Compatibility of New York City Local Law 19 With Federal Highway Act Competitive Bidding Requirements

Opinion

Compatibility of New York City Local Law 19 with Federal Highway Act Competitive Bidding Requirements

New York City Local Law 19, which allows bidders who do not make the lowest bid to be awarded contracts in cases where the lowest bidder has not signed an anti-apartheid certifi­ cate, is incom patible with § 112 o f the Federal Aid Highway Act, which requires that contracts for federally funded highway projects be awarded on the basis o f competitive bidding. The Departm ent of Transportation is therefore obligated to withhold funding for such contracts awarded subject to Local Law 19.

When Congress elects to distribute federal funds to states it may attach conditions to their distribution and, so long as those conditions are valid and clearly expressed, a state has no sovereign right to obtain or retain those federal funds without complying with the stated conditions. The Act’s conditioning o f federal highway construction grants on compliance with com petitive bidding requirements is valid and clearly expressed.

By imposing disadvantages on a class o f responsible contract bidders, Local Law 19 discourages responsible contractors from bidding and undermines the competitive bidding process. This departure from competitive bidding procedures was not justified by considerations of cost- effectiveness, as required by the Act.

June 30, 1986

M em orandum O p in io n for t h e G eneral C oun sel, D epa rtm en t of T r a n s p o r t a t io n

I. Introduction and Summary

This memorandum responds to your request for the opinion of the Attorney General on the question whether the Secretary of Transportation must withhold approval for payments under the Federal Aid Highway Act (Act) for any contract which has been awarded pursuant to a bidding process subject to New York City Local Law 19 (Local Law 19).' Section 112 of the Federal Aid Highway Act of 1958, as amended, 23 U.S.C. § 112, requires the Secretary to withhold approval for contracts for locally administered highway construction projects funded in whole or in part by the federal government unless the contracts are awarded through competitive bidding.

The provisions of Local Law 19 impose certain disadvantages in the bidding process for city contracts on bidders who fail to sign an anti-apartheid certifi­ cate stating that they have not, within the previous twelve months and for the 1 The Attorney G eneral has delegated his responsibility for rendering opinions to governm ent agencies to the Assistant A ttorney General, O ffice o f Legal Counsel. 28 C.F.R. § 0.25.

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term of the impending contract, done business with, and have neither bought from nor sold goods to certain agencies of the government of the Republic of South Africa or Namibia. Moreover, in the case of a contract to supply goods, the City requires the contractor to certify that none of the goods to be supplied to the City originated in South Africa or Namibia. 13 N. Y.C. Code § 343.11.0(a).2 These certification conditions are not required by any federal law or executive order.3 Section 343.11.0(b) provides that if a bidder complying with the anti­ apartheid certification makes a bid no more than five percent higher than a low bid submitted by a non-complying contractor, both bids are to be passed on to the New York Board of Estimate which “may determine that it is in the public interest that the contract shall be awarded to other than the lowest responsible bidder.”4 New York City has declared that it will apply Local Law 19 to federally funded projects.

2 Section 3 4 3 .1 1.0(a) provides:

W ith respect to contracts described in subdivision b and c o f this section, and in accordance w ith such provisions, no city agency shall contract for the supply o f goods or services with any p erson w ho does not agree to stipulate to the follow ing as material conditions o f the contract if th ere is an o th er p erson w ho will contract to supply goods o r services o f com parable quality at the co m p arab le price:

(1) that the co n tracto r and its substantially ow ned subsidiaries have not within the tw elve m onths p rio r to the aw ard of such contact sold o r agreed to sell, and shall not during the term of such co n tract sell o r agree to sell, g o o d s o r services other than food o r medical supplies directly to the follow ing agencies o f the S outh African governm ent or directly to a corporation owned or c o n tro lled by such government and established expressly fo r the purpose o f procuring such goods and services fo r such specific agencies: (a) the police, (b) the m ilitary, (c) the prison system, or (d) the d epartm ent o f cooperation an d developm ent; and (2) in the case o f a contract to su p p ly goods, that none o f the goods to be supplied to the city orig in ated in the R epublic of South A frica o r Namibia.

A lthough the term “com parable pnce” in th is section is not defined, § 343.11.0(b) makes clear that an agency m ust re fe r any contract in w hich a com plying bid is w ithin five percent o f a non-contract bid to the Board of E stim ate, w hich w ill m ake the final decision as to its award.

3 E xecutive O rd er No. 12S32 forbids governm ent agencies from providing export aid to corporations doing busin ess in South A frica unless they certify that they are adhering to certain principles o f nondiscrim ination w ith respect to their em ployees. The o rd e r also forbids the supply o f com puters to certain South African agencies but co n tain s no general prohibition against contracting with these agencies. See 21 W eekly Comp. Pres. D oc. at 10 5 1 -5 4 (Sept. 9, 1985).

4 Section 3 4 3 .1 1.0(b) provides:

In the case o f contracts subject to public letting under sealed bids pursuant to section 343 o f the ch arter, w henever the lowest responsible bidder has not agreed to stipulate to the conditions set fo rth in subdivision a o f this section and another b id d er who has agreed to stipulate to such co n d itio n s has subm itted a bid w ithin five percent o f the lowest responsible bid for a contract to supply g o o d s o r services of com parable quality, the contracting agency shall refer such bids to th e board o f estim ate which, pursuant to such rules as it may adopt, and in accordance with su bdivision b o f section 343 of the charter, may determ ine that it is in the public interest that the co n tract shall be aw arded to other th a n the lowest responsible bidder.

Section 343 o f the N .Y .C. C harter requires a tw o-thirds vote and the approval o f the corporation counsel and the c o m p tro ller before any such decision is made. New York C ity observes that § 343 o f the charter applies to all co n tracts fo r goods and services ex ceed in g $5,000 and thus allow s the Board o f Estim ate to award contracts to co n tracto rs o th er than the low bidder regardless o f the applicability o f Local Law 19. Therefore, New Y ork C ity argues. Local Law 19 c an n o t be deem ed to violate § 112, because it does no more than refer certain co n tracts fo r consideration under a standing procedure to which the Secretary o f Transportation has not h ereto fo re objected. The short an sw er to this argum ent is that the Secretary is not disabled from C ontinued

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We conclude that application of Local Law 19 to federally funded highway projects administered by New York City would violate 23 U.S.C. § 112. Section 112 clearly reflects a congressional judgment that the efficient use of federal funds afforded by competitive bidding is to be the overriding objective of all procurement rules for federally funded highway projects, superseding any local interest in using federal funds to advance a local objective, however laudable, at the expense of efficiency. By imposing disadvantages on a class of responsible bidders, Local Law 19 distorts the process of competitive bidding in order to advance a local objective unrelated to the cost-effective use of federal funds. Accordingly, the Department of Transportation is obligated to withhold funding for highway construction contracts subject to Local Law 19.5

II. Analysis

Under the Supremacy Clause,6 state or local action must give way to federal legislation passed pursuant to one of Congress’ enumerated powers where the “act of Congress fairly interpreted is in actual conflict with the law of the State” or state subdivision. Florida Lime & Avocado, Inc. v. Paul, 373 U.S. 132, 142- 43 (1963). It is well-settled that Congress, pursuant to its taxing and spending powers under Article I, § 8 of the Constitution, is authorized to disburse federal funds to the states for particular programs and to “fix the terms on which it shall disburse federal money.” Pennhurst State School and Hospital v. Halderman, 451 U.S. 1, 17 (1981). Accordingly, when Congress elects to distribute federal funds to states, it may attach conditions to their distribution. So long as the conditions are valid and clearly expressed, id., “[rjequiring States to honor their obligations voluntarily assumed as a condition of federal funding.. . simply does not intrude on their sovereignty.” Bell v. New Jersey, 461 U.S. 773, 790 (1983). “If the conditions [are] valid, the State has no sovereign right to retain [federal] funds without complying with those conditions.” Id. at 791.

4 ( . . . continued) challenging the application o f a provision to federal contracts which has not been brought to h e r attention previously. W hile the issue o f the legality o f § 343, considered by itself, is not d irectly before us, we believe that its application to federally funded highway projects would raise many o f the same issues as does application o f Local Law 19. We note, how ever, that Local Law 19 is different from § 343 in that it singles out a specific group o f contractors and d eclares that, in certain circum stances, their low bids must be referred to the Board o f Estim ate fo r potential disapproval. Therefore, the Secretary is w holly justified in being more concerned about Local Law 19 than § 343, because the latter does not single out a particular class o f contracts for m andatory reference to the Board o f Estimate.

5 This O ffice has been informed that legislation is being considered by C ongress that w ould direct the Secretary to approve paym ents under the Federal Aid Highway Act for contracts entered by New York City before O ctober 1, 1986, regardless o f the application o f Local Law 19. The stated purpose o f this legislation is to provide time for the Department o f Justice to render an opinion on the issue o f the legality o f the application o f Local Law 19 to federal program s. O ur opinion, o f course, considers the legality o f Local Law 19 under existing federal law and does not purport to evaluate the effect o f pending legislation on the S ecretary's obligation or authority to w ithhold approval for New York City highw ay construction projects using federal funds.

6 U.S. C onst, art. VI, § 2.

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The Supreme Court has specifically upheld Congress’ attachment of condi­ tions to the distribution of federal highway funds. In Oklahoma v. United States Civil Service Comm’n, 330 U.S. 127 (1947), the Court upheld a federal denial of highway funds to Oklahoma because of the state’s failure to observe the requirements of the Hatch Act. Congress had conditioned states’ receipt of federal highway funds on compliance with that Act. The Court stated: “While the United States is not concerned with, and has no power to regulate, local political activities of state officials, it does have the power to fix the terms upon which its .money allotments to states shall be disbursed.” Id. at 143.

New York City does not dispute that the competitive bidding conditions imposed by § 112 of the Federal Aid Highway Act are valid exercises of the congressional spending power and conditions which DOT is therefore obli­ gated to enforce. Careful examination reveals that Local Law 19 is in clear conflict with these conditions.7 Section 112 applies to all highway projects using federal funds “where construction is to be performed by the State highway department or under its supervision.” 23 U.S.C. § 112(b).8 The first two sentences of § 112(b) provide:

Construction of each project. . . shall be performed by contract awarded by competitive bidding, unless the State highway de­ partment demonstrates, to the satisfaction of the Secretary, that some other method is more cost effective. Contracts for the construction of each project shall be awarded only on the basis of the lowest responsive bid submitted by a bidder meeting established criteria of responsibility.9 A version of this provision has governed the process for awarding highway contracts since 1954, when the Senate insisted on amending the Federal Aid 7 B ecause o u r o pinion rests on the actu al conflict betw een Local Law 19 and 23 U .S.C. § 112, w e need not reach the question w hether application o f Local Law 19 to federally funded projects imperm issibly burdens foreign com m erce o r intrudes into a fie ld o f foreign affairs which is uniquely the concern o f the federal governm ent.

8 Section 112(d) m akes clear that the ph rase “under [the] supervision [o f the State highw ay departm ent]'’ in § 112(a) is intended to m ake that section apply to local subdivisions, such as New York City, as well as to State highw ay departm ents. Section 112(d) provides:

N o co n tract aw arded by com petitive bidding pursuant to subsection (b) o f this section, and subject to the provisions of this sectio n , shall be entered into by any State highw ay departm ent or local subdivision o f the State w ith o u t com pliance w ith the provisions o f this section, and w ithout the p rio r concurrence o f the Secretary in the aw ard thereof.

(E m phasis added.)

9 T he last sentence o f § 1 12(b) provides:

N o requirem ent o r obligation sh all be imposed as a condition precedent to the award o f a contract to such bidder fo r a project, or to the Secretary’s concurrence in the award o f a contract to such bid d er fo r a project, unless such requirem ent o r obligation is otherw ise law ful and is specifically set forth in the advertised specifications.

This sentence was added to the Federal Highway A ct o f 1968, Pub. L. No. 9 0 -495, 82 Stat. 830 (1968), in ord er to assure that the federal requirem ents o f equal em ploym ent opportunity m andated by Executive Order No. 11246 be advertised before the bid d in g so that contractors w ould know what w as expected o f them. See S. Rep. No. 1340, 90th C ong., 2d Sess. 16—18 (1968). The provision is manifestly not a carte blanche for the state to im pose additional requirements o f its own choosing unrelated to cost-effective use o f federal funds. By the term s o f this provision, any state requirem ent must be “otherw ise law ful” and therefore cannot interfere w ith the com petitive bidding requirem ent established by the first two sentences o f the section.

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Highway Act of 1954 to require competitive bidding “unless the Secretary finds some other method is in the public interest.” Pub. L. No. 83-350, § 17,68 Stat. 71 (1954).10 The Surface Transportation Assistance Act of 1982, Pub. L. No. 97-424, 96 Stat. 2106 (1983), strengthened the competitive bidding requirement by elimi­ nating the public interest exception and imposing the current requirement that departures from competitive bidding be justified by a demonstration by the local highway department that the alternative is more cost-effective. The legislative report accompanying the amendment reflects the concern of Con­ gress that cost-effectiveness be the only criterion by which to award contracts to responsible bidders for highway projects funded by the federal government. See H.R. Rep. No. 555,97th Cong., 2d Sess. 11 (1982). The 1982 amendments therefore make clear that the efficient use of federal funds is the touchstone by which the legality of state procurement rules for federally funded highway projects is to be tested.

Local Law 19 contravenes the clear requirement of § 112 that all contracts be awarded through a process of competitive bidding to the responsible bidder who submits the lowest bid; the local ordinance frustrates the manifest con­ gressional mandate reflected in the statute and its legislative history to make the most cost-effective use of federal highway funds.11 By imposing disadvan­ tages on a certain class of contractors, New York City discourages responsible contractors from bidding and undermines the competitive bidding process.12 New York City has failed to justify, as required by the statute, its departure from competitive bidding procedures by considerations of cost- effectiveness.13 >0The Senate proposed the amendment requiring com petitive bidding. See S. Rep. No. 1093, 83d Cong , 2d Sess 14 (1954) (stating that the requirem ent is designed to prevent “collusion or any other action in restraint of free com petitive bidding”). A fter the House acceded to the Senate amendm ents, one Senator hailed the bidding provision as one o f the most im portant achievem ents o f the entire bill. 100 Cong. Rec. 5124 (1954) (remarks o f Sen. Gore).

11 New York City argues that this congressional mandate is somehow undercut by 23 U.S.C § 145, which states:

The authorization o f the appropriation o f Federal funds or their availability under this chapter w ill in no way infringe on the sovereign rights o f the States to determ ine which projects will be financed. The provisions o f this chapter provide for a federally-assisted State program.

A provision perm itting states to choose their own projects obviously has no bearing on the issue of w hether C ongress has restricted the perm issible procurem ent procedures fo r such projects in the interest o f the cost- effective use o f federal funds.

12 There can be no doubt that an otherw ise qualified contractor who fails to furnish an anti-apartheid certificate is still a “responsible” bidder. Local Law 19 itself acknow ledges that the requirem ents o f the anti- apartheid statute are not criteria o f responsibility, because § 343.11.0(b) refers to “the low est responsible bidder w ho has not agreed to [the anti-apartheid certificate].” (Em phasis added.)

13 Indeed, because the prim ary purpose o f the anti-apartheid certification requirem ent is “to send a message to the governm ent o f the Republic o f South A frica and to encourage those who do business there to support change,” see New York C ity Local Law 19, § 2, Local Law 19 is not designed to promote cost efficiency, but to express a w ell-justified abhorrence o f apartheid. To be sure, the ordinance states that it “ also seeks to protect the financial interest o f the city by limiting the num ber o f city contracts which may depend for their satisfaction on the internal security o f South Africa, where relentless oppression has led to increasing civil disturbances, making sabotage o f business interests and even revolution possible.” Under certain circum ­ stances, such considerations may very well affect the cost-effectiveness o f a given contractual arrangem ent. New York C ity has not, however, provided the Secretary w ith any evidence for the proposition that a particular co m p an y 's contractual agreem ent with an agency in South A frica w ill endanger an unrelated contractual agreem ent to be perform ed in New York City on a highw ay construction project.

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New York City has attempted to defend the legality of its ordinance by observing that all contractors that have bid for its contracts have furnished the anti-apartheid certificate and that there is no evidence that any potential bidder would not be able to comply with the requirement. Thus, the City argues that its anti-apartheid certification requirement has not been shown to affect adversely the efficient use of federal funds. This argument is unavailing, however, because it attempts to reverse the burden of proof that § 112 requires to justify departures from competitive bidding. In order to satisfy this burden, New York City must demonstrate that its procedures lead to a more cost-effective use of federal funds; it cannot shift the burden to the Secretary of Transportation to demonstrate that the City’s procedures detract from cost-effectiveness.14 Second, New York City argues that its ordinance does not violate § 112 because it is not an absolute bar to the award of contracts to contractors who submit the lowest bid for a project but fail to provide an anti-apartheid certifi­ cate. According to the provisions of Local Law 19, a non-complying bidder is awarded the contract unless a complying bidder is within five percent of the low bid. Moreover, New York City emphasizes that even when there is less than a five percent differential between a complying and non-complying bid­ der, the Board of Estimate must still vote by a two-thirds majority to award the contract to the complying bidder rather than the non-complying bidder. The short answer to this argument is that § 112 requires that the contracts be awarded through a process of competitive bidding, not simply that contracts be awarded by a process that may lead to the award of the contract to the lowest bidder. This distinction is important, because the knowledge that a contract will be awarded through a strict process of competitive bidding in itself contributes to the cost-effective use of federal funds by encouraging the submission of bids by contractors who might not otherwise participate. Conversely, a contractor’s knowledge that he may submit the low bid and yet not win the contract would deter him from entering the bidding process and incurring bid preparation costs.15 Only a process which strictly adheres to the competitive bidding requirement comports with Congress’ overriding objective of cost-effective­

14 W e do n o t read 28 C .F .R . § 635 108 a s a decision by the Secretary through regulation to shoulder the burden o f p ro o f on the issue o f cost-effectiveness. Section 635.108 provides:

N o procedure o r requirement for prequalification o r licensing o f contractors w ill be approved w hich, in the ju d g m en t o f the Federal Highway A dm inistration, may operate to restrict com peti­ tion, to prevent subm ission of a bid b y , o r to prohibit the consideration of a bid submitted by, any resp o n sib le co n tracto r whether re sid en t or nonresident o f the state w herein the work is to be perform ed.

(E m phasis added.)

B ecause th e adm inistrator must still disapprove the procedure if the procedure may restrict com petition (i.e., has the potential to restrict com petition), the burden o f showing that the procedure does not restrict c om petition still rests w ith th e locality.

15 The co n tracto r w ho does not sign th e anti-apartheid certificate know s that in the event o f a com plying bid that is w ith in five percent o f his bid, he w ill have to persuade the B oard o f Estimate to award the contract to him , n o tw ithstanding h is refusal to com ply. The rational bidder w ould therefore revise his price to reflect the costs asso ciated w ith lob b y in g the Board o f Estim ate on this issue. Thus, even if the contract is aw arded to the n on -com plying bidder, it is reasonable to expect that h is bid would be higher than it would be w ithout the applicatio n o f L ocal Law 19.

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ness by maximizing the number of contractors who will bid for the contract and increasing the likelihood that the contract will be let for the lowest possible price.16 Since the provisions of Local Law 19 conflict with the requirement of competitive bidding contained in § 112(b), it is clear that 23 U.S.C. § 112(d) requires the Secretary to withhold approval for contracts let subject to the provisions of Local Law 19.

For the foregoing reasons, we believe that the Secretary of Transportation is obligated to withhold federal funds under the Federal Aid Highway Act for the payment of contracts whose award is subject to the procurement provisions of Local Law 19.

C h a r l e s J. C o o p e r Assistant Attorney General Office of Legal Counsel

16 New York C ity ’s argum ent that the Secretary o f Transportation may not disapprove contracts awarded under Local Law 19 until New York City actually w ithholds a contract from a low bidder under that ordinance m erits a sim ilar response. The Secretary is obligated to act when New York C ity 's procurement procedures depart from the process o f com petitive bidding required by federal law, rather than when New York City declines to accept a low bid.