Government & Politics

To avoid lawsuits, KC may change its rules on hiring minority- and women-owned firms

Mark Jones started his construction company, EJ & Sons, three years ago with 11 employees. He now has 50, who repair streets and sidewalks all over the city.

He said he owes the growth to the city program that requires companies working for the city to hire smaller women- or minority-owned firms as subcontractors — an effort to remediate decades of discrimination.

Last year, many of those 640 firms — from construction to architecture to accounting — received an estimated $295 million worth of work from city contractors.

Jones, 48, said he tries to hire those who have fallen off the edge of the job market — single mothers and those he calls “guys off the street.” They make good money, in some cases more than $40 an hour.

But Jones fears that his company and others like it could become collateral damage of proposed changes to the city’s MBE/WBE (minority- and women-owned business enterprise) program.

One provision would allow large enough MBE/WBE firms to win city jobs as self-performing “prime” contractors — meaning they would complete a project without hiring minority or women subcontractors.

Jones said if this happens, EJ & Sons would take a big hit.

“Don’t think about my company,” he said. “Think about the people that we hired in the last three years.”

Self-performance is one issue on the table as the city looks at overhauling its 20-year-old MBE/WBE program. The City Council is also weighing whether the personal net worth of company owners should affect eligibility. There is also disagreement over exactly what constitutes “good faith” when it comes to majority firms’ efforts to find qualified minority subcontractors.

The possible changes are a response to a consultant’s study that said the city’s race- and gender-based contracting programs might be vulnerable to lawsuits because their guidelines are too broad, and not “narrowly tailored” to help those in need.

The study’s author, California attorney Colette Holt, gave generally high marks to Kansas City’s efforts. But she said an increasingly conservative federal judiciary makes it prudent for the city to strengthen areas of potential weakness.

“I think it’s a fair statement that the federal courts are extremely hostile to these programs,” Holt told the council last week. “And I think it’s a fair conclusion that we will probably have five Supreme Court justices soon who are at best extremely skeptical about the use of race in public contracting.”

Since the beginning of the year, the City Council has struggled to wrangle a consensus among minority firms, majority contractors, real estate developers and their attorneys — many of them also generous contributors to council members’ campaigns. Ordinances have been introduced, amended and withdrawn.

At a work session Tuesday afternoon, the council will discuss two proposed ordinances.

A measure sponsored by City Councilman Jermaine Reed hews closely to Holt’s recommendations. An alternative, drafted by Mayor Pro Tem Scott Wagner, is less focused on narrow tailoring and does not include a net worth limit.

Large vs. small businesses

While most MBE/WBEs are subcontractors, some large minority- and women-owned firms are able to be prime contractors who can complete jobs without subcontracting out to other firms.

Holt recommended that the city adopt self-performance rules because they would help MBE/WBE companies grow and give them more opportunities to bid for work as prime contractors.

Blue Nile Contractors, a construction firm founded by Ethiopian engineer Henok Tekeste, is one of the most successful minority primes. The company has bid successfully on an estimated $50 million in city jobs over the last two years, many involving the city’s multi-billion effort to comply with EPA mandates for modernizing its sewer system. City officials say the company is pushing for the self-performance provision.

Mark One Electric, a woman-owned firm, is also said to favor the change. Both also happen to be frequent contributors to city campaigns.

Neither Blue Nile’s Tekeste nor Mark One president Rosana Privitera Biondo responded to requests for comment.

Jim Kissick, a non-minority construction company owner who frequently subcontracts with minority firms, said self-performance would undermine the program’s purpose to help grow all businesses.

“The MBE/WBE program ... was not established to grow a select few firms to very large levels at the expense of other smaller firms,” Kissick wrote in a letter to the City Council last month.

The letter was signed by 11 small minority subcontractors, including Dwayne Lewis, owner of Lewis Block & Supply, which is doing concrete work on the Loews hotel downtown.

Lewis, 60, who started his business 11 years ago, called himself “probably the model of what the program is supposed to do.”

He said he would survive if self-performance was approved.

“I’m more concerned about those people who are like me 11 years ago,” he said. “They won’t be able to gain a foothold.”

On the flip side, Holt also urged the city to use a business owner’s personal net worth to determine their company’s eligibility. Federal agencies have similar regulations.

Holt told the council that most cities use the Small Business Administration’s guidelines, which cap personal net worth eligibility at $1.32 million. That excludes any equity in the business or a home.

She said the absence of such a limit in Kansas City rules makes the city vulnerable to charges that it does not narrowly tailor its program to truly disadvantaged companies.

Reed’s ordinance includes a personal net worth cap; Wagner said the city has done fine without it.

“It would seem to me that we should be focused on the business as opposed to the individual running the business,” Wagner said. “How does an individual’s net worth impact whether their business succeeds or fails? Its success is based on the work it does for its customers. No work means the business fails.”

Who should determine good faith?

Current law requires that companies working for the city make a “good faith effort” to meet targets for the hiring of minority and women subcontractors.

The numbers, set by the city’s human relations department, vary by project. In construction, for example, about 15 percent of the value of a contract must go to minority-owned firms, 7 percent to women-owned businesses. Contractors can be subject to monetary damages if it is determined they didn’t try hard enough to include women or minorities.

Good faith is the focus of disagreement between human relations director Phillip Yelder and the city agencies that grant property tax abatements and other incentives to developers. These include the Tax Increment Financing (TIF) Commission and the Land Clearance for Redevelopment Authority.

As written, the law gives the agencies the last word on whether a good faith effort was made and whether damages should be assessed.

Yelder is pressing to change this provision, mainly because the agencies hardly ever find a problem.

Yelder told a City Council committee this spring that over the last four years, he has recommended more than $16 million in liquidated damages against firms that he thought didn’t work hard enough to find qualified minority- or women-owned subcontractors. Of that amount, he said, just $9,000 was actually assessed.

“So that’s a tremendous drop,” he said.

Agency attorneys said the city has no standing to insist on liquidated damages because the contracts are between the developers and the agencies.

“To have a human relations director who is not a party to that contract determine whether or not there is a default is problematic,” said Wesley Fields, attorney for the TIF Commission.

Council tensions

The months of negotiation largely have played out behind the scenes.

But tensions went public at the Sept. 20 council business session when Councilwoman Katheryn Shields called out Mayor Sly James for not taking a more assertive role in resolving the issues.

“I wish you would provide some leadership on this,” she said.

James, who has made racial equity a keynote issue of his final year in office, took extreme exception to Shields’ comment.

James convened a series of inconclusive meetings with stakeholders this summer, and said council members’ constant revisions have made it difficult to stake out a position.

“This has been before the council for a long time. You bounced it back and forth and somehow this is my fault? Uh, Uh. I ain’t buyin’ that,” James said. “I will participate when there is a conversation worthy of participation.”

Shields then gathered her papers and left.