Making Section 3 Work: Employment Training and Job Opportunities for Low-Income People

Copyright 1994 by National Clearinghouse for Legal Services, Inc. All rights reserved. Making Section 3 Work: Employment Training and Job Opportunities for Low-Income People By Brad Caftel and Arthur Haywood Brad Caftel is a staff attorney at the National Economic Development and Law Center (NED&LC), 2201 Broadway, Suite 815, Oakland, CA 94612, (510) 251-2600; Arthur Haywood is a staff attorney at Regional Housing Legal Services, 2 S. Easton Road, Glenside, PA 19038, (215) 572-7300. Arthur Haywood coordinates the Section 3 Monitoring Project. Jean Wiley, editor and staff planner at NED&LC, edited this article. Editor's Note: This is the second in a continuing series of CLEARINGHOUSE REVIEW articles on Jobs, Employment, Education, and Training (JET) issues affecting legal services clients. These articles are written by members of the JET Working Group. The initial article in the series, providing an overview of JET issues and highlighting ways in which these issues are interrelated and cut across traditional poverty law specialty areas, appeared in the January issue. I. Introduction A little known federal law, Section 3 of the Housing and Community Development Act of 1968 (Section 3), /1/ targets low-income people for hundreds of thousands of employment, training, and contracting opportunities generated by HUD. At the time of its enactment, several U.S. cities lay in ruin, as frustration mounted over the exclusion of inner city residents from federally funded jobs. Section 3 sought to provide economic opportunity to low-income persons and small businesses previously excluded from participation in federally funded housing and community development projects. All recipients of HUD funds, including state and local governments, public housing agencies, and their contractors, were required to make good-faith efforts to provide, "to the greatest extent feasible," opportunities to low-income persons and small businesses located in the area of the HUD-assisted development projects. /2/ In the intervening 24 years, HUD largely ignored Section 3 and failed to develop an effective monitoring and enforcement system. HUD was not alone; public housing authorities and local and state governments also ignored the law. Having amended Section 3 in 1969, 1974, and 1980, Congress again amended it in 1992, following the civil unrest in Los Angeles, and required a study of the obstacles to its successful implementation. /3/ As in 1968, jobs and contracting opportunities on federal projects were still going to white, largely suburban contractors and construction workers. Without altering the objectives of Section 3, the 1992 amendments clarify the types of HUD assistance, activities, and recipients that are subject to its requirements. The amendments also clarify the intended beneficiaries and their order of priority. This article describes the revised Section 3--what it provides, some examples of how it has been used, and certain obstacles that remain--and suggests roles for legal services and other advocates. It is important to keep in mind the vast amount of dollars generated by HUD projects. For public

housing modernization alone, HUD has been authorized to spend $31 billion since 1976. /4/ When HUD's other community development programs are considered, clearly hundreds of thousands of employment, training, and business opportunities should have been available to low-income people and their families over a quarter century--and were not. Section 3 was designed to be--and can become--a major generator of jobs for low-income people. Advocates are urged to help make it work. II. Section 3's Purpose, Coverage, and Benefits A. Employment and Training Section 3 requires that public and Indian housing agencies, and their contractors and subcontractors, make their best efforts to give low- and very low-income persons the training and employment opportunities generated by the development, operation, and modernization of public housing assistance (e.g., Comprehensive Grant and Comprehensive Improvement Assistance Program). /5/ Low income is defined as 80 percent or less of area median income; very low income is 50 percent or less. /6/ Priority is to be given to the following populations: /7/ residents of the housing development being assisted; residents of other developments managed by the housing agency; participants in Youthbuild programs; and other low- and very low-income persons residing in the metropolitan area or nonmetropolitan county in which the assistance is expended. A similar requirement applies in other programs that provide housing and community development assistance, including the Community Development Block Grant (CDBG); McKinney Homeless Assistance; HOME; HOPE; Sections 236, 221(d)(3), and 202 of the National Housing Act; and the Nehemiah Housing Opportunity Grant. To the greatest extent feasible, opportunities for training and employment arising in connection with housing rehabilitation, reduction and abatement of lead-based paint, housing construction, or other public construction projects are to be given to lowand very low-income persons residing in the area in which the project is located, with priority given to such persons residing in the service area of the project and participants in Youthbuild programs. /8/ B. Business Opportunities In addition to employment and training, Section 3 seeks to benefit businesses owned by lowincome people. Public and Indian housing agencies, and their contractors and subcontractors, also must make their best efforts to award contracts for work to be performed in connection with

development, operation, and modernization assistance, to business concerns that are controlled by low- and very low-income persons, or employ a substantial number of such persons. Priority is to be given to businesses controlled by, or employing, residents of the housing development being assisted; businesses controlled by, or employing, residents of other developments operated by the housing agency; Youthbuild programs; and other businesses controlled by, or employing, low- and very low-income persons residing in the area in which the assistance is provided. /9/ In the other programs that provide housing and community development assistance, such as CDBG, contracts awarded for work to be performed in connection with housing rehabilitation, reduction and abatement of lead-based paint, housing construction, or other public construction projects are to be given, to the greatest extent feasible, to businesses controlled by, or employing, low- and very low-income persons residing in the area in which the assistance is expended. Where feasible, priority is to be given to businesses controlled by, or employing, low- and very low-income persons residing in the service area of the project and then to Youthbuild programs. /10/ C. Greatest Extent Feasible Section 3 applies "to the greatest extent feasible." /11/ The Senate Committee Report to the 1969 amendment to Section 3 states that this phrase does not require a contractor to replace existing workers. /12/ To the extent that outside workers and subcontractors are needed, however, such people should be hired, if at all possible, from persons or businesses in the area. /13/ Recipients and contractors should advertise and provide notice of training and employment opportunities to local labor unions, community organizations, job training providers, and resident councils and resident management corporations. No minimum percentage of participation by low- and very low-income persons is required. /14/ Furthermore, Section 3 does not require that recipients and contractors establish a training program. It does require, however, that, when there is a training program, vacant training positions must be filled by low-income area residents in accordance with Section 3 priorities. Recipients and contractors must create the maximum number of training positions and fill them with low-income area residents in accordance with Section 3 priorities. The Bureau of Apprenticeship and Training, Department of Labor, sets standards for the ratio of journeymen to trainees on construction projects. Contractors must state the number and job position of trainees prior to contract award. In construing "greatest extent feasible" in the award of contracts, the court, in Ramirez, Legal & Co. v. City Demonstration Agency, held that it means "the maximum" and that every affirmative action that can properly be taken to award the contract consistent with Section 3 priorities must be taken. /15/ In Ramirez, that local firms were given a chance to bid or that there appeared to be a

rational basis for the contract to be awarded to an outside firm was not enough. The lower court had awarded summary judgment against the local firm because it was not the low bidder, even though the local firm had offered to match the low bid of the outside firm. The appellate court reversed and remanded. /16/ Section 3 applies to a broad range of activities within a covered project, including planning, architectural services, construction, consultation, maintenance, repair, and accounting. /17/ A Section 3 clause, requiring contractors and their subcontractors to comply, must be included in all contracts for work on a covered project. /18/ Moreover, bidder compliance with Section 3 must be evaluated prior to selection and contract award. It is here, at the bidding and selection stage, where Section 3 kicks in, and where efforts to intervene must be made to ensure full compliance. Competitive grant proposals are to be evaluated, in part, on the basis of past performance or evidence of commitment to train, employ, and contract in accordance with Section 3. /19/ Bidders who fail to comply are not responsible bidders, and their bids should be rejected. D. Grievances, Remedies, and Enforcement HUD is supposed to conduct periodical Section 3 monitoring and compliance reviews of state and local governments, public housing authorities, and all other recipients of HUD funds. Furthermore, aggrieved individuals or businesses may file a complaint with the HUD Assistant Secretary for Fair Housing and Equal Opportunity. Remedies include debarment, suspension, and denial of contractor or recipient participation in HUD programs; award of a contract or job training or employment position to the aggrieved party; monetary compensation; and affirmative actions to relieve the effects of past noncompliance and to preclude future violations. /20/ Few complaints have been brought successfully, however. /21/ A recent action by Central Florida Legal Services illustrates both how the grievance process works and how Section 3 can work for low-income people in a practical way. In 1992, prior to the amendment of the statute or promulgation of the HUD Handbook on Section 3, Central Florida Legal Services successfully negotiated a voluntary compliance agreement with the Sanford, Florida, housing authority. /22/ The grievance filed by the public housing residents council and a public housing resident alleged, among other violations, that the housing authority failed to notify residents of housing authority job opportunities. The voluntary agreement required the housing authority to notify residents of employment opportunities, to modify its personnel policies to comply with Section 3, and to seek a reference to Section 3 in its union collective bargaining agreement. The housing authority was also required to pay $5,000 to a resident who was denied an employment opportunity with the housing authority. /23/ The new statutory requirement for a study of the effectiveness of Section 3 recognizes that HUD's monitoring and enforcement have been lacking. HUD agrees that it has not "institutionalized" Section 3 and that many HUD program regulations, handbooks, and publications fail to incorporate policies and procedures on achieving the employment and contracting objectives of the regulation.

Furthermore, HUD claims to lack the data to determine the potential of Section 3 or to evaluate its impact. While it is not hostile to Section 3, neither has HUD sought to extend its reach in the broadest possible manner. Nothing in Section 3 stipulates a dollar threshold before compliance is required. Yet HUD, by setting a threshold, exempts moderate and small projects from Section 3 requirements--even though such projects often involve employment and contracting opportunities within the capacity of the persons and businesses which Section 3 seeks to assist. /24/ III. Policy Considerations for Successful Implementation As of this writing, we are awaiting the final regulations on Section 3. Several legal services advocates have commented on the proposed regulations, with the goal of enhancing their implementation and enforcement, and thus making Section 3 a practical and effective economic development tool in poor communities. Three key areas of comment on effective implementation are discussed below. A. Link to Job Training, Welfare Reform and Other Federal Initiatives Section 3 requirements should be linked to other federal employment and training programs for greater impact. Successful implementation of Section 3 requires not only the cooperation of HUD but also the active involvement of the Department of Labor (DOL) and the Small Business Administration (SBA). The 1992 amendment requires HUD to consult with these and other federal agencies to the extent necessary to carry out Section 3, but more could be done. The DOL-administered Job Training Partnership Act (JTPA) funds local employment training programs. Low-income area residents with priority under Section 3 could be given preference for JTPA-funded training. At a minimum, HUD-funded projects could develop better referral and coordination with JTPA-funded training providers. Likewise, the SBA could expand its directory of small businesses to include those owned by public housing residents and others identified by HUD as meeting the priorities of Section 3. Coordinating with other agencies would be easier if requirements similar to Section 3 were included in all federal assistance programs, not just HUD programs. The policy underlying Section 3--that economic opportunities generated by federal financial assistance shall be directed to lowincome persons--applies as well to all other programs. However, few federal programs have such requirements. /25/ B. Inclusion of Community-Based Organizations Many of those commenting on the proposed regulations have urged a stronger role for nonprofit community-based organizations. Such organizations might become "matchmakers"--matching

people to jobs through recruitment, prescreening, referral, etc. Indeed, in its own comments, the National Economic Development and Law Center wrote: -- "Recipients and contractors should be encouraged/required to utilize resident management corporations and other community organizations for screening and referral, and such organizations should have a monitoring role. They should 'sign off' that best efforts or every affirmative actions were made whenever a position is not filled by a low-income person or a contract not awarded to a Section 3 business concern." /26/ C. Inclusion of Nonprofit Enterprises Another means of strengthening Section 3 is to broaden its definition of businesses eligible for a contract preference to include nonprofit enterprises controlled by low-income persons. Such enterprises have grown significantly in the past twenty years and account for much of the development work inside poor communities. From community development corporations to resident managements corporations, these nonprofit enterprises are creating and renovating housing units, managing properties, and operating businesses. Indeed, in many communities, these nonprofit organizations, controlled by low-income residents, are far more likely to have the capacity to maintain businesses than individual low-income business owners. Thus, they are more able, at least potentially, to employ low-income residents. D. Removing Barriers in Existing Federal, State, and Local Regulations Section 3 is limited to efforts "consistent with existing federal, state, and local laws and regulations." /27/ But federal spending is governed by procurement rules with requirements, under certain circumstances, such as acceptance of the lowest responsible bidder, payment of prevailing wages, and purchase of insurance and bonding. All three of these requirements could undermine the objectives of the statute to employ needy persons. The Section 3 regulations could require that conflicting laws and regulations be interpreted in a manner that effectuates the policy of Section 3. For example, a neighborhood business might generate more employment for low-income area residents than a competing business, but if the bid of the neighborhood business is higher, it might not be awarded the contract. Should this business have the opportunity to match the bid of its competitor? Should this business be awarded the contract despite its higher bid because it does more to effectuate Section 3 policy? As to prevailing wage requirements, in some low-income communities, unemployed construction workers form a substantial portion of those actively seeking work. Such workers can, and should, be paid prevailing wages. But unskilled low-income persons have virtually no chance of obtaining training unless the prevailing wage requirements are removed from training positions. The prevailing wage levels discourage contractors from hiring truly unskilled persons since they can hire skilled persons for the same wage. DOL has been too slow in approving exemptions from the prevailing wage requirements for trainees.

Another barrier to implementation of Section 3 concerns insurance and bonding. New and small businesses often have difficulty obtaining insurance and bonding which meet federal requirements. Thus, they are prevented from bidding on federally funded projects. The effects of this barrier are not always apparent. Much of the day-to-day enforcement of Section 3 occurs at the local level--by housing authorities, redevelopment agencies, and other local government offices. Many of these agencies have little knowledge of Section 3 or have been as lax as HUD in their enforcement. Others operate under their own hiring and procurement rules, which might not be consistent with Section 3 requirements. The limitation that Section 3 be implemented only to the extent consistent with state and local laws and regulations might render Section 3 meaningless unless policies similar to those in Section 3 are adopted at the state and local levels. E. Tightening Monitoring and Enforcement Enforcement of Section 3 has been dismal, both locally and on the part of HUD. Henry Cisneros, Secretary of HUD, appears committed to tightening monitoring and enforcement; he is even considering producing training videos for HUD offices. Moreover, Maxine Cunningham, who heads HUD's special division on Section 3, appears determined to implement the law forcefully. More must be done, however. First, documentation of compliance must be accurate and timely. Second, all documentation must be made available to the public. Third, with such enormous opportunities at continued risk, low-income communities and their advocates must assume a greater role in monitoring full compliance with Section 3. Legal services advocates have an obligation to participate. IV. Next Steps for Advocates Advocates for low-income persons must take the initiative to make Section 3 work. Become proactively involved with public housing resident organizations and other community-based development organizations. Inform potential beneficiaries of Section 3 requirements. Assist community organizations in building the capacity to recruit, screen, and refer low-income residents to promised jobs. Help community organizations and residents form business enterprises. Make sure community organizations are "at the table" when decisions affecting employment and development are made. Monitor HUD's monitoring and enforcement efforts. For example, has HUD established a Section 3 task force in its local field office? Advocate for, or enforce, lowincome training, employment, and contracting preferences for all local government spending on infrastructure such as road construction; provision of community services such as trash pickup and public transportation; housing and community development grants and loans;

purchase of supplies and deposits of public funds; and loans and tax subsidies to business. For local legal services programs, it is important to view Section 3 as a benefit to which clients have a legal, legitimate claim. Become familiar with Section 3 and begin talking to representatives of local government and housing authorities. Specifically, take the following steps: obtain and review copies of (a) local government equal opportunity and affirmative action policies, (b) related monitoring forms, (c) standard bid package, and (d) HUD monitoring reports; advocate for a full implementation of Section 3; and file grievances if necessary to require Section 3 implementation. Most of all, talk to clients about, and their right to, this important employment vehicle. Finally, join the Section 3 Monitoring Project formed by Regional Housing Legal Services and the West Philadelphia Coalition of Neighborhoods and Business. Membership offers a newsletter, information and document sharing, monitoring assistance, and training on Section 3 issues. /28/ footnotes /1/ 12 U.S.C. Sec. 1701u. /2/ 114 CONG. REC. 15,241 (1968). /3/ Housing and Community Development Act of 1992 Secs. 915-16, Pub. L. No. 102-550, 106 Stat. 3878. /4/ Conversation with researcher at Low-Income Housing Information Service, Washington, DC (July 1993). /5/ 12 U.S.C. Sec. 1701u(c). /6/ The same income levels apply throughout Section 3. /7/ 12 U.S.C. Sec. 1701u(c)(1)(B). /8/ Id. Sec. 1701u(c)(2)(B). /9/ Id. Sec. 1701u(d)(1)(B). /10/ Id. Sec. 1701u(d)(2)(B).

/11/ Id. Sec. 1701u(b). /12/ SENATE COMM. ON BANKING & CURRENCY, REP. No. 392, 91st Cong., 1st Sess. (1969) (discussing Section 404 of the Housing and Urban Development Act of 1969, Pub. L. No. 91-152, 83 Stat. 395). /13/ HUD HANDBOOK 8023.1 at p. 4-3 (July 1992) (Implementation of Section 3 of the Housing and Urban Development Act of 1968 as amended) requires that recipients and contractors identify the number of positions, by skill level, needed for the project; determine the number of positions which are not filled by regular, permanent employees; and establish a target within each occupational category for the number of positions to be filled by low-income area residents in accordance with Section 3 priorities. The Handbook was prepared prior to the 1992 amendment of Section 3. /14/ HOUSE BANKING, FINANCE & URBAN AFFAIRS COMM. REP. No. 760, 102d Cong. 2d Sess. (July 30, 1992). In discussing the 1992 amendments to Section 3, the report states that "the Committee does not intend to mandate quotas or specific goals. Rather, the Committee intends that this provision serves as a guide and a reminder for policymakers and program administrators who implement federal housing and community development programs that they must consistently use their best efforts to ensure that these scarce federal resources are directed to those most in need." Id. at 162. /15/ Ramirez, Legal & Co. v. City Demonstration Agency, 549 F.2d 97 (9th Cir. 1976) (Clearinghouse No. 19,651). /16/ Id. A similar contracting preference for Indian-owned businesses is authorized by the Indian Self-Determination Act, 25 U.S.C. Sec. 450e(b). In construing the phrase "to the greatest extent feasible," one court, in upholding the HUD regulation directing Indian housing authorities to give contracting preference to Indian-owned businesses, stated that HUD could have gone further and required that all housing construction contracts be awarded to Indian-owned companies, whether or not they are the low bidders. Alaska Chapter, Associated Gen. Contractors v. Pierce, 694 F.2d 1162 (9th Cir. 1982). /17/ In Ramirez, 549 F.2d 97 (9th Cir. 1976), the court held that accounting services are one of the types of businesses envisioned under Section 3 for local preferential treatment. In Ramirez, a small minority accounting firm located in a Model Cities project area brought suit under Section 3 to compel acceptance of its bid to perform the annual audit for the Model Cities agency. /18/ See HUD HANDBOOK 8023.1 at app. E (July 1992). /19/ See id. at p. 5-4. /20/ See id. at p. 5-18. /21/ In 1971, Legal Services of Nashville, Tennessee, unsuccessfully challenged the local housing authority's award of contracts for public housing modernization. Of the three contractors, two

employed no extra employees, and the third employed only one extra employee. Drake v. Crouch, 377 F. Supp. 722 (M.D. Tenn. 1971), aff'd without opinion, 471 F.2d 653 (6th Cir. 1972) (Clearinghouse No. 4291). /22/ Pinkney v. Housing Auth. of Sanford, Florida (HUD, Voluntary Compliance Agreement entered Sept. 15, 1992) (Clearinghouse No. 48,637). Complainants represented by Treena Kaye, Central Florida Legal Services, (407) 322-8983. /23/ Id. /24/ Currently, projects which do not exceed $500,000 are exempt from Section 3. 24 C.F.R. Sec. 135.5 (M). HUD has proposed to exempt projects which receive less than $100,000 in HUD funds. See proposed regulations, 58 Fed. Reg. 52534-64 (1993). /25/ The Intermodal Surface Transportation Efficiency Act of 1991, Pub. L. No. 102-240, Sec. 1003(b), 105 Stat. 1919, requires that not less than 10 percent of highway and mass transit funds shall be contracted to small business concerns owned and controlled by socially and economically disadvantaged individuals. Recipients of Stewart B. McKinney Homeless Assistance Act funds, in addition to complying with HUD Section 3, must, to the maximum extent feasible, employ or otherwise involve homeless individuals and families in assisted activities. 42 U.S.C. Sec. 11375(c)(7). See supra note 16 for discussion of Indian-owned business contracting preferences. HUD public housing regulations, 24 C.F.R. pt. 963, provide contracting preferences for residentowned businesses and permits sole-source contracting to such businesses instead of competitive bidding. /26/ Letter from National Economic Development and Law Center to HUD General Counsel (Dec. 7, 1993) (on file with authors). /27/ 12 U.S.C. Sec. 1701u(c), (d). /28/ Contact Arthur Haywood, Regional Housing Legal Services, 2 S. Easton Rd. Glenside, PA 19038, (215) 572-7300.