To the "disadvantaged" go the spoils? - minority business contracts

Public Interest, Wntr, 2000 by George R. La Noue

IN the summer of 1998, the U.S. Department of Commerce released a controversial study supporting a form of affirmative action for minority-owned businesses. These businesses, when competing to provide goods and services to the federal government, are granted certain bidding advantages over their nonminority-owned competitors. The study, called the "benchmark limits" report, was the culmination of nearly two years of research. It intended to determine the procurement areas where federal agencies could apply a 10 percent "price adjustment evaluation," a euphemism for a bid preference, to "small disadvantaged businesses" (SDBs), which are businesses owned by African Americans, Hispanics, Asian Americans, and Native Americans.

Here's how the system operates: If a non-SDB bids $1,000,000 on a given contract and a SDB bids $1,090,000, the contract would be awarded to the SDB, because its bid was not more than 10 percent over that of the non-SDB's. According to the benchmark study, these bid preferences could be applied to nearly three-quarters of the $180 billion federal procurement budget.

It is remarkable that a study of such constitutional and budgetary importance was only 12 pages of text and tables. In addition, its inception and development were unusually opaque. But litigation has forced disclosure of some of the study's data, and it is now possible to examine its questionable methodology and conclusions.

Program specifics

Since 1973, the federal government has administered several programs that favor minority-owned enterprises seeking federal contracts. The largest of these programs is the 8(a) business-development program, which sets aside about $6 billion in federal contracts for approximately 6,000 eligible firms. The program is controversial because only a few 8(a) firms have reaped the lion's share of the contracts. In 1995, 1 percent of all 8(a) firms received a quarter of the money designated for the program. Few firms ever graduate from the 8(a) program.

The other major federal program for awarding contracts is the Small Disadvantaged Business (SDB) program. This program offers bid preferences to SDB firms if procurement officers determine that the preferences will be used to meet minority business goals. In 1994, Congress extended the 5 percent quota for SDB contracts, which was being used by the Department of Defense, to all federal agencies.

Both the 8(a) and the SDB programs employ the concept of "presumptive eligibility" to determine which firm owners are "socially and economically disadvantaged." What this means is that any person who is a member of one of the previously mentioned minority groups is automatically considered socially disadvantaged. Firm owners not from presumptively eligible groups can enter the program only if they can prove, with the requisite documentation, that they have been subjected to discrimination. The upshot is that over 99 percent of the 8(a) and SDB firm owners are members of presumptively eligible groups.

In the 8(a) program, to be considered economically disadvantaged, a firm owner must have a net worth of less than $250,000, excluding the value of the business and residence equity. The SDB program uses a more generous $750,000 limit, with the same exclusions. These limits mean that 80 to 90 percent of the business-owning families in the United States are "economically disadvantaged." Thus the true criteria for 8(a) and SDB certification is "social disadvantage" or membership in a minority group.

In 1995, the Supreme Court ruled, in Adarand v. Pena, that "strict scrutiny" be applied to the federal government's use of racial classifications in denying or conferring benefits. In other words, such racial classifications are unconstitutional unless the government has a compelling interest in using them in a narrowly tailored way against flagrant discrimination. This is a very stringent standard. Since Adarand, three U.S. district courts have struck down federal transportation programs that were using racial and ethnic preferences.

Adarand is an extension of a 1989 Supreme Court decision, Croson v. City of Richmond, which applied strict scrutiny to state and local minority procurement programs. Since the Croson decision, a variety of other race-based programs, in admissions, employment, redistricting, and contracting, have been found to violate the equal-protection clause of the Fourteenth Amendment. One consequence of the Croson decision was that many state and local governments commissioned "disparity studies," which purported to reveal discrimination in the awarding of contracts. Based on these studies, minority set-aside programs were initiated, maintained, or expanded. About 140 studies comparing disparities in the availability and utilization of minority-owned businesses have been completed at a cost of over $55 million. The validity of these studies, when judged by the strict-scrutiny standard, has not been proved in the courts. In fact, none of the studies has survived when subjected to discovery and brought to trial.