Implementing Race-Neutral Measures in State Disadvantaged Business Enterprise Programs (2011)

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5As highway construction programs are carried out by state departments of transportation (DOTs), they are required by the U.S.DOT to direct a portion of their federal-aid funds expen- ditures toward small businesses known as Disadvantaged Business Enterprises (DBEs), which are defined as small, for-profit business concerns that are at least 51% owned and controlled by one or more socially and economically dis- advantaged individuals. State DOTs are required to establish an overall DBE participation goal for federal-aid highway contracts and a methodology for arriving at the goal. Until March 2010, goals were required to be set annually; a new rule now requires them to be set every three years (Federal Register 2010). State DOTs are further required to meet the maximum feasible portion of their goals using race-neutral means—methods designed to remove barriers and enhance opportunities for all small businesses, not just DBEs. PURPOSE OF REPORT Race-neutral measures vary from state to state. This synthesis was initiated to identify tools and practices to help state DOTs effectively use race-neutral measures as they administer DBE programs that comply with federal requirements. To meet that need, the NCHRP funded this project to review and synthesize problems faced by state DOTs in the administration of their DBE programs and identify remedies used by states to over- come problems involving race-neutral efforts. BACKGROUND The current FHWA Disadvantaged Business Enterprise pro- gram is authorized by Section 1101(b) of the Safe, Account- able, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU), Public Law 109-59. The FHWA implements the program through U.S.DOT regulations in 49 Code of Federal Regulations (CFR) Part 26. (For more infor- mation, see the U.S.DOT website: http://osdbuweb.dot.gov/ DBEProgram/index.cfm.) The regulations include the follow- ing definitions: Race-conscious measure or program is one that is focused specifically on assisting only DBEs, including women-owned DBEs. Race-neutral measure or program is one that is, or can be, used to assist all small businesses. For the purposes of this part, race- neutral includes gender-neutrality. It is important to note that states differ in their interpretation of which strategies constitute race-neutral measures, and that a measure viewed as race-neutral by one state may not be con- sidered race-neutral in another Section 26.51 of Part 26 of the regulations contains a nonexhaustive list of race-neutral means, including providing supportive services targeted at DBEs and activities such as pub- lishing a DBE directory. Despite the program’s focus on DBE firms, U.S.DOT has stated that these measures are considered race-neutral (U.S.DOT 2009) (see http://www.osdbu.dot.gov/ DBEProgram/dbeqna.cfm). States provide supportive services to DBE firms through FHWA’s Disadvantaged Business Enterprise Supportive Services (DBE/SS) program, which operates as an adjunct to the federal DBE program. The DBE/SS program provides funding to states to support training, assistance, and other services provided to DBE firms “to further the develop- ment of DBEs . . . assisting them to move into non-traditional areas of work and/or compete in the marketplace outside the DBE program.” Since 1982, the U.S. Congress has authorized up to $10 mil- lion annually to accomplish these objectives; the FHWA awards these funds to the states. In 2010, FHWA awarded $9.9 million in grants to 33 states, ranging from $30,000 to $880,000. This is a discretionary grant program; states are not required to apply for the grants every year. The FHWA reports that it receives 35 to 40 grant proposals each year— not every state applies for funding. In their applications, states must describe their plans for using the grants, includ- ing the purpose and objectives, the target audience, and the period of performance. (For more information about the DBE/SS program, see http://www.fhwa.dot.gov/civil rights/programs/dbe.htm.) In addition to providing supportive services, states also facilitate DBE participation through administrative support measures, such as reserving smaller contracts for small busi- nesses, unbundling contracts to separate a larger project into smaller pieces that DBEs can more easily bid on, and requir- ing pre-bid registration for prime contractors so that DBE firms know whom to submit quotes to. Some states provide financial assistance as well, such as helping DBEs obtain bonding or loans to allow them to compete for contracts with larger firms. CHAPTER ONE INTRODUCTION

States publicize the services of their DBE programs through marketing and outreach to DBEs and prime contractors. Many states publish DBE newsletters and notify DBEs of contract opportunities by e-mail. States also commonly facilitate net- working and communication between DBEs and prime con- tractors by hosting events that bring the two groups together, in addition to outreach events that increase DBEs’ awareness of contracting opportunities with DOTs. In addition, although race-conscious measures include set- ting contract goals for DBE participation on specific con- struction contracts, race-neutral DBE participation includes, but is not limited to, any time a DBE wins a prime contract through customary competitive procurement procedures or is awarded a subcontract on a prime contract that does not carry a DBE goal. In implementing their DBE programs, nine states in the western United States must abide by the outcome of a 2005 decision by the Ninth Circuit Court of Appeals [Western States Paving Co. Inc. v. Washington State Department of Trans- portation, 407 F. 3d 983 (2005)]. The court held that a state DOT must limit its application of the race and gender pref- erence elements of the U.S.DOT/FHWA DBE program to situations where those preferences are demonstrably needed. These nine DOTs must use 100% race-neutral means in their efforts to meet their DBE participation goals, and may employ race-conscious methods with only those groups for which disparities have been recently demonstrated. STUDY APPROACH This synthesis project included the following tasks: • Literature review of state and local practices. • Survey of members of the AASHTO Subcommittee on Civil Rights. • Interviews with selected state DOT DBE program managers. • Review of sample documents provided by interviewees and survey respondents. The literature review focused on relevant state practices for implementing race-neutral measures in DBE programs. The literature review concluded that there is little to no published peer-reviewed research on this topic, which confirmed the need for this synthesis study. As part of this step, the results of a 2008 survey of DBE program managers conducted by the TRB DBE Committee, which asked states to describe the race- neutral measures they use, were reviewed. The 74 measures identified by respondents to that survey helped inform the list of strategies included in the survey for the current synthesis project. A bibliography of relevant research is provided at the end of this synthesis report. 6 The online survey for this synthesis was sent to all members of the AASHTO Subcommittee on Civil Rights. To facilitate a high response rate, it was important that the survey be com- pleted in a reasonable amount of time. Toward that end, the survey was designed to minimize the number of open-ended questions, while allowing respondents the option of providing greater detail on how the states’ most significant challenges were addressed using race-neutral methods. A copy of the sur- vey is presented as Appendix A to this report. States were allowed one month to complete the survey. Once the deadline had passed, follow-up contact was made through e-mails and phone calls to ensure that the target response rate of 80% (40 states) was reached. To ensure a high response rate among the states under the jurisdiction of the Ninth Circuit Court of Appeals, extra effort was made to encourage those states to complete the survey. Ultimately, staff from 47 of the 50 states participated, a 94% response rate. Most respondents were from state DOT offices of Civil Rights or Equal Opportunity. The results of the survey form the basis for chapters two and three of this report. The survey results were analyzed using a combined approach that incorporated both quantitative and qualitative analysis: • Quantitative analysis: The survey responses were tal- lied and the resulting data were analyzed to determine the race-neutral strategies that respondents found most and least effective, the strategies they used most commonly, and the most effective strategies by category. These data are displayed graphically in chapter two. Responses from the subset of states that use or have used 100% race-neutral measures, including those under the juris- diction of the Ninth Circuit Court of Appeals, were also analyzed. • Qualitative analysis: States’ responses to the survey’s open-ended questions were analyzed to identify patterns in the way states described the challenges they face and the race-neutral measures they use. Some topics pro- voked very little response, whereas others inspired lengthy descriptions. Respondents’ comments were grouped by topic, and the challenges they described were linked where possible with states’ efforts to over- come them. Based on this analysis, interviews were conducted with staff at state DOTs that are using especially effective or inno- vative strategies, especially those strategies that are less com- monly used. This process provided an in-depth look at how one state has implemented each strategy, including the choices each agency made that were successful and those that they would advise other agencies not to repeat. The survey included four questions about fraud and compli- ance among DBEs and prime contractors. When the responses

7to these questions were analyzed, it was determined that these topics were outside the scope of this synthesis project, and dis- cussion of these survey results was omitted from this final report. However, respondents’ answers to these questions are included in Appendix B. REPORT ORGANIZATION Following this introductory chapter, this synthesis report is organized as follows: • Chapter two analyzes survey respondents’ numerical ratings of the effectiveness of 22 race-neutral mea- sures and the significance of 19 challenges they face in meeting their goals for DBE participation in high- way contracting. • Chapter three summarizes survey respondents’ open- ended comments about the race-neutral strategies they have used, including the characteristics of successful and unsuccessful implementations. • Chapter four discusses the challenges state DOTs face in meeting their goals for DBE participation, and provides survey respondents’ descriptions of how they use race- neutral measures to address these challenges. • Chapter five consists of three case examples that detail how three states have effectively implemented specific race-neutral measures. • Chapter six summarizes the key findings of this synthesis project and describes conclusions about these findings.