Maryland’s minority-contracting program gets failing grade on ‘graduation’

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Corporations given millions of dollars in contracts under Maryland’s minority-contracting program virtually never grow into thriving businesses that are profitable in the private sector — a primary goal of the program, records show.

Businesses are “graduated” and no longer eligible for the program that guides government contracts to them when they exceed a certain size, but only 15 companies, five of which are black-owned, have ever fully graduated.


SEE ALSO: $4 billion program for disadvantaged businesses lacks oversight


An overall threshold for graduation is set at $22 million in annual revenue, but lower caps apply to individual lines of work. A total of 104 companies have partially graduated, meaning they can still get contracts but only in areas outside their original field of work, which critics say discourages them from becoming standouts in a specialized line of business.

Under Maryland law, a minority-business owner is considered disadvantaged if the value of his assets — not including his business, his home and retirement savings — is $1.6 million or less, or $1.3 million if the money is coming from the federal government. The state spends at least one-quarter of its contracting dollars with such businesses.

Nine of the 15 graduated companies had their disadvantaged status stripped because their owners’ net worth exceeded the cutoff rather than because they hit the revenue thresholds.

George Lanoue, a professor at the University of Maryland Baltimore County, said the low graduation rates were partially because of a combination of a too-broad definition of “disadvantaged” and evasion of those criteria, and partially show that the program does not achieve its goal of growing businesses that go on to be successful outside of government.

“To argue that someone is economically disadvantaged who has that kind of money is a very tortured definition of that concept; it would mean that 95 percent of all Americans are disadvantaged. The economic definition of net worth is way too high and there are also a number of ways to get around it,” such as keeping liquidity in the business or a spouse’s account, he said.

Baltimore lawyer John Sullivan, who represents contractors struggling to meet their government-mandated minority subcontracting quotas, said “the graduation rates are truly awful. Firms prefer staying in the program and out of the more competitive marketplace.”

The Washington Times’ findings on Maryland minority contractors’ abysmal rate of weaning off the program comes on top of a recent federal inspector general’s report saying the government has no idea if the minority contracting programs distributing federal transportation money in each state actually work.

Federal investigators said states are aware that some companies deliberately do not grow so they can remain government beneficiaries, a move that is possible because the minority contracting program mandated by the Transportation Department but implemented at the state level — known as the Disadvantaged Business Enterprise (DBE) program — is a more lenient parallel to the higher-profile federal minority contracting.

“There is little incentive for firms to grow beyond the DBE program,” the report said. “State officials reported that some DBE firms deliberately limit the amount of new contract dollars they receive in order to stay below the average annual gross receipt cap.”

The Government Accountability Office noted as long ago as 1994 that the Transportation Department recommended that it “evaluate the progress of the DBE program in helping to develop firms to compete outside the program.” But the department never did.

While applicants to the main federal contracting program must compose a narrative describing how they have been disadvantaged, DBEs are automatically eligible by signing a statement swearing they are a minority and have been discriminated against, along with personal finance statements showing their personal bank account has less than the prescribed amount.

Maryland declined to provide any records, saying they contained proprietary business information. The state also refused to say how many businessmen termed “disadvantaged” had $500,000 or more in cash in their personal bank accounts.

While the burden to prove disadvantage is minimal, there is little system in place for others to contest that determination, with the state refusing to disclose any relevant information.

On the most critical point — whether those being connected with federal dollars because of their race are in any way disadvantaged — the federal report found myriad problems related to personal net-worth calculations. Five out of six states are “unsure how to accurately calculate or verify” a company owner’s net worth, the report said, adding that as a result, staff could certify “unqualified firms.”

© Copyright 2014 The Washington Times, LLC. Click here for reprint permission.

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