Hearing on Use of Racial Preferences in Public Contracting

Statement of

John Sullivan

Associate Director of the Project on Civil Rights

before the

Subcommittee on the Constitution

July 17, 1998


 

My Name is John Sullivan. I am a lawyer and the Associate Director of the Project on Civil Rights and Public Contracts. My colleague, George La Noue, is in Phoenix today serving as a member of the Universal Purchasing Certification Council of the National Institute of Government Purchasers which accredits procurement officers in the United States and Canada.

I have been asked to comment on the June 30 benchmark report which is intended to support a racially based price preference for federal contracts. For the reasons set out here, I believe the report is not sufficient justification for the preference and that any contract awarded with the preference would be vulnerable to constitutional challenge.

Application of the Preference

 

The starting point is understanding how the preference will be applied. As of October 1, 1998, federal contracts in about three-quarters of the industries of the economy will be subjected to a racially based price preference. Only firms certified as Small Disadvantaged Businesses (SDBs) are eligible for the preference. Apparently more than 99% of the SDBs are businesses owned by Blacks, Hispanics, Asians, and Native Americans. Members of these racial and ethnic groups are considered presumptively socially disadvantaged. On the other hand, whites, both men and women, must individually prove their disadvantage to the satisfaction of the bureaucracy, a task arduous and discouraging enough that fewer than one percent of the firms in the 8(a) portfolio — all 8(a) firms will be automatically considered SDBs — are firms owned by white men or white women.

 

The amount of the preference is ten percent. In those sectors where the preference is applied, if the low bid on a contract is not an SDB, the low bidder will not be awarded the contract if an SDB's bid is within ten percent. To illustrate: if a firm owned by a white woman not an SDB is low bid at one million dollars for a tire contract, she will not necessarily get that contract. If an SDB bid $1,050,000 or $1,070,000 or anything lower than $1,100,000, because the SDB's bid is within ten percent of the low bid, the minority firm receives the tire contract instead of the firm owned by the white woman.

 

Application of the price preference does not change in any way the service or product provided by the contractor. It merely raises the cost to the taxpayer for the same work.

The Benchmark Report

 

The administration has offered as justification for the price preference the June 30, 1998 report produced by the Department of Commerce, which needed more than two years to complete its work. In May 1996, the Justice Department proposed in the Federal Register that "benchmark limits" be created for each industry because "Application of the benchmark limits ensures that any reliance on race is closely tied to the best available analysis of the relative capacity of minority firms to perform the work in question-or what their capacity would be in the absence of discrimination."

 

The benchmark report is intended to satisfy the requirements of the 1995 Supreme Court ruling in Adarand v. Pena. In Adarand the Court held that federal racial preference programs had to meet "strict scrutiny," the most demanding standard of constitutional review. Strict scrutiny requires that any preference have a compelling interest and be narrowly tailored. The administration's statement on compelling interest was first issued on May 23, 1996 in 61 Fed. Reg. 26050. The benchmarks report is the administration's attempt to meet the second prong of strict scrutiny, narrow tailoring.

 

In compiling the data for the benchmark report, Commerce limited itself to contracts over $25,000 awarded by the federal government in Fiscal Year 1996. To categorize these contracts, Commerce used 74 Census Bureau categories called Standard Industrial Classifications (SICs), which cover all aspects of the American economy.

 

Within each SIC, Commerce compared SDB availability with SDB utilization. Availability was determined by looking at three sources: (1) bidders on a random sample of contracts, (2) recipients of noncompetitive contracts, and (3) the 8(a) portfolio. Availability was then adjusted with some complex mathematics intended to reflect the varying capabilities of different firms to complete contracts of different sizes. Then Commerce derived the percentage of firms within each SIC which are SDB and compared that with the SDB share of federal dollars awarded in those SICs. In the SICs where SDBs are below parity (about three-quarters of all SICs), the price preference will be imposed.

 

Thus far the Administration has not released enough information to determine exactly how either the SDB availability or utilization figures were calculated, but it is apparent that the benchmark report suffers from some fundamental flaws, including: (1) combining minority groups, rather than addressing them separately; (2) treating minorities differently from whites in determining availability; (3) omitting subcontractor data from utilization totals; (4) presuming disadvantage for some groups but not others; (5) pursuing racial balancing rather than identifying racial discrimination; and (6) ignoring the 80% rule in evaluating disparities.

Combining Minority Groups

 

Since 1989 in the landmark Supreme Court decision City of Richmond v. Croson (488 US 469), it has been clear that any local preference program must be based on findings of identified discrimination against each group granted a racial, ethnic, or gender preference:

 

The random inclusion of racial groups, that, as a practical matter, may never have suffered from discrimination in the construction industry in Richmond suggests that perhaps the city's purpose was not in fact to remedy past discrimination . . . . The gross overinclusiveness of Richmond's racial preferences strongly impugns the city's claim of remedial motivation. (Croson, 488 U. S. at 506.)

The concept that there has to be a specific evidentiary basis for each preferred group has now been incorporated in a number of lower court opinions.

 

The Third Circuit in Contractors Association of Eastern Pennsylvania v. City of Philadelphia decided that summary judgment could be granted prohibitting the inclusion of white women, Asian Americans, Hispanics, and Native Americans in Philadelphia's MWBE programs because of a lack statistical and anecdotal evidence regarding those groups (6 F.3d 990,1993). The decision about African Americans was reserved for a trial, which concluded that preferences for African American contractors were not warranted either (893 F.Supp. 419, E.D. Pa. 1995)

 

A similar ruling was made recently in Prior Tire v. Atlanta Public School District, where the Court held a price preference program unconstitutional for women, Hispanics, and Asian- Americans, reserving for trial judgment about the inclusion of African-Americans, because:

 

As discussed, the Court is required by Croson to examine under the strict scrutiny standard the inclusion of each minority group in an affirmative action plan. (No.1-95-CV-825-JEC, S.D. Ga. (1997) at 27).

In April of this year the School District abandoned all preferences for at least the next two years.

In Engineering Contractors Association of South Florida v. Metropolitan Dade County, both the District and the Eleventh Circuit were careful to analyze both the statistical and anecdotal evidence for each of the three groups covered by the County preference program before determining that a sufficient predicate did not exist for providing preferences to any of them. (943 F.Supp. 1546 (S.D. Fla. 1996); 122 F.3d 895 (11th Cir. 1997) Because Adarand made the constitutional standard for federal preference programs consistent with that of their local counterparts, the benchmarks report should have disaggregated SDBs into separate groups. The ten percent price preference to be imposed as of October 1st, however, does not meet this requirement of addressing each group separately. The definition of "Small Disadvantaged Businesses" essentially divides the universe of firms into two parts: (1) those certified SDBs owned by Asians, Blacks, Hispanics, and Native Americans and (2) firms owned by white women, white men, corporations(which have no race or ethnicity), and minority firms which are not SDB certified. No attempt has been made to address the four minority groups separately. This violates constitutional standards and it goes against common sense as well. Assuming, for example, that a study showed discrimination against Blacks — would that justify a preference for Asians? The benchmark limits report does not address this issue since it combines all minority groups.

 

For two years the Justice Department has recognized the necessity of group specific narrow tailoring federal race-conscious plans in employment. On February 29, 1996, a Justice memorandum to General Counsels of federal agencies stated:

 

… if an agency's statistics were to reveal underutilization only in the hiring and promotion of African-Americans, the agency would be justified in focusing remedial action on African-Americans, but not on Hispanic-Americans, Native-Americans or Asian-Americans. Treating minorities as a single group raises concerns; remedial action in federal employment can be targeted only at specific groups determined to have a need for special focus. (John R. Schmidt, Associate Attorney General,"Post-Adarand Guidance On Affirmative Action in Federal Employment," February 29, 1996, p. 17.)

While there is no logical or constitutional reason to accept the need for group specificity in public employment while denying the need to do so in public procurement, that is currently the administration's position.

Treating Minorities and Whites Differently

 

The second serious flaw of the benchmarks report is that it treats minorities and whites differently in determining the availability of firms to contract with the federal government. Availability is the initial step in measuring the expected SDB share; if availability is improperly computed, any subsequent calculations will be wrong.

 

The benchmarks report used three sources of data for compiling the number of available firms. One of these sources is the firms in the Fiscal Year 1996 8(a) portfolio. In that year, the portfolio contained 6115 firms, more than 99% of which were minority owned (see sheet at the end of this testimony). Every one of these firms was considered available, whether or not they actually bid on a federal contract. In fact, most years only about half of all 8(a) firms actually bid on a contract.

 

Whites, on the other hand, are treated completely differently by the benchmarks report. White owned firms — both male and female owned — are not deemed available unless the firm actually received or at least bid on a contract. Minority firms are considered available by simply being in the 8(a) portfolio; whites must actively pursue a contract.

Omitting Subcontracts

 

In Croson, the Supreme Court stated unequivocally the need to have complete subcontractor data when attempting to statistically support a preference program: "Without any information on minority participation in subcontracting, it is quite simply impossible to evaluate overall minority representation in the city's construction expenditures." Nonetheless, the benchmarks report contains no subcontracting data; only prime contracts are included. Omitting subcontracts is a flaw not only in construction but in any industry where prime contractors hire smaller firms to work on parts of larger federal projects. Since minority owned firms are disproportionately newer and smaller, a comparatively greater share of their firm revenues derive from subcontracts than their white or corporate competitors.

Presuming Disadvantage

 

The fourth flaw of the benchmarks report arises from the very concept of "Small Disadvantaged Business." The SDB category is based on the presumption that all members of certain racial and ethnic groups are disadvantaged, regardless of the business owner's actual education, family background or personal success. That concept is under legal attack and may not survive, as the district court judge in the Adarand remand showed:

 

I find it difficult to envisage a race based classification that is narrowly tailored. By it's very nature, such a program is both underinclusive and overinclusive. This seemingly contradictory result suggests that the criteria are lacking in substance as well as in reason.

 

The statutes and regulations governing the SCC program are overinclusive in that they presume that all those in the named minority groups are economically and in, some acts and regulations, socially disadvantaged. The presumption is false, as is its corollary, namely that the majority (Caucasians )as well as members of other (unlisted )minority groups are not socially and/or economically disadvantaged. By excluding certain minority groups whose members are economically and socially disadvantaged due to past and present discrimination, the SCC program is underinclusive. (Adarand v. Pena, 965 F.Supp. 1556, 1580 (D. Colo. 1997)

Even if the general concept of presumptive eligibility were constitutional, there is grave doubt that all the groups now entitled to that presumption would survive strict scrutiny. The groups are:

 

Black (a person having origins in any of the original racial groups of Africa; Hispanic(a person of Mexican-American, Puerto Rican, Cuban, Central or South American, or other Spanish or Portuguese origin or culture, regardless of race; Native American(an American Indian, Eskimo, Aleut or Native Hawaiian.);Asian-American (Burma, Thailand, Malaysia, Indonesia, Singapore, Brunei, Japan, China, Taiwan, Laos, Cambodia, (Kampuchea), Vietnam, Korea, The Philippines, U.S. Trust Territory of the Pacific Islands (Republic of Palau), Republic of the Marshall Islands, Federated States of Micronesia, the Commonwealth of the Northern Mariana Islands, Guam, Samoa, Macao, Hong Kong, Fiji, Tonga, Kiribati, Tuvalu, Nauru, India, Pakistan, Bangladesh, Sri Lanka, Bhutan, the Maldives Islands and Nepal).

Some of the groups on the presumptively eligible list have been in this country since its beginning; some are very recent arrivals. Some are relatively poor; some are comparatively affluent. Some have very high rates of business formation; some very low. Some have well-documented histories of discrimination; some are virtually invisible. These groups have essentially nothing in common at all, except that they have lobbied to be included and they have been considered by the bureaucracy to be "people of color."

In 1997 two federal district courts reviewed the concept of presumptive eligibility in federal programs and both found that the concept failed to meet the narrow tailoring standard. One court was the Adarand remand. The other decision was Houston Contractors Association v. Metro Transit Authority. In Houston Contractors, the Court, commenting on the concept of presumptive eligibility which Metro borrowed wholly from federal regulations, declared:

 

Like all distinctions based on race and sex, Metro's classification of disadvantaged business enterprises is a blunt instrument. It is both over- and under-inclusive. The program designates groups and defines control and ownership, fixing the groups who win and lose in its allocation of public resources. The judiciary reviews distinctions by race and sex meticulously because none of them has been found to have a rational basis, except in political preference and social convention. The eradication of barriers is a noble goal, but it will not be achieved by creating new barriers.

 

A. Class presumption v. Individual Reality

 

While it is true that statistically members of these groups are more likely to be unable to participate fully in the economy because they suffer from the effects of past discrimination, Metro presumes that all bidders associated with "disadvantaged" are actually disadvantaged. Legislative presumptions are at best a convenience and at worst a cloak. (954 F.Supp. 1013, 1018 (S.D. Tex. 1996)

Racial Balancing, not Racial Discrimination

 

The fifth problem with the benchmarks report is that it reaches conclusions which contradict common sense. For instance, the ten percent price preference will be imposed in federal contracts in Water Transportation but not Railroad Transportation or Air Transportation. Fabricated Metal Products contracts will be subjected to the price preference but not Primary Metal Industries. In special trade construction contracts, such as plumbing and electrical, the preference will be imposed in Connecticut but not in New York and New Jersey. In general construction contracts, the preference will be applied in Texas but not New Mexico next door.

What pattern of discrimination could possibly explain these results? This is clearly not an effort at identifying racial discrimination, as required by Croson and Adarand, but is really an attempt at racial balancing in procurement. Diversity in procurement has never been recognized as a "compelling interest": any federal procurement awarded under this system would be vulnerable to court challenge.

 

And what of those SICs where SDBs are OVERutilized? If underutilization is grounds for a price preference, then, logically, overutilization should justify ending existing preferences in those SICs showing overutili1zation of SDBs.

The 80% Rule Ignored

 

The sixth flaw of the benchmarks report is that whoever decided to put the asterisk by a particular industry to indicate that a SIC code would be subject to the price preference treated the issue as though it was a simple matter of mathematics. Any disparity no matter how slight was viewed as grounds for a racial preference. As a result many SIC codes are slated for preferences based on numbers indicating virtually no disparity.

 

The Eleventh Circuit in a recent case striking down a minority business program in Dade County summarized the law regarding the 80% rule as follows:

 

In general, and as the District Court recognized, disparity indices of 80% or greater, which are close to full participation, are not considered indications of discrimination. For instance, the EEOC's disparate impact guidelines use the 80% test as the boundary line for determining a prima facie case of discrimination. 29 C.F.R. 1607.4D. Additionally none of the circuits that have explicitly endorsed the use of disparity indices have indicated that an index of less that 80% or greater might be probative of discrimination. Engineering Contractors Association of South Florida v. Metropolitan Dade County, 122 F.3d 895, 914 (11th Cir. 1997)

Applying the 80% rule to the Commerce data would make asubstantial difference affecting billions of dollars of federal procurement. If the 80% rule is applied to construction, of the 27 comparisons Commerce made, there are disparities indicating a prima facie case of discrimination (below 80%) in only 2 categories. Non-construction categories affected by the 80% rule are SIC 30,31 rubber, plastic and leather (82.3%); wholesale trades-durable goods (86.4%); wholesale trades non-durable goods (88%); and SIC 70 hotels and lodging (90.1%).

 

Unanswered Questions

 

John Sullivan, Associate Director Project on Civil Rights and Public Contracts. 410-455-2180 (phone)

There are also a number of technical questions currently unanswered in the Commerce report.

What percent of total federal contracts and dollars are represented in the random sample of contracts for which Commerce analyzed bidders in 1996? According to the 1996 Federal Procurement Report, there were 460,733 federal contracts awarded that year. How many in the over $25,000 category did Commerce analyze?

 

If a firm bid many times, was it counted as more available than a firm that bid once? Clearly, a firm bidding on more than 100 contracts should not be treated identically with a firm which bid on a single occasion.

George R. La Noue, Professor of Political Science, University of Maryland Baltimore County 410-455-1172 (fax)



 

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