Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program (2010)

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1The project to develop the National Model Disparity Study and Request for Proposals for state departments of transporta- tion (state DOTs) seeks to address the evidentiary tests created by the federal courts that govern the Disadvantaged Business Enterprise (DBE) Program for federally assisted transporta- tion contracts.1 In general, race- and gender-based govern- ment actions are subject to high levels of scrutiny: a program must be based on strong evidence and designed to be narrow in its remedies. It is in response to these strictures that disparity studies of discrimination in the market for public contracts were first conducted. It is therefore crucial to canvass the state of the law to develop national guidelines for the examination of ev- idence of discrimination in the market for federally assisted transportation contracts. This Model Study Project is designed to assist state DOTs in meeting the regulatory goal-setting requirements in con- formance with strict constitutional scrutiny. Where state DOT DBE programs have been challenged, a disparity or availability study has survived judicial review. It should pro- vide evidence relevant to the two steps in annual overall goal setting—estimating the base figure of DBE availability and the expected DBE utilization “but for” the effects of the DBE program and discrimination—as well as data relevant to contract-level goal setting.2 Specifically, we were directed to “prepare an analysis of the federal DBE goal-setting regula- tions and case law in all federal circuits considering challenges to the constitutionality of the U.S. Disadvantaged Business Program. Identify common themes and key distinguishing factors in state DOT DBE programs that influenced the court ruling on constitutionality.” What follows is a summary of the case law and regulations relevant to the development of a disparity study model, with the focus on evidentiary issues. A more detailed discussion, with case and other citations, is provided in Appendix C to the report. Strict Scrutiny Standard In City of Richmond v. J. A. Croson Co.,3 the United States Supreme Court established the constitutional contours of per- missible race-based public contracting programs. Strict scrutiny requires that a government entity prove both its “compelling interest” in remedying identified race discrimination based upon a “strong basis in evidence,” and that the measures adopted to remedy that discrimination are “narrowly tailored” to that evidence. In Croson, the Court struck down Richmond’s Minority Business Enterprise Plan that required prime contractors awarded city construction contracts to subcontract at least 30% of the project to minority-owned business enterprises (MBEs). In affirming the court of appeals’ determination that the plan was unconstitutional, the Court held: [A] state or local subdivision . . . has the authority to eradicate the effects of private discrimination within its own legislative ju- risdiction. . . . [Richmond] can use its spending powers to rem- edy private discrimination, if it identifies that discrimination with the particularity required by the Fourteenth Amend- ment. . . . [I]f the City could show that it had essentially become a “passive participant” in a system of racial exclusion . . . [it] could take affirmative steps to dismantle such a system. Having found that Richmond had not presented evidence to support its compelling interest in remedying discrimination— the first prong of strict scrutiny—the Court went on to make two observations about the narrowness of the remedy—the C H A P T E R 1 Overview of Legal Standards for Disadvantaged Business Enterprise Programs 149 C.F.R. Part 26. 2See infra at pp. 38–39. 3488 U.S. 469 (1989).

second prong of strict scrutiny. First, Richmond had not con- sidered race-neutral means to increase MBE participation. Second, the 30% quota had no basis in evidence and was ap- plied regardless of whether the individual MBE had suffered discrimination. Apparently recognizing that the opinion might be miscon- strued to categorically eliminate all race-conscious contract- ing efforts, the Court explicitly stated: Nothing we say today precludes a state or local entity from tak- ing action to rectify the effects of identified discrimination within its jurisdiction. If the City of Richmond had evidence before it that non-minority contractors were systematically excluding mi- nority businesses from subcontracting opportunities, it could take action to end the discriminatory exclusion. Where there is a significant statistical disparity between the number of qualified minority contractors willing and able to perform a particular service and the number of such contractors actually engaged by the locality or the locality’s prime contractors, an inference of discriminatory exclusion could arise. . . . Moreover, evidence of a pattern of individual discriminatory acts can, if supported by appropriate statistical proof, lend support to a local govern- ment’s determination that broader remedial relief is justified. In Adarand v. Peña,4 the court extended the analysis of strict scrutiny to race-based federal enactments such as the DBE Program. Just as in the local government context, the national government must have a compelling interest for the use of race and the remedies adopted must be narrowly tailored to the evidence relied upon. Intermediate Scrutiny In general, courts have subjected preferences for Women- Owned Business Enterprises (WBEs) to “intermediate scrutiny”: gender-based classifications must be supported by an “exceedingly persuasive justification” and “substantially related” to the objective. However, appellate courts reviewing the constitutionality of the DBE Program have applied strict scrutiny to the gender-based presumption of social disadvan- tage. Therefore, state DOTs would be wise to meet the rigors of strict scrutiny for gender preferences. Strict Scrutiny as Applied to the Disadvantaged Business Enterprise Program In the wake of Adarand, Congress reviewed and revised the DBE Program’s authorizing statute and implementing regulations. To date, every court that has considered the issue has found the regulations to be constitutional on their face.5 Congress Established its Compelling Interest in Remedying Discrimination All courts agree that the first prong of strict scrutiny is sat- isfied by the Congressional record that forms the basis for the DBE Program. Relevant evidence included: • Disparities between the earnings of minority-owned firms and similarly situated white-owned firms; • Disparities in commercial loan denial rates between black business owners compared to similarly situated white busi- ness owners; • The large and rapid decline in minorities’ participation in the construction industry when race-conscious contract- ing programs were struck down or abandoned; and • Various types of overt and institutional discrimination by prime contractors, trade unions, business networks, sup- pliers, and sureties against minority contractors. It is important to note Congress need not make specific findings on every possible ethnic subgroup that might be subject to discrimination. Moreover, much of the evidence of public and private sector discrimination went beyond the results of the DBE Program to address whether a recipient would be a passive participant in a discriminatory federal-aid market without race-conscious measures. Therefore, public and private discrimination is generally relevant not only in government contracts but also in the construction industry. DBE Regulations are Narrowly Tailored Next, the regulations are narrowly tailored. Part 26 pro- vides that: • The overall goal must be based upon demonstrable evi- dence of the number of DBEs ready, willing, and able to participate on the recipient’s federally assisted contracts;6 • The goal may be adjusted to reflect the availability of DBEs but for the effects of the DBE Program and of discrimination;7 2 4515 U.S. 200 (1995) (Adarand III). 5See Adarand Constructors, Inc. v. Slater, 228 F.3d 1147 (10th Cir. 2000), cert. granted, 532 U.S. 941, then dismissed as improvidently granted, 534 U.S. 103 (2001) (Adarand VII); Sherbrooke Turf, Inc. v. Minnesota Department of Trans- portation, and Gross Seed Co. v. Nebraska Department of Roads, 345 F.3d. 964 (8th Cir. 2003), cert. denied, 541 U.S. 1041 (2004); Western States Paving Co., Inc. v. Washington Department of Transportation, 407 F.3d 983 (9th Cir. 2005), cert. denied, 546 U.S. 1170 (2006); Northern Contracting, Inc. v. Illinois Department of Transportation, 473 F.3d 715 (7th Cir. 2007) (Northern Contracting III). 649 C.F.R. § 26.45(b). 749 C.F.R. § 26.45(d).

• The recipient must meet the maximum feasible portion of the goal through race-neutral measures,8 as well as esti- mate that portion of the goal it predicts will be met through such measures;9 • The use of quotas is not permitted,10 and set-asides are lim- ited only to extreme circumstances when no other method could reasonably be expected to redress egregious instances of discrimination;11 • The goals are to be adjusted during the year to remain narrowly tailored;12 • Absent bad faith administration of the program, a recipient cannot be penalized for not meeting its goal;13 • Eligibility is limited to small firms owned by persons whose net worth is less than $750,000;14 • Certification is available to persons who are not presump- tively disadvantaged but can demonstrate actual social and economic disadvantage;15 • The presumption of social disadvantage for minorities and women is rebuttable;16 • The firm must be a small business;17 • Exemptions from any or all program requirements are available;18 and • The authorizing legislation is subject to Congressional reauthorization that will ensure periodic public debate. State DOTs’ Implementation of Part 26 Must be Narrowly Tailored Part 26 requires that a state DOT narrowly tailor its DBE efforts to the evidence of discrimination in its marketplace. The regulations prescribe narrowly tailored methods for set- ting annual DBE goals to achieve a level playing field for DBEs. 49 C.F.R. § 26.45 provides that recipients must set an overall goal for DBE participation in their federally assisted contracts “based on demonstrable evidence of the availability of ready, willing and able DBEs relative to all businesses ready, willing and able to participate on your DOT-assisted contracts (here- after, the ‘relative availability of DBEs’). The goal must reflect your determination of the level of DBE participation you would expect absent the effects of discrimination.” Step 1 Analysis: Estimating DBE Availability. The process to set the overall annual DBE goal is divided into two steps under 49 C.F.R. § 26.45(c). Step 1 is to determine “a base fig- ure for the relative availability of DBEs. The following are ex- amples of approaches that you may take toward determining a base figure. . . . (1) Use DBE Directories and Census Bureau Data. . . . (2) Use a bidders list. . . . (3) Use data from a dispar- ity study. . . . (4) Use the goal of another DOT recipient. . . . (5) Alternative methods. Subject to the approval of the DOT operating administration, you may use other methods to determine a base figure for your overall goal.” Step 2 Analysis: Examining Evidence of Disparities in DBE Opportunities. After the state DOT has estimated its Step 1 base figure of DBE availability, it must estimate the level of DBE availability in a discrimination-free market, that is, DBE availability “but for” discrimination. 49 C.F.R. § 26.45(d) requires that state DOTs must consider the “current capacity of DBEs to perform work in your DOT-assisted contracting program, as measured by the volume of work DBEs have performed in recent years; [and] [e]vidence from disparity studies conducted anywhere within your jurisdiction, to the extent it is not already accounted for in your base figure” and may consider “[s]tatistical disparities in the ability of DBEs to get the financing, bonding and insurance” and “[d]ata on em- ployment, self-employment, education, training and union apprenticeship programs. . . . If you attempt to make an adjust- ment to your base figure to account for the continuing effects of past discrimination (often called the “but for” factor) or the effects of an ongoing DBE program, the adjustment must be based on demonstrable evidence that is logically and directly related to the effect for which the adjustment is sought.” Dis- parity or availability studies should provide data probative of this inquiry. Judicial Review of Disadvantaged Business Enterprise Goal Setting Under Part 26 To develop a model disparity or availability study for state DOTs, it is critical to understand the cases reviewing state DOTs’ application of Part 26. We briefly summarize the three decisions that speak directly to the types of evidence relevant and necessary for state DOTs’ narrowly tailored program implementation. Northern Contracting, Inc. v. Illinois Department of Transportation. In the most recent case, the Seventh Cir- cuit Court of Appeals held that the Illinois Department of Transportation’s (IDOT’s) Federal Fiscal Year (FFY) 2005 DBE Plan was narrowly tailored. IDOT had commissioned an availability study to meet Part 26’s requirements.19 For Step 1, the IDOT Study developed a 3 849 C.F.R. § 26.51(a) 949 C.F.R. § 26.51(c). 1049 C.F.R. § 26.43(a). 1149 C.F.R. § 26.43(b). 1249 C.F.R. § 26.51(f ). 1349 C.F.R. § 26.47(a). 1449 C.F.R. § 26.67(b). 1549 C.F.R. Part 26, Appendix E. 1649 C.F.R. § 26.67(b). 1749 C.F.R. § 26.65. 1849 C.F.R. § 26.15(a). 19NERA Economic Consulting. 2004a. Disadvantaged Business Enterprise Avail- ability Study: Prepared for the Illinois Department of Transportation.

“custom census” designed to provide an accurate calculation of the current relative availability of DBEs, which employed a seven-step analysis that: • Created a database of representative IDOT projects; • Identified the appropriate geographic market for IDOT’s contracting activity; • Identified the appropriate product market for IDOT’s con- tracting activity; • Counted all businesses in those relevant markets; • Identified minority-owned and women-owned businesses in those markets; • Verified the ownership status of minority-owned and women-owned businesses; and • Verified the ownership status of all other firms. For Step 1, the study estimated that DBEs comprised 22.77% of IDOT’s available firms. For Step 2, the study examined whether and to what extent there were disparities between the rates at which minorities and women form businesses relative to similarly situated white men, as well as disparities in the relative earnings of those businesses. Controlling for numerous variables such as the owner’s age, education, and the like, the study found that in a race-neutral marketplace, the availability of DBEs would be approximately 20.8% higher, yielding a Step 2 estimate of DBE availability “but for” discrimination of 27.51%. In addition to the IDOT Study, the court considered: • An availability study designed to meet Part 26 conducted for Metra, the Chicago commuter rail agency; • Expert reports from a decision holding that the City of Chicago had a compelling interest in its minority and women business program for construction contracts; • Expert reports and anecdotal testimony presented to the Chicago City Council in support of the city’s revised Minority and Women Business Enterprise (M/WBE) Pro- gram ordinance; • Anecdotal evidence gathered at IDOT’s public hearings on the DBE program; • Data on DBE utilization on construction projects in “un- remediated” markets without DBE goals; • DBE utilization of 1.6% in the Illinois State Toll Highway Authority’s voluntary DBE program for non-federal-aid contracts; and • IDOT’s “zero goal” experiment, where DBEs received ap- proximately 1.5% of the total value of contracts without goals. The trial and appellate courts held this to be sufficient proof of discrimination such that race-neutral measures alone would be inadequate to ensure that DBEs operate on a “level playing field” for IDOT’s contracts and subcontracts. Of particular importance for the Model Study Project is the court’s affirmance of estimating the availability of DBEs by relying on the study’s “custom census” approach rather than simply counting the certified DBEs among IDOT bidders, prequalified prime contractors, and registered subcontrac- tors, as the plaintiff had urged. The court held that the reme- dial nature of the program favors a method of DBE availability calculation that “casts a broader net.” Sherbrooke Turf, Inc. v. Minnesota Department of Trans- portation. The Minnesota Department of Transportation’s (Mn/DOT’s) implementation of Part 26, based on a similar availability study, was likewise held to be constitutional. After holding that Congress had ample evidence of discrimination against DBEs in the market for federal-aid transportation con- tracts, the Eighth Circuit noted that “Sherbrooke presented evidence attacking the reliability of the data the state used in determining its recommended overall goal.” But Sherbrooke “failed to establish that better data was [sic] available or that Mn/DOT was otherwise unreasonable in undertaking this thorough analysis and in relying on its results. The precipitous drop in DBE participation in 1999, when no race-conscious methods were employed, supports Mn/DOT’s conclusion that a substantial portion of its 2001 overall goal could not be met with race-neutral measures.”20 In Sherbrooke’s companion case, the Nebraska Department of Roads’ (NDORs’) DBE goal based on an availability study21 was upheld. Western States Paving Co., Inc. v. Washington State Department of Transportation. The result from the Ninth Circuit was dramatically different in the challenge to the Wash- ington State Department of Transportation’s (WSDOT’s) DBE Program. While the DBE Program’s legislation and regula- tions were held to facially satisfy strict scrutiny, WSDOT’s implementation of the regulations was not sufficiently nar- rowly tailored. Although a recipient need not demonstrate an independent compelling interest for its DBE Program, it is necessary to undertake an “as applied” inquiry into whether the state’s program is narrowly tailored to its marketplace. The Ninth Circuit held that grantees must proffer addi- tional evidence of discrimination beyond that relied upon by Congress to apply race-conscious contract goals to meet the annual goal, including that discrimination must have affected all of the presumptively socially disadvantaged groups included in Part 26. 4 20Sherbrooke, 345 F.3d. at 973–74. 21MGT of America, Inc., September 2000, “Availability and Goal Setting Study.” This study used the bidders list approach to estimating Step 1 availability. The Eighth Circuit did not comment on this method.

WSDOT determined its Step 1 base figure of DBE avail- ability by dividing the number of certified DBEs by the total number of establishments in the Census Bureau’s County Business Patterns (CBP) database. In Step 2, it followed the U.S.DOT’s guidelines and adjusted the base figure to reflect the average of the Step 1 estimate averaged with the median of prior 5 years’ DBE participation. WSDOT did not have sta- tistical evidence upon which to make an adjustment for dis- criminatory barriers and therefore could only rely upon the gap between its Step 1 estimate of 14% and the 9% DBE par- ticipation on contracts without goals. However, the court held that this 14% figure reflects the effects of the DBE Pro- gram, and thus is not indicative of DBE utilization in a race- neutral market. Further, the disparity between DBE availabil- ity and DBE utilization on race-neutral contracts was entitled to little weight because it did not account for the “relative capacity” of DBEs. Finally, the state did not rely upon any anecdotal evidence of discrimination in Washington’s trans- portation marketplace in setting its goal. The opinion is unclear how much evidence of discrimina- tion in a recipient’s jurisdiction is necessary to support the use of race-conscious contract goals. The court somewhat collapses the compelling interest requirement of “strong evidence” of discrimination with the requirement that the remedy be nar- rowly tailored to that evidence. The regulations disavow the need for grantees to conduct disparity studies, yet the opin- ion demands evidence that closely resembles a disparity study. It also seems to confuse the setting of an overall agency goal—the expected DBE participation in a discrimination- free market—with the means used to achieve that goal—the use of race-conscious subcontracting goals. Even if a recipient concluded that its market was fully fair and open, that does not mean that it would not set a goal, only that it would not employ race-based measures to meet it. Perhaps this merely illustrates that if a party presents no study, the court then lacks guidance on the correct economic and legal analysis of discrimination. The Ninth Circuit pointed out that “[b]oth Minnesota and Nebraska had hired outside consulting firms to conduct statistical analyses of the avail- ability and capacity of DBEs in their local markets, and the Eighth Circuit relied upon those studies to hold that the States’ DBE Programs independently satisfied strict scrutiny’s narrow tailoring requirement.”22 As a result of no study and no expert testimony, the Ninth Circuit made several serious errors, including imposing a requirement for a Step 2 adjust- ment, ignoring the effects of discrimination on DBE “capacity,” and misstating the test for whether a disparity is substantively significant. Given the Ninth’s Circuit’s reliance on Sherbrooke, what WSDOT lacked was the type of expert statistical evidence pre- sented by IDOT, Mn/DOT, and NDOR in support of their programs. The Sherbrooke and Northern Contracting courts reviewed ample targeted evidence of DBEs’ availability to perform on state DOT contracts and subcontracts, as well as evidence of the discriminatory barriers those firms face in pursuing such opportunities. Additional Evidence of Discrimination Step 2 requires recipients to consider evidence of the effects of the DBE Program and discrimination on DBE availability. The case law is very sparse regarding analysis of the elements of the determination of availability “but for” the effects of dis- crimination. The Western States opinion does not address what would suffice, and IDOT determined not to make a Step 2 ad- justment. Sherbrooke noted without further comment that the DBE availability figure was adjusted from 11.4 to 11.6%. This report therefore looks to cases construing state and local M/WBE programs for guidance on the types of evidence relevant to whether discrimination continues to affect the Step 1 base figure. Proof of the disparate impacts of economic factors on minority- and women-owned firms and the dis- parate treatment of such firms by actors critical to success should be shown using statistics and economic models to ex- amine the effects of systems or markets on different groups. Anecdotal evidence of personal experiences with discrimina- tory conduct, policies, or systems is also probative. Specific evidence of discrimination or its absence may be direct or cir- cumstantial and should include economic factors and oppor- tunities in the private sector affecting the business success of minority and women disadvantaged business enterprises (M/W/DBEs). Utilization of DBEs. Disparity studies examine whether and to what extent there are disparities between the availabil- ity of DBEs and their utilization on public and private sector contracts and subcontracts. This is known as the “disparity index” or “disparity ratio,” which is calculated by dividing the utilization of DBEs by the availability of DBEs. Courts have looked to disparity indices in determining whether Croson’s evidentiary foundation is satisfied. An index less than 100% indicates that a given group is being utilized less than would be expected based on its availability, thereby supporting an inference of the present effects of discrimination. The government need not prove that the statistical inferences of discrimination are “correct.” Statistical evidence creating inferences of discriminatory motivations has been held to meet strict scrutiny. It is the plaintiff who must then persuade the court that such proof does not support those inferences. Past utilization of DBEs on state DOT contracts is useful in suggesting a “floor” of the availability of DBEs that are “ready, willing and able.” That DBEs are utilized on the agency’s 5 22407 F.3d at 997.

contracts at greater percentages than the Step 1 headcount does not end the inquiry into whether discrimination still cre- ates barriers to equal contracting opportunities. However, where the government has been implementing race-conscious remedies like the long-standing DBE Program, DBE utiliza- tion may merely reflect those efforts; it does not signal the end of discriminatory barriers but rather the program’s success in reducing those barriers. While § 26.45(d) clearly defines “capacity” as past utiliza- tion, some agencies have added a gloss of “capacity analysis” to lower the Step 1 base figure. They note that DBEs are often smaller and newer than established white male-owned busi- nesses and may lack the qualifications needed for DOT work (prior DOT track record, high bonding capacity, ownership or long-term leases of equipment, existing union agreements, etc.). The agency therefore downgrades the remedial goal to reflect the “real-world” effects of discrimination. The Ninth Circuit has further confused the issue by rejecting the only type of “capacity” marker required to be considered by the regulations it held to be constitutional—past state DOT DBE utilization. WSDOT argued that DBE capacity should reflect the relationship between its Step 1 availability estimate and its past utilization. The court, however, held that was “no evidence of discrimination” because utilization was affected by the imposition of DBE contract goals. It then rejected the disparity between DBE availability and utilization because the availability measure did not statistically control for the “rela- tive capacity” (which it did not define). The court does not appear to have contemplated that the existence of the program would provide DBEs with more “capacity” (that is, supply) by creating more opportunities to work (that is, demand) by the application of contract goals. In Northern Contracting, the Seventh Circuit recognized that lack of DBE “capacity” reflects the injury of discrimination; it is not an argument for limiting or abandoning the cure. As dis- cussed in Appendix B, applying a “capacity” adjustment is sci- entifically unsound and contrary to the DBE Program’s objec- tive of remedying, not affirming, the results of discrimination. Size, longevity, bonding limits, etc., have been affected and re- duced by the discrimination the legislation seeks to ameliorate, and therefore cannot be used to dilute the remedy. Proper sta- tistical analysis should not control for the variables affected by the behavior sought to be isolated. Moreover, the construction industry is particularly elastic, such that any firm’s “capacity” today is not its “capacity” tomorrow, as the award of new con- tracts, the completion of existing projects, and the ability to employ temporary workers and rent equipment make the ability to perform a particular contract at a particular moment impossible to determine from a research standpoint. Economy-Wide Evidence of Discrimination. Evidence of discriminatory barriers in the private sector or economy- wide activities is also highly relevant to the state DOT’s pas- sive participation in discrimination. If DBEs are suffering discrimination in the private markets, the government has an interest in ensuring that its own contracting activities do not further this evil. Economy-wide evidence has consisted of various types. Barriers to the formation of DBE contractors have included the following: • Exclusion from “good old boy” networks, often the result of several generations of family participation in the industry; • Barriers to union membership; and • Race-based denial of access to start-up and working capital. Barriers to competition by existing DBEs have included the following: • Nonsolicitation of DBEs in the absence of DBE goals; • Bid shopping of DBE quotes to non-DBEs; • Industry domination by “informal, racially exclusionary business networks”; • Discrimination by surety bonding companies; and • Price and delivery discrimination by suppliers. Unremediated Markets Data. It is critical to measure the participation of minority- and women-owned firms in the ab- sence of race-conscious goals, if such evidence is available. Evidence of race and gender discrimination in relevant “un- remediated” markets, that is, markets that have no race- conscious subcontracting goals, provides an important indi- cator of the effects of the DBE Program and the level of DBE participation to be expected in the absence of DBE contract goals, that is, a totally race-neutral program. The courts are clear that the government has a compelling interest in not financing the evil of private prejudice with public dollars. If DBE utilization is below availability in un- remediated markets, then an inference of discrimination may be supportable. Numerous courts have recognized that the virtual disappearance of M/W/DBE participation after pro- grams have been enjoined or abandoned strongly indicates substantial barriers remain to the participation of minority contractors. This analysis addresses whether the govern- ment has been and continues to be a “passive participant” in such discrimination, in the absence of race-conscious remedies. Thus, the results of nongoals contracts can help to demonstrate that, but for the interposition of remedial race-conscious measures, discrimination would lead to dis- parities in government contracting. Anecdotal Evidence. Anecdotal evidence of experiences with discrimination in contracting opportunities, including testimony from other governments’ studies and programs, is 6

relevant since it goes to the question of whether observed sta- tistical disparities are due to discrimination and not to some other nondiscriminatory cause or causes. Testimony about discrimination by prime contractors, unions, bonding com- panies, suppliers, and lenders has been found relevant regard- ing barriers both to minority subcontractors’ business forma- tion and to their success on governmental projects. While anecdotal evidence is insufficient standing alone, such proof “may bring cold numbers convincingly to life.” There is no requirement that anecdotal testimony be verified. Additional Elements of Narrowly Tailored DBE Goal Setting Definition of State DOT’s Marketplace. Part 26 directs grantees to set goals based on the “relative availability of DBEs in your market.”23 State DOTs must therefore apply economic principles to empirically establish the geographic and industry dimensions of their contracting marketplace to ensure that the evidence is narrowly tailored. The studies re- lied upon by IDOT, Mn/DOT, and NDOR defined the rele- vant geographic market as those locations and industries that collectively accounted for at least 75% of the contract dollars awarded. Race- and Gender-Neutral Remedies. Race- and gender- neutral approaches are a necessary component of a defensi- ble and effective DBE Program. The Constitution and the regulations require that they be used to the maximum feasi- ble extent and applied in good faith. Such measures include unbundling of contracts into smaller units, providing techni- cal support, and addressing issues of financing, bonding, and insurance important to all small and emerging businesses.24 Difficulty in accessing procurement opportunities, restrictive bid specifications, excessive experience requirements, and overly burdensome insurance and/or bonding requirements, for example, might be addressed by recipients without resort to using race or gender in their decision making. Further, governments have a duty to ferret out and eliminate discrim- ination against minorities and women by their contractors, staff, lenders, bonding companies, or others. Collecting data is another necessary race-neutral measure. Agencies should track the utilization of M/W/DBEs as a mea- sure of their success in the bidding process, including as sub- contractors. Part 26 goes further in mandating the creation and maintenance of a bidders list.25 However, strict scrutiny does not require that every race- neutral approach must be implemented and then proven in- effective before race-conscious remedies may be utilized. While an entity must give good-faith consideration to race- neutral alternatives, every possible such alternative need not be exhausted. Annual and Contract Goal Setting. DBE goals must be substantially related to the availability of such firms in the rel- evant market. To freeze the goals at current head counts would set the results of discrimination—depressed DBE availability— as the marker of the elimination of discrimination. It therefore should be reasonable for the government to seek to attempt to level the racial playing field by setting targets somewhat higher than the current head count. Thus, 49 C.F.R. § 26.51 requires grant recipients to determine the availability of DBEs in their marketplaces, absent the presence of discrimination. In addition to the overall, aspirational goals for their an- nual, aggregate spending, state DOTs must set subcontract- ing goals for specific projects based upon the availability of DBEs to perform the anticipated scopes of subcontracting, not reiterate annual aggregate targets.26 Not only is contract- specific goal setting probably necessary to ensure constitu- tionally required flexibility, but also setting goals that reflect the reality of the scopes of work of the job instead of overall agency spending targets reduces the need to conduct good- faith effort reviews because bidders are more likely to achieve realistic targets. Contract goals also reduce the temptation to create “front” companies and sham participation to meet goals not reflective of the project. Implications and Effects of Western States The implications and effects of Western States have been profound. All grantees in the Ninth Circuit have been directed to suspend the use of subcontracting goals until the opinion’s evidentiary standards are satisfied. How to meet those stan- dards led in large part to TRB’s commissioning of this report. U.S.DOT Guidance for Ninth Circuit Recipients In response to Western States, the U.S.DOT General Coun- sel, in 2005, provided guidance that all Ninth Circuit grantees that lacked sufficient evidence of discrimination or its effects were to submit all race-neutral overall goals for FFY 2006 and an action plan, with timetables, to conduct a study. In particular, the guidance provides the following: • The study should ascertain the evidence for discrimination and its effects separately for each of the groups presumed by Part 26 to be disadvantaged. • The study should include an assessment of any anecdotal and complaint evidence of discrimination. 7 2349 CFR §26.45(b). 2449 C.F.R. § 26.51(b). 2549 C.F.R. § 26.11(c). 2649 C.F.R. § 26.51.

• Recipients may consider the kinds of evidence that are used in ‘Step 2’ of the Part 26 goal-setting process, such as evidence of barriers in obtaining bonding and financing, and disparities in business formation and earnings. • With respect to statistical evidence, the study should rigor- ously determine the effects of factors other than discrimina- tion that may account for statistical disparities between DBE availability and participation. This is likely to require a mul- tivariate/regression analysis. • The study should quantify the magnitude of any differences between DBE availability and participation, or DBE participa- tion in race-neutral and race-conscious contracts. Recipients should exercise caution in drawing conclusions about the presence of discrimination and its effects based on small dif- ferences. • In calculating availability of DBEs, the study should not rely on numbers that may have been inflated by race-conscious programs or that may not have been narrowly tailored. • Recipients should consider, as they plan their studies, evidence- gathering efforts that Federal courts have approved in the past. These include the studies by Minnesota and Nebraska cited in Sherbrooke Turf . . . [and] the Illinois evidence cited in Northern Contracting. DBE Program Implementation and Goal Setting in the Ninth Circuit While the Guidance provided the contours of the types of evidence to be analyzed, precisely what evidence a defensible study should include in the Ninth Circuit is not established. If WSDOT had presented a Sherbrooke/Northern Contracting- type availability study and proffered expert testimony in sup- port of its analysis, then the court may have approved the program. Whether additional evidence of discrimination of the type presented at the Northern Contracting trial should also be included is uncertain because while the Western States court suggests disparity evidence is required, it also relied upon Sherbrooke where such evidence was not presented. The Seventh Circuit explained the Ninth Circuit’s misreading of a previous Seventh Circuit case upon which the Ninth Circuit heavily relied, but the IDOT trial presented evidence of the type referred to by the Ninth Circuit, so it is again impossi- ble to know the outcome had Illinois relied solely upon its availability study. What is certain is that at a minimum, Ninth Circuit grantees, and perhaps all U.S.DOT aid recipients, must significantly cus- 8 tomize their DBE goals to withstand strict scrutiny. It is not enough to plug the Step 1 availability estimate into a formula without considering the effects of discrimination. Western States also casts doubt on the value of using the state DOT’s past levels of DBE utilization as a measure of the availability of DBEs “but for” discrimination because of the interposition of the DBE program. Any adjustment must be a quantifiable rep- resentation of the qualitative judgment that the ongoing effects of past or current discrimination either do or do not continue to impede DBEs’ full and fair access to the recipient’s market. Western States further implies, and the U.S.DOT guidance provides, that when a Ninth Circuit recipient determines that not all the enumerated groups have suffered discrimina- tion in its market, it must petition U.S.DOT for a waiver of the prohibition against separate goals for racial and ethnic minorities and white women. If a group is not found to suf- fer discrimination in the state DOT’s marketplace, then cer- tified DBEs owned by such persons cannot be counted by a prime contractor toward meeting a DBE contract goal. For example, in response to their disparity studies’ findings of in- sufficient evidence of discrimination, a waiver to remove Hispanic and Subcontinent Asian males from goal credit has been granted to the California Department of Transporta- tion’s (Caltrans’), and the Oregon Department of Trans- portation’s (ODOT’s) request to exclude white females and Hispanics is pending. TRB Model Disparity Study Project This TRB project was undertaken to assist grantees in meet- ing these guidelines, as well as the mandates of strict scrutiny and Part 26. In particular, we were retained to do the following: • Provide guidelines to state DOTs to determine when studies are needed; • Develop a model scope of work for Requests for Proposals (RFPs) for studies; • Develop a model disparity/availability study design; and • Determine what data should be collected. What follows is our best professional judgment on how best to respond to the evidentiary issues involved for state DOTs in meeting strict scrutiny and regulatory mandates.