TEA-21 Disadvantaged Business Enterprise Programs in the west face uncertainty after a recent court ruling

John Okamoto, Chief Administrative Officer, Port of Seattle, Washington; APWA Director-at-Large, Transportation
Julia Anastasio, Esq., Senior Manager of Government Affairs, APWA Washington, D.C. Office

Disadvantaged Business Enterprise (DBE) programs, run by nine western states in the 9th Federal Judicial Circuit Court (9th Circuit), now face uncertainty because of a recent ruling invalidating the Washington State Department of Transportation (WSDOT) DBE program. The Court held the state's DBE program unconstitutional because it failed to provide sufficient evidence of historical discrimination within the state's transportation construction industry. The 9th Circuit ruling means DBE firms in Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington will no longer have a leg up on winning contracts for state transportation construction at least until each state department of transportation demonstrates that its DBE program is justified by evidence of past discrimination in the transportation construction industry. Local agencies in the region also need to examine their subcontracting procedures to make sure that they are also not violating the court's ruling when soliciting subcontracts for transportation projects funded with TEA-21 monies.

DBE programs under the Transportation Equity Act for the 21st Century, Pub. L. No. 105-178, 112 Stat. 107 (1998) (TEA-21), give minority- and women-owned businesses preferences in highway construction contracts. The Court's decision applies to recipients* of federal financial assistance provided under the Transportation Equity Act for the 21st Century (TEA-21) from the Federal Highway Administration (FHWA), Federal Transit Administration (FTA) and the Federal Aviation Administration (FAA). Pub. L. No. 105-178, 112 Stat. 107 (1998). Recipients of federal TEA-21 funds in the affected states must now determine if they have any evidence of discrimination and its effects within the states' transportation construction industry. If the state has sufficient evidence of discrimination or its effects, the state DOT may continue to require minority- and women-utilization goals where appropriate. States currently lacking sufficient evidence of discrimination or its effects must rely on all race/sex-neutral goals in their contracting guidelines and begin conducting a rigorous and statistically valid study to determine whether there is sufficient evidence of discrimination or its effects to warrant a program giving an advantage to one class of business owners. The states within the 9th Circuit's jurisdiction are complying with the Court's order and have suspended minority- and women-utilization requirements in transportation contracts until federal administrators approve their programs.

* Any entity, public or private, to which FAA, FHWA or FTA financial assistance is extended, whether directly or indirectly through another recipient. Office of Equal Opportunity, Washington Department of Transportation, DBE Participation Plan (Revised February 2000).

In Western States Paving Co., Inc. v. Washington State Department of Transportation, 407 F.3d 983 (9th Cir. May 9, 2005), the 9th Circuit ruled against WSDOT, holding that its current race- and gender-conscious goals in its DBE program are unconstitutional because the agency did not have adequate evidence demonstrating historical discrimination within the state's transportation construction industry. Western States, 407 F.3d at 1003. The Court found the federal program to be an appropriate means of remedying the past effects of race- and sex-based discrimination within the transportation construction industry. Id., 407 F.3d at 995. The Court also evaluated whether the WSDOT DBE program was necessary to remedy the past effects of race and gender discrimination or whether it violated the Equal Protection Clause because it gave preferential treatment to certain groups at the exclusion of others. In reviewing WSDOT's application of the DBE program, the Court of Appeals reasoned that the record provided by the state was devoid of any evidence suggesting the WSDOT program was needed to remedy past discrimination toward minority- and women-owned businesses in the highway transportation construction industry. Id. at 1002. The Court determined that the connection between the means and the ends in WSDOT's application of the state's DBE program is absent and, as such, WSDOT application of TEA-21 conflicts with the guarantees of equal protection. Id. Therefore, the Washington State Department of Transportation DBE program failed because it was unclear to the Court whether the program was necessary to correct the effects of past discrimination. Western States, 407 F.3d at 1003. As such, WSDOT was required to immediately halt the use of race-conscious goals in awarding transportation contracts until they could identify sufficient evidence to justify the program.**

** WSDOT DBE Contracting Program Following the Decision of the Court of Appeals in the Western States Paving Rule, Frequently Asked Questions. http://www.wsdot.wa.gov/oeo/pdffiles/DBEFAQ9th.pdf

TEA-21 is one in a series of federal transportation statutes providing for minority preferences. Western States, 407 F.3d at 988. The federal regulations provide that at least 10 percent of the money made available under the Act be expended on "small business concerns owned and controlled by socially and economically disadvantaged individuals." Id., see also, P.L. No. 105-178, 112 Stat. at 113. However, the USDOT regulations make clear that the 10 percent DBE utilization requirement is merely an aspiration goal and not a mandate. Western States, 407 F.3d at 989. The regulations do not establish a nationwide DBE program but rather delegate to each state accepting federal transportation funds the responsibility to implement a DBE program that comports with the federal regulations. Id. TEA-21 expressly requires state recipients of federal transportation construction funds to develop an undifferentiated race-neutral*** goal that includes all minority groups. Western States, 407 F.3d at 990. The regulations outline a two-step analysis, designed to result in a utilization goal reflecting the level of DBE participation that would be expected absent the effects of discrimination, for states to follow in setting DBE utilization goals. Id.

*** Race-neutral also includes sex-neutral by definition in the TEA-21 regulations. 49 C.F.R. Part 26.

In establishing the Washington State DBE program, WSDOT followed the two-step analysis set forth by the TEA-21 regulations and established a final DBE utilization goal of 14 percent. Western States, 407 F.3d at 999, see also, 49 C.F.R. Part 26. To arrive at this figure, WSDOT first calculated the baseline availability of ready, willing and able DBEs in the state by dividing the number of transportation construction firms in the state DBE Business Directory by the total number of transportation construction firms identified in Census Bureau reports. Id. Next, WSDOT adjusted the baseline figure (11.17 percent) upward to account for the proven capacity of DBEs to perform this type of work. However, in reaching the adjusted figure, WSDOT failed to make any adjustments to account for discrimination in obtaining bonding and financing by DBE firms. Id. Likewise, WSDOT made no adjustment for the effects of present or past discrimination because it lacked any statistical evidence of such discrimination. Western States, 407 F.3d at 999.

The Court's conclusion that the WSDOT DBE program was unconstitutional rested on several factors. First, WSDOT never conducted a complete or valid statistical study to establish historical or past discrimination in the state's transportation construction industry. Id. at 1000. Second, the Court determined WSDOT's calculation of the capacity of DBEs to do the work was flawed because it failed to take into account the effects of past race-conscious programs on current DBE participation. Id. Third, the disparity between DBE participation on contracts with and without minority utilization goals also did not provide the necessary evidence. Id. at 1000. Fourth, a further problem with WSDOT's calculation was that the small disparity between the proportion of DBE firms in the state and the percentage of funds awarded to DBEs in race-neutral contracts did not establish evidence of historical discrimination because it failed to account for other factors that could affect the capacity of a DBE to perform the work. Id. at 1001. Fifth, WSDOT failed to even provide anecdotal evidence of historical discrimination in the highway construction industry. Id. at 1002. As a consequence of all of these factors, the Court held that WSDOT's DBE program was unconstitutional as implemented by the state. Id. at 1003. According to the Court, claims of general societal discrimination or even generalized assertions about discrimination in an entire industry cannot be used to justify the WSDOT program. Id. at 1002.

Accordingly, the Court of Appeals reasoned that there was not sufficient evidence to suggest that the WSDOT program was appropriately designed to remedy past discrimination toward minority-owned businesses in the Washington transportation construction industry. Id. at 1002. The Court determined that the connection between the means and the ends in the state's DBE program was absent and, as such, WSDOT application of TEA-21 conflicts with the guarantees of equal protection. Id. By implementing a program that was improperly designed to remedy past discrimination, the WSDOT program violates the Equal Protection Clause and it instead provides an unwarranted windfall to minority contractors solely on the basis of their race or sex. Western States, 407 F.3d at 1002. As such, the program must fail and the state must implement race- and sex-neutral utilization goals until it can sufficiently demonstrate to federal administrators that the program is needed to remedy past discrimination. Id.

Since the 9th Circuit's ruling, the USDOT has been advising state recipients receiving federal transportation financial assistance that they need to take precautions and undertake extra measures in advertising and developing state DBE programs so as not to violate the Court's rule but while still continuing to honor the intent of the program. Recent guidance issued by USDOT instructs state recipients to examine the evidence they have on hand of past discrimination and its effects to determine if there is adequate evidence of discrimination to support the program. 71 F.R. 14775 (Mar. 23, 2006). If there is sufficient evidence of discrimination or its effects, state recipients should submit race- and gender-conscious goals where appropriate to federal administrators. Id. However, in cases where federal administrators determine that a DBE goal submission fails to include sufficient evidence or documentation, recipients will be directed to revise and resubmit its submission. Id. If the evidence of discrimination and its effects pertains to some, but not all, of the groups presumed**** to be socially and economically disadvantaged, then a state recipient's race-and gender-conscious goals should apply only to the group or groups for which the evidence is adequate. 71 F.R. 14776 (Mar. 23, 2006). If the recipient does not have sufficient evidence of discrimination or its effects, then the state recipient must submit an all-race-neutral overall goal for fiscal year 2006. Id. These recipients must also submit a statement addressing the absence of adequate evidence of discrimination and its effects. Id. In addition, this submission should include a plan describing the methods that will be used to determine the existence of discrimination or its effects in the recipient's transportation construction industry. Id. An action plan outlining the study, including timelines for completion, should also be included. Id.

**** The regulations presume that Black Americans, Hispanic Americans, Native Americans, Asia-Pacific Americans and Subcontinent Asian-Americans, women and any additional groups whose members are designated as socially and economically disadvantaged by the Small Business Administration. Office of Equal Opportunity, Washington State Department of Transportation, DBE Participation Plan (Revised February 2000).

State recipients lacking sufficient evidence of past discrimination are directed to take affirmative steps to use race-neutral means, such as informational and instructional programs targeted to minorities, to achieve DBE participation to continue to meet the overall state minority utilization goal and to demonstrate that the DBE program is being administered in good faith. 71 F.R. 14776 (Mar. 23, 2006). However, state recipients should continue to collect the data required for the "Uniform Report of Disadvantaged Business Enterprise Awards or Commitments and Payments form" and continue monitoring compliance with the commercially useful function requirements of the federal regulations. 49 C.F.R. Section 26.11. State recipients are also directed to implement an effective monitoring and enforcement program to help track DBE participation obtained through race-neutral means so that the recipient may claim credit towards its overall goal. 71 F.R. 14777 (Mar. 23, 2006).

State recipients implementing a race-neutral program are expected to conduct a statewide disparity study in cooperation with transit and airport recipients in the state to evaluate whether there is sufficient evidence of past discrimination or its effects in the transportation construction industry to warrant a preferential DBE program. Id. Recipients are directed by the Court's ruling to consider several factors, including:

  • Evidence for discrimination and its effects separately for each of the groups presumed by the federal regulations to be disadvantaged;
  • An assessment of any anecdotal and complaint evidence;
  • Evidence of barriers in obtaining bonding and financing, and disparities in business formation and earnings;
  • The study should rigorously determine the effects of factors other than discrimination that may account for statistical disparities between DBE availability and participation; and
  • The study should quantify the magnitude of any differences between DBE availability and participation, or DBE participation in race-neutral and race-conscious contracts. In calculating the availability of DBEs, the study should not rely on numbers that may have been inflated by race-conscious programs that may not have been properly designed. Id.

Where feasible, recipients may conduct regional studies to reduce costs and the guidance suggests that larger transit and/or airport recipients may want to conduct their own studies, since the demographics of large urban areas may differ from the state as a whole. Id. Finally, the guidance indicates that FHWA, FTA, and FAA will treat the costs of conducting this disparity study as federally approved reimbursable costs. Id.

The Court's holding now means that local agency state contractors receiving federal transportation construction assistance may need to revise their subcontracting procedures to reflect race-neutral goals until state recipients perform a statistically rigorous disparity study to justify minority utilization requirements. All state recipients in the region are modifying their programs to comply with the Court's decision and are evaluating the evidence they have, whether statistical or anecdotal, of discrimination or its effects in the transportation construction industry. Federal administrators expect state recipients submitting all race-neutral goals to complete the required disparity study expeditiously.

Local agencies responsible for highways, roads, tunnels, roadside drainage systems, ferry terminals and routes, and airport construction projects receiving federal funding also need to revise their subcontracting procedures to comply with the Court's holding. Moreover, local agencies must also change their subcontracting procedures immediately to retain federal funding eligibility. Local agencies will only be permitted to continue with their own DBE programs with race-and gender-conscious goals if such programs are federally approved. WSDOT has advised local agency contractors that, until the state determines whether the evidence they have of past discrimination is sufficient to comply with the Court's ruling, they are no longer required to meet state DBE goals as a condition of award on transportation construction projects. For the Port of Seattle the ruling has changed the way it solicits quotes from subcontractors. The Port, on direction from the FAA, has revised its DBE program by making it race-neutral until they can evaluate the adequacy of the WSDOT disparity study.

Each of the states affected by the 9th Circuit's ruling are now in the process of evaluating the existing evidence, both statistical and anecdotal, of past discrimination in the transportation construction industry to determine if their DBE programs comport with the Court's ruling. This process includes conducting focus groups and public hearings to solicit comments on past discrimination in the transportation construction industry and comprehensive reviews of civil rights complaints filed with the state DBE offices to justify the continuation of the state DBE program. Local agencies affected by these changes should consider playing an active role so that local needs are properly considered in the state disparity studies. Watch for announcements or notices from state DBE program administrators by regularly monitoring agency websites, newsletters and local newspaper announcements. In addition, contact state DBE program administrators to ensure that the statewide disparity study considers local conditions, and factors, such as demographics, in their studies. Participation at this level may save local agencies the time and expense of conducting their own studies to satisfy the federal rules.

John Okamoto can be reached at (206) 728-3832 or okamoto.j@portseattle.org; Julia Anastasio can be reached at (202) 218-6750 or janastasio@apwa.net.