps most important, Dibble says, the effort has raised awareness among lawmakers of the need for intense oversight. “In order to remedy age-old injustices” against disadvantaged firms, he says, “it requires proactive action, not passive acceptance.” Still there’s an inherent challenge when a state endeavors to mix bureaucracy with “complicated social problems,” says Dibble. “It’s a problem, and I don’t really know how to solve it.”

Another place that’s taking on contract reform is New Orleans. The city has long had a minority contracting program in place, but when construction projects ramped up as the city rebuilt after Hurricane Katrina, it became clear the program had extensive problems. There was a two-year backlog of companies waiting to be certified as minority- or women-owned businesses, and the city had virtually no record-keeping or monitoring processes in place. In 2013, Mayor Mitch Landrieu introduced a set of proposals to raise the profile of the program. These reforms focused mostly on outreach and oversight of public contracts.

Last fall the city implemented a second wave of regulations, focused more on enforcement and compliance. Now, when fraudulent activity is discovered, the city can withhold payments and exclude that particular firm from future contracts. The city has also introduced new technology tools to monitor existing contracts and payments. (As a side benefit, the technology will allow subcontractors to see when a primary contractor gets paid, adding another level of transparency to the entire contracting process.) The city needed to invest in more people. When Landrieu took office in 2010, the Office of Supplier Diversity was made up of one person. But thanks to a local millage, the city was able to budget $700,000 to beef up staffing. Now there’s a staff of seven people. It’s too soon to know how effective the new technology and compliance measures will be; the city only began training employees on them in February.

National Association of Minority Contractors’ Stemley believes the high-profile cases of fraud and noncompliance are the exception to the rule. The onus, he says, is on states and cities to step up their efforts to attract more minority- and women-owned businesses. “We need to be trying harder to make sure we have workforce diversity in the contracting community,” he says. “We can’t ignore these underserved communities that need jobs.”
And don't forget that the main job of the acquisition program and staff is to get the government's needed things and services delivered when and where needed and on budget. Too many times, preference programs are simple political campaigns, big on promotion and bereft of substance and accountability, and the acquisition process gets blamed for the short-changes of the programs.