Among the minority: Many Maryland MBE contracts going to nonprofits

Some question whether nonprofits should qualify for MBE status

Baltimore Business Journal
April 1, 2011

By Scott Dance

Maryland paid nearly $800 million to 20 contractors through the state’s minority business program over much of Gov. Martin O’Malley’s first term. But almost a third of that money went to nonprofits that help people with disabilities, not the minority- and women-owned companies the program was originally intended to boost.

Of the total $3 billion paid through the state’s Minority Business Enterprise program in that time, some 60 percent went to 100 of the 5,000 MBE-certified companies. State law mandates spending 25 percent of contracting dollars with MBE companies.

It has always been a mystery which firms get the most contracts, and minority business advocates have questioned whether the program is adequately addressing racial discrimination. O’Malley’s administration has stressed that minority inclusion is improving, nearly reaching the 25 percent goal.

But a look at state contracts shows that the 25 percent goal remains elusive. By counting hundreds of millions of dollars in contracts with nonprofits that aren’t minority-owned, the state is even further from its goal than it says. That makes it harder to determine how much minority firms actually get, and it could conflict with federal precedents that govern affirmative action contracting programs.

The Baltimore Business Journal analyzed more than 30,000 contracts awarded through the minority contracting program from fiscal year 2006 through fiscal year 2009 to determine exactly who is benefiting most from the program.

Since 2008, state officials had twice refused the Business Journal’s requests for information on the largest recipients of contracts through the program, saying they didn’t know the answer because they do not sort the contract data by firm. Instead, they provided databases of all payments made through the minority business program.

During a four-month investigation, the Business Journal analyzed the data to reveal:

• Nonprofits with social missions of “community rehabilitation” or helping people with disabilities are among the highest-paid contractors in the MBE program. Six of them rank in the program’s top 20 highest-paid, landing a combined $242 million in work over four years.

• A relatively small group of contractors gets hired for a disproportionate amount of contracts. About 160 contractors averaged at least $1 million in business with the state each year over four years.

• A common thread among top contractors was a connection to some of the state’s busiest general contractors. Many of the highest-paid construction-oriented firms reported working with firms such as the Whiting-Turner Contracting Co., Hensel Phelps Construction Co., and Concrete General Inc., better known as CGI.

Meanwhile, the officials in charge of the minority contracting program have recognized it may not be effective. In recent weeks, the General Assembly has approved a one-year extension of the program, during which it will test whether some policy changes increase minority contracting. While the state’s program is held up as a model nationally, some wonder if the facts show there is more work to be done.

“Maryland has one of the best programs in the country,” said Walter Dean III, a former state delegate and chairman of the Greater Baltimore Black Chamber of Commerce’s policy committee. “There are some problems with it. There are lots of loopholes and favoritism.”

Who’s on top?

Among the highest-paid contractors are a handful that work for the state Developmental Disabilities Administration, an agency that accounted for more than a third of all the money the state spent on MBE contracting in fiscal year 2009.

The agency spent $373 million with MBE-certified firms that year, according to data from the agency. That is out of $989 million the state spent in total on MBE contracts in fiscal 2009, according to the Business Journal’s investigation. Firms drawing the most business from the program were Chimes International, the Arc of Baltimore, the Arc of Washington County, Columbia nonprofit Emerge Inc., and United Cerebral Palsy of Central Maryland.

For many of those groups, holding MBE certification is an afterthought. Phyllis Landry, executive director of the Arc of Washington County, said she didn’t know when or why her organization applied to be part of the program — just that it was done some time before her tenure. But for at least one official at another of the organizations, it begged the question — does it make sense to include them in the program?

Special Secretary for Minority Affairs Luwanda W. Jenkins, who oversees enforcement of the MBE contracting program, agreed that it might not. The nonprofits aren’t included in a study the state undertakes periodically to prove the program is still needed to address ongoing discrimination, she said. Such studies are required of any affirmative action program — federal courts have only considered them Constitutional if they are correcting proven discrimination.

On top of that, the state would hire many of the nonprofits regardless of whether they are certified as MBEs, she said. Her office has considered in the past whether the nonprofits should be distinguished from minority firms when adding up contracting dollars and the state’s overall percentage of minority inclusion, she said. It may be something the office will look into soon, though — it’s “on the horizon to look at these types of issues,” she said.

One expert in MBE program law said not only does he disagree with including the nonprofits, but doing so might conflict with guidelines established in federal court.

Franklin Lee, an attorney with Tydings & Rosenberg LLP in Baltimore who has advised Maryland and many other states on minority business law, questioned why nonprofits are allowed to be certified under the program. While the social good they bring should be encouraged, Lee said, hiring them doesn’t help reverse any discrimination — which is the goal of the MBE program.

“I think the policymakers have confused two different policy objectives and kind of lumped them together,” he said. “It has the unfortunate consequence of having those two different types of entities competing with each other when they really shouldn’t be.”

It also might not fall within requirements that minority business programs be “narrowly tailored,” established in the 1989 case City of Richmond v. J.A. Croson Co., Lee said. In that case, the city lost in a challenge to its MBE program because it was deemed to be too broad. Since then, Maryland’s MBE program and its peers have had to focus strictly on reversing proven discrimination.

But some in the black community don’t see a problem, given the nonprofits’ positive social mission. Pless Jones Sr., owner of P&J Contracting in Baltimore, said including nonprofits in the program doesn’t affect companies like his, which received $12 million in MBE contracts over four years.

“They don’t take any work from minority contractors and they serve a purpose in what they do,” he said.

Who you know

It can also help to have the right connections. Many of the top MBE firms work for majority contractors that dominate their fields in state contracting. Just as there is a relatively short list of firms that land most major state projects, there tends to be a relatively short list of minority subcontractors, as well.

For Genesis Steel Service Inc., a black-owned Essex firm that did $39 million in business with the state over four years, that source was contractors like Concrete General Inc., better known as CGI; Cherry Hill Construction, Corman Construction, McLean Contracting Co. and P. Flanigan and Sons. Genesis works mainly on State Highway Administration bridge projects between Baltimore and Washington, D.C., President Roland Peed said.

Traffic Systems Inc. owes much of its $47 million in state business to Dayton Superior, an Ohio company that works on state concrete bridge and highway projects. Owner Marsha Zorich said her company processes Dayton’s freight bills, which means they process its invoices to FedEx and other shippers.

The Whiting-Turner Contracting Co.’s banner has appeared on many a state building under construction, and it has channeled work to contractors like Hancock and Albanese of Elkridge, the sixth-highest-paid MBE contractor.

About 60 percent of its business comes from projects like school construction, and it has worked for major contractors including Whiting-Turner and Hensel Phelps Construction Co., owner Liz Hancock said. Her company is currently working on jobs at Morgan State University and the Maryland Fire and Rescue Institute in College Park.

Jenkins said given trends in overall state contracting, it’s not surprising to see a relatively small amount of companies take a large share of contracts, among both general contractors and MBE contractors.

“That’s just a reflection of the way we spend money,” she said. There is no mechanism in the state procurement or MBE programs that tracks just how dominant any single company or group of companies might be.

But there are still those who argue the program is inherently unfair, and that cozy relationships with large contractors and preferential treatment from the state hurts small white-owned companies.

“You’ve got the same companies over and over again filling up these goals,” said Kevin Howell, CEO of Specialty Service Contractors, a highway contractor in Cockeysville. “It just costs the taxpayers money and causes people to go out of business.”

Finding a solution

MBE program officials hope policy changes will spur improvements in minority inclusion, or at least shine a light on how better to do that.

Currently, the state tries to hire black firms for 7 percent of state contracting and women-owned firms for 10 percent, but a proposal from Jenkins’ office will remove those so-called sub-goals for a one-year test period. State officials are wondering if they are ineffective, as neither sub-goal has been reached; in fiscal 2009, 5 percent of contracting dollars went to black-owned firms and 5.9 percent went to women-owned firms.

Jenkins said her office is striving to improve minority inclusion, and while goals haven’t been met, MBE contracting is growing. MBE participation has grown from 16 percent in fiscal 2003 to 22 percent in fiscal 2009, including contracts with nonprofits.

“We’re looking to see those year-over-year increases to signal that the program is moving in the right direction,” Jenkins said. “We’re trying to help companies assimilate into the mainstream.”

But Jenkins’ predecessor, Sharon Pinder, said she hopes more sweeping changes to the program come out of the test period, since the program has repeatedly failed to meet the 25 percent goal.

“If it’s not producing the expected results, it’s a pretty significant message that we really need to do something different,” said Pinder, who also founded the Top 100 MBE Awards. “I’m hoping that what comes out at the other end a year from now is truly leading-edge at how we begin to solve this issue.”