In January 2011, USDOT issued a new rule which made several significant changes to the DBE program, including (a) an increase to the Personal Net Worth limit (from $750,000 to $1.32 million) and (b) providing an avenue for interstate certification. These two changes, both of which provided for increased certification opportunities for potential DBEs, were the subject of previous blogs. (here and here). On September 6, 2012, USDOT issued a Notice of Proposed Rulemaking (NPRM) that proposes a series of new, more technical changes that will likely decrease certification opportunities and increase the burden on previously certified firms. Comments to the USDOT proposed rule must be received by November 5, 2012. Given the implications of these rules, we encourage your comments to these rules and have provided more information on how to do so below. We have also prepared our own comments to the rule, if you would like assistance in submitting your own or would like us to include your comments in ours, please let us know.
The following is a summary of the most significant proposed changes:
Rebuttal of Economic Disadvantage: The most troubling proposed revision is USDOT’s desire to broaden the areas which automatically rebut a presumption of disadvantage. Currently, a Personal Net Worth (“PNW”) exceeding $1.32 million automatically rebuts the presumption of economic disadvantage, but the Office of Minority and Women Business Enterprises (“OMWBE”) may rebut the presumption if it has a “reasonable basis to believe the individual is not socially or economically disadvantaged.” USDOT proposes including, as part of that rule, a second statement taken from USDOT’s guidance (which is currently not an official mandate):
If the person demonstrates an ability to accumulate substantial wealth, has unlimited growth potential, or has not experienced or has not had to overcome impediments to obtaining access to financing, markets, and resources, the individual’s presumption of economic disadvantage is rebutted, even if it individual’s PNW is less than $1.32 million.
USDOT states that with this language, it is appropriate for recipients (certifying agencies such as OMWBE) to review the total fair market value of the individual’s assets and determine if that level appears to be “substantial” and indicates an ability to accumulate substantial wealth. The purported purpose of this provision is to give recipients a tool to exclude an individual who, in overall asset terms, is what a reasonable person would consider to be a wealthy individual, even if their liabilities bring their PNW below the $1.32 million cap. Notably, USDOT also seeks comment as to whether a more bright-line approach would be preferable, such as saying that someone whose Adjusted Gross Income on his or her Federal income tax return was over $1 million for two or three years in a row would lose the presumption of economic disadvantage regardless of PNW.
Although we disagree that there should be an avenue to rebut the presumption of economic disadvantage at all (why have a PNW cap if it can easily be disregarded), if USDOT is including the provision, the bright line approach is the only reasonable approach. Simply mandating the vague guidance language (above), which recipients have already been enforcing, has and will continue to produce arbitrary results, allow recipients to bar applicants with impunity, and provide no objective basis to check overzealous administrator’s personal biases. Specifically, the above guidance leaves the fate of DBE certification to subjective interpretation, forcing DBEs to guess at what the recipient will consider “an ability to accumulate substantial wealth” or what constitutes an impediment to obtaining financing. Moreover, this “standard,” which will vary among states and even among administrators in a recipient’s office, authorizes and encourages arbitrary enforcement. For example, should the State of Washington’s OMWBE feel a $1,000,000 house with a $900,000 mortgage be enough to constitute “substantial” resources there is nothing prohibiting the State of Oregon or Idaho from enforcing a different standard.
New Personal Net Worth Form: USDOT proposes a newly designed PNW statement required of all applicants. The new form would include all assets owned by the individual, including ownership interests, personal assets, and the value of the personal residence. This revision is a welcome change. Currently OMWBE uses the Small Business Administration’s (“SBA”) Personal Financial Statement. This form can be confusing and does not account for the specific PNW calculation rules. For example, under the DBE rules, an individual’s PNW does not include his or her personal residence or ownership interest in the applicant firm. The SBA form, however, provides no instruction as to where to include this information, if at all. Without instruction, the various methods applicants use to fill out the form can potentially cause misunderstandings during the application review process. A copy of the revised form can be found here. USDOT also seeks comment on whether the spouse of an applicant owner should have to file a PNW statement, again an overly intrusive and irrelevant requirement in our view.
Transfers: USDOT proposes to directly add a paragraph into the regulation restating the requirement (currently in Appendix E) that assets transferred to an immediate family member for less than fair market value within the last two years can be counted toward an individual’s PNW calculation. USDOT also proposes that transfers from business owners to the companies be counted toward the owner’s PNW to avoid artificially depressing that owner’s PNW. This represents a positive change aimed at reducing fraud in the program.
Certification Related Provisions: USDOT also proposes several changes to how ownership and control are determined. Specifically, the rule will require applicants to submit additional proof as to the sufficiency of their initial capital contribution and the circumstances of any funding streams to the firm since its inception, including collateral value, proof of asset ownership, and more stringent guidelines relating to deposits made by the applicant.
Good Faith Efforts: USDOT adds some clarification for establishing Good Faith Efforts to meet the DBE goal. USDOT states that prime contractor bidders whose bid includes a promise to include DBEs after the contract awarded is not to be considered as a good faith effort. USDOT proposes that bidders would have two options: (1) bidders may submit Good Faith Effort documentation along with original bids, or (2) Bidders may submit good faith documentation within one day of being notified of their winning bid. USDOT also provides examples of Good Faith Efforts to Appendix A.
Counting Trucking Operations: In one of the only areas favorable to DBE firms, USDOT proposes to revise the current requirements for how much of a DBE trucking company’s involvement can be counted towards a DBE goal. The proposal would give credit to a DBE that leases trucks from non-DBE entities but uses its own employees as drivers. This “change” is already implemented in many states.
We are currently drafting comments to USDOT’s proposed rules. Should you wish to submit a comment of your own, you may submit comments (identified by the agency name and DOT Docket ID Number OST-2012-0147) by any of the following methods:
– Federal Rulemaking Portal: Go to www.regulations.gov and follow the online instructions for submitting comments.
– Mail: Docket Management Facility: U.S. Department of Transportation, 1200 New Jersey Avenue SE., West Building Ground Floor, Room W12-140, Washington, DC 20590-0001.
– Hand Delivery or Courier: West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue SE., Washington, DC 20590-0001 between 9 a.m. and 5 p.m. ET, Monday through Friday, except Federal holidays.
– Fax: 202-493-2251.
Please note that all comments received will become part of the docket and will be posted without change to www.regulations.gov including any personal information provided and will be available to internet users.