At risk. minority set-aside program

Entrepreneur, Feb, 1997 by Stephen Barlas

Political and legal threats loom over the Small Business Administration's 8(a) minority set-aside program, which provided 6,625 new contracts and more than 25,000 contract modifications totaling $5.82 billion to small minority businesses in fiscal 1995. California's passage of the anti-affirmative action Proposition 209 and the Supreme Court's June 1995 decision in Adarand v. Pena possibly invalidating government' agencies' racial classifications make it more than likely Congress will attempt to redraw the SBA program as part of a broader effort to make federal laws more color- and ethnicity-blind.

Rep. Charles Canady (R-FL) will reintroduce the bill he sponsored last session, which ends racial and gender preferences for federal programs. Last session, only Republicans publicly supported the Dole-Canady bill. But a Canady aide says some Democrats were also on board, if silently. "There will be Democratic support for something in this direction," he maintains.

It is uncertain whether anyone will introduce a narrower bill on the 8(a) program, as Rep. Jan Meyers (R-KS), the retired chair of the House Small Business Committee, did in 1996, to no avail. But the Clinton administration will fight any major reform efforts. "There is no need for drastic change," says SBA spokesman D.J. Caulfield, who notes that while the Justice Department is considering changes to federal programs in the wake of Adarand, none are expected to significantly affect 8(a).

* THE BEGINNINGS

President Richard Nixon started the 8(a) program in response to conclusions made by the Kerner Commission on Civil Disorder, which met in 1967 after urban riots resulting from racial unrest. The commission said blacks needed "special encouragement" to enter the economic mainstream. The program initially was reserved for the socially or economically disadvantaged; those terms were not defined. But in 1973, the SBA listed five groups "presumed" to fit that category: African Americans, American Indians, Spanish Americans, Asian Americans and Puerto Ricans. Today, a long list of ethnic groups are presumed eligible.

The 8(a) program is envisioned as a starter program for minority businesses (companies must leave the program after nine years). Many minority firms have used the 8(a) program to boost themselves up, eventually leaving the program to thrive. Steven Farinha, president of Farinha Inc., dba Paragon Construction, in Auburn, California, founded his company in 1983 "with a pickup truck, a dog and $500." He was certified by the 8(a) program in 1989 and received his first contract two years later. The company now employs 100 people and does about $17 million a year. "I cannot stress enough how essential the 8(a) program has been to my success," Farinha says. Some 35 percent of his company's revenue comes from 8(a) contracts.

* COURT CHALLENGES

Since 1989, federal courts have issued decisions questioning the legality of local, state and federal procurement set-aside programs. In City of Richmond v. Croson, the Supreme Court ruled racially oriented policies could be maintained by states and localities only if there was concrete evidence of discrimination. In the six years since, federal courts, using Croson as a guideline, have struck down several state and local set-aside programs.

In 1995, the Supreme Court applied that same reasoning to federal programs in Adarand v. Pena, which dealt with a set-aside contract from the U.S. Department of Transportation. The judgment stated that "all racial classifications" by government agencies are "inherently suspect and presumptively invalid." A federal district court in Colorado is still reconciling the facts in that case.

Michael A. Carvin, a Washington, DC, attorney with Cooper & Carvin PLLC who worked on procurement set-aside cases in the Reagan Justice Department, says it is unlikely the final Colorado federal court ruling in Adarand will force the Clinton administration to pull the plug on 8(a). However, he says, "all federal set-aside programs, particularly 8(a), are vulnerable under Adarand."

George R. La Noue, a professor of political science at the University of Maryland, Baltimore County, graduate school and director of its Project on Civil Rights and Public Contracts, has testified nationwide in court cases on government set-asides. He feels the affirmative action policy changes being considered by the Justice Department in the wake of Adarand are insufficient. In fact, he argues, there probably is no way to save 8(a) because the Supreme Court requires proven discrimination by a federal agency before that agency can set aside contracts for an ethnic or racial group.

* POLITICAL PERILS

The near-term threat to 8(a) is probably more political than legal. Rep. Canady's aide says exit polls showed substantial Democratic support for California Proposition 209, which passed by a vote of 54 percent to 46 percent. It's too early to tell whether Democrats in Congress will support either a Canady bill or a narrower bill targeting only 8(a).