In 2021 and 2022, as part of President Biden’s promise to “Build Back Better,” Congress appropriated nearly $2 trillion to strengthen the country’s infrastructure and stimulate the transition to a clean energy economy. A significant portion of this money is being allocated in the form of federal grants to state and local governments, which contract out to private companies to fortify the transportation infrastructure, expand the EV charging grid, and reduce pollution at airports and ports—investments that have the potential to create good jobs, advance climate justice, and promote racial equality. However, this potential cannot be fully realized because of a little-known federal rule requiring that all contracts using federal grant funds be awarded through a “competitive bidding” process that privileges low price over all other criteria—effectively preempting local governments from using their procurement authority to sponsor public works projects meeting pressing social needs.
Since the 1980s, this federal competition rule has had far-reaching and underappreciated consequences for domestic economic development policy. Although a version of the rule covers all federally funded procurement conducted by state and local governments, in this brief post—drawing on our recently published research—we focus on local procurement conducted with funding from the U.S. Department of Transportation (DOT). DOT funding has been used since the 1980s to support local infrastructure projects to revitalize cities across the country: transforming decaying streetscapes, reconnecting communities through freeway removal, creating vibrant riverwalks, and building essential new public transit. Yet, much like with recent infrastructure funding, local governments have been unable to fully harness DOT funds to address structural economic problems because of the prevailing interpretation of the competition rule, which forces them to award contracts to bidders that promise a low price rather than a broader return on the investment of public funds.
This restriction is the result of legal interpretations advanced by the Office of Legal Counsel (OLC), which has taken the position that when state and local governments use federal transportation funding, they are not permitted to impose bid requirements used to solicit contractors that undermine the efficient use of federal funds. In practice, this means that otherwise legal local policies that seek to attach conditions on contractors awarded public projects—like hiring local workers, paying livable wages, or agreeing to use clean fuel sources—become invalid through the involvement of federal funding because they are viewed as excluding bidders unable to meet the conditions. This result—what we call “preemption by procurement”—permits the federal competition rule to dictate the priorities state and local governments can advance through public works spending by preempting innovative local policy efforts.
Misreading History and Misinterpreting Policy
The central problem is this: the expansive reading of the competition rule to preempt local government action is unsupported by the legal history and underlying policy rationale of federal law. The original and dominant meaning of competitive bidding grew out of the Federal-Aid Highway Act (FAHA) § 112, passed in 1956 to build the interstate highway system. The foundation of this law, and the amendments to it through the early 1980s, were based not on a narrow definition of efficiency but rather on an anticollusion principle designed to prevent local governments from using nontransparent bid procedures and arbitrary requirements to direct public contracts to insiders.
Rather than seek to maximize the bidding pool, as efficiency proponents would later argue, the competition language in federal law was designed to preclude real-world manipulation of bid procedures to arbitrarily favor certain bidders over others and thus protect the public interest. Moreover, the federal government itself has long authorized contract criteria designed to advance substantive public policy aims—such as the promotion of equal employment opportunities for workers of color, domestic economic development, and the use of small business subcontractors. The point of competitive bidding was to ensure a fair and open process, not to simply require contract work at the lowest price.
This changed in 1986, when OLC presented a new interpretation of competition as part of the Reagan administration’s broader assault on government regulation, mobilizing ascendent Law and Economics thinking to reformulate notions of the public interest in terms of “efficiency”—associated with the idea of reducing regulatory barriers to market access. In the context of this wider effort, the Reagan Department of Justice (DOJ) sought to limit the scope of federal procurement to the low-cost acquisition of goods and services, thereby disabling procurement as a tool of effective socioeconomic policy. The case that OLC used to effectuate this change was based on a New York City law, called Local Law 19, which imposed sanctions on companies invested in the South African apartheid regime. Local Law 19 was part of a growing wave of anti-apartheid laws pushed by activists at the state and local level after Reagan refused to take a national stand against apartheid. In response, corporations profiting from South African investments lobbied the Reagan administration to shut down local sanction regimes. Because transportation and infrastructure projects often relied on federal funds, one legal avenue to restrict sanction laws was to withhold funding on the theory that, by awarding projects to higher priced anti-apartheid contractors, state and local governments were imposing substantive bid requirements that violated the competition rule.
In 1986, Secretary of Transportation Elizabeth Dole asked the OLC to review Local Law 19 on these grounds. In response, the OLC issued an opinion concluding that the law violated the “competitive bidding” language in FAHA § 112(b) by incorporating bid criteria not specifically related to “efficient” procurement. Without reviewing the act’s history, the opinion claimed that § 112(b) reflected a “congressional judgment that the efficient use of federal funds afforded by competitive bidding is to be the overriding objective for 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.” Proclaiming that “cost-effectiveness be the only criterion” on which to judge “the legality of state procurement rules for federally funded highway projects,” the opinion concluded that Local Law 19 violated the competition rule by “imposing disadvantages on a class of responsible bidders.” As a result, the opinion effectively outlawed the inclusion of substantive bid criteria that could potentially interfere with contracting at the “lowest possible price.”
This interpretation, although technically limited to DOT funded procurement, soon gained wider influence over federally funded procurement. In March 1987, at the height of the pressure campaign targeting municipal anti-apartheid laws, the Reagan White House built on the 1986 OLC opinion by directing the Office of Management and Budget (OMB) to issue a proposed “common rule” to bring “efficiency” and “productivity” into federal grantmaking. The resulting Common Grant Rule, consolidated and renamed in 2014 as the OMB’s Uniform Grants Guidance, provides that “[a]ll procurement transactions will be conducted in a manner providing full and open competition,” while imposing an explicit government-wide ban on “the use of statutorily or administratively imposed in-state or local geographical preferences in the evaluation of bids or proposals, except in those cases where applicable Federal statutes expressly mandate or encourage geographic preference.” While shaping the meaning of competition in the Common Grant Rule, the 1986 OLC opinion also had chilling effects on state and local transportation procurement. As a matter of practice, most projects went forward without substantive standards that could be construed as violating the competition rule. Those that did were blocked. For example, in 1997, DOT determined that a San Francisco law requiring contractors to provide domestic partner benefits violated FAHA § 112, while in 2004, DOT arrived at the same conclusion with respect to an LA ordinance requiring contractors to disclose their business ties to slavery.
Freeing Procurement from Efficiency
Given these outcomes and intervening caselaw questioning the 1986 OLC interpretation, the Obama OLC was asked in 2013 to revisit the meaning of competition in relation to FAHA 112. While its opinion created theoretical space for more forward-looking local policies, it left local governments with a murky legal test for determining when such requirements would “unduly limit the pool of potential bidders” that carried forward the efficiency logic of its 1986 predecessor. In this sense, the 2013 opinion failed to engage with the central preemption problem: that federal transportation law was never designed to prevent state and local governments from adding their own bid requirements on top of those authorized by the federal government to ensure a broad public return on the investment of public funds. By the 1980s, many cities that had been economically destabilized by deindustrialization and redlining had begun to use policies—such as requiring public contracts to go to companies that promised to hire local workers at high wages—as a way to regenerate opportunities that would put unemployed local residents, often people of color, back to work. The key point is that these and similar local economic development and social equity policies were often deemed legitimate exercises of local government authority under controlling state and local law—until the federal competition rule was interpreted to effectively preempt them.
Uncovering the history of competition untethered from the rigid logic of efficiency helps unlock the potential of procurement as a tool for thoughtful economic development policy. In response to sustained activism by community and labor groups, led by the Local Opportunities Coalition and mobilizing the research in this article, the Biden administration has recently taken steps to restore the original meaning of competition in federal statutes while permitting local governments to attach socioeconomic policy criteria to federally funded contracting.
On October 4, 2023, the White House and the OMB released a comprehensive re-write of the Uniform Grants Guidance that provides flexibility to conduct grant-based procurement responsive to local needs. These proposed changes to the Uniform Guidance explicitly require federal grant-funded contracts to include standards of fairness, transparency, ethics, and equity—and to allow state and local governments flexibility to define what those standards mean. Along the same lines, the proposed changes to the Uniform Guidance would explicitly permit grantees to adopt policies related to equal opportunity, employment, health and safety, and the environment to be included in bids as enforceable contract terms. Significantly, the proposal deletes the prohibition against geographic preferences. Assuming that this change is finalized, federal grantees will be able to use federal grant-funded procurement to build pipelines to good union jobs, which an Obama-era pilot program suggested could be achieved without raising costs.
We believe this is an important step toward a broader program of responsible procurement that lays the groundwork for a stronger democracy built on principles of economic, environmental, and racial justice. By reforming the competition rule, the federal government can unlock the enormous potential of responsible procurement as a tool—not for outsourcing government functions and cutting short-term costs—but for winning the long-term battle for a sustainable economy.