The Magazine

The Quotas That Won't Die

Neither party has the nerve to take on the scandal of preferential set-asides in government contracts.

Jul 21, 2008, Vol. 13, No. 42 • By JENNIFER RUBIN
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Forty years ago, the Nixon administration (building on the Johnson administration's attempt to transform the Small Business Administration into a weapon in the War on Poverty) undertook efforts to enhance "black capitalism," using Section 8a of the Small Business Act to provide preferences, assistance, and loans based on the race of government contractors. Thus was born race- and gender-conscious contracting which would become endemic. From the U.S. State Department to city garbage collection, contracts at all levels of government employ race and gender preferences.

Preferential contracting is a multibillion dollar business. According to a study by Justin Marion of the University of California at Santa Cruz, government contracting is estimated at almost 10 percent of gross domestic product and the practice of giving preferential treatment to disadvantaged business enterprise (DBE) contractors and subcontractors is widespread. In 2002, 6.75 percent of federal procurement dollars, for example, were awarded through the Small Business Administration to DBEs. And between 1983 and 1999, all Department of Transportation contracts required 10 percent "goals"--their term of art for set-asides--for minority- and women-owned firms.

The original intent of the DBE programs was to spread work around to a variety of struggling minority business owners, lifting them from poverty to the ranks of the successful. But study after study has shown that a small number of firms, a monopoly of just one or two in some jurisdictions, gets the overwhelming share of the contract awards. Todd Gaziano, a U.S. Civil Rights commissioner, told me, "When you use race as a proxy for disadvantaged [status], the subset that will take advantage are the most educated and the most affluent."

Race-conscious contracting practices are an enormous burden on taxpayers. Marion found that road construction projects in California cost 6 percent less after the overturning of affirmative action by Proposition 209 in 1996. In the two years after racial preferences were eliminated the state saved an estimated $64 million.

The list of the presumed minorities recognized by the Small Business Administration (upon which many government agencies rely) is a monument to racial pieties. Some groups are on the list (e.g., Pakistanis) and some not (e.g., Afghans). The evidence that individuals from Japan, Korea, Burma, Vietnam, Laos, Cambodia, Thailand, Malaysia, Indonesia, and the Philippines are suffering from discrimination in the United States is virtually nonexistent. "These lists," Gaziano says, "show just how political the determinations are rather than having anything to do with current or even recent discrimination."

Confirming the arbitrary nature of these preferences, Justice Sandra Day O'Connor wrote in the Supreme Court's 1989 decision in City of Richmond v. J.A. Croson Co.:

There is absolutely no evidence of past discrimination against Spanish-speaking, Oriental, Indian, Eskimo, or Aleut persons in any aspect of the Richmond construction industry. .  .  . It may well be that Richmond has never had an Aleut or Eskimo citizen.

In 2007 Salon detailed the "often-secretive world of federal contracting, an area of government rife with abuse and poor oversight," and told the sordid tale of an Alaska Eskimo firm receiving a no-bid State Department contract for assistance on Bolivian coca eradication. (Thanks to Senator Ted Stevens's influence, federal no-bid contracts to Eskimo tribes under preferential contracting provisions grew from $180 million in 2000 to $876 million in 2004.) In many of these cases, the politically connected Eskimos displaced other minority firms whose bids were far more competitive.

George LaNoue, professor of political and public policy at the University of Maryland, Baltimore County, explained in a recent study of minority set-asides that a typical DBE program doesn't concern itself with actual victims of discrimination:

It does not identify contracts where discrimination occurred. It does not identify firms subjected to discrimination and provide remedies to them. It does not identify prime contractors that discriminate in the selection of subcontractors and sanction them. What it does do is redistribute subcontracting dollars to firms owned at least 51 percent by women or minorities.

If the person in a group "presumed to be disadvantaged" has a net worth of less than $750,000 (excluding the value of the person's principal residence and the business) and a construction business with revenues below a set threshold (in the case of the Department of Transportation, $20.41 million in 2007), he or she can gain certification as a DBE. Under this definition 95 percent of Americans might be "disadvantaged" if they started a construction business.

Examining airport contracting, LaNoue found that women, not minorities, were the prime beneficiaries of DBE programs, noting:

A person may have gone to elite schools, have had very prestigious employment, be selected to prominent positions, and be a member of the best clubs; nevertheless, because of their race or gender they will be presumed by the DBE program to be "socially disadvantaged" as long as they live. Every DBE must be certified by a government agency and must provide considerable data to get certified, but that data do not deal in any detail with whether the owners or the business have ever suffered discrimination.

LaNoue found African-American businesses (the originally intended beneficiaries of DBE programs) received 23.5 percent of the airport contracts (31 percent of the dollars) awarded to DBEs while white women received 48.3 percent (36.5 percent of the dollars).

Ward Connerly, a longtime opponent of preferences and the driving force behind the overturning of affirmative action in California in 1996, points out that the DBEs' original goal of creating self-sufficient "minority entrepreneurs" has never been met. These DBE businesses who are supposedly being helped, Connerly says, "don't graduate from preferences. They remain beholden to the primes." (DBE contracting programs can either meet their goals through direct bids from prime contracts, or, more frequently, indirectly from prime non-DBE contractors which subcontract out the work to DBEs.) He observes ruefully that we have created a system where "Mexican Americans are given preference over people of Chinese descent on the rationale that 100 years ago white people enslaved black people."

And despite the best efforts of government auditors, no one really knows if these programs work: how much they cost, how successful they are in assisting owners to operate without preferences, or any other meaningful indication of success. In 2001, the GAO reported to Congress that not only could none of these questions be answered, but that the 14 disparity studies which it examined were all analytically flawed.

In 1989, the U.S. Supreme Court intervened to put limits on race-based contracting. The Court in Richmond v. Croson held that to use preferences state and local governments must pass a "strict scrutiny" test demonstrating a "compelling state interest" in remedying discrimination and must narrowly tailor their programs to reach that goal. Then in Adarand Constructors, Inc. v. Peña in 1995, the Court held that all racial classifications used by the federal government must also be subject to "strict scrutiny," with the burden of proof on the government to demonstrate that the classification is the least restrictive way of serving a "compelling governmental interest." The Court insisted that race-neutral alternatives be considered.

It would be understandable, if perhaps naïve, to assume that after Croson and Adarand government entities abolished preference programs that did not meet the strict scrutiny test. Jonathan Bean, a professor of history at Southern Illinois University, has studied the effects of affirmative action programs. He explains that there was "massive resistance across the board" to implementing the Court's edicts. "The proponents of affirmative action have played rope-a-dope for decades." The Croson and Adarand decisions did not actually abolish race-based contracting. "The Court left the door open," notes Roger Clegg, the president and general counsel of the Center for Equal Opportunity, "and the government proceeded to drive a truck through it." An entire industry of consultants sprang up to provide studies of racial disparity to justify preferential contracting programs. By the end of 2005, LaNoue found there were almost 200 such disparity studies, which had cost taxpayers an estimated $75 million.

The results are often comical. When KPMG Peat Marwick conducted a disparity study for the city of Miami and proudly announced that there was no evidence of discrimination against blacks or Hispanics, the city commissioners demanded a new study that provided the desired results. These studies, moreover, never provide evidence of discrimination. Although questionnaires are sent out and focus groups convened in an attempt to extract evidence, respondents tend to provide generic opinions on societal discrimination. The findings are, LaNoue notes, simply a "measure of ideology and opinion."

He also found that DBE programs cause more discrimination than they remedy. With regard to the FAA airport contracts, LaNoue's study determined that the programs creating preferences for DBEs did not accurately measure the relative numbers of ready, willing, and able DBE and non-DBE subcontracting. LaNoue concluded: "Under the USDOT regulations, recipients of federal transportation funds are to set goals to create 'the level of DBE participation that would be expected absent discrimination.' .  .  . As this article shows, the FAA DBE goals process, instead, creates preferences for DBEs and massive overutilization of them as subcontractors."

In September 2005 the U.S. Civil Rights Commission published a study concluding "Ten years after the Adarand decision, the Commission has found that federal agencies still largely fail to consider race-neutral alternatives as the Constitution requires":

In 1995, Adarand's strict scrutiny requirements compelled agencies to narrowly tailor reliance on race-conscious programs and to seriously consider race-neutral alternatives that would effectively redress discrimination. Ten years later, the agencies in this study have still largely failed to satisfy this requirement. Indeed, no agency reviewed in this report engages in serious consideration of race-neutral alternatives.

Adarand seemed a dead letter. But that same year a major stumbling block was thrown in the way of preferential contracting. In Western States Paving, Inc. v. Washington State Department of Transportation, the Ninth U.S. Circuit Court of Appeals found the administration of a DBE program failed the strict scrutiny test. The circuit court explained:

Whether Washington's DBE program is narrowly tailored to further Congress's remedial objective depends upon the presence or absence of discrimination in the State's transportation contracting industry. If no such discrimination is present in Washington, then the State's DBE program does not serve a remedial purpose; it instead provides an unconstitutional windfall to minority contractors solely on the basis of their race or sex.

At least in theory, the decision required that if preferential contracting was to continue within the Ninth Circuit--Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington--localities needed evidence of actual discrimination. (Because this decision was limited to the Ninth Circuit, the Justice Department has not enforced the ruling in other states.) Just as they did after Croson, the preference professionals revved up the production of disparity studies.

Spokane County in Washington State is a good example of the legal chicanery that ensued. Ed Repp recently retired as the equal employment officer for Spokane County's Public Works Department, which oversees local government contracting. He has documented the shenanigans that characterize race-conscious contracting in a 300-page report. As a result of Western States Paving, Washington State's DBE program was invalidated in 2005. But soon new studies were underway, aiming to prove discrimination.

The premise of the Washington State Department of Transportation's (WSDOT) statistical studies was that any disparities in earnings between various groups proved discrimination. If statistics identified a difference in annual wages between a given group and white men, it was only attributable to "discrimination." Repp noted:

The utilization study creates an aura of scientific-methodology to rationalize the DBE Program. Its inferences of discrimination based on race and sex were then used as the justification for WSDOT's adopted 18.77 percent DBE Goal. The study offers statistical evidence of disparity but no evidence of discrimination. It appears to entail "omitted-variable bias" (OVB), in that it omits the independent variable(s) that could explain the disparities.

The WSDOT conducted six focus groups where a consultant tried to extract firsthand evidence of discrimination from groups of contractors and subcontractors who participated in the DBE program. One consultant was quite candid about the goal: "As soon as we get these focus groups done and the write-up, we'll have a new package, send that off to the Federal Highway Administration, and hopefully WSDOT will start setting new goals in the contracts."

In the focus groups, generic expressions of societal discrimination were common:

PARTICIPANT A: Personally, you know, I don't think I've ever been discriminated against. But you just have to look around to figure out that we live in a society full of discrimination. And if that weren't the case, then you'd see a lot more women and minorities in positions of power and influence, and you don't.

MS. HOLT: Uh-huh.

PARTICIPANT A: Like, it's a no-brainer.

MS. HOLT: You would think, but well, yeah, I mean, you would think. But sometimes we have to convince judges of things that we thought that everybody already knew, which is why we go through this exercise.

Try as they might, the questioners had trouble getting what they were looking for:

MR. MILLER: Let's put it out there beforehand. There are two ways--or two things that we commonly hear, one is as part of being a small business and the other has to do with the--with the discrimination. And for Colette's report it's--in terms of answering the questions that the court really wanted to find, we want to focus in the beginning with issues related to discrimination. We'll get back to some of the small business issues, but we really want to focus in on what has been your experience. Are you experiencing examples of discrimination?

PARTICIPANT F: How do you define that?

MS. HOLT: Well, it depends. Sometimes it's pretty blatant, like if people spray paint across a truck "No Spics."

PARTICIPANT F: But if you say, okay, here is an engineering firm that's doing work for, you know, all these tribes and entities and they do fantastic, but not one piece of work from WSDOT, how do you want to take that? I don't know.

The participants were sometimes even unwilling to concede that life without preferences was an ordeal:

MS. HOLT: And then what was your experience? You said that the work dropped off [after the Western States Paving ruling]?

PARTICIPANT F: Well, actually, strangely enough, we were afraid that the work was going to drop off, obviously, but actually, it turned out to be one of our biggest growth years. We went from 55 to about 70 that year. But we had--I guess, I would say--that we had, really strategically figured out how we were going to handle it. .  .  . And then, like I said, we had made, you know, a really concerted effort to not just do great work, but establish the client relationships with WSDOT and with our other clients.

And again:

MS. HOLT: A lot of places I hear that the minute the firms graduate, nobody will use them anymore; and then the next year they're back in the program because their sales fell by 75 percent so they get to get back in.

PARTICIPANT D: I actually can't think of an example of a company locally that would meet that story.

PARTICIPANT I: And all the ones that have graduated don't need a job.

A general contractor when asked to confirm that DBE goals are too low gave the questioner an unexpected (if logical) response:

We bend over backwards to help [the DBEs] stay in business. If they really want to be in their business, they would probably make it without the DBE certification. If they really want to be in the business, this would all be part of it. Most of the people that are really successful in the construction industry don't rely on the DBE certificate to make a living. They make it without it.

Rather than finding factual evidence of discrimination against DBEs, Repp found that the "six Focus Group Sessions unintentionally include copious evidence of discrimination against non-DBE firms, or conversely--evidence of preferences for women or minorities, in both construction and design contracting, perpetrated under the DBE Program."

Washington also held eight meetings around the state to try to discern discrimination and satisfy the strict scrutiny standard. But inconveniently for the supporters of the DBE program, a number of attendees complained that the DBE program itself was "discriminatory" and that "it benefits a select few." Repp noted, too, that "The salient finding from these empirical data is that for the twelve months after Western States Paving, one firm, North Star Enterprises, received 100 percent of the $463,043.23 awarded to DBE contractors in Spokane County, under seven separate contracts."

North Star Enterprises is a paving firm owned by the daughter (who is white) of the former owner of the largest paving contractor in eastern Washington. North Star was a DBE from 1984 to 2000 when it "graduated" from the program. It was able to recertify in 2003, and, according to Repp, North Star held "a virtual monopoly for the provision of traffic control services in Spokane County and much of Eastern Washington."

Repp concludes that "With about a two to three year hiatus after Western States Paving, the DBE Program is being reinstituted in Washington state. And in Eastern Washington, at least, we are back to denying highway work to smaller, struggling non-DBE firms, particularly subcontractors, while providing protection from competition to multimillionaires who are certified DBEs--socially and economically disadvantaged." Programs designed in the 1960s to lift African Americans out of poverty have instead made a white woman in Washington very wealthy.

North Star has once again "graduated" from the program, but a firm run by the owner's husband--using the same equipment, same fax number, and same personnel as North Star--has qualified for DBE status thanks to the ethnic minority rules. He stands ready to inherit the monopoly on DBE contracts in eastern Washington.

Several factors account for the tenacity of preferential-contracting programs despite two Supreme Court rulings against them. First, aggrieved non-DBE-eligible companies are loath to sue the government and offend a hand that might feed them. (When, for example, a contracting association sued the city of Chicago over race-conscious contracting, a number of contractors withdrew from the association out of just such a concern.) They also fear offending well-organized civil rights activists who have the potential to organize pickets, demonstrations, and sophisticated public relations campaigns against a firm. In addition, contractors are already used to all types of government regulations and codes and tend to view affirmative action as just another of the many obstacles in doing business with the government.

On the political front, neither party takes seriously the concept of colorblind government. Conservatives may hold Democrats responsible for these programs, but Republicans have acceded to them for decades in what Connerly claims is their belief that "If you support preference you can hide behind the fig leaf that you are doing the morally right thing. You have cover that you are 'doing the Lord's work.' " Nearly all elected Republicans and Republican candidates for governor and senator opposed the Michigan Civil Rights Initiative in 2006, which easily passed and banned preferences in hiring, contracting, and school admissions in the state. "Too many Republicans think it's just messy," says Todd Gaziano of the U.S. Civil Rights Commission. "And it is safer not to rock the boat."

Unless the public loudly demands a colorblind government, we will continue with the one we have--one which uses spurious studies to justify entrenched programs benefiting a select few and which capitulates to the notion that the government is entitled, indeed obligated, to discriminate among its citizens.

Jennifer Rubin is a writer in Virginia.