Empty jackpot

Advertising executive Bob Dale looks down at Chicago from his downtown office. Dale’s company, R.J. Dale Advertising, won a big contract with the Illinois Lottery that ultimately almost put the company in jeopardy. Photo by Jason Reblando.

Advertising executive Bob Dale looks down at Chicago from his downtown office. Dale’s company, R.J. Dale Advertising, won a big contract with the Illinois Lottery that ultimately almost put the company in jeopardy. Photo by Jason Reblando.

Shaking hands with officials from the Illinois Lottery, Bob Dale felt like a winner. No, he didn’t win the jackpot or even one of those scratch-off cards. But his business, R.J. Dale Advertising, had just sealed a $100 million contract with the Illinois Department of Revenue, one of the largest contracts awarded to a black-owned business in Illinois.

But looking back on his big win now, Dale doesn’t feel so lucky. Low commission rates and sky-high legal fees from state audits meant R.J. Dale Advertising didn’t even make a profit for being the lottery’s chief advertising agency.

“Quite honestly, it damn near put us out of business,” he said.

The lottery, on the other hand, fared well. During its five-year contract term, revenue from the lottery increased by $490 million. Dale and hiscolleagues hoped that success would generate new business.

As it turned out, the lottery contract opened no new doors for the firm. Major corporations “didn’t care about the phenomenal success we had,” Dale said. “They just weren’t interested in hiring a black-owned business.”

Many minority business owners say they still face significant discrimination in the marketplace. To help remedy that, some states, including Illinois, have created programs to make sure that some government contracts go to diverse businesses.

Dale’s contract was part of the Business Enterprise Program, Illinois’ effort to award government contracts to businesses owned by minorities, women and people with a disability. But a Chicago Reporter investigation found that even though the State of Illinois sets lofty goals and touts its overall successes, some of its departments aren’t even coming close to the program’s goal of steering 20 percent of all contracts to target businesses.

Between fiscal years 2007 and 2010, 13 out of the 28 state departments with at least $10 million in their contract budget during those years failed to meet the program’s 20 percent goal, including five of the six departments with the largest budgets. Four of these departments even fell short of the 12 percent minimum required by law.

And even when departments are meeting their goals, the money is often going to one big contract with one single firm, like Dale’s lottery contract. Forty-five percent of state departments awarded more than half of their contract dollars for the program to just one firm.

Dale said every time those goals aren’t met, it means minority communities miss out. If every department had met its goal, businesses owned by minorities, women and people with a disability in Illinois would have earned another $586 million between fiscal years 2007 and 2010.

“The black unemployment rate is at least twice as high as the general market, maybe even three times as high,” Dale said. “Every time we don’t get a contract, that’s jobs that black people don’t get.”

And though the state seems to be patting itself on the back for meeting its goals overall, a comparison to states with similar programs raises questions on Illinois’ calculations, the Reporter found.

On a per-resident basis, Illinois’ total contract budget is smaller than those of most other states, the Reporter analysis shows. Critics say this reflects the fact that Illinois allows some contracts to be overlooked when tallying its budget—thus effectively inflating the proportion of money received by target businesses among the total contract budget.

Still, Illinois is one of only a handful of states that even have a program to direct contract dollars to disadvantaged businesses, said Tim Lohrentz, director of the Inclusive Business Initiative at the Insight Center for Community and Economic Development in Oakland, Calif.
“It’s a lot better than other states, for one, for having a program and for having a program that functions pretty well,” Lohrentz said. “Minority- and women-owned firms get left out of the process, and there’s a need for economic development in these communities.”

Alka Nayyar, communications manager at the Illinois Department of Central Management Services, which administers the program, said the department works with individual departments to help them meet their goals, but that the law only requires that the state meet its goal overall.

“The legislatively mandated goal is a statewide target, and the act does not set percentage goals for individual agencies,” Nayyar said. “However, [the Business Enterprise Program] does work closely with each executive agency, and other state entities, to identify appropriate disadvantaged vendors and craft a [Business Enterprise Program] compliance plan.”

But there’s ample room for improvement, said Shelia Hill Morgan, president and CEO of the Chicago Minority Suppliers Development Council. “I don’t think the state is doing nearly as good as we would like for them to do,” she said. “Do we throw the baby out with the bathwater? I say we do not. But I’d like to see a little more rigor and growth in the program.”

Morgan says she wants to see the state held more accountable for the goals they set.

“I think one of the biggest challenges that the state has right now is that they have some pretty lofty goals,” she said. “It’s one thing to have a goal and another thing to hit it.”

Larry Ivory, a member of the Business Enterprise Council, which oversees the program, said he’s disappointed by the departments’ repeated failures, but that there’s not enough leverage to create change.

“We need more teeth in the [Business Enterprise Council],” said Ivory, who is also president and CEO of the Illinois Black Chamber of Commerce. “Departments need to be brought before the council and justify why they’re not performing as well. Underperformance should not be tolerated.”

Illinois established the Business Enterprise Program in 1984 with the Business Enterprise for Minorities, Females and Persons with Disabilities Act. The law set a minimum requirement: That 12 percent of state contracts go to target businesses. Within that 12 percent, 5 percent was designated for minority-owned businesses, another 5 percent for women-owned businesses and the remaining 2 percent for businesses owned by people with a disability.

In 1998, the Business Enterprise Council increased the goal from 12 percent to 19 percent. In 2010, it was raised to 20 percent. According to the council’s annual reports, the state has met and exceeded its goals for contracting with target businesses every fiscal year between 2007 and 2010. But a closer look at individual departments demonstrates some agencies are consistently missing the mark.

According to the Reporter analysis, four departments—the Illinois Department of Agriculture, the Illinois Department of Human Services, the Illinois Department of Natural Resources and the State Board of Education—failed to meet the statutory goal of 12 percent when each agency’s budget was combined for 2007 through 2010. The agriculture and natural resources departments failed to meet the 12 percent goal each fiscal year since 2007, while the board of education met the goal only once, in 2009. Spending with target businesses has been as low as 0.13 percent for the board of education in 2008. The human services department steered only 4.26 percent of its contracts to target businesses in 2008. But it met the 12 percent goal in 2007 and reached more than 20 percent since 2009.

Lohrentz of the Insight Center said it’s unrealistic for every agency to meet spending goals every year. “It’s more important that the agencies are improving from year to year,” he said.

But Dale said these agencies aren’t doing enough to reach out to diverse businesses. Dale belongs to several black-owned business associations in Chicago and the state, and he’s never heard of any of his colleagues getting a request for proposal from the state board of education.

Morgan of the Chicago Minority Suppliers Development Council agreed. “That is what the [businesses] reported to us, that they don’t have access to those contracts,” she said. “It’s happening because they’re letting those contracts go to non-minorities. There are minorities who are qualified to do that work, but they don’t have the opportunity or access.”

Mary Fergus, senior communications specialist at the state board of education, said the agency is aware of the problem and working to improve it. She said the state’s fiscal crisis, resulting in late payments to contractors, means many small diverse businesses have had to cut ties with the agency. In addition, she said, the agency spends a large amount of money on standardized testing and scoring systems, an area where there are very few contractors available.

“We do get some exemptions because of the very highly technical work we do,” Fergus said. “There’s just very few vendors out there total who do that kind of work. It’s definitely something that we’re working toward.”

The agriculture department, which spent only 2.84 percent of its contract dollars for 2007 through 2010 with target businesses, said it doesn’t have an official procurement officer, making it tough to reach out to new contractors. It noted that much of its budget goes toward state fairs, and it has not been able to find target businesses to fulfill the contracting roles.

The natural resources department said it is working on a new reporting system that will better identify target businesses that it can contract with.

“The Illinois Department of Natural Resources recognizes the importance of the [Business Enterprise Program] and continues to strive to meet program goals,” said Januari Smith, the department’s communications manager. “The agency is committed to working with certified businesses that fall under the program guidelines.”

The Reporter’s analysis also found that, of the six departments with the largest budgets, only one department—the Illinois State Toll Highway Authority—met the program’s goal with combined budgets for fiscal years 2007 through 2010. The other five departments—the board of education, the Capital Development Board, the human services department, the natural resources department and the Illinois Department of Transportation—all failed the 20 percent goal.

State officials say some departments struggle to find diverse businesses that can meet their needs, a problem that the Business Enterprise Program is trying to remedy.

“To help make sure agencies have access to a variety of businesses and service providers, we continue our outreach efforts to encourage eligible businesses to certify as [Business Enterprise Program] vendors and make sure the online database of these businesses is updated regularly,” said Nayyar of the central management service department.

Ivory of the Business Enterprise Council said one of the main problems is the tracking and reporting system. There’s no uniform way for departments to report their contracts with target businesses, and the system doesn’t allow real-time tracking.

“One of the key factors in business is to be able to know where you stand each month, each week, each day,” he said. “Right now, there’s no real tracking system that we can get our hands on. Even the [Business Enterprise Council] can’t truly track how many contracts are out there.”

Morgan said that the program needs better oversight.

“If you want to get to the [20] percent goal, you have to be strategic in how you get there, and you have to hold people accountable,” she said. “There is no reason—given the state of Illinois and the type of diversity, and the diverse types of businesses in Illinois that are mature, that have had years and years of success—that the state could not do a better job if they had a desire to do that.”

Janet Sloan was a lawyer working in state government before she bought Seville Staffing back in 2005. “I’m a recovering attorney,” she said. “I practiced law a lot of years and decided that my husband and I were going to get out of corporate America.”

Seville, a temporary staffing company, tries to split its business between the private sector and government business, Sloan said. Between 2007 and 2010, Seville Staffing and Seville Temporary Services did about $10 million worth of business with the State of Illinois. Sloan says she made sure to go through the lengthy process to become certified as a women-owned business because she felt it gave her a leg-up in a competitive market.

“I’ve found that having the diversity certifications that we do—national, state, federal, county, city—has been beneficial in the last few years,” Sloan said.

But in the past two years, she feels like state business has slumped. She used to be approached quite often by a larger corporation looking for a subcontractor to help fulfill the state’s minority- or women-owned business requirement.

“I don’t see that happening as much as I did two years ago,” Sloan said. “I’m not sure if government agencies are taking that out of the requirements or if they’re just finding other agencies to do that for them.”

While Sloan feels business has been slowing down, the annual reports from the Business Enterprise Program show ever increasing percentages of contract dollars going to target businesses.

But the situation is much more complex, according to the Reporter analysis, which compared Illinois’ total contract budget reported for the Business Enterprise Program with those of other states that have similar programs.

Illinois’ total contract budget, on a per-resident basis, was $312 during fiscal year 2010. Among 15 states for which contract figures were available, it ranked fourth lowest. The highest was the spending by Connecticut, at $773 per resident in state contracts. Only Indiana, Missouri and Pennsylvania had a lower contract budget.

Among 15 states, Illinois is the second most populous. But, for contracts, four less-populous states—Maryland, Massachusetts, North Carolina and Ohio—had a larger budget. Ohio, for example, has about 1 million fewer residents, but its contract budget was more than $1 billion higher than that of Illinois.

Ivory said the disparities in spending stem from the fact the state procurement system is too complicated, allowing departments to circumvent the program’s goals. Departments are allowed to continue contracting with a business without having the contract subjected to the Business Enterprise Program, if it’s deemed “economically infeasible” or if one company can claim to be the only possible source for its needs.

“There’s a lot of loopholes to hide and deny minority participation, and that needs to be changed,” he said. “Procurement has become so complicated that it’s even hard for people who’ve served on the council for years to understand it. I think we’re playing catch-up, while people internally know the game and know how to run circles around us.”

And even the numbers reportedly going to minority companies don’t tell the whole story, Ivory said. Contracts are often written for a large sum and then downgraded later to a much smaller amount, but it’s recorded that the original larger sum was spent with diverse businesses, even though the state never paid it. In addition, he said, a lot of minority contracts are for materials, which offer a very small profit margin.

“What we want to see is real contracts that offer legitimate opportunity,” he said. “There’s no discrimination in collecting taxes. There should be no discrimination when it comes to issuing contracts.”

Nayyar said exemptions for some contracts to be excluded from the Business Enterprise Program are clearly stated in the statute.

“Agencies and universities may use several procurement methods as designated by the Procurement Code, which also makes a [Business Enterprise Program] component available,” she said. “And we encourage agencies to utilize [Business Enterprise Program] vendors wherever possible.”

Because of his company’s minority-owned business status, Ernesto Pedroza said he often feels like people assume he can’t handle big business. Pedroza, who started his marketing business, Alta Vista Graphics Corp., nine years ago, has had several state contracts and done business with Metra, several restaurant chains, entertainment venues and sports teams, such as the Chicago White Sox.

 “I’ve seen other companies that are nonminority that don’t have our capacity given a shot at bigger opportunities,” he said. “As a minority, you’re automatically looked at like you’re small time.”

Pedroza believes the state should make an effort to contract with diverse businesses, but it shouldn’t end when the goals are fulfilled. “It seems like they’re saying, ‘Hey, we’re only going to give you the minority piece that we’re obligated to give,’” he said. “Why can’t I participate in the whole pie?”

Minorities, women and people with a disability already get a small slice of the state contract pie, but a few large businesses may be eating up most of that piece, shows the Reporter analysis of every state contract under the Business Enterprise Program that went directly through the comptroller’s office between 2007 and 2010.

Within those contracts, 27 of the 59 state agencies spent 50 percent or more of their contract dollars with just one business. Another six departments spent 40 percent or more with just one business. An additional eight departments spent the majority of their business with just one minority group.

Contracts with just two companies—R.J. Dale Advertising and Gareda Diversified Business Services, a nurse staffing company—were large enough to make up 23 percent of all state contract dollars received by target businesses between 2007 and 2010. Of the money that went to African-American businesses during that time, the contracts with the two companies accounted for nearly 60 percent.

Morgan said she’s glad these companies are able to get such prominent contracts but worries that not enough businesses are getting these opportunities. “I think that there should be more opportunity,” she said. “There is more opportunity than for just these two companies to participate.”

Lohrentz pointed out that small businesses often struggle to be large enough to manage government business.

“There needs to be somebody within the state really concerning themselves with building up the capacity of new and emerging firms,” Lohrentz said. “Somehow, newer firms need to get so that a year or two from now, they’ll be able to bid much better on state projects.”

Pedroza says the perception that his business can’t handle large contracts because he’s a minority has made him hesitant about advertising himself as a minority-owned business.

“I’m Hispanic, and I’m proud of it,” he said. “But I don’t want my business to be seen as not having the capacity to do more.”

Dale said advertising is a particularly difficult business to be in as a black entrepreneur. There’s a strong perception that black-owned advertising companies are only able to sell to the black community. In addition, he said, being competitive is a lot about who you know, and major corporations aren’t interested in getting to know black companies.

“It’s plain old racism,” Dale said. “That’s what many of us believe is at the bottom of it.”

During the lottery contract, when his firm was being audited by the state, some media outlets around the state wrote articles that cast doubts on the firm’s integrity.

Just days later, after the results of the audit were made public, they reported that there were no problems found with financial management. Even after all the trouble with the contract, much of it reported in the news, Dale hasn’t been reticent to try and win state business again. “But we haven’t won any,” he said.

Susan Hofer, communications manager for the revenue, department, said R.J. Dale was paid exactly what they bid for the lottery advertising contract, and that the audits were a standard part of doing business with the state.

But Dale says things weren’t quite that straightforward. When R.J. Dale took over the last five months of the contract from the previous agency, DDB, Dale was told the state would pay him a 9 percent commission, even though DDB had been paid 11 percent. When the contract was rebid in July, he heard through the grapevine that his firm wouldn’t get the contract if they asked for 11 percent.

“What they told us was, ‘We have to show savings,’” said Dale. “My interpretation was that that was the only way they could justify hiring a black agency. We had to be willing to work for less.”

This story was made possible, in part, by a grant from the Fund for Investigative Journalism. The statements made and views expressed are solely the responsibility of The Chicago Reporter.

Contributing: Samuel Charles, Dylan Cinti, Caitlin Huston and Alexis Pope

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