26042 Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices

1Set forth as an appendix to this notice is a

preliminary survey of evidence establishing the

compelling interest for affirmative action in federal

procurement.

2 Section 2323 establishes a five percent goal for

DoD contracting with small disadvantaged

businesses (‘‘SDBs’’) and authorizes DoD to ‘‘enter

into contracts using less than full and open

competitive procedures * * * and partial set asides

for [SDBs].’’ Section 2323 states that the cost of

using such measures may not exceed fair market

price by more than ten percent. It authorizes the

DEPARTMENT OF JUSTICE

Proposed Reforms to Affirmative

Action in Federal Procurement

AGENCY: Department of Justice.

ACTION: Public notice and invitation for

reactions and views.

SUMMARY: The proposal set forth herein

to reform affirmative action in federal

procurement has been designed to

ensure compliance with the

constitutional standards established by

the Supreme Court in Adarand

Constructors, Inc. v. Pen ̃ a, 115 S. Ct.

2097 (1995). The proposed structure,

which has been developed by the Justice

Department, will form a model for

amending the affirmative action

provisions of the Federal Acquisition

Regulation and the Defense Federal

Acquisition Regulation Supplement.

DATES: Comment Date: Reactions and

views on the proposed model must be

submitted in writing to the address

below by July 22, 1996.

ADDRESSES: Interested parties should

submit written comments to Mark

Gross, Office of the Assistant Attorney

General for Civil Rights, P.O. Box 65808,

Washington, D.C. 20035–5808, telefax

(202) 307–2839.

FOR FURTHER INFORMATION CONTACT:

Mark Gross, Office of the Assistant

Attorney General for Civil Rights, P.O.

Box 65808, Washington, D.C. 20035–

5808, telefax (202) 307–2839.

Introduction

In Adarand, the Supreme Court

extended strict judicial scrutiny to

federal affirmative action programs that

use racial or ethnic criteria as a basis for

decisionmaking. In procurement, this

means that any use of race in the

decision to award a contract is subject

to strict scrutiny. Under strict scrutiny,

any federal programs that make race a

basis for contract decisionmaking must

be narrowly tailored to serve a

compelling government interest.

Through its initial authorization of

the use of section 8(a) of the Small

Business Act to expand opportunities

for minority-owned firms and through

reenactments of this and other programs

designed to assist such businesses,

Congress has repeatedly made the

judgment that race-conscious federal

procurement programs are needed to

remedy the effects of discrimination that

have raised artificial barriers to the

formation, development and utilization

of businesses owned by minorities and

other socially disadvantaged

individuals. In repeated legislative

enactments, Congress has, among other

measures, established goals and granted

authority to promote the participation of

Small Disadvantaged Businesses (SDBs)

in procurement for the Department of

Defense, NASA and the Coast Guard. It

also enacted the Surface Transportation

Assistance Act of 1982, the Surface

Transportation and Uniform Relocation

Assistance Act of 1987 and the

Intermodal Surface Transportation

Efficiency Act of 1991, each of which

successively authorized a goal for

participation by Disadvantaged Business

Enterprises. Congress also included

similar provisions in the Airport and

Airway Improvement Act of 1982 with

respect to procurement regarding airport

development and concessions. Under

Section 15(g) of the Small Business Act,

15 U.S.C. 644(g), Congress has

established goals for SDB participation

in agency procurement. Finally, in 1994,

Congress enacted the Federal

Acquisition Streamlining Act (FASA),

which extended generally to federal

agencies authority to conduct various

race-conscious procurement activities.

The purpose of this measure was to

facilitate the achievement of goals for

SDB participation established for

agencies pursuant to Section 15(g) of the

Small Business Act.

Based upon these congressional

actions, the legislative history

supporting them, and the evidence

available to Congress, this congressional

judgment is credible and

constitutionally defensible. Indeed, the

survey of currently available evidence

conducted by the Justice Department

since the Adarand decision, including

the review of numerous specific studies

of discrimination conducted by state

and local governments throughout the

nation, leads to the conclusion that, in

the absence of affirmative remedial

efforts, federal contracting would

unquestionably reflect the continuing

impact of discrimination that has

persisted over an extended period. For

purposes of these proposed reforms,

therefore, the Justice Department takes

as a constitutionally justified premise

that affirmative action in federal

procurement is necessary, and that the

federal government has a compelling

interest to act on that basis in the award

of federal contracts.1

Subject to certain statutory limitations

(that are discussed below), Congress has

largely left to the executive agencies the

determination of how to achieve the

remedial goals that it has established.

The Court in Adarand made clear that,

even when there is a constitutionally

sustainable compelling interest

supporting the use of race in

decisionmaking, any such programs

must be narrowly tailored to meet that

interest. We have focused, therefore, on

ensuring that the means of serving the

congressionally mandated interest in

this area are narrowly tailored to meet

that objective. This task must be taken

very seriously. Adarand made clear that

Congress has the authority to use raceconscious decisionmaking to remedy

the effects of past and present

discrimination but emphasized that

such decisionmaking must be done

carefully. This Administration is

committed to ensuring that

discriminatory barriers to the

opportunity of minority-owned firms

are eliminated and the maximum

opportunities possible under the law are

maintained. Our focus, therefore, has

been on creating a structure for raceconscious procurement that will meet

the congressionally determined

objective in a manner that will survive

constitutional scrutiny.

In giving content to the narrow

tailoring prong of strict scrutiny, courts

have identified six principal factors: (1)

Whether the government considered

race neutral alternatives and determined

that they would prove insufficient

before resorting to race-conscious

action; (2) the scope of the program and

whether it is flexible; (3) whether race

is relied upon as the sole factor in

eligibility, or whether it is used as one

factor in the eligibility determination;

(4) whether any numerical target is

reasonably related to the number of

qualified minorities in the applicable

pool; (5) whether the duration of the

program is limited and whether it is

subject to periodic review; and (6) the

extent of the burden imposed on

nonbeneficiaries of the program. Not all

of these factors are relevant in every

circumstance and courts generally

consider a strong showing with respect

to most of the factors to be sufficient.

This proposal, however, responds to all

six factors.

The Department of Defense (DoD),

which conducts a substantial majority of

the federal government’s procurement,

was the focus of initial post-Adarand

compliance actions by the federal

government. In particular, DoD, acting

pursuant to authority granted by 10

U.S.C. § 2323,2 had developed through
Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices 26043

Secretary of Defense to adjust the applicable

percentage ‘‘for any industry category if available

information clearly indicates that nondisadvantaged

small business concerns in such industry category

are generally being denied a reasonable opportunity

to compete for contracts because of the use of that

percentage in the application of this paragraph.’’

3 10 U.S.C. 2323 incorporates by explicit

reference the language of section 8(d) of the Small

Business Act, which states that members of

designated racial or ethnic groups are presumed to

be socially and economically disadvantaged.

Participants in the 8(a) program are also presumed

to be SDBs.

4 FASA states that in order to achieve goals for

SDB participation in procurement negotiated with

the Small Business Administration, an ‘‘agency may

enter into contracts using—(A) less than full and

open competition by restricting the competition for

such awards to small business concerns owned and

controlled by socially and economically

disadvantaged individuals described in subsection

(d)(3)(C) of section 8 of the Small Business Act (15

U.S.C. 637); and (B) a price evaluation preference

not in excess of 10 percent when evaluating an offer

received from such a small business concern as the

result of an unrestricted solicitation.’’

5 This proposal addresses only affirmative action

in the federal government’s own direct

procurement. It does not address affirmative action

in procurement and contracting that is undertaken

by states and localities pursuant to programs in

which such entities receive funds from federal

agencies (e.g., the Disadvantaged Business

Enterprise program that the Department of

Transportation administers pursuant to the

Intermodal Surface Transportation Efficiency Act of

1991, Pub. L. No. 102–240, section 1003(b), 105

Stat. 1919–1922, and the Airport and Airway

Improvement Act of 1982, 49 U.S.C. 47101, et seq.).

regulation a practice known as the ‘‘rule

of two.’’ Pursuant to the rule of two,

whenever a contract officer could

identify two or more SDBs that were

qualified to bid on a project at a price

within 10% of fair market price, the

officer was required to set the contract

aside for bidding exclusively by SDBs.

Under section 2323, firms owned by

individuals from designated racial

minority groups are presumed to be

SDBs.3 Others may enter the program by

establishing that they are socially and

economically disadvantaged. After

consultation with the Department of

Justice, DoD suspended use of the rule

of two in October 1995.

Congress in 1994 extended the

affirmative action authority granted DoD

by section 2323 to all agencies of the

federal government through enactment

of the Federal Acquisition Streamlining

Act (FASA), Public Law No. 103–355,

sec. 7102, 108 Stat. 3243, 15 U.S.C. 644

note.4 Because of Adarand and the effort

to review federal affirmative action

programs in light of that decision,

regulations to implement the affirmative

action authority granted by FASA have

been delayed. See 60 Fed. Reg. 448258,

48259 (Sept. 18, 1995). This proposal

provides the basis for those regulations.

The proposed structure will

necessarily affect a wide range of

measures that promote minority

participation in government contracting

through race-conscious means. Taking

DoD as an example, approximately onesixth of contracting with minorityowned firms in 1994 resulted from use

of the rule of two. The majority of

dollars to minority firms was awarded

by DoD through other means: direct

competitive awards, the Small Business

Administration’s (SBA) section 8(a)

program, subcontracting pursuant to

section 8(d) of the Small Business Act,

and a price credit applied pursuant to

section 2323. With the exception of

direct competitive awards (which do not

take race into account), activities

pursuant to all of these methods will be

affected by the proposed reforms.5

The 8(a) program merits special

mention at the outset. This program

serves a purpose that is distinct from

that served by general SDB programs.

The 8(a) program is designed to assist

the development of businesses owned

by socially and economically

disadvantaged individuals. To this end,

the program is targeted toward concerns

that are more disadvantaged

economically than other SDBs (e.g. the

standard for economic disadvantage for

entry into 8(a) is an owner’s net worth

of $250,000 compared to $750,000 for

SDB programs). Participants in the

program are required to establish

business development plans and are

eligible for technical, financial, and

practical assistance, and may compete

in a sheltered market for a limited time

before graduating from the program.

Each of these aspects of the program is

designed to assist the business in

developing the technical and practical

experience necessary to become viable

without assistance. By contrast, the

general SDB program is a procurement

program, designed to assist the

government in finding firms capable of

providing needed services, while, at the

same time, helping to address the

traditional exclusion of minority-owned

firms from contracting opportunities.

The operation of the 8(a) program will

become subject to the overall limitations

in the measures described below. In

addition, the SBA is working to

strengthen safeguards against fraud and

to ensure that the 8(a) program serves its

purpose of assisting the development of

businesses owned by individuals who

are socially and economically

disadvantaged.

Because the proposed reforms are

broad and cover a number of different

subjects related to affirmative action in

federal procurement, the Justice

Department is seeking comments on

each of the aspects of the proposal.

Comments will be taken into account in

the formulation of revised procurement

regulations.

Overview of Structure

The SDB reform outlined herein

involves five major topics: (1)

Certification and eligibility; (2)

benchmark limitations; (3) mechanisms

for increasing minority opportunity; (4)

the interaction of benchmark limitations

and mechanisms; and (5) outreach and

technical assistance. The proposed

structure incorporates these elements

into a system that furthers the

President’s commitment to ensuring

equal opportunity in contracting,

responds to the courts’ narrow tailoring

requirements, and is faithful to statutory

authority.

I. Eligibility and Certification

At present, while a concern must have

its eligibility certified by the SBA to

participate in the 8(a) program, there is

no similar certification requirement for

participation in SDB programs. Under

current practice, firms simply check a

box to identify themselves as SDB’s

when bidding for federal contracts or

8(d) subcontracts. Reform of this

certification process is needed to assure

that programs meet constitutional and

statutory objectives. While the basic

elements of eligibility under these

programs are statutorily determined,

agencies have discretion to impose

significant additional controls and to

establish mechanisms to assure that the

statutory criteria are in fact met.

The SBA will continue as the sole

agency with authority to certify firms for

the 8(a) program. The following

discussion, therefore, concerns only

certification of SDB’s that are not

participants in the 8(a) program.

Each bid that an SDB submits to an

agency, or to a prime contractor seeking

to fulfill 8(d) subcontracting obligations,

will have to be accompanied by a form

certifying that the concern qualifies as a

small disadvantaged business under

eligibility standards that will be

published by the SBA. The standards

and certification form will allow 8(a)

participants to qualify automatically for

SDB programs. Others will be required

to establish their eligibility by

submitting required statements and

documentation.

When a concern has been certified by

an agency as eligible for SDB programs,

its name will be entered into a central

on-line register to be maintained by

SBA. That certification will be valid for

a period of up to three years during

which time registered firms will have

only to complete a portion of the form

confirming the continued validity of

that certification to participate in SDB
26044 Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices

6 Both FASA and 10 U.S.C. 2323 incorporate by

explicit reference the definition of social and

economic disadvantage contained in section 8(d) of

the Small Business Act. Pursuant to section 8(d),

members of designated groups are presumed to be

both socially and economically disadvantaged;

those presumptions are rebuttable. By contrast, for

the 8(a) program, members of identified groups are

rebuttably presumed to be socially disadvantaged,

but must establish that they are economically

disadvantaged.

7 Members of minority groups do not have to

participate in the SDB program in order to bid on

federal contracts.

8 The form that such individuals are to complete

will ask whether they previously have applied for

SDB certification and been rejected or accepted. A

rejected firm will not be permitted to re-apply for

certification for one year after rejection, unless it

can show changed circumstances.

9 The standard certification form will

accommodate one eligibility criterion peculiar to

the DoD’s SDB program under 10 U.S.C. 2323—that

the majority of earnings must directly accrue to the

socially and economically disadvantaged

individuals that own and control the concern. The

standard certification form will accommodate this

criterion by including a DoD-specific section

requiring the concern to attest that the majority of

the firm’s earnings do flow in this manner.

10The protests contemplated in the discussion

here relate only to certification and eligibility. The

discussion does not relate to protests to other

features of the proposed reforms that might be

raised through existing bid protest procedures or

through actions under the Administrative

Procedure Act.

programs at any agency. A full

application will have to be submitted to

an agency every three years to maintain

eligibility.

A. Social and Economic Disadvantage

Members of designated minority

groups seeking to participate in SDB

and 8(d) programs will continue to fall

within the statutorily mandated

presumption of social and economic

disadvantage.6 This presumption is

rebuttable as to both forms of

disadvantage. The form will ask the

applicant to identify the group

identification triggering a presumption

of social and economic disadvantage.7

In addition, the form will enumerate the

objective criteria constituting economic

disadvantage according to SBA

standards and advise the applicant that

the presumption of such disadvantage is

rebuttable and any challenge to the

individual’s SDB status will be resolved

on the basis of these criteria. Challenges

would be processed through existing

SBA challenge mechanisms.

Individuals who do not fall within the

statutory presumption will be required

to establish social and economic

disadvantage by answering a series of

questions demonstrating such

disadvantage. Questions regarding

social disadvantage will be included in

the standard certification form. Pursuant

to current practice, individuals who do

not fall within a presumption must

prove their social disadvantage by clear

and convincing evidence. That standard

will be changed to permit proof by a

preponderance of the evidence.

The SBA currently has criteria for

evaluating social disadvantage. SBA

will conduct training seminars designed

to instruct personnel from other

agencies on the procedures for making

eligibility determinations. Individuals

who do not fall within the statutory

presumption will also be required to

demonstrate that they are economically

disadvantaged according to the criteria

established by SBA.

Agencies will have discretion to

decide which official within the agency

will have authority to determine

whether ‘‘non-presumed’’ individuals

are socially and economically

disadvantaged.8 In most instances, the

contracting officer should not have final

authority to make the determination; the

procedure must, however, facilitate

quick decisions so that the procurement

process will not be delayed and

applicants will have a fair opportunity

to compete. An agency may wish to

assign this responsibility to its Office of

Small and Disadvantaged Business

Utilization. The SBA will answer

inquiries regarding eligibility

determinations and the procuring

agency will retain the ability to refer

applications to the SBA for final

eligibility determinations through the

protest procedures now in place. In the

alternative, an agency may enter into an

agreement with SBA to have SBA make

all determinations, including the initial

determination of eligibility.

B. Ownership and Control

In addition to submitting the form

described above, every applicant will be

required to submit with each bid a

certification that the business is owned

and controlled by the designated

socially and economically

disadvantaged individuals as those

terms are defined by the SBA’s

standards for ownership and control at

13 C.F.R. 124.103 and 124.104.9 Such a

certification must come from an SBA

approved organization, a list of which

will be maintained by the SBA. In order

to be approved by the SBA to certify

ownership and control, (1) the entity

must certify ownership and control

according to the standards established

by the SBA for the 8(a) program (13

C.F.R. 124.103 and 124.104); (2) the

entity’s certifications must have been

accepted by a state or local government

or a major private contractor; and (3) the

entity must not have been disqualified

by any government authority from

making certifications within the past

five years. Such entities may include

private organizations, the SBA (i.e.

through the 8(a) program), entities that

provide certifications for participation

in the Department of Transportation’s

disadvantaged business enterprise

(‘‘DBE’’) program, or states or localities,

so long as the certification addresses the

standards for ownership and control

promulgated by the SBA.

This procedure is intended to take

advantage of the extensive network of

certifying entities already in existence.

At present, firms may have to obtain

several different certifications as they

pursue a mix of private and public

contracts. While it is clear that a control

mechanism is needed to protect against

fraud, it makes little sense to create a

new federal bureaucracy to perform

work that is already being done and to

erect another hurdle that an SDB must

clear before qualifying for a federal

contract. The limited resources of the

federal government and of SDBs make

creation of such a bureaucracy

counterproductive.

To police the quality of certifications,

SBA will conduct periodic audits of

certifying organizations. Any entity may

submit information to the SBA in an

effort to persuade the agency to initiate

such an audit.

As a means of ensuring that the

identified socially and economically

disadvantaged individuals retain

ownership and control of a firm, a

certification of ownership and control

will be valid for a maximum of three

years from the date it was issued.

Certified firms will be required to

recertify their eligibility by submitting a

full application, including an updated

certification of ownership and control,

every three years.

C. Challenges

Where an SDB is the apparent

successful offeror on a contract, the

name of that firm and of the entity that

certified its ownership and control will

be a matter of public record. SBA

regulations currently allow any concern

that submitted an offer to protest the

eligibility of an SDB that receives a

contract through an SDB program. The

procuring agency or SBA may also

protest the eligibility of an SDB.

Individuals or organizations that did not

submit a bid for the contract in question

may submit information to the

procuring agency in an effort to

convince the agency to initiate a

protest.10 The SBA’s Division of

Program Certification and Eligibility

will process any protest that contains
Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices 26045

11 The basis for such a challenge would be 48

C.F.R. 19.508, which requires completion of a

minimum percentage of contract activities by the

firm awarded a contract through a small business

set aside or the 8(a) program. A clause must be

inserted in such contracts that limits the amount of

work that can be subcontracted. 48 C.F.R. 52.219–

14. These requirements will be expanded to include

contracts awarded through the reformed SDB

program as well.

12See, e.g., 10 U.S.C. 2323 (5% goal for DoD

contracting with SDBs); Intermodal Surface

Transportation Efficiency Act of 1991, Pub. L. No.

102–240, 105 Stat. 1914 (10% goal for highway

construction projects carried out directly by the

Department of Transportation).

13 For these purposes, the calculation of the

number of minority-owned firms will not include

corporations owned by federally-recognized Native

American tribes and Alaskan Native villages.

Bidding credits for such corporations are not

subject to the Adarand strict scrutiny standard.

specific factual allegations that the

concern is not eligible for the program.

Grounds for an eligibility protest may

include, but are not limited to, evidence

that:

• The owners of the firm are not in

fact socially or economically

disadvantaged;

• The firm is not owned and

controlled by the individuals who meet

the definition of social and economic

disadvantage;

• The disadvantaged firm has acted,

or is acting, as a front company by

failing to complete required percentages

of the work contracted to the concern.11

Upon receiving a protest supported by

specific factual information, the SBA

will make an eligibility determination

by examining documentation from the

SDB including, for example, personal

and business financial statements,

business records, ownership

certifications, and other information

deemed necessary to permit a

determination as to the eligibility of the

firm. Current regulations require the

SBA to make a determination

concerning the eligibility of the firm

within 15 days of the filing of the

challenge or notify the contracting

officer of any delay.

D. Enforcement

Finally, there must be a concerted

effort to enforce the law against

individuals who present fraudulent

information to the government. The

existence of a meaningful threat of

prosecution for falsely claiming SDB

status, or for fraudulently using an SDB

as a front in order to obtain contracts,

will do much to ensure that the program

benefits those for whom it is designed.

To this end, there will be an enhanced

effort by SBA and the Department of

Justice to identify and pursue

individuals fraudulently

misrepresenting information in order to

obtain contracts through an SDB

program. Any individual may forward

specific factual information suggesting

such a misrepresentation to the

procuring agency contracting officer or

the agency’s inspector general.

Similarly, the Inspector General of SBA

will refer evidence of misrepresentation

that emerges through the challenge

procedure or otherwise to the

Department of Justice. In its

enforcement, the Department of Justice

will ensure that it pursues to the extent

permitted by law all of the parties

responsible for fraudulent or sham

transactions.

Penalties for misrepresentations in

this area were increased by the Business

Opportunity Development and Reform

Act of 1988 and include:

(1) A fine of up to $500,000,

imprisonment of up to 10 years, or both;

(2) Suspension and debarment from

Federal contracting (48 C.F.R. pt. 9.4);

(3) Ineligibility to participate in any

program or activity conducted under the

authority of the Small Business Act or

the Small Business Investment Act of

1958 for a period of up to three years;

and

(4) Administrative remedies

prescribed by the Program Fraud Civil

Remedies Act of 1986 (31 U.S.C. 3801–

3812).

Knowing and willful fraudulent

statements or representations may

subject an individual to criminal

penalties, including imprisonment for

up to five years, pursuant to 18 U.S.C.

1001. In addition, knowing

misrepresentations to obtain payment

from the federal government may violate

the False Claims Act, 31 U.S.C. 3729,

and subject the claimant to civil

penalties and treble damages.

II. Benchmark Limits

Although Congress has made the

judgment that affirmative raceconscious measures are needed in

federal contracting, the use of race must

be narrowly tailored. The federal

government operates under a general

statutory mandate to achieve the

‘‘maximum practical opportunity’’ for

SDB participation and that overall

mandate is translated into specific

agency-by-agency goals. Some specific

programs operate under statutorily

prescribed goals.12 To the extent that

race-conscious measures (going beyond

outreach and technical assistance) are

utilized to obtain these objectives,

limitations must be established to

comply with narrow tailoring

requirements.

To this end, the proposal relies on

development of a set of specific

guidelines to limit, where appropriate,

the use of race-conscious measures in

specific areas of federal procurement.

The limits, or ‘‘benchmarks’’, will be set

for each industry for the entire

government. The Department of

Commerce, in consultation with the

General Services Administration (GSA)

and SBA, will establish appropriate

benchmark limitation figures for each

industry and report them to the Office

of Federal Procurement Policy (OFPP),

which will publish and disseminate the

final benchmark figures. Each industry

benchmark limitation will represent the

level of minority contracting that one

would reasonably expect to find in a

market absent discrimination or its

effects. Benchmark limitations will

provide the basis for comparison with

actual minority participation in

procurement in that industry (and,

where appropriate, in a region).

In establishing the benchmark

limitations, the first step is to define

whether industries operate according to

regional or national markets. In general,

industries will be defined according to

two-digit Standard Industrial

Classification (SIC) codes. Based on the

evidence, it appears that most federal

contracting is conducted on a national

basis. We also start from the view,

reflected in a variety of federal policies,

that federal contracting should

encourage the development of national

markets wherever feasible. Where data

indicate, however, that an industry

operates regionally, the benchmark

limitations will be established by

region.

After identifying the markets, the

system will then measure, using

primarily census data, the capacity of

firms operating in each market that are

owned by minorities. In estimating

capacity, a number of factors will be

examined. Most significant, of course,

will be the number of minority SDBs

available and qualified to perform

government contracts.13 In general, it

appears appropriate to look at the

industry in question and identify the

smallest firm that has won a government

contract in that industry in the last three

years. Firms that are significantly

smaller would be presumed to be

unqualified to perform government

contracts in that industry. While

keeping in mind that capacity is not

fixed, it will also be important to look

at measures such as the number of

employees and amount of revenues.

In addition to calculating the capacity

of existing minority firms, the proposed

system will examine evidence, if any,

demonstrating that minority business

formation and operation in a specific

industry has been suppressed by
26046 Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices

14For certain types of procurement, Section 8(d)

requires agencies to negotiate an SDB

subcontracting plan with the successful bidder for

the prime contract. The statute provides that each

such plan shall include percentage goals for the

utilization of SDB subcontractors.

15As was the case with respect to the use of the

term ‘‘credit’’ in connection with bids from SDBs

as prime contractors, the use of that term here in

connection with SDB subcontracting is not

intended to restrict the utilization of this

mechanism to the evaluation of prime contract bids

for which price is the primary factor in selecting the

successful bidder.

16 In either case, a successful prime contractor

should notify the contracting officer of any

substitution of a non-SDB subcontractor for an SDB

firm with which the prime contractor had entered

into enforceable commitments or that had been

specifically identified in the prime contractor’s

subcontracting plan.

17See e.g., Department of Transportation

Incentive Subcontracting Program for Small and

Small Disadvantaged Business Concerns, 48 C.F.R.

52 219–10.

discrimination. This evidence may

include direct evidence of

discrimination in the private and public

sectors in such areas as obtaining credit,

surety guarantees and licenses. It may

also include evidence of discrimination

in pricing and contract awards. In

addition, the evidence may include the

results of regression analysis techniques

similar to those used in state studies of

discrimination in procurement. That

form of analysis holds constant a variety

of variables that might affect business

formation so that the effect of race can

be isolated.

The combination of existing minority

capacity and, where applicable, the

estimated effect of race in suppressing

minority business activity in the

industry will form the benchmark

limitation. Although there is no

absolutely precise way to calculate the

impact of discrimination in various

markets, the benchmark limitations

represent a reasonable effort to establish

guidelines to limit the use of raceconscious measures and to meet the

requirement that such measures be

narrowly tailored to accomplish the

compelling interest that Congress has

identified in this area.

Benchmark limitations will be

adjusted every five years, as new data

regarding minority firms are made

available by the Census Bureau.

Generally, census regions will be used

in defining the scope of regional

markets.

III. Mechanisms for Increasing Minority

Opportunity

Under the reformed structure, the

federal government will generally have

authority, subject to the limitations

discussed in the next section, to use

several race-conscious contracting

mechanisms: SBA’s 8(a) program; a

bidding credit for SDB prime

contractors; and an evaluation credit for

non-minority prime contractors that use

SDBs in subcontracting. In addition, at

all times, agencies must engage in a

variety of outreach and technical

assistance activities designed to

enhance contracting opportunities for

SDBs (but that are not subject to strict

scrutiny). Those efforts will be

expanded as described more fully

below.

The 8(a) program will continue to

provide for sole source contracting and

sheltered competition for 8(a) firms.

However, the program will be

monitored; and where the benchmark

limitations described more fully below

warrant adjustments to the SDB

program, corresponding adjustments

will be made to the 8(a) program to

ensure that its operation is subject to

those limitations.

A second available race-conscious

measure will be a bidding credit in

prime contracting for SDBs. Statutory

authority for the use of such a credit

exists for DoD in 10 U.S.C. 2323 and for

the remainder of the government in

FASA. Each statute permits use of such

a credit so long as the final price does

not exceed a fair market price by more

than 10%.

The use of the term ‘‘credit’’ is not

meant to restrict utilization by agencies

of this mechanism to contracts where

price is the primary factor in selecting

the successful bidder. Where the

successful bidder is selected based on

other factors—such as the ability to

produce a contract that provides the

‘‘best value’’ to the agency—agencies

may build the value of increasing the

participation of SDB contractors into the

evaluation of offers. For some contracts,

a numerical credit may be appropriate;

in others, some form of nonnumerical

assignment may make more sense to the

agency. This proposal does not restrict

such options. However, regardless how

it operates, any bidding credit will be

subject to the overall limitations on

race-conscious mechanisms described

herein.

Pursuant to 10 U.S.C. 2323 and FASA,

agencies will also be permitted to use,

as a third race-conscious mechanism, an

evaluation credit with respect to the

utilization by nonminority prime

contractors of SDBs as subcontractors.

Such goals would be set by the agency

for each prime contract based on the

availability of minority firms to perform

the work. The award of evaluation

credits for prime contractors that use

SDBs as subcontractors will supplement

the existing statutory SDB

subcontracting requirements in Section

8(d) of the Small Business Act.14 In

order to certify their eligibility as SDBs,

subcontractors will submit the same

certification form to the prime

contractor that is described in the

certification section of this proposal.

Such an evaluation credit can take a

number of different forms, depending

on the circumstances of a solicitation.15

For example, where it is practical for

bidders to secure enforceable

commitments from SDB subcontractors

prior to the submission of bids, agencies

should establish an SDB subcontracting

goal for the contract, and award an

evaluation credit to bidders who

demonstrate that they have entered into

such commitments as a means of

achieving the goal. Where that is not

practical, agencies can award an

evaluation credit to a bidder that

specifically identifies in a

subcontracting plan those SDB

subcontractors that it intends to use to

achieve the agency’s SDB

subcontracting goal.16 Agencies may

also award an evaluation credit based

on demonstrable evidence of a bidder’s

past performance in using SDB

subcontractors. Agencies may also grant

bonus awards to prime contractors to

encourage the use of SDB

subcontractors.17 This proposal is not

intended to limit agencies in developing

or using additional mechanisms to

increase SDB subcontracting, but any

such mechanism will be subject to the

limitations on race-conscious

mechanisms described herein.

In applying these bidding and

evaluation credits, race will simply be

one factor that is considered in the

decision to award a contract—in

contrast to programs in which race is

the sole factor.

IV. Interaction of Benchmark Limits and

Mechanisms

In determining how benchmark

limitations will be used to measure the

appropriateness of various forms of

race-conscious contracting, the objective

has been to develop a system that can

operate with a sufficient degree of

clarity, consistency and simplicity over

the range of federal agencies and

contracting activities. Where the use of

all available tools, including direct

competition and race-neutral outreach

and recruitment efforts, results in

minority participation below the

benchmark, race-based mechanisms will

remain available. Their scope, however,

will vary and be recalculated depending

on the extent of the disparity between

capacity and participation. Where

participation exceeds the benchmark,

and can be expected to continue to do
Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices 26047

18 In order to measure accurately SDB

subcontracting participation, it will be necessary to

have information regarding SDB subcontracting

participation by two-digit SIC code. At the same

time, however, it is important to minimize the

amount of new record-keeping and reporting that

these reforms may require. Prime contractors such

as commercial vendors that report SDB

participation through company-wide annual

subcontracting plans will continue to be able to use

this reporting method, with some modification that

serves to facilitate SIC code reporting. Under one

approach, prime contractors could require all

subcontractors to identify their primary SIC code

and then track, as most primes do now, the amount

of dollars that flows to each subcontractor.

19More than three ‘‘standard deviations’’ will

generally be viewed as ‘‘substantial’’ for these

purposes. Under applicable Supreme Court

decisions, a disparity in the range of two or three

standard deviations is strong evidence of a prima

facie case of discrimination in the employment

context. A standard deviation is a measure of the

departure from the level of activity that one would

expect in the absence of discrimination.

so with reduced race-conscious efforts,

adjustments will be made.

At the close of each fiscal year, the

Department of Commerce will review

data collected by its GSA’s Federal

Procurement Data Center for the three

preceding fiscal years to determine the

percentage of contracting dollars that

has been awarded to minority-owned

SDBs in each two-digit SIC code.

Commerce will analyze minority SDB

participation for all transactions that

exceed $25,000. This review will

include minority-owned SDBs

participating through direct contracting

(including full and open competition),

the 8(a) program, and SDB prime and

subcontracting programs.18 Data

regarding minority participation will be

reviewed annually, but will include the

past three fiscal years of experience.

Examining experience over three year

stretches should produce a more

accurate picture of minority

participation, given short-term

fluctuations and the fact that the process

of bidding and awarding a contract may

span more than a single fiscal year.

Commerce will analyze the data and,

after consultation with SBA, report to

OFPP regarding which mechanisms

should be available in each industry and

the size of the credits that can be

applied. OFPP will publish and

disseminate the mechanisms that can be

used by the agencies in the upcoming

year.

Pursuant to 15 U.S.C. 644(g), each

agency now negotiates goals for SDB

participation with SBA for each year.

Commerce would inform SBA and

agencies of the appropriate benchmark

limits for the industries in which the

agency contracts and of the mechanisms

available.

Where Commerce determines that

participation by SDB’s in government

contracting in an industry is below the

relevant benchmark limitation, it may

report to OFPP that agencies should be

authorized to grant credit to SDB

bidders and to prime contractors for

SDB subcontracting. Commerce will set

a percentage cap of up to ten percent on

the amount the credit can allow the

price of a contract to deviate from the

fair market price. That percentage will

represent the maximum credit that each

agency may use in the evaluation of bids

from SDBs and prime contractors who

commit to subcontracting with SDBs.

The size of the credit will depend, in

part, on the extent of the disparity

between the benchmark limitations and

minority SDB participation in federal

procurement and industry. It also will

depend on an assessment of pricing

practices within particular industries to

indicate the effect of credits within that

industry. Commerce’s determinations

would be published and disseminated

by OFPP.

Where the bidding and evaluation

credits have been used in an industry

and the percentage of dollars awarded to

SDBs in that industry exceeds the

benchmark limit, Commerce, in

consultation with SBA, must estimate

the effect of curtailing the use of raceconscious contracting mechanisms and

report to OFPP. If Commerce determines

that the minority participation rate

would fall substantially below the

benchmark limit in the absence of raceconscious measures,19 it need not

require agencies to stop using such

measures, but may, as described below,

require agencies to adjust their use.

Agencies will report the number of

contracts that were awarded using a

bidding or evaluation credit as well as

the amount of those credits. These

figures will allow an estimate of the

effect on SDB participation of adjusting

or removing the credit. In the absence of

that objective measure, Commerce will

have to estimate and report to OFPP

how much minority contracting resulted

from the application of these raceconscious measures. One indication

may be the success of minorities in

winning contracts through direct

competition in which race is not used

in the decision to award a contract. It

may also be useful to examine

comparable experience in private

industries operating without affirmative

action programs.

Even when agencies are not required

to terminate bidding and evaluation

credits, they may be required to adjust

their size in order to ensure that the

credits do not lead to the award of a

disproportionately large numbers of

contracts to SDBs. Statutory authority

for this adjustment exists in both FASA

and section 2323. Because the size of

credits will affect industries differently,

it is impossible to prescribe a set of

specific rules to govern adjustments.

Responsibility will rest with Commerce

to analyze the impact of credits by

industry category and make adjustments

where appropriate, which would then

be published and disseminated by

OFPP.

In addition, in some circumstances,

an agency may use less than the

authorized bidding or evaluation credit

where necessary to ensure that use of

the credits by a specific agency does not

unfairly limit the opportunities of nonSDB contractors seeking contracts from

that agency. While the size of the

maximum credits will be determined on

an industry-wide basis and apply across

all agencies, it remains important to

maintain flexibility at the agency level

to ensure against any undue

concentrations of SDB contracting and

unnecessary use of race-conscious

credits. Thus, for example, where an

agency has been particularly successful

in reaching out to SDB contractors, it

may find its use of the full credits

unnecessary to achieve its goals, in

which event it could, subject to

approval by Commerce, depart

downward from the authorized credits.

The exercise of this discretion will be

particularly important to avoid

geographic concentrations of SDB

contracting that unduly limit

opportunities for non-SDBs.

When Commerce concludes that the

use of race-conscious measures is not

justified in a particular industry (or

region), the use of the bidding credit

and the evaluation credit will cease.

Suspending the use of race-conscious

means will not affect the continued use

of race-neutral contracting measures.

The limits imposed by the benchmarks

also would not affect the applicability of

statutorily mandated goals, but would

limit the extent to which race-conscious

means could be used to achieve those

goals. For example, DoD would retain

its five percent overall statutory goal

and would continue to exhort prime

contractors to achieve goals for

subcontracting with SDB’s. Prime

contractors, however, would no longer

receive credit in evaluation of their bids

for signing up or identifying SDB

subcontractors. Likewise, outreach and

technical assistance efforts would

continue and minority bidders on prime

contracts would continue to seek and

win competitive awards; but there

would no longer be any bidding credit

for minority firms.

It should be emphasized that the

benchmarks are not a limit on the level
26048 Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices

20 As with calculation of the benchmark

limitations, see n. 13, supra, corporations owned by

federally-recognized Native American tribes and

Alaskan Native villages will not be included in this

calculation.

of minority contracting in any industry

that may be achieved without the use of

race-conscious measures. Conversely,

there is, of course, no assurance that

minority participation in particular

industries will reach the benchmark

limitations through the available race

conscious measures. Minority

participation will depend on the

availability of qualified minority firms

that successfully win contracts through

open competition, subcontracting, the

8(a) program or through the application

of price or evaluation credits. The

system described herein is a good faith

effort to remedy the effect of

discrimination, but it is not a guarantee

of any particular result.

The affirmative action structure

described herein does not utilize the

statutory authorization under FASA to

allow federal agencies (or in the case of

DoD its direct authorization under 10

U.S.C. 2323) to set contracts aside for

bidding exclusively by SDBs. If federal

agencies use race-conscious measures in

the manner outlined above, together

with concerted race-neutral efforts at

outreach and technical assistance as

described below, we believe the use of

this additional statutory authority

should be unnecessary. Following the

initial two-year period of the reformed

system’s operation (and at regular

intervals thereafter), however,

Commerce, SBA and DoD will evaluate

the operation of the system and

determine whether this statutory power

to authorize set-asides should be

invoked. In making that determination,

those agencies will take into account

whether persistent and substantial

underutilization of minority firms in

particular industries or in government

contracting as a whole is the result of

the effects of past or present

discriminatory barriers that are not

being overcome by this system.

Such periodic reviews should also

consider whether, based on experience,

further limitation of the use of raceconscious measures is appropriate

beyond those outlined herein. In that

regard, it should be noted that the

reformed structure is inherently and

progressively self-limiting in the use of

race-conscious measures. As barriers to

minority contracting are removed and

the use of race-neutral means of

ensuring opportunity succeeds,

operation of the reformed structure will

automatically reduce, and eventually

should eliminate, the use of race in

decisionmaking. In addition, the

statutory authority upon which the use

of bidding and evaluation credits is

based expires at the end of fiscal year

2000. Congress will determine whether

that authority should be extended. See

10 U.S.C. 2323; FASA, § 7102.

Section 8(a) Program

Contracts obtained by minority firms

through the 8(a) program will count

toward the calculation whether minority

participation has reached or exceeded

the benchmark in any industry.20 The

Administrator of SBA will be under an

obligation to monitor the use of the 8(a)

program in relation to the benchmark

limits. Thus, where Commerce advises

that the use of race-conscious measures

must be curtailed in a specific industry

on the basis of the benchmarks, the

Administrator would take appropriate

action to limit the use of the program

through one or more of the following

techniques: (1) Limiting entry into the

program in that industry; (2)

accelerating graduation for firms that do

not need the full period of sheltered

competition to satisfy the goals of the

program; and (3) limiting the number of

8(a) contracts awarded in particular

industries or geographic areas.

These same techniques should be

used by the Administrator in carrying

out existing authority to ensure that 8(a)

contracting is not concentrated unduly

in certain regions. Even where a market

is defined as national in scope, and 8(a)

is being used within applicable national

benchmark limits, efforts should be

made to guard against excessive use of

8(a) contracting in a limited region.

As noted earlier, the 8(a) program is

distinct from the general SDB program

in that it is animated by its own distinct

purpose—to assist socially and

economically disadvantaged individuals

to overcome barriers that have

suppressed business formation and

development. Consistent with its unique

nature, the 8(a) program has features

that already reflect some of the factors

that make up the narrow tailoring

requirement. Unlike other SDB’s,

individuals seeking admission to the

8(a) program must establish economic

disadvantage without the benefit of any

presumption. The Small Business Act

defines economically disadvantaged

individuals as ‘‘those socially

disadvantaged individuals whose ability

to compete in the free enterprise system

has been impaired due to diminished

capital and credit opportunities as

compared to others in the same business

area who are not socially

disadvantaged.’’ Furthermore, SBA

employs objective criteria to measure

whether an individual is economically

disadvantaged. In this sense, the statute

and regulations are targeted toward

victims of discrimination; the SBA is

proposing to clarify the regulations

implementing the program to emphasize

this fact. In addition, individuals are

admitted to the 8(a) program for a

limited period—nine years—and their

performance is reviewed throughout. An

individual may be required to leave the

program prior to the nine year

graduation period if the review reveals

that the individual is no longer

economically disadvantaged or the firm

meets other graduation criteria

determined by the SBA.

SBA has under consideration

additional program changes designed to

ensure that the 8(a) program focuses on

its central mission of assisting

businesses to develop and concentrates

it resources on its intended

beneficiaries. These changes would

further ensure that the 8(a) program is

narrowly tailored to serve the

compelling interest for which it was

enacted by Congress.

V. Outreach and Technical Assistance

At present, agencies undertake a

variety of activities designed to make

minority firms aware of contracting

opportunities and to help them take

advantage of those opportunities. As a

general proposition, these activities are

not subject to strict scrutiny. The

structure outlined above for the use of

race-conscious measures assumes that

agencies will continue such outreach

and technical assistance efforts at all

times, so that race-conscious measures

will be used only to the minimum

extent necessary to achieve legitimate

objectives. Our review indicates that,

while there are a variety of good

programs of this nature operated by

various federal agencies, there is a lack

of consistency and sustained energy and

direction to these efforts.

SBA operates several assistance

programs that are targeted toward

minority firms, but are also available to

qualifying nonminority firms. Notably,

pursuant to section 7(j) of the Small

Business Act, SBA provides financial

assistance to public and private

organizations to provide technical and

management assistance to qualifying

individuals. 13 CFR 124.403, 404. SBA

also operates a program to provide

assistance to socially and economically

disadvantaged businesses in preparing

loan applications and obtaining prequalification from SBA for loans. See 13

CFR 120. SBA also operates a surety

bond program pursuant to which it

provides up to a 90% guarantee for

bonds required of small contractors.
Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices 26049

21 The SBA’s 8(a) program contains a variety of

elements that help to target the program on firms

in need of special assistance, including a

requirement that applicants affirmatively

demonstrate economic disadvantage. Furthermore,

the program is not limited to minority-owned firms.

These features of the program ensure that race is not

the sole factor in determining entry into the

program.

The Department of Commerce,

through the Minority Business

Development Administration, sponsors

several programs to provide

information, training and research that

are targeted toward minority-owned

businesses. These programs include

Minority Business Development Centers

around the country to provide hands on

assistance to minority businesses.

DoD has operated since 1990 the

Mentor-Protege Pilot Program, which

provides incentive for DoD prime

contractors to furnish SDB’s with

technical assistance. See 10 U.S.C. 2301.

Mentor firms provide a variety of

assistance, including progress

payments, advance subcontract

payments, loans, providing technical

and management assistance and awards

of subcontracts on a noncompetitive

basis to the protege. DoD reimburses the

mentor firm for its expenses. The award

of subcontracts under this program is

subject to strict scrutiny, but other

portions of the program are not.

The following are among the efforts

that should be actively pursued:

1. A race-neutral version of the

mentor-protege program (that does not

guarantee the award of subcontracts on

a non-competitive basis) should be

encouraged at all agencies.

2. DoD has proposed—and other

agencies should follow DoD’s lead—

eliminating the impact of surety costs

from bids. Because SDB’s generally

incur higher bond costs, this raceneutral change would assist SDB’s and

address one of the most frequently cited

barriers to minority success in

contracting. In this regard, agencies

should also examine the use of

irrevocable letters of credit in lieu of

surety bonds.

3. Where agencies use mailing lists, a

minimum goal should be set for

inclusion of SDB’s on agency mailing

lists of bidders.

4. The function of the Procurement

Automated Source System (PASS),

currently maintained by SBA, should be

continued. The system provides

contracting officers with a continuously

updated list of SDB firms, classified by

interest and region.

5. A uniform system for publishing

agency procurement forecasts on SBA

Online should be established. In

addition, SBA should develop a

systematic means for publishing

upcoming subcontracting opportunities.

6. Agencies should target outreach

and technical assistance efforts,

including mentor-protege initiatives,

toward industries in which SDB

participation traditionally has been low.

Agencies should continue to pursue

strategies in which minority-owned

firms are encouraged to become part of

joint ventures or form strategic alliances

with non-minority enterprises.

7. The SBA should enhance its

technical assistance initiatives to

enhance the ability of SDBs to use the

tools of electronic commerce.

8. Pursuant to Executive Order 12876,

which directs agencies to seek to enter

into contracts with Historically Black

Colleges and Universities, agencies

should attempt to increase participation

by such institutions in research and

development contracts as means of

assisting the development of business

relationships between the institutions

and SDB’s.

9. Each agency should review its

contracting practices and its

solicitations to identify and eliminate

any practices that disproportionately

affect opportunities for SDBs and do not

serve a valid and substantial

procurement purpose.

The foregoing is merely a partial list

of possible measures. What is

required—both as a matter of policy and

constitutional necessity—is a systematic

and continuing government-wide focus

on encouraging minority participation

through outreach and technical

assistance. It is proposed in contracting,

therefore, that agencies should report

annually to the President on their

outreach and technical assistance

practices. These reports should present

the actual practices and experiences of

federal agencies and include

recommendations as to approaches that

can and should be adopted more

broadly. The maximum use of such

race-neutral efforts will reduce to a

minimum the use of race-conscious

measures under the benchmark limits

described above.

Conclusion

The structure outlined above has been

crafted with regard for each of the six

factors that courts have identified as

relevant in determining whether racebased decisionmaking is narrowly

tailored to meet an identified

compelling interest. While courts have

identified these six factors as relevant in

determining whether a measure is

narrowly tailored, they have not

required that race-conscious enactments

satisfy each element or satisfy any

particular element to any specific

degree. The structure proposed herein

for SDB procurement, however,

measures up favorably with respect to

each of the six factors.

The proposal requires that agencies at

all times use race-neutral alternatives to

the maximum extent possible. An

annual review mechanism is established

to ensure maximum use of such raceneutral efforts. Only where those efforts

are insufficient to overcome the effects

of past and present discrimination can

race-conscious efforts be invoked.

The system is flexible in that race will

be relied on only when annual analysis

of actual experience in procurement

indicates that minority contracting falls

below levels that would be anticipated

absent discrimination. Moreover, the

extent of any credit awarded will be

adjusted annually to ensure that it is

closely matched to the need for a racebased remedial effort in a particular

industry.

Race will not be relied upon as the

sole factor in SDB procurement

decisions. The use of credits (instead of

set-asides) ensures that all firms have an

opportunity to compete and that in

order to obtain federal contracts

minority firms will have to demonstrate

that they are qualified to perform the

work.21

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 duration of the program is

inherently limited. As minority firms

are more successful in obtaining federal

contracts, reliance on race-based

mechanisms will decrease

automatically. When the effects of

discrimination have been eliminated, as

demonstrated by minority success in

obtaining procurement contracts,

reliance on race will terminate

automatically. The system as a whole

will be reexamined by the executive

branch at the end of two years and at

regular intervals thereafter. In addition,

the principal enactments that this

proposal implements, FASA and the

Department of Defense Authorization

Act, expire at the end of the fiscal year

2000. Congress will have to examine the

functioning of this system and make a

determination whether to extend the

authority to continue its operation.

Finally, the proposal avoids any

undue burden on nonbeneficiaries of

the program. As a practical matter, the

overwhelming percentage of federal

procurement money will continue to

flow, as it does now, to nonminority

businesses. Furthermore,
26050 Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices

1Adarand involved a constitutional challenge to

a Department of Transportation (‘‘DOT’’) program

that compensates prime contractors if they hire

subcontractors certified as small businesses

controlled by ‘‘socially and economically

disadvantaged’’ individuals. The legislation on

which the DOT program is based, the Small

Business Act, establishes a government-wide goal

for participation of such concerns at ‘‘not less than

5 percent of the total value of all prime contract and

subcontract awards for each fiscal year.’’ 15 U.S.C.

§ 644(g)(1). The Act further provides that members

of designated racial and ethnic minority groups are

presumed to be socially and economically

disadvantaged. Id. § 637(a)(5)(6), § 637(d)(2),(3). In

Adarand, the Supreme Court stated that the

presumption constitutes race-conscious action,

thereby triggering application of strict scrutiny. 115

S. Ct. at 2105.

2Adarand, 115 S. Ct. at 2117. The Court

emphasized that point in order to ‘‘dispel the

notion that strict scrutiny is ‘strict in theory, but

fatal in fact.’’’ Id. Seven of the nine justices of the

Court embraced the principle that it is possible for

affirmative action by the federal government to

meet strict scrutiny. This group included: (i) Justice

O’Connor and two other justices in the majority,

Chief Justice Rehnquist and Justice Kennedy; and

(ii) the four dissenting justices (Stevens, Souter,

Ginsburg, and Breyer). Only Justices Scalia and

Thomas, both of whom concurred in the result in

the case, advocated a position that approaches a

near blanket constitutional ban on affirmative

action.

3Adarand did not alter the principle that the

government may take race-conscious remedial

action in the absence of a formal judicial or

administrative determination that there has been

discrimination against individual members of

minorities groups (or minorities as a class). The test

is whether the government has a ‘‘strong basis in

evidence’’ for the conclusion that such action is

warranted. City of Richmond v. J.A. Croson Co., 488

U.S. 469, 500 (1989). Adarand also did not alter the

principle that the beneficiaries of race-conscious

remedial measures need not be limited to those

individuals who themselves demonstrate that they

have suffered some identified discrimination. See

Local 28, Sheet Metal Workers’ Int’l Ass’n v. EEOC,

478 U.S. 421, 482 (1986); Wygant v. Jackson Bd. of

Educ., 476 U.S. 267, 277–78 (1986) (plurality

opinion); id. at 287 (O’Connor, J., concurring).

4The term ‘‘federal procurement’’ refers to goods

and services that the federal government purchases

directly for its own use. This is to be distinguished

from programs in which the federal government

provides funds to state and local governments for

use in their procurement activities. As part of those

programs, Congress has authorized recipients of

federal funds to take remedial action in

procurement. Those programs are not the focus of

this memorandum. However, much of the evidence

discussed herein that supports the use of remedial

measures in the federal government’s own

procurement also supports the use of

congressionally-authorized remedial measures in

state and local procurement.

implementation of the benchmark

limitations will ensure that race-based

decisionmaking cannot result in

concentrations of minority contracting

in particular industries or regions and

will thereby limit the impact on

nonminorities.

The structure of affirmative action in

contracting set forth herein will not be

simple to implement and will

undoubtedly be improved through

further refinement. Agencies will have

to make judgments and observe

limitations in the use of race-conscious

measures, and make concentrated raceneutral efforts that are not required

under current practice. The Supreme

Court, however, has changed the rules

governing federal affirmative action.

This model responds to principles

developed by the Supreme Court and

lower courts in applying strict scrutiny

to race-based decisionmaking. The

challenge for the federal government is

to satisfy, within these newly-applicable

constitutional limitations, the

compelling interest in remedying the

effects of discrimination that Congress

has identified.

Michael C. Small,

Deputy Associate Attorney General.

Appendix—The Compelling Interest for

Affirmative Action in Federal

Procurement: A Preliminary Survey

Under the Supreme Court’s ruling last

year in Adarand Constructors, Inc. v.

Pen ̃ a, 115 S. Ct. 2097 (1995), strict

scrutiny applies to federal affirmative

action programs that provide for the use

of racial or ethnic criteria as factors in

procurement decisions in order to

benefit members of minority groups.

Such programs satisfy strict scrutiny if

they serve a ‘‘compelling interest,’’ and

are ‘‘narrowly tailored’’ to the

achievement of that interest. Strict

scrutiny is the most exacting standard of

constitutional review. It is the same

standard that courts apply when

reviewing laws that discriminate against

minority groups. The Supreme Court in

Adarand did not decide whether a

compelling interest is served by the

procurement program at issue in the

case (or by any other federal affirmative

action program), and remanded the case

to the lower courts, which had not

applied strict scrutiny.1 Nevertheless, a

strong majority of the Court—led by

Justice O’Connor, who wrote the

majority opinion—admonished that

even under strict scrutiny, affirmative

action by the federal government is

constitutional in appropriate

circumstances.2 Without spelling out in

precise terms what those circumstances

are, the Court stated that the

government has a compelling interest in

remedying ‘‘[t]he unhappy persistence

of both the practice and the lingering

effects of racial discrimination against

minority groups in this country.’’ 115 S.

Ct. at 2117.

At bottom, after Adarand, the

compelling interest test centers on the

nature and weight of evidence of

discrimination that the government

needs to marshal in order to justify raceconscious remedial action. It is clear

that the mere fact that there has been

generalized, historical societal

discrimination in the country against

minorities is an insufficient predicate

for race-conscious remedial measures;

the discrimination to be remedied must

be identified more concretely. The

federal government would have a

compelling interest in taking remedial

action in its procurement activities,

however, if it can show with some

degree of specificity just how ‘‘the

persistence of both the practice and the

lingering effects of racial

discrimination’’—to use Justice

O’Connor’s phrase in Adarand—has

diminished contracting opportunities

for members of racial and ethnic

minority groups.3

In coordinating the review of federal

affirmative action programs that the

President directed agencies to undertake

in light of Adarand, the Justice

Department has collected evidence that

bears on that inquiry. The evidence is

still being evaluated, and further

information remains to be collected. As

set forth below, that evidence indicates

that racially discriminatory barriers

hamper the ability of minority-owned

businesses to compete with other firms

on an equal footing in our nation’s

contracting markets. In short, there is

today a compelling interest to take

remedial action in federal procurement.4

The purpose of this memorandum is

to summarize the evidence that has been

assembled to date on the compelling

interest question. Part I of the

memorandum provides an overview of

the long legislative record that

underpins the acts of Congress that

authorize affirmative action measures in

procurement—a record that is entitled

to substantial deference from the courts,

given Congress’ express constitutional

power to identify and redress, on a

nationwide basis, racial discrimination

and its effects. The remaining sections

of the memorandum survey information

from various sources: (1) Congressional

hearings and reports that bear on the

problems that discrimination poses for

minority opportunity in our society, but

that are not strictly related to specific

legislation authorizing affirmative

action in government procurement; (2)

recent studies from around the country

that document the effects of racial

discrimination on the procurement

opportunities of minority-owned

businesses at the state and local level;

and (3) works by social scientists,

economists, and other academic

researchers on the manner in which the

various forms of discrimination act

together to restrict business
Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices 26051

5 It is well-established that the factual predicate

for a particular affirmative action measure is not

confined to the four corners of the legislative record

of the measure. See, e.g., Concrete Works v. City

and County of Denver, 36 F.3d 1513, 1520–22 (10th

Cir. 1994), cert. denied, 115 S. Ct. 1315 (1995);

Contractors Ass’n v. City of Philadelphia, 6 F.3d

990, 1004 (3d Cir. 1993); Coral Constr. Co. v. King

County, 941 F.2d 910, 920 (9th Cir. 1991), cert.

denied, 502 U.S. 1033 (1992).

6Congress has also adopted affirmative action

measures in federal procurement, as well as in

programs that fund the procurement activities of

state and local governments, that are intended to

assist women-owned businesses. At present, such

measures are subject to intermediate scrutiny, not

the Adarand strict scrutiny standard. Therefore,

they have not been the focus of the post-Adarand

review that the Justice Department is coordinating.

However, some of the evidence collected by the

Justice Department bears on the constitutional

justification for affirmative action programs for

women in government procurement. See, e.g.,

Interagency Committee on Women’s Business

Enterprise, Expanding Business Opportunities for

Women (1996); National Foundation for Women

Business Owners and Dunn & Bradstreet

Information Services, Women-Owned Businesses: A

Report on the Progress and Achievement of WomenOwned Enterprises—Breaking the Boundaries

(1995); Problems Facing Minority and WomenOwned Small Businesses in Procuring U.S.

Government Contracts: Hearing Before the

Subcomm. on Commerce, Consumer and Monetary

Affairs of the House Comm. on Government

Operations, 103d Cong., 2d Sess. (1994).

7See Croson, 488 U.S. at 488 (plurality opinion);

Fullilove v. Klutznick, 448 U.S. 448, 483 (1980)

(plurality opinion); id. at 500 (Powell, J.,

concurring); see also Adarand, 115 S. Ct. at 2114;

Metro Broadcasting, Inc. v. FCC, 497 U.S. 547, 563

(1990); id. at 605–06 (O’Connor, J., dissenting); cf.

Seminole Tribe of Florida v. Florida, 116 S. Ct.

1114, 1125 (1996) (reaffirming that broad grant of

remedial power under Section 5 of the Fourteenth

Amendment enables Congress to override state

sovereign immunity).

8See Croson, 488 U.S. at 490 (plurality opinion);

Fullilove, 448 U.S. at 476–78 (plurality opinion); id.

at 500 (Powell, J., concurring); Runyon v. McCrary,

427 U.S. 160, 179 (1976); see also Adarand, 115 S.

Ct. at 2126 (Stevens, J., dissenting); Metro

Broadcasting, 497 U.S. at 605 (O’Connor, J.,

dissenting).

9See Croson, 488 U.S at 492 (plurality opinion)

(‘‘It is beyond dispute that any public entity, state

or federal, has a compelling interest in assuring that

public dollars, drawn from the tax contributions of

all citizens, do not serve to finance the evil of

private prejudice.’’); see also Metro Broadcasting,

497 U.S. at 563–64; Fullilove, 448 U.S at 473–76

(plurality opinion).

10See Adarand, 115 S. Ct. at 2117 (Congress may

adopt affirmative action to remedy ‘‘both the

practice and the lingering effects of

discrimination’’). Accord id. at 2133 (Souter, J.,

dissenting) (government may act to redress effects

of discrimination ‘‘that would otherwise persist and

skew the operation of public systems even in the

absence of current intent to practice any

discrimination’’).

11Croson, 488 U.S. at 490, 504; Fullilove, 448 U.S.

at 502–03 (Powell, J., concurring).

12Congressional hearings on the subject from

1980 to the present include the following: The

Small Business Administration’s 8(a) Minority

Business Development Program: Hearing Before the

Senate Comm. on Small Business, 104th Cong., 1st

Sess. (1995); Discrimination in Surety Bonding:

Hearing Before the Subcomm. on Minority

Enterprise, Finance and Urban Development of the

House Comm. on Small Business, 103d Cong., 1st

Sess. (1993); Department of Defense: Federal

Programs to Promote Minority Business

Development: Hearing Before the Subcomm. on

Minority Enterprise, Finance and Urban

Development of the House Comm. on Small

Business, 103d Cong., 1st Sess. (1993); SBA’s

Minority Business Development Program: Hearing

Before the House Comm. on Small Business, 103d

Cong., 1st Sess. (1993); Problems Facing Minority

and Women-Owned Small Businesses in Procuring

U.S. Government Contracts: Hearing Before the

Subcomm. on Commerce, Consumer and Monetary

Affairs of the House Comm. on Government

Operations, 103d Cong., 1st Sess. (1993); Fiscal

Economic and Social Crises Confronting American

Cities: Hearings Before the Senate Comm. on

Banking, Housing and Urban Affairs, 102d Cong.,

2d Sess. (1992); Small Disadvantaged Business

Issues: Hearing Before the Investigations Subcomm.

of the House Comm. on Armed Services, 102d

Cong., 1st Sess. (1991); Federal Minority Business

Programs: Hearing Before the House Comm. on

Small Business, 102d Cong., 1st Sess. (1991); To

Amend the Civil Rights Act of 1964: Permitting

Minority Set-Asides: Hearing Before the Senate

Comm. on Governmental Affairs, 101st Cong., 2d

Sess. (1990); City of Richmond v. J.A. Croson:

Impact and Response: Hearing Before the

Subcomm. on Urban and Minority-Owned Business

Development of the Senate Comm. of Small

Business, 101st Cong., 2d Sess. (1990); Minority

Business Set-Aside Programs: Hearing Before the

House Comm. on the Judiciary, 101st Cong., 1st

Sess. (1990); Minority Construction Contracting:

Hearing Before the Subcomm. on SBA, the General

Economy and Minority Enterprise Development of

the House Comm. on Small Business, 101st Cong.,

1st Sess. (1989); Surety Bonds and Minority

Contractors: Hearing Before the Subcomm. on

Commerce, Consumer Protection and

Competitiveness of the House Comm. on Energy

and Commerce, 100th Cong., 2d Sess. (1988);

Twenty Years after the Kerner Commission: The

Need for a New Civil Rights Agenda: Hearing Before

the Subcomm. on Civil and Constitutional Rights of

the House Comm. on the Judiciary, 100th Cong., 2d

Sess. (1988); Disadvantaged Business Set-Asides in

Transportation Construction Projects: Hearings

Before the Subcomm. on Procurement, Innovation

and Minority Enterprise Development of the House

Comm. on Small Business, 100th Cong., 2d Sess.

(1988); Barriers to Full Minority Participation in

Federally Funded Highway Projects: Hearings

Before a Subcomm. of the House Comm. on

Government Operations, 100th Cong., 2d Sess.

(1988); The Small Business Competitiveness

Demonstration Program Act of 1988: Hearings on S.

1559 Before the Senate Comm. on Small Business,

100th Cong., 2d Sess. (1988); Small Business

Problems: Hearings Before the House Comm. on

Small Business, 100th Cong., 1st Sess. (1987);

Continued

opportunities for members of racial and

ethnic minority groups.5

All told, the evidence that the Justice

Department has collected to date is

powerful and persuasive. It shows that

the discriminatory barriers facing

minority-owned businesses are not

vague and amorphous manifestations of

historical societal discrimination.

Rather, they are real and concrete, and

reflect ongoing patterns and practices of

exclusion, as well as the tangible,

lingering effects of prior discriminatory

conduct.6

It is important to emphasize that, even

though the government has a

compelling interest in taking raceconscious remedial measures in its

procurement, their use must be limited.

Under the requirements of the ‘‘narrow

tailoring’’ prong of strict scrutiny, the

federal government may only employ

such measures to the extent necessary to

serve the compelling interest in

remedying the impact of discrimination

on minority contracting opportunity.

The Justice Department’s proposed

reforms to affirmative action in federal

procurement (to which this

memorandum is attached) are intended

to target race-conscious remedial

measures to markets in which the

evidence indicates that discrimination

continues to impede the participation of

minority firms in contracting. Thus, the

proposal seeks to ensure that affirmative

action in federal procurement operates

in a flexible, fair, limited, and careful

manner, and hence will satisfy the

requirements of narrow tailoring.

I. Survey of the Legislative Record

In evaluating the evidentiary

predicate for affirmative action in

federal procurement, it is highly

significant that the measures have been

authorized by Congress, which has the

unique and express constitutional

power to pass laws to ensure the

fulfillment of the guarantees of racial

equality in the Thirteenth and

Fourteenth Amendments.7 These

explicit constitutional commands vest

Congress with the authority to remedy

discrimination by private actors, as well

as state and local governments.8

Congress may also exercise its

constitutionally grounded spending and

commerce powers to ensure that

discrimination in our nation is not

inadvertently perpetuated through

government procurement practices.9 In

exercising its remedial authority,

Congress need not target only deliberate

acts of discrimination. It may also strive

to eliminate the effects of discrimination

that continue to impair opportunity for

minorities, even in the absence of

ongoing, intentional acts of

discrimination.10 Furthermore, in

combatting discrimination and its

effects, Congress has the latitude to

develop national remedies for national

problems. Congress need not make

findings of discrimination with the

same degree of precision as do state or

local governments. Nor is it obligated to

make findings of discrimination in

every industry or region that may be

affected by a remedial measure.11

Congress has repeatedly examined the

problems that racial discrimination

poses for minority-owned businesses. A

complete discussion of the entire record

of Congress in this area is beyond the

scope of this memorandum.12 The
26052 Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices

Minority Business Development Act: Hearing Before

the Subcomm. on Procurement, Innovation and

Minority Enterprise Development of the House

Comm. on Small Business, 100th Cong., 1st Sess.

(1987); A Bill to Reform the Capital Ownership

Development Program: Hearings on H.R. 1807

Before the Subcomm. on Procurement, Innovation

and Minority Enterprise Development of the House

Comm. on Small Business, 100th Cong., 1st Sess.

(1987); To Present and Examine the Result of a

Survey of the Graduates of the Small Business

Administration Section 8(a) Minority Business

Development Program: Hearings Before the Senate

Comm. on Small Business, 100th Cong., 1st Sess.

(1987); Minority Enterprise and General Small

Business Problems: Hearings Before the Subcomm.

on SBA and SBIC Authority, Minority Enterprise

and General Small Business Problems of the Senate

Comm. on Small Business, 99th Cong., 2d Sess.

(1986); The State of Hispanic Small Business in

America: Hearings Before the Subcomm. on SBA

and SBIC Authority, Minority Enterprise and

General Small Business Problems of the House

Comm. on Small Business, 99th Cong., 1st Sess.

(1985); Federal Contracting Opportunities for

Minority and Women-Owned Businesses: An

Examination of the 8(d) Subcontracting Program:

Hearings Before the Senate Comm. on Small

Business, 98th Cong., 1st Sess. (1983); Minority

Business and Its Contribution to the United States

Economy: Hearing Before the Senate Comm. on

Small Business, 97th Cong., 2d Sess. (1982); Small

Business and the Federal Procurement System:

Hearings Before the Subcomm. on General

Oversight of the House Comm. on Small Business,

97th Cong., 1st Sess. (1981); Small and Minority

Business in the Decade of the 1980’s (Part 1):

Hearings Before the House Comm. on Small

Business, 97th Cong., 1st Sess. (1981); Small

Business and the Federal Procurement System:

Hearings Before the Subcomm. on General

Oversight of the House Comm. on Small Business,

97th Cong., 1st Sess. (1981); To Amend the Small

Business Act to Extend the Current SBA 8(a) Pilot

Program: Hearings on H.R. 5612 Before the Senate

Select Comm. on Small Business, 96th Cong., 2d

Sess. (1980).

13Affirmative Action Review: Report to the

President 55 (1995).

14See Croson, 488 U.S. at 488–90 (plurality

opinion); Fullilove, 448 U.S. at 472–73 (plurality

opinion); id. at 508–10 (Powell, J., concurring); see

also Metro Broadcasting, 497 U.S. at 563; id. at 605–

07 (O’Connor, J., dissenting). This principle was not

disturbed by the Supreme Court’s ruling in

Adarand; thus, it continues to have force, even

under strict scrutiny. See Adarand, 115 S. Ct. at

2114; id. at 2126 (Stevens, J., dissenting); id. at 2133

(Souter, J., dissenting).

15 Fullilove, 448 U.S. at 467 (plurality opinion).

16That program targets federal procurement

opportunities for small firms owned and controlled

by individuals who are socially and economically

disadvantaged. See 15 U.S.C. § 637(a). Members of

certain minority groups are presumed to be socially

disadvantaged. 13 C.F.R. Pt. 124.

17 15 U.S.C. § 644(g).

18H.R. Rep. No. 468, 94th Cong., 1st Sess. 2

(1975).

19S. Rep. No. 1070, 95th Cong., 2d Sess. 14

(1978). See also H.R. Rep. No. 949, 95th Cong., 2d

Sess. 8 (1978).

20Pub. L. No. 95–507, § 201, 92 Stat. 1757, 1760

(1978). See 124 Cong. Rec. 35,204 (1978) (statement

of Sen. Weicker) (commenting on the introduction

of the conference report on the 8(a) legislation and

observing that the report recognizes the existence of

a ‘‘pattern of social and economic discrimination

that continues to deprive racial and ethnic

minorities of the opportunity to participate fully in

the free enterprise system’’). In the same year it

passed the 8(a) legislation, Congress considered an

additional bill that sought to target federal

assistance to minority-owned firms. In introducing

that measure, Senator Dole remarked that ‘‘minority

businessmen can compete equally when given

equal opportunity. One of the most important steps

this country can take to insure equal opportunity

for its hispanic, black and other minority citizens

is to involve them in the mainstream of our free

enterprise system.’’ 124 Cong. Rec. 7681 (1978).

21H.R. Rep. No. 460, 100th Cong., 1st Sess. 16,

18 (1987). See 133 Cong. Rec. 37,814 (1987)

(statement of Sen. Bumpers) (discussing proposed

revisions to 8(a) program and commenting that

minorities ‘‘continue to face discrimination in

access to credit and markets’’); id. at 33,320

(statement of Rep. Conte) (discussing proposed

revisions to 8(a) program and commenting that

effects of discrimination continued to be felt, and

that 8(a) amendments were needed to ‘‘create a

workable mechanism to finally redress past

discriminatory practices’’). See generally S. Rep.

No. 394, 100th Cong., 2d Sess. (1988); The Small

Business Competitiveness Demonstration Program

Act of 1988: Hearings on S. 1559 Before the Senate

Comm. on Small Business, 100th Cong., 2d Sess.

(1988); Small Business Problems: Hearings Before

the House Comm. on Small Business, 100th Cong.,

1st Sess. (1987); Minority Business Development

Act: Hearing Before the Subcomm. on Procurement,

Innovation and Minority Enterprise Development of

the House Comm. on Small Business, 100th Cong.,

1st Sess. (1987); A Bill to Reform the Capital

Ownership Development Program: Hearings on H.R.

1807 Before the Subcomm. on Procurement,

Innovation and Minority Enterprise Development of

the House Comm. on Small Business, 100th Cong.,

1st Sess. (1987); To Present and Examine the Result

of a Survey of the Graduates of the Small Business

Administration Section 8(a) Minority Business

Development Program: Hearings Before the Senate

Small Business Comm., 100th Cong., 1st Sess.

(1987); Minority Enterprise and General Small

Business Problems: Hearings Before the Subcomm.

on SBA and SBIC Authority, Minority Enterprise

and General Small Business Problems of the Senate

Comm. on Small Business, 99th Cong., 2d Sess.

(1986); The State of Hispanic Small Business in

America: Hearings Before the Subcomm. on SBA

and SBIC Authority, Minority Enterprise and

General Small Business Problems of the House

Comm. on Small Business, 99th Cong., 1st Sess.

(1985).

theme that emanates from this record is

unequivocal: Congress has adopted raceconscious remedial measures in

procurement directly in response to its

findings that ‘‘widespread

discrimination, especially in access to

financial credit, has been an

impediment to the ability of minorityowned business to have an equal chance

at developing in our economy.’’ 13

Furthermore, Congress has recognized

that expanding opportunities for

minority-owned businesses in

government procurement helps to bring

into mainstream public contracting

networks firms that otherwise would be

excluded as a result of discriminatory

barriers. In light of Congress’ expansive

remedial charter, it is a fundamental

principle that courts must accord a

significant degree of deference to those

findings and the attendant judgment of

the Congress that remedial measures in

government procurement are

warranted.14

The relevant congressional findings

encompass a broad range of problems

confronting minority-owned businesses.

They include ‘‘deficiencies in working

capital, inability to meet bonding

requirements, disabilities caused by an

inadequate ‘track record,’ lack of

awareness of bidding opportunities,

unfamiliarity with bidding procedures,

pre-selection before the formal

advertising process, and the exercise of

discretion by government procurement

officers to disfavor minority

businesses.’’ 15

For example, in a report that led to

the legislation that created what has

become known as the ‘‘8(a)’’ program at

the Small Business Administration,16

and that established goals for

participation in procurement at each

federal agency by firms owned and

controlled by socially and economically

disadvantaged individuals (SDB’s),17 a

congressional committee found that the

difficulties facing minority-owned

businesses were ‘‘not the result of

random chance.’’ Rather, the committee

stated, ‘‘past discriminatory systems

have resulted in present economic

inequities.’’ 18 In connection with the

same legislation, another committee

concluded that a pattern of

discrimination ‘‘continues to deprive

racial and ethnic minorities * * * of the

opportunity to participate fully in the

free enterprise system.’’ 19 Eventually,

when it adopted the 8(a) legislation,

Congress found that minorities ‘‘have

suffered the effects of discriminatory

practices or similar invidious

circumstances over which they have no

control,’’ and that ‘‘it is in the national

interest to expeditiously ameliorate’’ the

effects of this discrimination through

increased opportunities for minorities in

government procurement.20

When revamping the 8(a) program in

the late 1980s, Congress again found

that ‘‘discrimination and the present

effects of past discrimination’’

continued to hinder minority business

development. Congress concluded that

the program required bolstering so that

it would better ‘‘redress the effects of

discrimination on entrepreneurial

endeavors.’’ 21

In the same vein are congressional

findings that underpin legislation that

sets agency-specific goals for

participation by disadvantaged

businesses—including minority-owned

firms—in procurement and grant

programs administered by those

agencies. For instance, in

recommending the continued use of

such goals as part of programs through

which the Department of Transportation

provides funds to state and local

governments for use in highway and
Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices 26053

22 S. Rep. No. 4, 100th Cong., 1st Sess. 11 (1987).

The DoT goals were initially established in the

Surface Transportation Assistance Act of 1982, Pub.

L. No. 97–424, § 105(f), 96 Stat. 2097 (1982). They

were continued in the Surface Transportation and

Uniform Relocation Assistance Act of 1987

(‘‘STURAA’’), Pub. L. No. 100–17, § 106(c)(1), 101

Stat. 132, 145 (1987). Congress held further hearings

on the subject after passage of STURAA. See

Minority Construction Contracting: Hearing Before

the Subcomm. on SBA, the General Economy and

Minority Enterprise Development of the House

Comm. on Small Business, 101st Cong., 1st Sess.

(1989); Disadvantaged Business Set-Asides in

Transportation Construction Projects: Hearings

Before the Subcomm. on Procurement, Innovation

and Minority Enterprise Development of the House

Comm. on Small Business, 100th Cong., 2d Sess.

(1988); Barriers to Full Minority Participation in

Federally Funded Highway Construction Projects:

Hearing Before a Subcomm. of the House Comm. on

Government Operations, 100th Cong., 2d Sess.

(1988). Congress subsequently reauthorized the

goals in the Intermodal Surface Transportation

Efficiency Act of 1991, Pub. L. No. 102–240,

§ 1003(b), 105 Stat. 1914, 1919 (1991). See 137

Cong. Rec. S7571 (June 12, 1991) (statement of Sen.

Simpson) (expressing support for continuation of

disadvantaged business program at Transportation

Department).

Congress has established comparable initiatives

to encourage disadvantaged business participation

in grant programs administered by the

Environmental Protection Agency (EPA). For

example, recipients of grants awarded by EPA

under the Clean Air Act are required to set

disadvantaged business goals. See 42 U.S.C. § 7601

note; see also 42 U.S.C. § 4370d (establishing an

SDB goal for recipients of EPA funds used in

support of certain environmental-related projects);

H.R. Rep. No. 226, 102 Cong., 1st Sess. 48 (1991).

23 10 U.S.C. § 2323.

24See H.R. Rep. No. 332, 99th Cong., 1st Sess.

139–40 (1985) (if disadvantaged firms had been able

to ‘‘participate in the ‘early’ development of major

Defense systems, they would have had an

opportunity to gain the expertise required to bid on

such contracts’’); see also H.R. Rep. No. 450, 99th

Cong., 1st Sess. 179 (1985); 131 Cong. Rec. 17,445–

17,448 (1985); H.R. Rep. No. 1086, 98th Cong., 2d

Sess. 100–01 (1984).

25 See 131 Cong. Rec. 17,447 (1985) (statement of

Rep. Conyers) (affirmative action needed to break

down ‘‘buddy-buddy contracting’’ at the Defense

Department, ‘‘which has the largest procurement

program in the Federal Government’’); id.

(statement of Rep. Schroeder) (an ‘‘old boy’s club’’

in Defense Department contracting excludes many

minorities from business opportunities); see also

Department of Defense: Federal Programs to

Promote Minority Business Development: Hearing

Before the Subcomm. on Minority Enterprise,

Finance and Urban Development of the House

Comm. on Small Business, 103d Cong., 1st Sess. 49

(1993) (statement of Rep. Roybal-Allard) (‘‘Old

attitudes and old habits die hard * * *. Defense

contracting has, traditionally, been a closed shop.

Only a select few need apply. Since the passage of

the minority contracting opportunity law, some

progress has been made.’’); H.R. Rep. No. 1086, 98th

Cong., 2d Sess. 100–101 (1984) (low level of

participation by disadvantaged firms in Defense

Department contracting indicated a need to expand

procurement opportunities at that agency for such

firms).

26H.R. Rep. No. 870, 103d Cong., 2nd Sess. 5

(1994).

27 140 Cong. Rec. H9242 (Sept. 20, 1994)

(statement of Rep. Dellums).

28Beginning with the Small Business Act of 1953,

Congress has authorized numerous programs to

‘‘aid, counsel, assist, and protect * * * the interests

of small-business concerns’’ and ‘‘insure that a fair

proportion of the total purchases and contracts for

supplies and services for the government be placed

with small-business enterprises.’’ Pub. L. No. 163,

§ 202, 67 Stat. 232 (1953). After recognizing in the

1960s the specific problems facing minority owned

businesses, Congress attempted to address them

through race-neutral measures. For example, in

1971, Congress amended the Small Business

Investment Act to create a surety bond guarantee

program to assist small businesses that have trouble

obtaining traditional bonding. In 1972, Congress

created a new class of small business investment

companies to provide debt and equity capital to

small businesses owned by socially and

economically disadvantaged individuals. And over

the years, Congress has continuously reviewed and

strengthened programs to assist all small businesses

through the Small Business Act. See e.g. Pub. L. No.

93–386, 88 Stat. 742 (1974); Pub. L. No. 94–305, 90

Stat. 663 (1976); Pub. L. No. 95–89, 91 Stat. 553

(1977).

29Croson, 488 U.S. at 550 (Marshall, J.,

dissenting). Accord Fullilove, 448 U.S. at 467

(plurality opinion); id. at 511 (Powell, J.,

concurring); see also City of Richmond v. J.A.

Croson: Impact and Response: Hearing Before the

Subcomm. on Urban and Minority-Owned Business

Development of the Senate Comm. on Small

Business, 101st Cong., 2d Sess. 48 (1990) (statement

of Ray Marshall); H.R. Rep. No. 468, 94th Cong., 1st

Sess. 32 (1975).

30 It bears emphasizing that race-neutral programs

for small businesses are important and necessary

components of an overall congressional strategy to

enhance opportunity for small businesses owned by

minorities. For example, Congress has authorized

contracting set asides for small businesses

generally—minority and nonminority alike—as well

as a host of bonding, lending, and technical

assistance programs that are open to all small

businesses. See 15 U.S.C. § 631 et seq.

31The Meaning and Significance for Minority

Businesses of the Supreme Court Decision in the

City of Richmond v. J.A. Croson Co.: Hearing Before

the Legislation and National Security Subcomm. of

the House Comm. on Government Operations, 101st

Cong., 2d Sess. 57, 62–90 (1990); City of Richmond

v. J.A. Croson: Impact and Response: Hearing

Before the Subcomm. on Urban and MinorityOwned Business Development of the Senate Comm.

on Small Business, 101st Cong., 2d Sess. 39–44

(1990) (statement of Andrew Brimmer).

transit projects, a congressional

committee observed that it had

considered extensive testimony and

evidence, and determined that this

action was ‘‘necessary to remedy the

discrimination faced by socially and

economically disadvantaged persons

attempting to compete in the highway

industry and mass transit construction

industry.’’ 22

Congress has also established goals for

SDB participation in procurement at the

Defense Department, and authorized

that agency to use specific forms of

remedial measures to achieve the

goals.23 The Defense Department

program too is predicated on findings

that opportunities for minority-owned

businesses had been impaired.24 More

fundamentally, in establishing the

program, Congress recognized that

fostering contracting opportunities for

minority-owned businesses at the

Defense Department is crucial, because

that agency alone typically accounts for

more than two-thirds of the federal

government’s procurement activities.

Therefore, affirmative action efforts at

the Defense Department enable

minority-owned businesses to

demonstrate their capabilities to

contracting officers at that important

procuring agency and to the vast

number of nonminority firms that

provide goods and services to the

Pentagon. In turn, minority-owned

businesses can begin to break into the

contracting networks from which they

typically have been excluded.25

Opportunities for minority-owned

businesses to participate in Defense

Department procurement increased

following the introduction of the

affirmative action program there in the

late 1980s. However, the effects of

discrimination were still felt in federal

procurement generally. Based on

information it obtained through a 1993

hearing, a congressional committee

reported the following year that this

‘‘lack of opportunity results primarily

from discriminatory or economic

conditions,’’ and that ‘‘improving access

to government contracts and

procurement offers a significant

opportunity for business development

in many industry sectors.’’ 26 In the

Federal Acquisition Streamlining Act of

1994, Congress saw fit to make available

to all agencies the remedial tools that

previously had been granted to the

Defense Department, in order to

‘‘improv[e] access to contracting

opportunities for * * * minority-owned

small businesses.’’ 27

Through its recurring assessments of

the implications of discrimination

against minority-businesses, Congress

has concluded that, standing alone,

legislation that simply proscribes racial

discrimination is an inadequate remedy.

Congress also has attempted to redress

the problems facing minority businesses

through race-neutral assistance to all

small businesses.28 Congress has

determined, however, that those

remedies, by themselves, are

‘‘ineffectual in eradicating the effects of

past discrimination,’’ 29 and that raceconscious measures are a necessary

supplement to race-neutral ones.30

Finally, based on its understanding of

what happens at the state and local level

when use of affirmative action is

severely curtailed or suspended

outright, Congress has concluded that

minority participation in government

procurement tends to fall dramatically

in the absence of at least some kind of

remedial measures, the result of which

is to perpetuate the discriminatory

barriers that have kept minorities out of

the mainstream of public contracting.31
26054 Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices

32 Small and Minority Business in the Decade of

the 1980’s (Part 1): Hearings Before the House

Comm. on Small Business, 97th Cong., 1st Sess. 4

(1981). See also H.R. Rep. No. 870, 103d Cong., 2d

Sess. 5 (1994).

33 United States Commission on Minority

Business Development, Final Report 2–6 (1992).

These statistics are based on 1987 census data, the

most recent full data available regarding the status

of minority-owned businesses. Preliminary reports

from 1992 census data reveal that the status of

minority firms has not significantly improved. For

instance, African Americans are 12 percent of the

population but, in 1992, owned only 3.6% of all

businesses (up from 3.1% in 1987) and received just

1 percent of all U.S. business receipts (which is the

same level as in 1987).

34 Id. at 3.

35 Id. at 4.

36 Id. at 60.

37 See Division of Minority and Women’s

Business Development, Opportunity Denied: A

Study of Racial and Sexual Discrimination Related

to Government Contracting in New York State,

Appendix D, 53–75 (1992) (finding that minorities

in New York were 20% less likely to enter selfemployment than similarly situated whites);

Timothy Bates, Self-employment Entry Across

Industry Groups, Journal of Business Venturing,

Vol. 10, at 143–56 (1995).

38 Timothy Bates, Self-employment Entry Across

Industry Groups, Journal of Business Venturing,

Vol. 10, 149 (1995).

39 Samuel Doctors & Anne Huff, Minority

Enterprise and the President’s Council 4–6 (1973)

(quoted in Tuchfarber et al., City of Cincinnati:

Croson Study 150 (1992)).

40H.R. Rep. No. 870, 103d Cong., 2d Sess. 5

(1994).

The foregoing is just a sampling from

the legislative record of congressionallyauthorized affirmative action in

government procurement. The

remainder of the memorandum surveys

evidence from other sources regarding

the impact of discrimination on the

ability of minority-owned businesses to

compete equally in contracting markets.

This evidence confirms Congress’

determination that race-conscious

remedial action is needed to correct that

problem.

II. Discriminatory Barriers to Minority

Contracting Opportunities

Developing a business that can

successfully compete for government

contracts depends on many factors. To

begin with, technical or professional

experience, which is typically attained

through employment and trade union

opportunities, is an important

prerequisite to establishing any

business. Second, obtaining financing is

necessary to the formation of most

businesses. The inability to secure the

twin building blocks of experience and

financing may prevent a business from

ever getting off the ground. Some

individuals overcome these initial

obstacles and are able to form

businesses. However, they subsequently

may be shut out from important

contracting and supplier networks,

which can hinder their ability to

compete effectively for contract

opportunities. And further barriers may

be encountered when a business tries to

secure bonding and purchase supplies

for projects—critical requirements for

many major government contracts.

While almost all new or small

businesses find it difficult to overcome

these barriers and become successful,

these problems are substantially greater

for minority-owned businesses.

Empirical studies and reports issued by

congressional committees, executive

branch commissions, academic

researchers, and state and local

governments document the widespread

and systematic impact of discrimination

on the ability of minorities to carry out

each of the steps that are required for

participation in government contracting.

This evidence of discrimination can be

grouped into two categories:

(i) evidence showing that

discrimination works to preclude

minorities from obtaining the

experience and capital needed to form

and develop a business, which

encompasses discrimination by trade

unions and employers and

discrimination by lenders;

(ii) evidence showing that

discriminatory barriers deprive existing

minority firms of full and fair

contracting opportunities, which

encompasses discrimination by private

sector customers and prime contractors,

discrimination by business networks,

and discrimination by suppliers and

bonding providers.

The following provides an overview

of both categories of evidence.

A. Effects of Discrimination on the

Formation and Development of Minority

Businesses

A primary objective of affirmative

action in procurement is to encourage

and support the formation and

development of minority-owned firms

as a remedy to the ‘‘racism and other

barriers to the free enterprise system

that have placed a heavier burden on

the development and maturity of

minority businesses.’’ 32 That these

efforts are necessary is evident from the

recent findings by the U.S. Commission

on Minority Business Development,

appointed by President Bush. The

Commission amassed a large amount of

evidence demonstrating the marginal

position that minority-owned

businesses hold in our society:

• Minorities make up more than 20

percent of the population; yet, minorityowned businesses are only 9 percent of

all U.S. businesses and receive less than

4 percent of all business receipts.33

• Minority firms have, on average,

gross receipts that are only 34% of that

of nonminority firms.34

• The average payroll for minority

firms with employees is less than half

that of nonminority firms with

employees.35

President Bush’s Commission

undertook an extensive analysis of the

barriers that face minority-owned

business formation and development. It

concluded that ‘‘minorities are not

underrepresented in business because of

choice or chance. Discrimination and

benign neglect is the reason why our

economy has been denied access to this

vital resource.’’ 36 Further evidence of

the effect of discrimination on minority

business development is revealed in

recent studies showing that minorities

are significantly less likely than whites

to form their own business—even after

controlling for income level, wealth,

education level, work experience, age

and marital status.37 These findings

strongly indicate that minorities ‘‘face

barriers to business entry that

nonminorities do not face.’’ 38

Since the inception of federal

affirmative action initiatives in

procurement, policy makers have

recognized that there are two principal

barriers to the formation and

development of minority-owned

businesses: limited technical experience

and limited financial resources.

President Nixon’s Advisory Council on

Minority Business Enterprise identified

these barriers in 1973 when it reported

that ‘‘a characteristic lack of financial

and managerial resources has impaired

any willingness to undertake enterprise

and its inherent risk.’’ 39 Two decades

later, a congressional committee found

that minorities continue to have ‘‘fewer

opportunities to develop business skills

and attitudes, to obtain necessary

resources, and to gain experience,

which is necessary for the success of

small businesses in a competitive

environment.’’ 40 Discrimination in two

sectors of the national economy

accounts, at least in part, for the

diminished opportunity: discrimination

by trade unions and employers, which

has prevented minorities from garnering

crucial technical skills; and

discrimination by lenders, which has

prevented minorities from garnering

needed capital.

1. Discrimination by Trade Unions and

Employers

President Nixon’s Advisory Council

on Minority Business Enterprise

determined that ‘‘the lack of

opportunity to participate in managerial

technical training has severely restricted

the supply of [minority] entrepreneurs,
Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices 26055

41 Samuel Doctors & Anne Huff, Minority

Enterprise and the President’s Council 4–6 (1973)

(quoted in Tuchfarber et al., City of Cincinnati:

Croson Study 150 (1992)).

42 Affirmative Action Review: Report to the

President 7 (1995).

43 See, e.g., Joseph Pierce, Negro Business and

Business Education (1947); Andrew Brimmer, The

Economic Potential of Black Capitalism, Public

Policy Vol. 19, No. 2, at 289–308 (1971); Kent

Gilbreath, Red Capitalism: An Analysis of the

Navajo Economy (1973).

44 S. Rep. No. 872, 88th Cong., 1st Sess. 1 (1964).

See, e.g., Brimmer & Marshall, Public Policy and

Promotion of Minority Economic Development: City

of Atlanta and Fulton County, Georgia, Pt. VII, 11–

17 (1990) (in 1963, minorities were prohibited from

joining Atlanta unions representing plumbers,

electricians, steel workers and bricklayers); TEM

Associates, Minority/Women Business Study:

Revised Final Report, Phase I, Volume I 3–13 (‘‘In

1963, not one of the 1,000 persons in

apprenticeship training in Dade County was Black,

and the Miami Sheet Metal Workers local, like most

other trade unions, was all white.’’).

45 United States v. Iron Workers Local 86, 443

F.2d 544, 548 (9th Cir.) cert. denied, 404 U.S. 984

(1971). See also Hameed v. International Ass’n of

Bridge, Structural & Ornamental Iron Workers, 637

F.2d 506 (8th Cir. 1980) (selection criteria,

including aptitude test, and the requirement of a

high school diploma as a condition of eligibility

were discriminatory).

46 United States v. Iron Workers Local 86, 443

F.2d 544, 548 (9th Cir.) (differential application and

admissions requirements between whites and

blacks; spurious reasons given for rejections of

blacks), cert. denied, 404 U.S. 984 (1971); Sims v.

Sheet Metal Workers Int’l Ass’n, 489 F.2d 1023 (6th

Cir. 1973) (union waived requirements for white

applicants).

47 United States v. United Bhd. of Carpenters and

Joiners of America, 457 F.2d 210, 215 (7th Cir.) cert.

denied, 409 U.S. 851 (1972) (family relation

requirement excluded minorities from Carpenters

trade); United States v. International Ass’n of

Bridge, Structural and Ornamental Iron Workers,

438 F.2d 679, 683 (7th Cir.) (requiring family

relationships between new and existing members

‘‘effectively precluded non-white membership’’)

cert. denied, 404 U.S. 830 (1971); Asbestos Workers,

Local 53 v. Vogler, 407 F.2d 1047 (5th Cir. 1969)

(rule restricting membership to sons or close

relatives of current members perpetuated the effect

of past exclusion of minorities).

48 Jaynes Associates, Minority and Women’s

Participation in the New Haven Construction

Industry: A Report to the City of New Haven 24

(1989) (citing findings of President’s Commission

on Equal Opportunity).

49 Steve Askin & Edmund Newton, Blood, Sweat

and Steel, Black Enterprise, Vol. 14, at 42 (1984).

50 Department of Labor Memorandum from

Arthur Fletcher to All Agency Heads (1969) (cited

in Affirmative Action Review: Report to the

President 11 (1995)) (introducing the ‘‘Philadelphia

Plan’’ requiring the use of affirmative action goals

and timetables in construction, Secretary Fletcher

noted that ‘‘equal employment opportunity in these

trades in the Philadelphia area is still far from a

reality. * * * We find, therefore, that special

measures are required to provide equal opportunity

in these seven trades’’).

51 See Pennsylvania v. Operating Eng’rs, Local

542, 469 F. Supp. 329, 339 (E.D. Pa. 1978) (unions

held liable for racial discrimination in employee

referral procedures and practices); Waldinger &

Bailey, The Continuing Significance of Race: Racial

Conflict and Racial Discrimination in Construction,

Politics and Society, Vol. 19, No. 3, at 299 (1991)

(‘‘Despite rules and formal procedures, informal

relationships still dominate the union sector’s

employment processes.’’); Edmund Newton, Steel,

The Union Fiefdom, Black Enterprise, Vol. 14, at 46

(1984) (discrimination in operation of hiring halls

‘‘operated as impenetrable barriers’’ to minority job

seekers). See generally Barbara Lindeman Schlei &

Paul Grossman, Employment Discrimination Law

619–28 (1983).

52 United Steelworkers of Am. v. Weber, 443 U.S.

193, 198 n. 1 (1979).

53 Taylor v. United States Dept. of Labor, 552 F.

Supp. 728, 734 (E.D. Pa. 1982). See Minority

Business Participation in Department of

Transportation Projects: Hearing Before a

Subcomm. of the House Comm. on Government

Operations, 99th Cong., 1st Sess. 201 (1985)

(testimony of James Haughton) (minority

contractors continue to ‘‘suffer[] heavily because

they have been victims to that discrimination as

practiced by the unions’’); Division of Minority and

Women’s Business Development, Opportunity

Denied!: A Study of Racial and Sexual

Discrimination Related to Government Contracting

in New York State 41 (1992) (‘‘At least seven reports

were issued by federal, state and city commissions

and agencies between 1963 and 1982 documenting

the pattern of racial exclusion from New York’s

skilled trade unions by constitution and by-law

provisions, member sponsorships rules, subjective

interview tests and other techniques, as well as the

complicity of construction contractors and the

acquiescence of government agencies in those

practices.’’).

54 478 U.S. 421 (1986)

55 Id. at 476.

managers and technicians.’’ 41 A history

of discrimination by unions and

employers helps to explain this

unfortunate phenomenon.

Prior to the civil rights

accomplishments of the 1960s, labor

unions and employers were virtually

free to practice overt racial

discrimination. Minorities were

segregated into menial, low wage

positions, leaving no minority managers

or white collar workers in most sectors

of our economy. Trade unions, which

controlled training and job placement in

many skilled trades, commonly barred

minorities from membership. As a

result, ‘‘whole industries and categories

of employment were, in effect, all-white,

all-male.’’ 42 These practices left

minorities unable to gain the experience

needed to operate all but the smallest

businesses, primarily consisting of small

‘‘mom and pop’’ stores with no

employees, minimal revenue, located in

segregated neighborhoods, and serving

an exclusively minority clientele.43

Discrimination by unions has been

recognized as a major factor in

preventing minorities from obtaining

employment opportunities in the skilled

trades. Title VII of the Civil Rights Act

of 1964 (prohibiting employment

discrimination) was passed, in part, in

response to Congress’s desire to halt

‘‘the persistent problems of racial and

religious discrimination or segregation

* * * by labor unions and professional,

business, and trade associations.’’ 44

Even after Title VII went on the books,

however, unions precluded minorities

from membership through a host of

discriminatory policies, including the

use of ‘‘tests and admissions criteria

which [have] no relation to on-the-job

skills and which [have] a differential

impact’’ on minorities; 45 discriminating

in the application of admission

criteria; 46 and imposing admission

conditions, such as requiring that new

members have a family relationship

with an existing member, that locked

minorities out of membership

opportunities.47 As a result, unions

remained virtually all-white for some

time after the enactment of Title VII:

• In 1965, the President’s

Commission on Equal Opportunity

found that out of 3,969 persons selected

for skilled trade union apprenticeships

in 30 southern cities, only 26 were

black.48

• In 1967, blacks made up less than

1 percent of the nation’s mechanical

union members (i.e. sheet metal

workers, boilermakers, plumbers,

electricians, ironworkers and elevator

constructors).49

• In 1969, only 1.6 percent of

Philadelphia construction union

members were minorities.50

Even when minorities were admitted

to unions, discriminatory hiring

practices and seniority systems often

were used to foreclose job opportunities

to them.51 These actions were the

subject of numerous civil rights suits,

leading the Supreme Court to declare in

1979 that ‘‘judicial findings of exclusion

from crafts on racial grounds are so

numerous as to make such exclusion a

proper subject for judicial notice.’’ 52

Well into the 1980s, courts, committees

of Congress, and administrative agencies

continued to identify the ‘‘inability of

many minority workers to obtain jobs’’

through unions because of ‘‘slavish

adherence to traditional preference

practices [and] also from overt

discrimination.’’ 53

The discriminatory conduct that was

the subject of the Supreme Court’s

decision in Local 28, Sheet Metal

Workers v. EEOC,54 is illustrative of the

pattern of racial exclusion by trade

unions and its consequences for

minorities. The union local operated an

apprenticeship training program

designed to teach sheet metal skills.

Apprentices enrolled in the program

received class-room training, as well as

on-the-job work experience. As the

Supreme Court described it, successful

completion of the program was the

principal means of attaining union

membership. But by excluding

minorities from the apprenticeship

program through ‘‘pervasive and

egregious discrimination,’’ 55 the local

effectively excluded minorities from the
26056 Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices

56 Id. at 433–34.

57 Jaynes Associates, Minority and Women’s

Participation in the New Haven Construction

Industry: A Report to the City of New Haven 25–

26 (1989).

58 Id. at 26–27.

59 Id. at 28.

60 Id. at 28.

61 Id. at 33; New Haven Board of Aldermen,

Minority and Women Business Participation in the

New Haven Construction Industry: Committee

Report 7 (1990).

62 Jaynes Associates, Minority and Women’s

Participation in the New Haven Construction

Industry: A Report to the City of New Haven 34

(1989). Comparable conclusions about the impact of

trade union discrimination have been reached in

studies from other jurisdictions around the country.

See, e.g., D.J. Miller & Associates, et al., The

Disparity Study for Memphis Shelby County

Intergovernmental Consortium 11–46 (Oct. 1994)

(‘‘In Memphis, trade unions have historically

discriminated against African Americans.’’); Report

of the Blue Ribbon Panel to the Honorable Richard

M. Daley, Mayor of the City of Chicago 43 (March

1990) (‘‘The Task Force specifically notes the

exclusion of minorities and women from the

building trades.’’); National Economic Research

Associates, et al., Availability and Utilization of

Minority and Women-Owned Business Enterprises

at the Massachusetts Water Resources Authority 72

(Nov. 1990) (‘‘A number of M/WBE owners

complain that problems caused by unions are

exacerbated by state bidding requirements that

make it difficult or impossible for non-union firms

to bid.’’); Coopers & Lybrand, et al., State of

Maryland Minority Business Utilization Study 9

(Feb. 1990) (discussing discriminatory union

practices).

63See BPA Economics, et al., MBE/WBE Disparity

Study of the City of San Jose I–34 (1990) (‘‘When

trying to join unions, minorities may face testing

and experience requirements that are waived in the

case of relatives of current union members.’’);

Waldinger & Bailey, The Continuing Significance of

Race: Racial Conflict and Racial Discrimination in

Construction, Politics and Society, Vol. 19, No. 3,

at 296–97 (1991) (‘‘In 1987, blacks averaged less

than 80 percent of parity for all skilled trades with

even lower levels of representation in the most

highly paid crafts like electricians and plumbers.’’);

The Meaning and Significance for Minority

Businesses of the Supreme Court Decision in the

City of Richmond v. J.A. Croson Co.: Hearing Before

the Legislation and National Security Subcomm. of

the Comm. on Government Operations, 101st Cong.,

2d Sess. 111–15 (1990).

64H.R. Rep. No. 238, 92d Cong., 2d Sess. 3 (1972).

65 Id. at 7.

66See, e.g., Winbush v. Iowa, 69 FEP Cases 1348

(8th Cir. 1995) (evidence was ‘‘overwhelming’’ that

employer had engaged in disparate treatment with

respect to promotion of black employees); (United

States v. N.L. Industries, Inc., 479 F.2d 354 (8th Cir.

1973) (99 percent white management structure

caused, in part, by promoting lesser qualified white

employees over more qualified minorities).

67See, e.g., EEOC v. Detroit Edison Co., 515 F.2d

301, 313 (6th Cir. 1975), vacated and remanded on

other grounds, 431 U.S. 951 (1977) (finding

discrimination in ‘‘the practice of relying on

referrals by a predominantly white work force’’);

Long v. Sapp, 502 F.2d 34, 41 (5th Cir. 1974) (wordof-mouth recruitment serves to perpetuate all-white

work force); Thomas v. Washington County Sch.

Bd., 915 F.2d 922 (4th Cir. 1990). See also Univ. of

Mass., Barriers to the Employment and Work-Place

Advancement of Latinos: A Report to the Glass

Ceiling Commission 52 (Aug. 1994) (word-of-mouth

recruiting methods that rely on social networks are

a significant ‘‘exclusionary barrier’’ to employment

opportunities for minorities); Roosevelt Thomas, et

al., The Impact of Recruitment, Selection,

Promotion and Compensation Policies and

Practices on the Glass Ceiling, submitted to U.S.

Department of Labor Glass Ceiling Commission, 14

(April 1994) (noting that ‘‘recruitment practices

primarily consist[ing] of word-of-mouth and

employee referral networking * * * promote the

filling of vacancies almost exclusively from within.

If the environment is already homogenous, which

many are, it maintains this same ‘home-grown’

environment’’); Gertrude Ezorsky, Racism and

Justice: The Case for Affirmative Action 14–18

(1991); U.S. Commission on Civil Rights,

Affirmative Action in the 1980s: Dismantling the

Process of Discrimination 8 (1981); Barbara

Lindeman Schlei & Paul Grossman, Employment

Discrimination Law 571 (1983).

68See, e.g., Paxton v. Union National Bank, 688

F.2d 552, 565–566 (8th Cir. 1982), cert. denied, 460

U.S. 1083 (1983); Sears v. Bennett, 645 F.2d 1365

(10th Cir. 1981) (system requiring that porters, all

of whom were black, forfeit seniority when

changing jobs designed to prevent promotion of

black employees), cert. denied, 456 U.S. 964 (1982);

Terrell v. U.S. Pipe and Foundry Co., 644 F.2d 1112

(5th Cir. 1981) (seniority system created for clearly

discriminatory purposes), vacated on other grounds,

456 U.S. 955 (1982). See also Ella Bell & Stella

Nkomo, Barriers to Workplace Advancement

Experienced by African Americans 3 (1994)

(‘‘African Americans * * * are functionally

segregated into jobs less likely to be on the path to

the top levels of management.’’).

69Barbara Bergmann, In Defense of Affirmative

Action 32–33 (1996).

70 Id. at 33.

71 Id. at 62.

72 Id. at 63–82.

union for decades. Such exclusion

continued notwithstanding the passage

of Title VII and a series of

administrative and judicial findings in

the 60s and 70s that the local had

engaged in blatant discrimination in

shutting minorities out of the program.

Indeed, even into the 80s, the local

persisted in violating court orders to

open up the program to minorities.56

More recently, a Yale University

economist prepared a report

documenting the history of

discrimination by New Haven unions

that ‘‘confirms the nationwide pattern of

discrimination.’’ 57 Prior to the passage

of the Civil Rights Act of 1964, New

Haven’s unions prohibited minority

membership, and minority workers

were almost completely segregated into

jobs that whites would not take because

they required working under conditions

of extreme heat or discomfort.58 After

passage of the Civil Rights Act,

minorities were prevented from entering

unions by a rule requiring that at least

three current members sponsor the

application of any new member.59

Although the policy was race-neutral on

its face, ‘‘it was almost impossible to

find three members who would

nominate a minority [and] stand up for

him in a closed meeting when other

members would undoubtedly attack the

candidate and his sponsors.’’ 60 This and

other discriminatory policies prevented

all but five African Americans from

joining the 1,216 white members of the

highest paid skilled trade unions in

1967, and throughout the mid-70s,

unions and apprenticeship programs

remained virtually all-white.61 The

report concluded that the history of

‘‘blocked access to the skilled trades is

the most important explanation of the

low numbers of minority and women

construction contractors today.’’ 62

There is no doubt that trade unions

have put much of the discriminatory

past behind them, and they now provide

an important source of opportunity for

minorities. Some barriers to full

opportunity remain, however.63

A parallel history of discriminatory

treatment by employers has prevented

minorities from rising into the private

sector management positions that are

most likely to lead to self-employment.

In 1972, Congress found that only 3.5

percent of minorities held managerial

positions compared to 11.4 percent of

white employees.64 Congress attributed

this underrepresentation to continued

discriminatory conduct by ‘‘employers,

labor organizations, employment

agencies and joint labor-management

committees.’’ 65 Evidence derived from

caselaw and academic studies shows a

variety of discriminatory employment

practices, including promoting white

employees over more qualified minority

employees; 66 relying on word-of-mouth

recruiting practices that exclude

minorities from vacancy

announcements; 67 and creating

promotion systems that lock minorities

into inferior positions.68

A study published earlier this year

surveyed a broad range of current labor

market evidence and concluded that

employment discrimination is ‘‘not a

thing of the past.’’ 69 Rather, race still

matters when it comes to determining

access to the best employment

opportunities.70 Progress has been

made, of course. Yet, ‘‘more than three

decades after the passage of the Civil

Rights Act, segregation by race and sex

continues to be the rule rather than the

exception in the American workplace,

and discrimination still reduces the pay

and prospects of workers who are not

white or male.’’ 71 The exclusionary

conduct frequently is not deliberate, and

the people on top—who are mostly

white and male—often believe that they

are behaving fairly. But old habits die

hard: reliance on outmoded stereotypes

and group reputations, and the

persistence of ‘‘invisible biases’’ work to

perpetuate a system that creates

disadvantages in employment for

minorities today.72

The results of recent ‘‘testing’’

studies—in which equally matched
Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices 26057

73Cross et al., Employer Hiring Practices:

Differential Treatment of Hispanic and Anglo Job

Seekers (1990); Turner et al., Opportunities Denied,

Opportunities Diminished: Discrimination in Hiring

(1991).

74Adarand, 115 S. Ct. at 2135 (Ginsburg, J.,

dissenting).

75Federal Glass Ceiling Commission, Good for

Business: Making Full Use of the Nation’s Human

Capital iii (1995) (citing 1991 statement by Senator

Dole regarding 1991 Department of Labor Report on

the Glass Ceiling Initiative).

76 Id. at iii.

77 Id. at 9.

78 Id. at iv–vi.

79 Id. at 15–16.

80 Id. at 13.

81 Id. at 10–11.

82See, e.g., The Meaning and Significance for

Minority Business of the Supreme Court Decision in

the City of Richmond v. J.A. Croson: Hearing Before

the Legislative and National Security Subcomm. of

the House Comm. on Government Operations,

100th Cong., 2d Sess. 111 (1990) (statement of

Manuel Rodriguez) (‘‘[f]ew [minorities] today have

families from whom they can inherit’’ a business);

H.R. Rep. No. 870, 103d Cong., 2d Sess. 15 n. 36

(1994) (‘‘[T]he construction industry is * * *

family dominated. Many firms are in their second

or third generation operating structures.’’); New

Haven Board of Aldermen, Minority and Women

Business Participation in the New Haven

Construction Industry 10 (1990) (‘‘The exclusion of

minorities from construction trades employment

before the 1970s resulted in an absence of a parent

or family member owning a construction

business.’’).

83 National Economic Research Associates, et al.,

The Utilization of Minority and Women-Owned

Businesses Enterprises by Alameda County 176–77

(June 1992) (‘‘A number of witnesses identified

historic union discrimination as a major limitation

to the formation and success of minority firms.’’);

Jaynes Associates, Minority and Women’s

Participation in the New Haven Construction

Industry: A Report to the City of New Haven 34

(1989) (discrimination has prevented minorities

from ‘‘gain[ing] experience and skills’’ necessary to

operate a business and therefore has ‘‘kept the pool

of potential minority * * * contractors artificially

small’’).

84Availability of Credit to Minority and WomenOwned Small Businesses: Hearing Before the

Subcomm. on Financial Institutions Supervision,

Regulation and Deposit Insurance of the House

Comm. on Banking, 103d Cong., 2d Sess. 6 (1994)

(statement of Andrew Hove). One reason that

minorities starting small businesses are especially

reliant on bank lending is because they traditionally

lack personal wealth or access to other sources of

private credit, such as loans from family or friends.

See generally Oliver & Shapiro, Black Wealth/White

Wealth (1993).

85See The Wall Street Journal Reports: Black

Entrepreneurship R.1 (1992) (Roper Organization

poll of 472 minority business owners listed access

to capital as the primary barrier to their business

development); United States Commission on

Minority Business Development, Final Report 12

(1992) (‘‘One of the most formidable stumbling

blocks to the formation and development of

minority businesses is the lack of access to

capital.’’).

86See Availability of Credit to Minority and

Women Owned Small Businesses: Hearing Before

the Subcomm. on Financial Institutions

Supervision, Regulation and Deposit Insurance of

the House Comm. on Banking, 103d Cong., 2d Sess.

27 (1994) (statement of Wayne Smith) (while

perhaps more subtle than discrimination in

mortgage lending, discrimination in business

lending exists); H.R. Rep. No. 870, 103d Cong., 2d

Sess. 7 (1994) (‘‘There is a widespread reluctance

on the part of the commercial banking * * * and

capital markets to take the same risks with a

[minority] entrepreneur that they would readily do

with a white one.’’); Disadvantaged Business SetAsides in Transportation Construction Projects:

Hearing Before the Subcomm. on Procurement,

Innovation, and Minority Enterprise Development of

the House Comm. on Small Business, 100th Cong.,

2d Sess. 26 (1988) (statement of Joann Payne)

(‘‘[b]ecause of the ethnic and sex discrimination

practiced by lending institutions, it was very

difficult for minorities and women to secure bank

loans.’’); The Disadvantaged Business Enterprise

Program of the Federal-Aid Highway Act: Hearing

Before the Subcomm. on Transportation of the

Senate Comm. on Environment and Public Works,

99th Cong. 1st Sess. 363 (1985) (statement of James

Laducer) (North Dakota banks ‘‘refuse to lend

monies to minority businesses from nearby Indian

communities’’); see also Fiscal Economic and Social

Crises Confronting American Cities: Hearings Before

the Senate Comm. on Banking, Housing, and Urban

Affairs, 102d Cong., 2d Sess. (1992); Federal

Minority Business Programs: Hearing Before the

House Comm. on Small Business, 102d Cong., 1st

Sess. (1991); City of Richmond v. J.A. Croson:

Impact and Response: Hearing Before the

Subcomm. on Urban and Minority-Owned Business

Development of the Senate Comm. on Small

Business, 101st Cong., 2d Sess. (1990); Minority

Construction Contracting: Hearing Before the

Subcomm. on SBA, the General Economy and

Minority Enterprise Development of the House

Comm. on Small Business, 101 Cong., 1st Sess.

(1989).

minorities and nonminorities seek the

same job—are but one source of

evidence supporting this conclusion.

These studies show, for instance, that

white males receive 50 percent more job

offers than minorities with the same

characteristics applying for the same

jobs.73 As Justice Ginsburg described

them, the testing studies make it

abundantly clear that ‘‘[j]ob applicants

with identical resumes, qualifications,

and interview styles still experience

different receptions, depending on their

race.’’ 74

Even when minorities are hired today,

a ‘‘glass ceiling’’ tends to keep them in

lower-level positions. This problem was

recognized by Senator Dole who, in

1991, introduced the Glass Ceiling Act

on the basis of evidence ‘‘confirming

* * * the existence of invisible,

artificial barriers blocking women and

minorities from advancing up the

corporate ladder to management and

executive level positions.’’ 75 That Act

created the Federal Glass Ceiling

Commission, which subsequently

completed an extensive study of the

opportunities available to minorities

and women in private sector

employment, and concluded that ‘‘at the

highest levels of business, there is

indeed a barrier only rarely penetrated

by women or persons of color.’’ 76

Evidence released by the Commission

paints the following picture:

• 97 percent of the senior level

managers in the nation’s largest

companies are white.77

• Black and Hispanic men are half as

likely as white men to be managers or

professionals.78

• In the private sector, most minority

managers and professionals are tracked

into areas of the company—personnel,

communications, affirmative action,

public relations—that are not likely to

lead to advancement to the highest

levels of experience.79

• Because private sector

opportunities are so limited, most

minority professionals and managers

work in the public sector.80

In light of the evidence that it

considered, the Commission concluded

that, ‘‘in the private sector, equally

qualified and similarly situated citizens

are being denied equal access to

advancement on the basis of gender,

race, or ethnicity.’’ 81

In sum, there are two central means

to gaining the experience needed to

operate a business. One is to be taught

by a parent, passing on a family-owned

business. But the long history of

discrimination and exclusion by unions

and employers means there are very few

minority parents with any such business

to pass on.82 The second avenue is to

learn the skills needed through private

employment. But the effects of

employment and trade union

discrimination have posed a constant

barrier to that entryway into the

business world.83

2. Discrimination by Lenders

Without financing, a business cannot

start or develop. There are two main

methods for a new business to raise

capital. One is to solicit investments

from the public by selling stock in the

company (public credit); the other is to

solicit investments from banks or other

lenders (private credit). Congress has

heard evidence that ‘‘since small

businesses have very limited or no

access to public credit markets, it is

critically important that these entities,

especially minority-owned small

businesses, have adequate access to

bank credit on reasonable terms and

conditions.’’ 84 The rub is that small

businesses owned by minorities find it

much more difficult than small firms

owned by nonminorities to secure

capital. Indeed, this is often cited as the

single largest factor suppressing the

formation and development of minorityowned businesses.85 The sad fact is that,

through countless hearings, Congress

has learned that lending discrimination

plays a major role in this regard.86

Over and over again, studies show

that minority applicants for business

loans are more likely to be rejected and,
26058 Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices

87Timothy Bates, Commercial Bank Financing of

White and Black Owned Small Business Start-ups,

Quarterly Review of Economics and Business, Vol.

31, No. 1, at 79 (1991) (‘‘The findings indicate that

black businesses are receiving smaller bank loans

than whites—not because they are riskier, but,

rather, because they are black-owned businesses.’’).

88 Grown & Bates, Commercial Bank Lending

Practices and the Development of Black-Owned

Construction Companies, Journal of Urban Affairs,

Vol. 14, No. 1, at 34 (1992).

89Bradford & Bates, Factors Affecting New Firms

Success and their Use in Venture Capital

Financing, Journal of Small Business Finance, Vol.

2, No. 1, at 23 (1992) (‘‘The venture capital market

* * * differentially restricts minority entrepreneurs

from obtaining venture capital.’’).

90Faith Ando, Capital Issues and the MinorityOwned Business, The Review of Black Political

Economy, Vol. 16, No. 4, at 97 (1988).

91 Grown & Bates, Commercial Bank Lending

Practices and the Development of Black-Owned

Construction Companies, Journal of Urban Affairs,

Vol. 14, No. 1, at 34 (1992).

92The Colorado Center for Community

Development, University of Colorado at Denver,

Survey of Small Business Lending in Denver v.

(1996). See Michael Selz, Race-Linked Gap is Wide

in Business-Loan Rejections, Wall St. J., May 6,

1996, at B2.

93The Colorado Center for Community

Development, University of Colorado at Denver,

Survey of Small Business Lending in Denver v.

(1996).

94 Id.

95 Id.

96There is also evidence that minorities face

discrimination in mortgage lending. See Munnell et

al., Mortgage Lending In Boston: Interpreting the

HMDA Data, 86 Am. Econ. Rev. 25 (1996) (finding

that minority applicants were 60 percent more

likely to be rejected for a mortgage loan than white

males with identical characteristics, including age,

income, wealth, and education). This serves to

aggravate the problems that minorities face in

seeking business loans, because an important

source of collateral for such loans to a new firm is

the home of the owner of the firm. Thus, mortgage

discrimination that impedes the ability of

minorities to obtain loans to purchase homes (or

drives them to purchase less valuable homes than

they otherwise would) diminishes their ability to

post collateral for business loans.

97United States Commission on Minority

Business Development, Final Report 6 (1992).

While the nation has made great strides in

overcoming racial bias, the Commission’s apt

characterization of the debilitating effects of lending

discrimination mirrors the description of the

problem in a landmark monograph written over

one-half century ago:

The Negro Businessman encounters greater

difficulties than whites in securing credit. This is

partially due to the marginal position of negro

business. It is also partially due to prejudicial

opinions among whites concerning business ability

and personal reliability of Negroes. In either case

a vicious circle is in operation keeping Negro

business down.

Gunnar Myrdal, An American Dilemma: The

Negro and Modern Democracy 308 (6th ed. 1944).

98See New Haven Board of Aldermen, Minority

and Women Business Participation in the New

Haven Construction Industry 10 (1990) (‘‘The

construction industry in New Haven remains to a

large extent a closed network of established

contractors and subcontractors who have close

long-term relationships and are highly resistant to

doing business with ‘outsiders.’’’); Brimmer &

Marshall, Public Policy and Promotion of Minority

Economic Development: City of Atlanta and Fulton

County, Georgia, Pt. II, 61 (1990) (member of trade

association testified that ‘‘contractors develop good

working relationships with certain subcontractors

and tend to use them repeatedly, even in a few

cases when their prices are just a little bit higher

than other subcontractors’’).

99See National Economic Research Associates,

The State of Texas Disparity Study: A Report to the

Texas Legislature as Authorized by H.B. 2626, 73rd

Legislature 148 (1994) (‘‘African American owner

* * * told by an employee of a prime contractor

that the contractor prefers to work with

[nonminority-owned firms] and works with

[minority-owned firms] only when required to do

so.’’); D.J. Miller & Associates, Disparity Study for

Memphis/Shelby County Intergovernmental

Consortium VII–10 (1994) (‘‘Majority companies

will not do business with [minority-owned

businesses] because they lack confidence in [them]

and are not willing to go beyond those businesses

with whom they have a 10 to 15 year

relationship.’’); Brown, Botz & Coddington,

Disparity Study: City of Phoenix VIII–10 (July 1993)

(‘‘From the responses of a number of MBE/WBEs,

another form of marketplace discrimination that

severely hampers their access to the marketplace is

denial of the opportunity to bid. This may occur in

a variety of ways, including, but not limited to, the

use of non-competitive procurement and selection

procedures, as well as intentional acts of

rejection.’’); National Economic Research

Associates, The Utilization of Minority and WomanOwned Businesses by Contra Costa County: Final

Report ix, xiii (1992) (70 percent of minority-owned

firms reported seldom or never being used for

contracts that do not contain affirmative action

requirements); National Economic Research

Associates, The Availability and Utilization of

Minority-Owned Business Enterprises at the

when accepted, receive smaller loan

amounts than nonminority applicants

with identical collateral and borrowing

credentials:

• The typical white-owned business

receives three times as many loan

dollars as the typical black-owned

business with the same amount of

equity capital.87 In construction, whiteowned firms receive fifty times as many

loan dollars as black-owned firms with

identical equity.88

• Minorities are approximately 20

percent less likely to receive venture

capital financing than white firm

owners with the same borrowing

credentials.89

• All other factors being equal, a

black business owner is approximately

15 percent less likely to receive a

business loan than a white owner.90

• The average loan to a black-owned

construction firm is $49,000 less than

the average loan to an equally matched

nonminority construction firm.91

A comparable pattern of disparity

appears in the most recent study on

lending to minority firms, which was

released earlier this year. That study

surveyed 407 business owners in the

Denver area. It found that African

Americans were 3 times more likely to

be rejected for business loans than

whites.92 The denial rate for Hispanic

owners was 1.5 times as high as white

owners.93 Disparities in the denial rate

remained significant even after

controlling for other factors that may

affect the lending rate, such as the size

and net worth of the business.94 The

study concluded that ‘‘despite the fact

that loan applicants of three different

racial/ethnic backgrounds in this

sample (Black, Hispanic and Anglo)

were not appreciably different as

businesspeople, they were ultimately

treated differently by the lenders on the

crucial issue of loan approval or

denial.’’ 95

In sum, capital is a key to operating

a business. Without financing, no

business can form. Once formed,

restricted access to capital impedes

investments necessary for business

development. Minority-owned firms

face troubles on both fronts. And in

large part, those troubles stem from

lending discrimination.96 As President

Bush’s Commission on Minority

Business Development explained, the

result is a self-fulfilling prophecy:

Our nation’s history has created a

‘‘cycle of negativity’’ that reinforces

prejudice through its very practice;

restraints on capital availability lead to

failures, in turn, reinforce a prejudicial

perception of minority firms as

inherently high-risks, thereby reducing

access to even more capital and further

increasing the risk of failure.97

B. Discrimination in Access to

Contracting Markets

Even when minorities are able to form

and develop businesses, discrimination

by private sector customers, prime

contractors, business networks,

suppliers, and bonding companies

raises the costs for minority firms,

which are then passed on to their

customers. This restricts the

competitiveness of minority firms,

thereby impeding their ability to gain

access to public contracting markets.

1. Discrimination by Prime Contractors

and Private Sector Customers

In the private sector, minority

business owners face discrimination

that limits their opportunities to work

for prime contractors and private sector

customers. All too often, contracting

remains a closed network, with prime

contractors maintaining long-standing

relationships with subcontractors with

whom they prefer to work.98 Because

minority owned firms are new entrants

to most markets, the existence and

proliferation of these relationships locks

them out of subcontracting

opportunities. As a result, minorityowned firms are seldom or never invited

to bid for subcontracts on projects that

do not contain affirmative action

requirements.99 In addition, when
Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices 26059

Massachusetts Water Resources Authority 74 (1992)

(55 percent of minority-owned construction firms

reported that prime contractors that use their firms

on contracts with affirmative action requirements

seldom or never used their firms on projects that

do not contain such requirements); A Study to

Identify Discriminatory Practices in the Milwaukee

Construction Marketplace 125 (Feb. 1990) (‘‘Only

18% of black contractors currently have private

sector contracts with primes with which they have

worked on public sector contracts with MBE

requirements.’’); see also Coral Constr. Co. v. King

County, 941 F.2d 910, 916 (9th Cir. 1991), cert.

denied, 502 U.S. 1033 (1992) (noting reports that

nonminority firms in the county refused to work

with minority firms); Cone Corp. v. Hillsborough

County, 908 F.2d 908, 916 (11th Cir.), cert. denied,

498 U.S. 983 (1990) (noting reports that when

minority contractors in the county ‘‘approached

prime contractors, some prime contractors either

were unavailable or would refuse to speak to [the

minority contractors]’’).

100See Associated Gen. Contractors v. Coalition

for Economic Equity, 950 F.2d 1401, 1416 (9th Cir.

1991), cert. denied, 503 U.S. 985 (1992) (noting

reports that local minority firms were ‘‘denied

contracts despite being the low bidder,’’ and

‘‘refused work even after they were awarded the

contracts as low bidder’’); Cone Corp. v.

Hillsborough County, 908 F.2d 908, 916 (11th Cir.),

cert. denied, 498 U.S. 983 (1990) (‘‘[c]ontrary to

their practices with non-minority subcontractors,’’

local prime contractors would take minority

subcontractors’ bids ‘‘around to various nonminority subcontractors until they could find a nonminority to underbid [the minority firm]’’); BBC

Research and Consulting, Regional Disparity Study:

City of Las Vegas IX–12 (1992) (low bidding

Hispanic contractor told that he was not given

subcontract because the prime contractor ‘‘did not

know him’’ and that the prime ‘‘had problems with

minority subs in the past’’); BPA Economics, MBE/

WBE Disparity Study for the City of San Jose (Vol.

1) III–1 (1990) (describing practices contributing to

low utilization in construction contracts as

including ‘‘bid shopping, insufficient distribution

of notices of contracts [and] insufficient lead time

to prepare bids’’); BBC Research and Consulting,

The City of Tucson Disparity Study IX–9–IX–11

(June 1994) (same).

101See, e.g., How State and Local Governments

Will Meet the Croson Standard: Hearing Before the

Subcomm. on Civil and Constitutional Rights of the

House Comm. on the Judiciary, 100th Cong., 1st

Sess. 54 (1989) (statement of Marc Bendick) (‘‘[t]he

same prime contractor who will use a minority

subcontractor on a city contract and will be terribly

satisfied with the firm’s performance, will simply

not use that minority subcontractor on a private

contract where the prime contractor is not forced

to use a minority firm.’’); The Meaning and

Significance for Minority Businesses of the Supreme

Court Decision in the City of Richmond v. J.A.

Croson Co.: Hearing Before the Legislation and

National Security Subcomm. of the Comm. on

Government Operations, 101st Cong., 2d Sess. 57

(1990) (statement of Gloria Molina); id. at 100–101

(statement of E.R. Mitchell); id. at 113 (statement of

Manuel Rodriguez); A Bill to Reform the Capital

Ownership Development Program: Hearings on H.R.

1807 Before the Subcomm. on Procurement,

Innovation and Minority Enterprise Development of

the House Comm. on Small Business, 100th Cong.,

1st Sess. 593 (1987) (statement of Edward Irons);

Small Disadvantaged Business Issues: Hearings

Before the Investigations Subcomm. of the House

Comm. on Armed Services, 100th Cong., 1st Sess.

19–23 (1991) (statement of Parren Mitchell).

102Brimmer & Marshall, Public Policy and

Promotion of Minority Economic Development: City

of Atlanta and Fulton County, Georgia, Pt. I, 9–10

(1990). See also D.J. Miller & Associates, City of

Dayton: Disparity Study 183 (1991) (‘‘A small

percentage of Black firms’ revenues come from

private sector projects.’’).

103Brimmer & Marshall, Public Policy and

Promotion of Minority Economic Development: City

of Atlanta and Fulton County, Georgia, Pt. III, 15,

34 (1990).

104New Haven Board of Aldermen, Minority and

Women Participation in the New Haven

Construction Industry 10 (1990).

105National Economic Research Associates, The

Utilization of Minority and Women-Owned

Businesses by the City of Hayward 6–23 (1993).

106See BBC Research and Consulting, City of

Tuscon Disparity Study IX–23 (1994).

107Bailey & Waldinger, The Continuing

Significance of Race: Racial Conflict and Racial

Discrimination in Construction, Politics and

Society, Vol. 19, No. 3, 298 (1991). See Brimmer &

Marshall, Public Policy and Promotion of Minority

Economic Development: City of Atlanta and Fulton

County, Georgia, Pt. II, 35 (1990) (‘‘(M)ost job

seekers find their jobs through informal channels.

So too it is with construction markets, especially in

the private sector.’’).

108 Minority Business Development Program

Reform Act of 1987: Hearings on S. 1993 and H.R.

1807 Before the Senate Comm. on Small Business,

100th Cong., 2d Sess. 127 (1988) (statement of

Parren Mitchell). See H.R. Rep. No. 870, 103d

Cong., 2d Sess. 15 n.36 (‘‘The construction industry

is close-knit; it is family dominated (and reflects an)

old buddy network. Minorities and women, unless

they are part of construction families, have been

and will continue to be excluded whenever

possible.’’); Minorities and Franchising: Hearings

Before the House Comm. on Small Business, 102d

Cong., 1st Sess. 54 (1991) (statement of Rep.

LaFalce) (discussing ‘‘problems relating to

exclusion of minorities or groups of minorities from

franchise systems’’); 131 Cong. Rec. 17,447 (1985)

(statement of Rep. Schroeder) (an ‘‘old boy’s club’’

excludes many minorities from business

opportunities).

109See, e.g., Associated Gen. Contractors v.

Coalition for Economic Equity, 950 F.2d 1401, 1414

(1991) (municipal study showed that there

‘‘continued to operate an ‘old boy network’ in

awarding contracts, thereby disadvantaging

(minority firms)’’), cert. denied, 503 U.S. 985

(1992); BBC Research & Consulting, The City of

Tuscon Disparity Study 202 (1994) (citing

‘‘numerous detailed examples of the exclusionary

operation of good old boy networks’’); National

Economic Research Associates, The Utilization of

Minority and Women Owned Business Enterprises

by the Southeastern Pennsylvania Transportation

Authority 107 (1993) (exclusion from ‘old-boy’

Continued

minority firms are permitted to bid on

subcontracts, prime contractors often

resist working with them. This sort of

exclusion is often achieved by white

firms refusing to accept low minority

bids or by sharing low minority bids

with another subcontractor in order to

allow that business to beat the bid (a

practice known as ‘‘bid shopping’’).100

These exclusionary practices have been

the subject of extensive testimony in

congressional hearings.101

An Atlanta study revealed evidence of

the effect of discrimination by private

sector customers and prime contractors

on minority contracting opportunities.

The study found that 93 percent of the

revenue received by minority-owned

firms came from the public sector and

only 7 percent from the private sector.

In sharp contrast, the study found that

nonminority firms receive only 20

percent of their revenue from the public

sector and 80 percent from the private

sector.102 In addition, the study reported

that nearly half of the black-owned

firms worked primarily for minority

customers, and minority firms rarely

worked in a joint venture with a whiteowned firm.103

Customer prejudices are sometimes

graphically expressed. African

American business owners have

reported arriving at job cites to find

signs saying ‘‘No Niggers Allowed,’’ 104

and ‘‘Nigger get out of here.’’ 105 Other

potential customers have simply refused

to work with a business after

discovering that its owner is a minority.

In a recent encounter, a black business

owner arriving at a home-site was told

to leave by a white customer, who

commented ‘‘you didn’t tell me you

were black and you don’t sound

black.’’ 106

2. Discrimination by Business Networks

Contrary to the common perception,

contracting is not a ‘‘meritocracy’’

where the low bidder always wins.

‘‘(B)eneath the complicated regulations

and proliferation of collective

bargaining contracts lies a different

reality, one dominated mainly by

personal contacts and informal

networks.’’ 107 These networks can yield

competitive advantages, because they

serve as conduits of information about

upcoming job opportunities and

facilitate access to the decisionmakers

(e.g., contracting officers, prime

contractors, lenders, bonding agents and

suppliers). Simply put, in contracting,

access to information is a ticket to

success; lack of information can be a

passport to failure. Networks and

contacts can help a business find the

best price on supplies, facilitate a quick

loan, foster a relationship with a prime

contractor, or yield information about

an upcoming contract for which the firm

can prepare—all of which serve to make

the firm more competitive.

What transforms the mere existence of

established networks into barriers for

minority-owned businesses is the extent

to which they operate to the exclusion

of minority membership. It has been

recognized in Congress that private

sector business networks frequently are

off-limits to minorities: ‘‘institutional

wall(s),’’ and ‘‘old-boy network(s) * * *

make( ) it exceedingly difficult for

minority firms to break into the private

commercial sector.’’ 108 Parallel

descriptions appear in numerous state

and local studies.109 Ultimately,
26060 Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices

networks ‘‘was the most frequently cited problem’’

of minority and women-owned firms); National

Economic Research Associates, The Utilization of

Minority and Women-Owned Business Enterprises

by the City of Hayward 6–14 (1993) (‘‘75 percent of

the witnesses cited problems breaking into

established ‘old-boy’ networks’’.).

110United States v. Georgia Power Co., 474 F.2d

906 (5th Cir. 1973) (finding that district court’s

‘‘failure to order (word-of-mouth recruitment

practices) to be supplemented by affirmative action

* * * was clearly an abuse of power’’). See

National Economic Research Associates,

Availability and Utilization of Minority and Women

Owned Business Enterprises at the Massachusetts

Water Resources Authority 74 (1990) (finding that

minorities ‘‘need to spend much more time and

money on marketing because they do not have

established networks and reputations’’); Minority

Business Enterprise Legal Defense and Education

Fund, An Examination of Marketplace

Discrimination in Durham County 16 (1991) (citing

‘‘numerous allegations that black contractors * * *

learned of bid opportunities much later than their

white competitors that are tied into the ‘good old

boy’ network’’).

111 Kevin Thompson, Taking the Headache Out of

Government Contracts, Black Enterprise 219 (1993).

112 This is accomplished by, for example,

specifying that bidders must use certain brandname products available only to several companies,

specifying a depth of contract experience that

minority-owned firms can rarely provide, and

bundling projects into large contracts that small

minority-owned companies cannot perform. See,

e.g., H.R. Rep. No. 870, 103d Cong., 2d Sess. 14

(1994) (citing recommendation that agencies

separate ‘‘contracts into smaller parts, so that

M&WOSB’s would be able to participate in those

opportunities’’); Mason Tillman Associates,

Sacramento Municipal Utility District: M/WBE

Disparity Study 146 (1992) (noting that, in many

instances, contract specifications are written so

narrowly that there are only a few firms that can

do the job); Tuchfarber et al., City of Cincinnati:

Croson Study 153 (1992) (‘‘Products specified in the

Request for Proposals were so narrow that only one

company that had exclusive distribution of the

product specified could satisfy the contract.’’).

113 H.R. Rep. No. 870, 103d Cong., 2d Sess. 13

(1994).

114 40 U.S.C. §§ 270a–270e.

115 United States Congress, Federal Compliance

to Minority Set-Asides: Report to the Speaker, U.S.

House of Representatives, by the Congressional

Task Force on Minority Set-Asides 29 (1988). See

also H.R. Rep. No. 870, 103d Cong., 2d Sess. 14

(1994) (‘‘Inability to obtain bonding is one of the top

three reasons that new minority small businesses

have difficulty procuring U.S. Government

contracts.’’); Minority Business Participation in

Department of Transportation Projects: Hearing

Before a Subcomm. of the House Comm. on

Government Operations, 99th Cong., 1st Sess. 159

(1985) (statement of Sherman Brown) (‘‘Virtually

everyone connected with the minority contracting

industry * * * apparently agrees that surety

bonding is one of the biggest obstacles in the

development of minority firms.’’).

116 H.R. Rep. No. 870, 103d Cong. 2d Sess. 15

(1994).

117 See Discrimination in Surety Bonding:

Hearing Before the Subcomm. on Minority

Enterprise, Finance and Urban Development of the

House Comm. on Small Business, 103d Cong., 1st

Sess. 2 (1993) (statement by Rep. Kweisi Mfume)

(‘‘Similarities between a banker’s ability to make

arbitrary credit decisions and a surety producer or

an underwriter’s capability of injecting personal

prejudice into the bonding process are compelling

indeed.’’); City of Richmond v. J.A. Croson: Impact

and Response: Hearing Before the Subcomm. on

Urban and Minority-Owned Business Development

of the Senate Comm. on Small Business, 101st

Cong., 2d Sess. 40 (1990) (statement of Andrew

Brimmer); id. at 165–66 (statement of Edward

Bowen); Disadvantaged Business Set-Asides in

Transportation Construction Projects: Hearings

Before the Subcomm. on Procurement, Innovation

and Minority Enterprise Development of the House

Comm. on Small Business, 100th Cong., 2d Sess.

107 (1988) (statement of Marjorie Herter)

(‘‘Discrimination against women and minorities in

the bonding market is quite prevalent’’).

118 See Division of Minority and Women’s

Business Development, Opportunity Denied! A

Study of Racial and Sexual Discrimination Related

to Government Contracting in New York State,

Executive Summary 57 (1992) (noting that 47

witnesses reported ‘‘specific incidents of racial

discrimination * * * in attempting to secure

performance bonds’’); National Economic Research

Associates, The Utilization of Minority and WomenOwned Business Enterprises by Alameda County

202, 212 (June 1992) (nearly 50 percent of minority

businesses reported experiencing bonding

discrimination); National Economic Research

Associates, The Utilization of Minority and WomenOwned Businesses Enterprises by Costa County 231,

241 (May 1992) (noting evidence of bonding

discrimination); Board of Education of the City of

Chicago, Report Concerning Consideration of the

Revised Plan for Minority and Women Business

Enterprise Economic Participation 316 (1991)

(‘‘Bonding is selectively and capriciously provided

or denied with the decision being 85 percent

subjective.’’); Mason Tillman Associates,

Sacramento Municipal Utility District, M/WBE

Disparity Study 119, 135–43 (1990) (noting

evidence of bonding discrimination).

119 D.J. Miller & Associates, State of Louisiana

Disparity Study Vol. 2, pp. 35–57 (June 1991).

exclusion from business networks

‘‘isolate(s minorities) from the ‘web of

information’ which flows around

opportunities’’ thereby putting them at

a distinct disadvantage relative to

nonminority firms.110 In government

contracting, this disadvantage can be

fatal: ‘‘(government) vendors who do get

contracts, experts agree, have obtained

vital bits of information their

competitors either ignored or couldn’t

find. * * * (O)nly the well connected

survive.’’ 111

Restricted access to business networks

can particularly disadvantage minorities

in the planning stages of government

procurement. In designing contracts for

public bidding, agencies commonly

consult businesses to make sure that

specifications match available services.

Only bidders who meet the

specifications may compete for the

contract and the exclusion of minorityowned businesses from planning and

consultations can lead to specifications

that are written so narrowly as to

exclude minority bidders.112 In

addition, the failure to consult minorityowned businesses during the planning

stages of procurement prevents them

from mobilizing resources for the

upcoming competition. As a committee

of Congress recently reported,

‘‘(m)inorities and women are always left

out in any kind of design or planning

phase for these projects, and that is why

when (they) first know about them

* * * it is traditionally too late to get

(their) forces and resources together to

react.’’ 113

3. Discrimination in Bonding and By

Suppliers

The competitiveness of bids on public

and private contracts is not determined

solely by the bidder’s resources. Rather,

competitiveness often hinges on the

ability of the bidding company to obtain

quality services from bonding

companies and suppliers at a fair price.

Here too, discrimination places minority

firms at a disadvantage.

All contractors on federal

construction, maintenance, and repair

contracts valued at over $100,000 are

required to secure a surety bond

guaranteeing the performance of the

contract.114 To obtain bonding, most

surety companies require that a firm

present a record of experience to

substantiate its ability to perform the

job. This mandate often lands minorities

in the middle of a vicious circle. Since

a history of discrimination has

prevented many minority companies

from gaining experience in contracting,

they cannot get bonding. And since they

cannot get bonding, they cannot get

experience. As Congress has recognized,

this dilemma ‘‘serves to preclude

equitable minority business

participation in federal construction

contracts.’’ 115

Congress also has realized that

minorities are disadvantaged by their

exclusion from business networks that

facilitate bonding, because ‘‘firms tend

to give performance and payment bonds

to people they already know and not to

the new business person, especially if

the small business owner is a woman or

of a racial or ethnic minority.’’ 116

Furthermore, Congress has considered

evidence indicating that bonding agents,

like lenders, inject racial biases into the

bonding process.117 Evidence of

discrimination in bonding also has been

accumulated in a number of state and

local studies.118 These problems have

made minority businesses significantly

less able to secure bonding on equal

terms with white-owned firms with the

same experience and credentials. For

example:

• A Louisiana study found that

minority firms were nearly twice as

likely to be rejected for bonding, three

times more likely to be rejected for

bonding for over $1 million, and on

average were charged higher rates for

the same bonding policies than white

firms with the same experience level.119

• An Atlanta study found that 66

percent of minority-owned construction
Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices 26061

120 Brimmer & Marshall, Public Policy and

Promotion of Minority Economic Development: City

of Atlanta and Fulton County, Georgia, Pt. III, 131–

38 (1990).

121 Cone Corp. v. Hillsborough County, 908 F.2d

908, 916 (11th Cir.) cert. denied, 498 U.S. 983

(1990). Evidence of pricing discrimination outside

the contracting setting indicates that the problem

cuts across the economy. For example, a recent

testing study of automobile purchases showed that,

on average, black men were charged nearly $1,000

more for cars than white men. Ian Ayres, Fair

Driving: Gender and Race Discrimination in Retail

Car Negotiations, 104 Harv. L. Rev. 817 (1991).

122 National Economic Research Associates, The

Utilization of Minority and Woman-Owned

Businesses by the Regional Transportation District

(Denver Colorado): Final Report 16–23 (1992).

123 See National Economic Research Associates,

The State of Texas Disparity Study: A Report to the

Texas Legislature as Authorized by H.B. 2626, 73rd

Legislature 148 (1994) (Hispanic business owner

denied credit by supplier who told him that ‘‘we

only sell on a cash basis to people of your kind’’);

D.J. Miller & Associates, Disparity Study for

Memphis/Shelby County Intergovernmental

Consortium 117 (1994) (‘‘Other frequent complaints

pertaining to informal barriers included being

completely stopped by suppliers’ discriminatory

practices.’’); BBC Research Associates, Disparity

Study for the City of Fort Worth IX–20 (1993) (citing

evidence that suppliers discriminate against

minorities by ‘‘refus[ing] to sell or sell[ing] at higher

prices than [to] whites’’); Division of Minority and

Women’s Business Development, Opportunity

Denied! A Study of Racial and Sexual

Discrimination Related to Government Contracting

in New York State, Executive Summary, 53 (1992)

(53 witnesses reported ‘‘specific incidents of racial

discrimination * * * where materials or equipment

suppliers would not extend the same payment

terms and discounts to them as they knew were

being made available to white male owned

contractors with the same financial histories’’);

National Economic Research Associates, The

Utilization of Minority and Women-Owned Business

Enterprises by Alameda County 187 (1992) (41% of

minority-owned business respondents reported

experiencing discrimination in quotes from

suppliers); City of Dayton, Disparity Study 101

(1991) (citing evidence of discriminatory pricing);

D.J. Miller & Associates, City of St. Petersburg

Disparity Study 39–40 (1990) (‘‘Discrimination by

suppliers has also prevented [minority-owned

businesses] from entering successful bids.’’); Mason

Tillman Associates, Sacramento Municipal Utility

District, M/WBE Disparity Study 135–43 (1990).

124 Brimmer & Marshall, Public Policy and

Promotion of Minority Economic Development: City

of Atlanta and Fulton County, Georgia Pt. II, 76

(1990).

125 BBC Research and Consulting, Regional

Disparity Study: City of Las Vegas IX–20 (1992).

126 In describing what it takes for the government

to establish a remedial predicate in procurement,

the Court in Croson said that ‘‘[w]here there is a

significant statistical disparity between the number

of qualified minority contractors willing and able to

perform a particular service and the number of such

contractors actually engaged by the [government] or

the [government’s] prime contractors, an inference

of discriminatory exclusion could arise.’’ 488 U.S.

at 509.

127The studies are also of particular relevance in

assessing the compelling interest for

congressionally-authorized affirmative action

measures in programs that provide federal funds to

state and local governments for use in their

procurement.

128To date, UI has evaluated 56 of the studies.

Ultimately, UI excluded 17 of the 56 studies from

its analysis, on the grounds that those studies do

not present disparity ratios; do not present tests of

statistical significance or number of contracts; do

not present separate results by industry; or do not

present disparity ratios based on government

contracting.

129UI’s findings of underutilization are predicated

on two different measures: the median disparity

ratio across all studies and the percent of studies

reporting substantial underutilization (defined as a

disparity ratio of less than 0.8). A disparity ratio is

the proportion of government contracting received

by minority-owned firms to the proportion of

available firms that are minority-owned. Thus, a

disparity ratio of 0.8 indicates that businesses

owned by members of a minority group received

only 80 cents of every dollar expected to be

allocated to them based on their availability. UI’s

findings of disparity do not change substantially

when analysis is limited to studies with either a

large number of contracts or high availability. In

fact, in most instances, the disparity between

availability and utilization was greater in studies

that involve large numbers of contracts.

firms had been rejected for a bond in the

last three years, 73 percent of those

firms limited themselves exclusively to

contracts that did not require bonding,

and none of them had unlimited

bonding capacity. By contrast, less than

20 percent of nonminority firms had

unlimited bonding capacity.120

Another factor restricting the ability

of minority-owned businesses to

compete in both private and public

contracting is discrimination allowing

‘‘non-minority subcontractors and

contractors [to get] special prices and

discounts from suppliers which [are]

not available to [minority]

purchasers.’’ 121 This drives up

anticipated costs, and therefore the bid,

for minority-owned businesses. A recent

survey reported that 56 percent of black

business owners, 30 percent of Hispanic

owners, and 11 percent of Asian

business owners had experienced

known instances of discrimination in

the form of higher quotes from

suppliers.122 Numerous other state and

local studies have reported similar

findings.123

In one glaring case, a firm in Georgia

began sending white employees to

purchase supplies posing as owners of

a white-owned company. The ‘‘whitefront’’ routinely received quotes on

supplies that were two thirds lower than

those quoted to the minority-owned

parent company.124 Another firm

entered into a joint venture with a white

firm and each obtained quotes from the

same supplier for the same project.

When the two firms compared the

quotes, they discovered that those given

to the minority-owned firm were so

much higher than those given to his

white joint venture partner that they

would have added 40 percent to the

final contract price.125

C. Evidence of the Impact of

Discriminatory Barriers on Minority

Opportunity in Contracting Markets:

State and Local Disparity Studies

In recent years, many state and local

governments have undertaken formal

studies to determine whether there is

evidence of racial discrimination in

their relevant contracting markets that

would justify the use of race-conscious

remedial measures in their procurement

activities. These studies—many of

which have been cited in the previous

sections of this memorandum—typically

contain extensive statistical analyses

that have revealed gross disparities

between the availability of minorityowned businesses and the utilization of

such businesses in state and local

government procurement. Under the

rules established by the Supreme Court

in its 1989 Croson decision, which held

that affirmative action at the state and

local level is subject to strict scrutiny,

such disparities can give rise to an

inference of discrimination that can

serve as the foundation of raceconscious remedial measures in

procurement.126 The studies also

generally contain anecdotal evidence

and expert opinion, developed in

hearings, surveys, and reports, that

bring the statistical evidence to life and

vividly illustrate the effects of

discrimination on procurement

opportunities for minorities.

The federal government obviously

purchases some goods and services that

state and local governments do not (e.g.,

space shuttles, naval warships). For the

most part, though, the federal

government does business in the same

contracting markets as state and local

governments. Therefore, the evidence in

state and local studies of the impact of

discriminatory barriers to minority

opportunity in contracting markets

throughout the country is relevant to the

question whether the federal

government has a compelling interest to

take remedial action in its own

procurement activities.127 Accordingly,

the Justice Department asked the Urban

Institute (UI) to analyze the statistical

findings in the studies. On the strength

of the findings in 39 studies that it

considered, UI has reached the

following conclusions: 128

• The studies show underutilization

by state and local governments of

African American, Latino, Asian and

Native American-owned businesses.

The pattern of disparity across

industries varies with racial and ethnic

groups. However, the median disparity

figures calculated by UI demonstrate

disparities for all ethnic groups in every

industry.129

• Minority-owned businesses receive

on average only 59 cents of state and

local expenditures that those firms
26062 Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices

130United States Commission on Minority

Business Development, Final Report 99 (1992).

131 Id.

132 Id.

133 Id.

134BPA Economics, et al., MBE/WBE Disparity

Study for the City of San Jose, Vol. III, 118–19

(1990).

135 The role of state and local governments in

impeding contracting opportunities for minority

firms is most directly addressed through federal

programs that authorize recipients of federal funds

to take affirmative action in their procurement

activities. Those programs plainly are examples of

the exercise of Congress’ power under the

Fourteenth Amendment to remedy discrimination

by state and local governments. See Adarand, 115

S. Ct. at 2126 & n.9 (Stevens, J., dissenting). Since

that same state and local conduct constitutes an

impediment to minority opportunity in contracting

markets in which the federal government does

business, it also serves as a basis for affirmative

action measures in the federal government’s own

procurement. Therefore, those measures too entail

an exercise of Congress’ authority under the

Fourteenth Amendment. See id. at 2132 n.1 (Souter,

J., dissenting) (for purposes of exercise of Congress’

power under the Fourteenth Amendment, there is

no difference between programs in which ‘‘the

national government makes a construction contract

directly’’ and programs in which ‘‘it funnels

construction money through the states’’).

136See Croson, 488 U.S. at 492.

would be expected to receive, based on

their availability. The median

disparities vary from 39 cents on the

dollar for firms owned by Native

Americans to 60 cents on the dollar for

firms owned by Asian-Americans.

• Minority firms are underutilized by

state and local governments in all of the

industry groups examined:

Construction, construction

subcontracting, goods, professional

services and other services. The largest

disparity between availability and

utilization was seen in the category of

‘‘other services,’’ where minority firms

receive 51 cents for every dollar they

were expected to receive. The smallest

disparity was in the category of

construction subcontracting, where

minority firms still receive only 87 cents

for every dollar they would be expected

to receive.

An important corollary to UI’s

findings is the experience following the

Supreme Court’s 1989 ruling in Croson.

In the immediate aftermath of that case,

state and local governments scaled back

or eliminated altogether affirmative

action programs that had been adopted

precisely to overcome discriminatory

barriers to minority opportunity and to

correct for chronic underutilization of

minority firms. As a result of this retreat

from affirmative action, minority

participation in state and local

procurement plummeted quickly. To

cite just a few examples:

• After the court of appeals decision

in Croson invalidating the City of

Richmond’s minority business program

in 1987, minority participation in

municipal construction contracts

dropped by 93 percent.130

• In Philadelphia, public works

subcontracts awarded to minority and

women-owned firms declined by 97

percent in the first full month after the

city’s program was suspended in

1990.131

• Awards to minority-owned

businesses in Hillsborough County,

Florida, fell by 99 percent after its

program was struck down by a court.132

• After Tampa suspended its

program, participation in city

contracting decreased by 99 percent for

African American-owned businesses

and 50 percent for Hispanic-owned

firms.133

• The suspension of San Jose’s

program in 1989 resulted in a drop of

over 80 percent in minority

participation in the city’s prime

contracts.134

Together, the information in the state

and local studies, and the impact of the

cut-back in affirmative action at the

state and local level after Croson,

provide strong evidence that further

demonstrates the compelling interest for

affirmative action measures in federal

procurement. The information

documents that the private

discrimination discussed previously in

part II of this memorandum—

discrimination by trade unions,

employers, lenders, suppliers, prime

contractors, and bonding providers—

substantially impedes the ability of

minorities to compete on an equal

footing in public contracting markets.

And it these same discriminatory

barriers that impair minority

opportunity in federal procurement. The

information also indicates that, without

affirmative action, minorities would

tend to remain locked out of contracting

markets.

The information also helps to

illuminate what it is that Congress is

seeking to redress—and hence what

interests are served—through remedial

action in federal procurement. First,

Congress has a compelling interest in

exercising its constitutional power to

remedy the impact of private

discrimination on the ability of minority

businesses to compete in contracting

markets that is reflected in the studies.

Second, Congress has a compelling

interest in exercising its constitutional

power to redress the statistical

disparities reflected in the studies that

give rise to an inference of

discrimination by state and local

governments, or at minimum suggest

that those governments are

compounding the impact of private

discrimination through ostensibly

neutral procurement practices that

perpetuate barriers to minority

contracting opportunity.135 Finally,

Congress has a compelling interest in

ensuring that expenditures by the

federal government do not inadvertently

subsidize the discrimination by private

and public actors that is reflected in the

studies.136 Were that to occur, the

federal government would itself become

a participant in that discrimination

through procurement practices that

serve to sustain impediments to

minority opportunity in national

contracting markets.

III. Conclusion

As a nation, we have made substantial

progress in fulfilling the promise of

racial equality. In contracting markets

throughout the country, minorities now

have opportunities from which they

were wholly sealed off only a generation

ago. Affirmative action measures have

played an important part in this story.

However, the information compiled by

the Justice Department to date

demonstrates that racial discrimination

and its effects continue to impair the

ability of minority-owned businesses to

compete in the nation’s contracting

markets.

The evidence shows that the federal

government has a compelling interest in

eradicating the effects of two kinds of

discriminatory barriers: first,

discrimination by employers, unions,

and lenders that has hindered the ability

of members of racial minority groups to

form and develop businesses as an

initial matter; second, discrimination by

prime contractors, private sector

customers, business networks,

suppliers, and bonding companies that

raises the costs of doing business for

minority firms once they are formed,

and prevents them from competing on

an equal playing field with nonminority

businesses. This discrimination has

been, in many instances, deliberate and

overt. But it also can take a more subtle

form that is inadvertent and

unconscious. Either way, the

discrimination reflects practices that

work to maintain barriers to equal

opportunity.

The tangible effects of the

discriminatory barriers are documented

in scores of studies that reveal stark

disparities between minority availability

and minority utilization in state and

local procurement. In turn, the

disparities show that state and local

governments themselves are tangled in

this web through ostensibly neutral

procurement actions that perpetuate the
Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices 26063

discriminatory barriers. The very same

discriminatory barriers that block

contracting opportunities for minorityowned businesses at the state and local

levels also operate at the federal level.

Without affirmative action in its

procurement, the federal government

might well become a participant in a

cycle of discrimination.

Affirmative action in federal

procurement is not the cure-all that will

eliminate all the obstacles that racial

discrimination presents for minority

businesses. No one remedial tool can

completely address the full dimension

of this problem. Laws proscribing

discrimination and general race-neutral

assistance to small businesses are

critical to the achievement of these

ends. But the evidence demonstrates

that such measures cannot pierce the

many layers of discrimination and its

effects that hinder the ability of

minorities to compete in our nation’s

contracting markets. Thus, there

remains today a compelling interest for

race-conscious affirmative action in

federal procurement.

[FR Doc. 96–13123 Filed 5–22–96; 8:45 am]

BILLING CODE 4410–01–P