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COLOR OF MONEY: The sham of minority contracts

TEN YEARS ago, then-Mayor John Street took the podium at a NAACP convention and declared: "The brothers and sisters are running this city. Running it! Don't you let nobody fool you; we are in charge of the City of Brotherly Love."

TEN YEARS ago, then-Mayor John Street took the podium at a NAACP convention and declared: "The brothers and sisters are running this city. Running it! Don't you let nobody fool you; we are in charge of the City of Brotherly Love."

Yet, when it came to city contracts, most black-owned companies weren't getting any love. They were getting a ridiculously thin slice of a huge pie. More like crumbs, actually.

Between 1998 and 2003, only 2.3 percent of city-contract dollars went to minority-owned firms, and 2.2 percent to women, according to Councilman W. Wilson Goode Jr.

Companies owned by white men handled 95.5 percent of the work.

Those numbers are dramatically improved today. The city says that companies run by minorities, women and people with disabilities snagged 26.6 percent of contract dollars during the first quarter of fiscal year 2012.

But some of that money still finds its way into white guys' bank accounts.

For years, contractors have ignored the city's minority-participation laws or have hatched schemes to circumvent them. Some hire minority firms that, in turn, pass on the work to other vendors that might not be minority-owned or have a diverse workforce.

As a result, the amount of "true minority work" in Philadelphia falls short of the percentages that the city publishes, said Joanna Harris, an African-American operating engineer who sits on the city's Board of Labor Standards.

"It's a fiasco," said Harris, owner of A.R.B. Construction. "For too many years it's been going on. Everyone's talking about it, but no one is really doing anything about it."

That's changing. Mayor Nutter signed legislation this month to crack down on firms that flout or abuse the city's contracting requirements. The bill, sponsored by Goode and passed unanimously, will create a committee to hear testimony from whistle-blowers and recommend to City Council which companies should be barred from doing business with the city.

"I want to keep people honest by having an open and transparent process where people are encouraged to come snitch when they know there are contractors not complying with city rules," Goode said.

More 'bite' in the law

Some companies have brushed aside provisions for disadvantaged businesses because, until recently, there was minimal enforcement.

"People don't believe they have to meet the goals and that there will be no penalties or debarment," Goode said.

Those days are over, said Philadelphia Inspector General Amy Kurland.

In January, Kurland announced that her office had uncovered a "sham" minority-contracting scheme involving a $1 million weatherization contract with the Philadelphia Housing Development Corp. It's likely the first of many.

Kurland said that the prime contractor, UGI HVAC, Inc., claimed to be buying hot-air furnaces and other products from JHS and Sons Supply Co., a certified minority-owned firm. But UGI, she said, was actually buying goods from William Betz Jr. Inc., a white-owned company. Investigators discovered that Betz was paying JHS 3 percent of the contract proceeds to use the company's name to meet the minority-contracting requirement.

"They got caught with their hand in the cookie jar, but everyone is doing it," said Harris, 46, who is on the civil-rights committee for Operating Engineers Local 542. "It's quick, easy revenue. You sign some papers and they give you some money."

Investigators believe that Betz used JHS as a phony contractor on at least 14 other city contracts.

"We have several cases under investigation, in addition to those 14," Kurland said. "It seems like sham minority businesses are sort of a common scheme. The company that's being used as a 'pass through,' it's kind of a benefit for them because they're getting money for absolutely nothing, just the use of their name."

The city is seeking to have Betz banned from doing business with the city for up to three years, JHS has been removed from the list of certified minority contractors and UGI agreed to pay the city $100,000 as part of a no-fault settlement.

"A lot of people have gotten away with it," Harris said. "It's not just nonminorities taking advantage of minorities. There are also some minority firms with bloodstained hands."

Violating the hiring requirements can hurt a company's bottom line - if it's caught. Last May, the city announced that it had banned Ernest Bock & Sons Inc. from bidding on city contracts through next month because the company had failed to use minority firms on a $35.9 million airport-construction contract.

There are other ways in which money intended for women and minorities ultimately ends up in white men's pockets - in some cases without even running afoul of minority-contracting rules.

On city construction contracts, for instance, disadvantaged subcontractors are required to perform only 20 percent of the subcontract value themselves - meaning that up to 80 percent of their cut could be sub-subcontracted to nonminority male-owned firms. The city doesn't track where that money goes once the contracts are sliced up a second time.

"Our hope and expectation would be for them to subcontract with other minority- and women-owned businesses, but that is their business decision," Angela Dowd-Burton, executive director of Philadelphia's Office of Economic Opportunity, said of disadvantaged businesses.

In the Philadelphia School District, which has its own regulations, Chaka Fattah Jr., the son of the Philadelphia congressman, apparently had such a subcontract with Delaware Valley High School, a for-profit education company paid by the district.

DVHS paid Fattah Jr.'s company, 259 Strategies, $450,000 in 2010-11. But DVHS owner David Shulick said he believes that 259 Strategies used between $250,000 to $350,000 of that amount to pay DVHS-approved support staff and other vendors.

Hiring Fattah's firm allowed DVHS to fulfill the district's requirement that 10 percent of its $4.5 million contract that year went to a minority firm, even though some of the money was passed through 259 Strategies to other vendors.

"It gets complicated when you have to have an M/W/DBE [minority-, woman- or disabled-owned business enterprise]," Shulick said. "When you are supposed to be focused only on providing great service, it creates a layer of complexity that is just the most frustrating thing I've ever seen."

Last month, FBI agents raided Fattah Jr.'s residence at the Ritz-Carlton hotel across from City Hall and his workspace at Shulick's law office. Shulick said that he wouldn't have "had any dealing" with 259 Strategies if not for the district's minority-hiring requirement.

"Chaka Fattah Jr. approached us and said, 'I have an M/W/DBE that's already certified. I can do this work and do it better at lower cost,' " Shulick said.

A source close to Fattah disputed Shulick's description of the 259 Strategies contract and said the amount of pass-through money was significantly less.

'Vicious cycle'

Disadvantaged businesses often sub out portions of their subcontract because they don't have the capability to do all the work themselves. But some companies see anti-discrimination laws as an opportunity to make a quick buck by acting as a conduit for the money, but doing little work.

"They get it because they're a minority and then they sub it out, a lot of times to nonminority companies," Harris said. "It's a vicious cycle."

In 2010, there were about 1,300 certified minority-, woman- and disabled-owned businesses in the city's registry. Today, there are more than 2,000, according to Dowd-Burton.

Another loophole in the system, minority workers point out, is that some companies are owned by women or minorities but have a workforce consisting mostly of white males.

"Once they get the contract, some of them couldn't care less if their workforce has minorities," said Margarita Padin, 48, a Latina carpenter from North Philly who's been leading rallies at a Temple University construction site, calling for the hiring of more local residents.

"Just because you have a minority contractor doesn't mean you'll have a minority workforce," Padin said.

Goode said that his bill is a step in the right direction for a city that's about 43 percent black and 41 percent white. Besides accepting testimony from whistle-blowers, the five-person Economic Opportunity Review Committee will look into where the regulations are working and where they can be tightened up.

Some government procurement officers, general contractors and subcontractors get used to dealing with each other and don't appreciate being told that they have to include women, minorities and people with disabilities in their business decisions.

That attitude needs to change, Goode said. If it doesn't, the government will change it for them.

"It's simply a matter of people doing business the same way," he said. "And if the way they were doing business before wasn't fair, then it's not fair now. Unless they are strongly encouraged to engage in business diversity, they will not do so."