Credit: Photograph by Darrow Montgomery

Anacostia Senior High School used to symbolize much of what was wrong in the District. Not many of its students graduated; fewer still came anywhere near the proficiency levels of peers in better schools. The building was literally falling apart, a physical manifestation of one of the worst schools in one of the worst school systems in the country.

Mayor Vince Gray, speaking at a ribbon-cutting ceremony at Anacostia last summer, remembered visiting years ago and seeing students wearing their overcoats in class.

“It was just as cold in the classroom as it was outside,” Gray said, adding that he had no doubts there was a clear link between the school’s poor physical shape and its poor academic record.

Now, after a $62 million facelift that includes a new name, The Academies at Anacostia, a new gymnasium, and renovated classrooms, city leaders say the building represents an affirmation of the District’s commitment to making sure all kids have a nice, well-built school.

“This indeed is a great day,” Gray said at last year’s ceremony, which marked the completion of the first phase of the renovation. He and other city leaders took turns congratulating each other for their support for kids.

But the story of Anacostia’s renovation may come to symbolize another broken system. This time, it’s not a story of neglected schoolchildren, but of a broken contracting process that, in dollar terms, might be the most dysfunctional program in the District government.

The Certified Business Enterprise program was born out of the city’s old minority set-asides, a hallmark of Marion Barry’s mayoral legacy that helped black-owned businesses enter into city contracting and the construction business, long dominated by white firms. But 20 years after courts limited race-based programs, the CBE program has morphed into an unrecognizable mess that gives special preference to any business of any size based in D.C.—or pretending to be based in the city—that knows how to play the game.

Critics say the setup gives mammoth, politically connected firms unfair advantages, invites waste and fraud, and actually hurts, rather than helps, smaller minority-owned businesses. The program, say Barry and many others, lost its way a long time ago.

A review of hundreds of pages of documents obtained through Freedom of Information Act requests, court records, and other sources, as well as interviews with city officials, contractors, and outside experts, found plenty of evidence that the critics are right. And there’s probably no better example of the program’s faults than at Anacostia.

Not far from the District line, in a small industrial office park in Landover, Md., sits Environmental Engineering & Construction, Inc., a waste cleanup and construction company. Visitors find a modest operation, with a few trucks parked outside and a small warehouse in the back. In 2001, Andre Downey, the company’s owner, told Black Enterprise that his company grossed $2.5 million that year. A regular competitor of EEC estimates that the biggest contract the company could currently handle on its own would be about a $5 million job.

But a sister company Downey established in 2005, EEC of DC, is a much bigger deal, thanks to the CBE program. EEC of DC has been the majority partner in at least three joint ventures on major public construction projects, including the new Department of Employment Services headquarters on Minnesota Avenue NE, a senior wellness center in Ward 1, and the renovation of Anacostia Senior High School. In fiscal 2010, the Office of Contracting and Procurement listed EEC of DC and its minority-share partner as the fifth largest supplier in the city, at $70 million. All told, EEC of DC’s joint ventures, in which the firm has been a majority partner, has been paid more than $120 million in public funds since 2008.

An impressive feat, but EEC of DC has essentially served as a front on those jobs, while its much larger partner, Rockville-based Forrester Construction, has done almost all the work and gotten almost all the pay. That, at least, is what Downey, owner of EEC of DC, has said. The two companies are suing each other in D.C. Superior Court and federal court in Maryland over the alleged misappropriation of $1.6 million and breaches of contracts. In court records, as well as letters to city officials, Downey lays bare how the CBE-driven joint venture at Anacostia really worked, and it’s not pretty.

Downey says Forrester approached him for a joint venture on the Anacostia job because his firm is a registered CBE, which would tack on 12 points to its bid out of a maximum score of 100. EEC of DC controlled 51 percent of the joint venture, as required by law for the partnership to get CBE points. The idea behind joint ventures is to allow CBEs to manage jobs that most local companies are too small to do by themselves by pairing up with bigger firms based elsewhere.

The joint venture’s CBE points helped it win the Anacostia job, according to a memo city officials sent to the D.C. Council asking for the contract’s approval. One competitor, who offered a slightly higher price but had a better technical proposal, would have beaten EEC of DC and Forrester for the contract without the extra 12 points, the memo shows.

Exhibits filed by EEC of DC, which Forrester had sealed from public view a week after they were filed (and a day after I’d gotten copies), show that the joint venture existed almost entirely in name only. EEC of DC and Forrester signed an agreement on June 9, 2009, giving EEC of DC 51 percent control of the company. But in December 2010, after the job had started, Downey and John Forrester, one of Forrester’s employees, signed a new side contract that changed the division of labor.

That contract says EEC of DC was responsible for $2.8 million in demolition and trash hauling, while Forrester was responsible for “all remaining” work, which totaled $46 million. Each company would keep whatever profit it could make from that split. The contract didn’t specify a profit level, but other contractors estimated that typical margins on a similar job would be about 3 percent, or $1.4 million on a $46 million contract.

Representatives from Forrester did not respond to repeated requests for comment.

Downey told me via email that he’d love to talk about the “whole grimy, David vs. Goliath story” but can’t on the advice of his lawyers. In court records, though, he says he only signed the side agreement under “duress” because Forrester was improperly withholding money that he needed to keep his company afloat and pay subcontractors. Downey says he had similar arrangements with Forrester on two previous joint ventures with them. He says Forrester subcontracted 100 percent of the work to itself on the senior center in Ward 1, and kept more than $47 million worth of work for itself on the $48 million DOES project. Forrester did not respond to those specific complaints in court records, but alleges Downey misappropriated $1.6 million from the Anacostia contract, which he denies.

Harold Pettigrew, the director of the Department of Small and Local Business Development, which oversees the CBE program, wouldn’t comment on the specifics of the deal because of the lawsuit. But he says the Anacostia job will serve as a “case study” as the Gray administration seeks to make changes to the CBE program.

Side agreements like the one in the Forrester-EEC venture are all too common in D.C., say several contractors who have seen or are familiar with the deal. Keith Forney, the owner of another CBE that finished second in the bidding behind Forrester and EEC of DC for the Department of Employment Services headquarters, says the companies cheated the system “with a backroom deal.”

Courtland Cox, a consultant who ran the city’s minority contracting office during Barry’s early years as mayor and has been involved in shaping and executing the policy almost ever since, says these joint ventures don’t work. “They view CBE participation as an add-on,” Cox says of the larger, out-of-town contractors.

So how much do these add-ons cost the city?

One contractor, who asked not to be named discussing a potentially illegal situation, says he was once offered a $100,000 flat fee from a larger company on a $40 million city project. The fee wasn’t for any work; it was just so the contractor’s CBE points could be used for the bid. One hundred thousand dollars is a fraction of the overall cost, but even a small portion of the $5 billion the city will spend on construction projects in the next six years is several million dollars. The contractor, who turned down the offer, says the blame mostly lies with the city, not the companies.

“The District has created the craziness,” the contractor says. “Everybody has to do it, or you can’t compete.”

The program affects much more than just prime contractors on public construction projects. The District requires that any development, public or private, that receives any city aide (which includes most construction in the city) spend 35 percent of its discretionary budget on CBEs. Several contractors say it’s common for CBEs to be used as fronts to get to that mark. Former Mayor Adrian Fenty’s fraternity brother, Sinclair Skinner, ran a CBE-certified engineering firm that essentially acted as a pass-through subcontractor and tacked on “grossly inflated” rates to a city park construction contract, an outside law firm found last year.

City law also requires that the District government contract much of its discretionary spending with smaller CBEs, likely adding more unnecessary costs. An investigation of the city’s technology office by an outside law firm in 2010 found the CBE program created a class of middlemen who performed “services” like searching to find temporary tech workers and adding large mark-ups to goods widely available on the open market, including “gray market” software without warranties. Soon after Fenty was sworn in as mayor in 2007, city officials did an informal investigation of several CBE office-supply vendors, which found that many contractors simply bought supplies from Staples and passed them on to D.C. with a markup. “Which is insane,” says Will Singer, Fenty’s former budget director.

But the harm goes beyond wasted money. Many critics say the program has actually chilled the growth of legitimate small minority-owned businesses. Bobby Green, the president of the Capital Area Minority Contractors & Business Association, says contractors have little reason to expand when they can make a tidy profit without doing any work or taking any risk by simply farming out their CBE points. Legitimate contractors who want to do the work are viewed by larger contractors as a liability, Green says: “The [big] contractors won’t go to us to get our help.”

Worst of all, the program helps prop up the District’s all-too-cozy political culture, which either looks exactly like a pay-to-play system or actually is one. It’s no coincidence that some of the city’s biggest political donors also own businesses that have long feasted on city contracts, thanks in part to their CBE status. Fort Myer Construction, a CBE-certified road-building behemoth, has dominated city paving contracts for decades while simultaneously filling local pols’ campaign accounts—the firm and its associates have given $150,000 to D.C. politicians in the last decade, campaign records show. (Forrester has given more than $45,000 in the last six years to local pols through various LLCs it controls, records show.)

Jeff Thompson, the man who U.S. Attorney Ron Machen says financed an illegal “shadow campaign” that helped get Gray elected, has used his Medicaid contracting company’s CBE status to secure enormous city contracts for more than a decade. At a plea hearing earlier this summer, a Thompson associate told a federal judge that Thompson backed the alleged shadow campaign because he was worried about losing those contracts.

Almost all the fallout from the Thompson scandal, however, has focused on campaign finance laws and which politicians might have broken them. But no matter how many campaign aides plead guilty, the real problem—the motivation behind the pay-to-play system—won’t change.

Passed just a few years after Home Rule, the Minority Contracting Act of 1976 originally created a sheltered marketplace for minority firms on certain D.C. contracts. Marion Barry beefed up the law during his first term, mandating that 35 percent of contracts, rather than 25 percent, go to minority-owned businesses. Sure, plenty of Barry cronies benefited from the program. But Barry’s strong support for black-owned businesses was one of the positive parts of his legacy; along with Barry’s massive District government hiring spree, the program helped build the city’s solid black middle class. In the early 1970s, fewer than 5 percent of city contracts went to minority-owned firms. By the early ’90s, that figure was more than 40 percent.

“When we started this program, it worked,” says Barry. “I got it up to 47 percent.”

But a 1989 Supreme Court case on minority set-asides and a 1992 ruling by the U.S. Court of Appeals for the District (which sided with a white construction contractor who said he faced reverse discrimination) effectively ended the program. Then-Mayor Sharon Pratt set up a hastily devised replacement, called the Local, Small, and Disadvantaged Business Enterprise program, that was officially “race blind” but whose main purpose was to continue directing city contracts to minority- and women-owned businesses.

Twenty years later, the same quick fix has been tinkered with more times than a used Datsun. It’s now the CBE program.

“A lot of people in their head still think of it as race-based,” says Cox, the former Barry aide. That misconception, Cox says, explains why so many people, including Barry, are unhappy with the CBE program.

That also explains why politicians aren’t eager to fix the program. One white elected official, who asked not to be named because of the racial sensitivity of the topic, says only a black politician would have the political cover necessary to try. Councilmember Vincent Orange, who is African-American, has introduced an omnibus bill aimed at reforming the CBE program, with a greater emphasis on enforcement. “It appears to be widespread fraud taking place,” says Orange.

Another common misconception is that the CBE program is tailored to help small or newer businesses grow. Actually, any company of any size that sets up an office in D.C. can qualify. Arent Fox, the powerhouse lobbying and law firm whose attorneys include a number of former legislators, was one CBE that did work related to the construction of Nationals Park. CBE-qualified Tompkins Builders is owned by Turner Construction, one of the biggest construction companies in the U.S. Turner, in turn, is a subsidiary of the German-based Hochtief, whose annual sales are about $30 billion.

In 2007, city lawyers explained in court records that the District had decided to give more CBE points to businesses 20 years or older as a thank-you, not as any type of growth incentive. “The rationale is to reward a business’ longtime dedication to the District through the poorest years of the local economy,” the city’s Office of Attorney General said at the time.

“There was no business development component of it at all,” says one former high-level Fenty official of the entire CBE program, who also asked not to be named while discussing what he says was a highly sensitive topic.

Nowadays, the best spin city officials can put on the program is that it helps stimulate the local economy by keeping local dollars local. That sounds like a reasonable goal, but as the Anacostia project illustrates, “local” is sometimes a term of art.

Near the intersection of H Street NE and Bladensburg Road, there’s a small, run-down building that looks like it might rent office space by the hour. There are no trucks or other construction equipment. It’s the headquarters of EEC of DC, the building that qualifies the joint venture as a local business.

In court records, Forrester says there’s no difference between EEC of DC and Downey’s other company, Landover-based EEC, Inc. Downey’s work trucks are painted with logos from both companies, and during two recent visits, I saw trucks with D.C. plates parked at EEC’s Maryland office. EEC qualifies for additional CBE points because Downey has an apartment in Southwest, even though Maryland tax, court, and property records show he has also lived in Prince George’s County for at least a decade.

Technically, all a company needs to qualify as local is an office in the District where its CEO and other top managers “perform their managerial” duties. What that means, however, is merely that companies need to put up with the slight inconvenience of opening a small office in D.C. while conducting most of their business elsewhere.

Take Parkinson Construction, Forrester’s newest joint-venture partner on a new student center at the University of the District of Columbia. At its office in Brentwood, Md., Parkinson has a warehouse, trucks, and accounting records. They also have a small suite in a building on the District side of Eastern Avenue, where the company keeps its D.C. business license. That license lists Parkinson’s Brentwood location as both its billing address and “premise” address.

A favorite place for Maryland companies to set up in D.C. is an office park at 1818 New York Ave. NE. In 2009, two construction companies based there lost their certification, according to records obtained through the Freedom of Information Act. Dynamic Corporation lost its CBE certification when a city inspector found almost its entire operation, save for a few project managers on New York Avenue, was run out of Hyattsville. Another construction company, Specialty Construction Management, lost its certification that same year. A city inspector found that Specialty’s office in Hyattsville had 11 private offices, a conference room, and a reception room in a 15,000-square-foot workspace, while its 250-square-foot D.C. office was locked. A day after the inspector’s visit, Specialty’s owner sent a letter to the city saying her company’s D.C. headquarters was now located in her home near the convention center. The two companies were paid $8.4 million in contracts during the two years before their CBE status was revoked. (CBE status has to be renewed every two years.)

Arlington-based Sigal Construction has formed several joint ventures with a D.C. CBE called GCS—which have been paid more than $115 million by the city. Corporate records show that the same man, Gerry Sigal, owns both Sigal Construction and GCS; the two companies also share a senior vice president, and Sigal was maintaining GCS’s books. A city commission found that GCS had broken the law and should have its CBE status revoked but allowed the company to keep the status anyway. (Orange says he asked the inspector general to look into GCS after I first wrote about it earlier this year.)

The same commission also dismissed a complaint against Motir Services, which has used its CBE status to win city contracts on everything from construction to janitorial work to providing temporary health workers. The company used to have an office on Capitol Hill, but it’s now closed due to a recent fire. But business continues at the company’s large spread in Capitol Heights, Md., where Motir has had an office for several years. A Dunn and Bradstreet report from 2008 lists the Maryland address as the company’s headquarters, though Motir’s website only lists the D.C. address. Two recent visits to the Maryland office found a number of Motir trucks with Maryland license plates parked by the company’s warehouse, which is located right behind several offices. I tried to speak with Motir’s owner, Emmanuel Irono, when I visited but was told he was in a meeting. I left my number twice but never heard back. Motir, as it happens, partnered with Forrester a few years ago to build the Anacostia Gateway Building office complex.

“Candidly, there’s no affordable warehouse space in the District,” says one contractor with a similar setup.

District officials say they have only recently been made aware of the problems between EEC of DC and Forrester. But Downey says in court records those problems began in early 2008.There’s an easy explanation why the city wasn’t clued in: It’s because no one is watching.

When I ask Pettigrew, the head of the Department of Small and Local Business Development, how many staffers he has checking on whether CBEs are following city rules, he answers: “Short answer is zero, longer answer is zero as well.”

During the crafting of the fiscal 2010 budget, then-Councilmember Kwame Brown, who was heading the council’s economic development committee at the time, transferred DSLBD’s five-person compliance office to the D.C. Auditor. The move was done so quietly that Pettigrew had to tell the auditor the new staffers were on their way over. (While DSLBD now has no dedicated compliance officers, Pettigrew has detailed one employee to investigate complaints of potential fraud as they come in.)

In 2010, the D.C. Auditor could only review 75 of 275 private projects that required 35 percent CBE participation, because the DSLBD didn’t have all the necessary paperwork. There are also several city agencies that routinely don’t provide required records documenting their spending on CBEs, according to quarterly audits.

“It’s like the worst-kept secret,” Pettigrew says of the chasm between his agency’s responsibilities and its lack of resources. “From the development community, from the CBE community to the council and everyone else, it’s widely known.”

Even if there was someone watching the store, there’s almost no chance of rulebreakers receiving any punishment. City records show only a handful of CBEs have had their status temporarily revoked recently. The commission tasked with making those decisions has been all but disbanded; it hasn’t met in more than a year, as the Gray administration tries to overhaul the District’s various boards and commissions. (Pettigrew says the board hasn’t necessarily been missed and that CBE fraud is limited to a few bad actors. He says there are plenty of examples of the program helping legitimate businesses grow.)

City Administrator Allen Lew says the District is committed to a thorough evaluation of the CBE program’s weaknesses, as well as pursuing sanctions against any company caught breaking the rules. (His spokesman said the city is considering “all legal options” against Forrester and EEC of DC.) When I ask how many companies have ever been punished, Lew says he doesn’t have a comment. Earlier, Pettigrew told me he’d never heard of fines or other civil penalties for any company caught breaking CBE rules. When I tell Lew that, he says, “Let’s go with his answer, then.”

Last week, Lew, Gray, and other District officials gathered at the renovated Academies at Anacostia to congratulate themselves once again. The tone was similar to the ribbon cutting of a year earlier. “You needed to put an overcoat on to get through the day,” Gray again reminisced about the old building.

There was one difference, though. A year ago, city officials had asked Downey and a staffer from Forrester to address the audience. (Fittingly, the Forrester guy did most of the talking.)

This year, neither was asked to speak, and I couldn’t find Downey anywhere in the crowd.