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State spends more by using middlemen on public projects
By Josh Sweigart, Staff Writer, Dayton Daily News
Laws requiring state agencies to award a percentage of their contracts to minority-owned and disadvantaged companies have created a cottage industry of middlemen who essentially rent their status to larger firms for a cut of the profit on public contracts.
The practice isn’t illegal. It isn’t even uncommon. And sometimes it leads to markups paid by taxpayers, an investigation by the Dayton Daily News found.
An example: When Ohio State University needed to repair some sewage and stormwater pumps at some of its labs last year, it had the work done by Toledo-based Peterson Thermal Equipment Company.
But instead of hiring Peterson, university officials had Approved Components and Systems, Inc. handle the transaction and tack on a 3 percent markup because ACSI is a state-approved disadvantaged company.
Peterson did all the work while the university made progress on meeting its requirement to give a percentage of such jobs to disadvantaged firms.
Taxpayers paid ACSI 3 percent of the $27,770 contract.
ACSI consists of one man, Steven Garcia, who works out of his Columbus home. According to state records, ACSI has done $676,000 worth of direct sales to OSU since 2009, and $47,606 combined to the Public Utilities Commission, Public Works Commission and state Adjutant General since the beginning of 2010.
The majority of Garcia’s work, though, is as a materials supplier for larger contracts let by the Ohio Schools Facilities Commission, he told the Daily News. Such contracts must obtain 5 percent of their goods from a disadvantaged vendor. A company tells him what to buy and who to buy from, and he does so and sells it to the company so it can meet that requirement.
“I’m buying from company A and selling to the state,” Garcia said. “If you want to yell and scream and say there’s some insanity about the program, it would have to be with the state legislature.”
When presented with the newspaper’s findings, State Sen. Bill Beagle, R-Tipp City, said he doesn’t believe this practice is in line with the intent of the law, which has been in place for decades.
“I think the spirit of the law probably involved trying to give an opportunity to genuine retailers and manufacturers that are owned by minorities to participate in state contracts,” he said. “I’d be surprised if the intent was to create a loophole that might put a few minorities to work exploiting the loophole.”
Beagle said he would be open to suggestions on how the program could be fixed without hurting the chances of minority-owned and disadvantaged companies that actually have something to sell and their chances to do business with the state.
“You want to be careful not to hurt legitimate operators with a fix,” he said.
State: OSU is not alone
The laws in question deal with a pair of closely related state programs called MBE and EDGE. MBE stands for Minority Business Enterprise and creates set-asides for companies with owners who are black, American Indian, Hispanic or Asian.
State agencies are required to set aside 15 percent of their purchases each year for bidding among MBE companies.
EDGE stands for Encouraging Diversity, Growth and Equity and encourages agencies to spend 5 percent of their constructions costs with companies that have owners who are considered disadvantaged because they have a net worth of less than $750,000 and a qualifying social characteristic such as race, gender, disability, where they live or some other objective factor.
EDGE is primarily met by general contractors who bid on projects and attest that they will spend 5 percent of their project cost with EDGE subcontractors.
Statewide, this resulted in steering $111.6 million in state expenditures to MBE companies in fiscal year 2012, and spending nearly $292 million on EDGE firms. This is 6.25 percent of MBE eligible expenses, far short of the goal. It exceeds the EDGE goal at 6.8 percent.
OSU planned to spend $18.6 million in 2011 and $18.7 million in 2012 to meet its EDGE goals, according to a state report.
Department of Administrative Services Assistant Director Rand Howard told the Daily News the MBE and EDGE programs were created to give groups that faced a history of discrimination a fair shot at public contracts.
MBE and EDGE are administered statewide by DAS, which registers companies as MBE- or EDGE-eligible and monitors agencies’ compliance with the percentage rules. But individual agencies handle the contracts themselves.
“OSU is not the only state entity that has practiced that kind of activity,” Howard said of the relationship between ACSI’s Garcia and OSU.
“I don’t want to say, and I can’t say, that it’s an all-bad or criticizable business practice,” he added, noting that it would only clearly be a problem if it cost taxpayers more money.
But, he said, for the agencies DAS purchases for directly, they would not use or tolerate a structure wherein a large firm used a one-person MBE or EDGE company working out of his or her home to help the large firm get set-aside money.
“The state does not countenance that kind of behavior. We would call that a front and we attempt to police it,” he said. “We’re not about the business of putting up with sham operations.
“We want to do the job that makes these programs legitimate and … there ought to be a more … straightforward way to accomplishing that.”
ACSI serves as pass-through
Records reviewed by the Daily News show Garcia would receive a purchase order from OSU and email it to Peterson or another vendor. The vendor would do the work, then send an invoice to Garcia, who would change the letterhead and fax it to OSU. When the university paid the bill, Garcia would pass 97 percent of the payment to the vendor.
A fax from Peterson Thermal to ACSI obtained by the Daily News explains that Peterson provides OSU the quote, then OSU asks for a quote from ACSI, which the company provides as the Peterson quote plus 3 percent.
“PTE and OSU are happy with the situation,” wrote Peterson owner Ray Peterson in the fax to Garcia.
Peterson did not return a call for comment for this story.
Garcia said agencies such as OSU would “tie” his business with another, sometimes talking to the vendor directly then using his business to meet EDGE goals. Sometimes he would call an agency to notify them that he’s an EDGE vendor and ask if they need anything specific bought.
“I’d say, ‘Tie me up with the guy you’re either talking to, or I’ll call them myself,’ ” he said.
OSU officials would not grant an interview for this story. The university responded with a written statement that said it does not “pair, or in any other way match EDGE vendors with contractors. (OSU’s) contracting and procurement practices are consistent with EDGE rules set by the Ohio Revised Code and Ohio Administrative code.”
In sub-contracted construction work, university officials said bidders self-assert that they will use EDGE vendors to meet the 5 percent goal.
“The contractor is the only party involved in determining which EDGE vendor they will use as well as what specific goods or services they will procure through EDGE vendors,” the statement says.
‘Common practice,’ says state
The Ohio Inspector General launched an investigation in September 2011 into Garcia’s dealings with OSU after he frankly told investigators how his business operates while being interviewed during an investigation into another company.
“I’m transparent. I don’t have a problem telling anybody. If I can find some way to make a buck and it’s legal, I have no problem with it at all,” Garcia told the Daily News. “(I’m) meeting the needs of a client that has a specific requirement that he buys this stuff from an EDGE vendor.”
The investigation concluded this year with the findings that Garcia was doing nothing wrong, but that the entire MBE/EDGE program should be reviewed.
“It is a common practice to see (a) middleman used by agencies in order to reach their MBE and/or EDGE requirements,” investigators concluded, according to the unreleased report obtained by the Daily News using Ohio’s public records laws.
The inspector general’s report lists nine companies that OSU purchases goods from through ACSI. Based on the company’s 3 percent markup, investigators estimated OSU could have “overpaid” $20,000.
Ohio Deputy Inspector General Carl Enslen told the Daily News his office is tasked with finding violations of policy or law, and found none in this case. He would not comment on whether an investigation of the MBE/EDGE program was launched, as suggested in the report.
“Policy-makers elected to the legislature decided it’s a good policy for state government to obtain goods and services provided by certain people even when the arrangement will mean that taxpayers will have to give more money to make the purchase or buy the service,” he said.
Garcia defends the program, saying the amount of money spent is a “drop in the bucket” on the cost of these projects and that “without it, there would be no small business in construction.”
“Yes, it adds more to these construction projects, but it’s bringing diversity into these programs where there would be none,” he said.