[Federal Register Volume 61, Number 101 (Thursday, May 23, 1996)]
[Notices]
[Pages 26042-26063]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13123]




[[Page 26041]]


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Part VI





Department of Justice





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Federal Procurement; Proposed Reforms to Affirmative Action; Notice

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

[[Page 26042]]



DEPARTMENT OF JUSTICE


Proposed Reforms to Affirmative Action in Federal Procurement

AGENCY: Department of Justice.

ACTION: Public notice and invitation for reactions and views.

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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. Pena, 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
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    \1\ Set forth as an appendix to this notice is a preliminary 
survey of evidence establishing the compelling interest for 
affirmative action in federal procurement.
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    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 
race-conscious 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 
race-conscious 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. 
Sec. 2323,2 had developed through

[[Page 26043]]

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.
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    \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 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.
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    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.
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    \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.''
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    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 
one-sixth of contracting with minority-owned 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
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    \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.).
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    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

[[Page 26044]]

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.
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    \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.
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    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.
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    \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.
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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.
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    \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.
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    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

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specific factual allegations that the concern is not eligible for the 
program.
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    \10\ The 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.
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    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
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    \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.
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    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 race-
conscious 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.
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    \12\ See, 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).
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    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.
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    \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.
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    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

[[Page 26046]]

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 race-
conscious 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.
---------------------------------------------------------------------------

    \14\ For 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \15\ As 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.
    \17\ See e.g., Department of Transportation Incentive 
Subcontracting Program for Small and Small Disadvantaged Business 
Concerns, 48 C.F.R. 52 219-10.
---------------------------------------------------------------------------

    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

[[Page 26047]]

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 race-conscious 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 race-conscious measures,19 it need not require 
agencies to stop using such measures, but may, as described below, 
require agencies to adjust their use.
---------------------------------------------------------------------------

    \19\ More 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.
---------------------------------------------------------------------------

    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 race-conscious 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 non-SDB 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

[[Page 26048]]

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 race-conscious 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, Sec. 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 pre-qualification 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.

[[Page 26049]]

    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 race-neutral 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 race-based 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 race-neutral 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 race-based 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
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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,

[[Page 26050]]

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 race-neutral 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. Pena, 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.
---------------------------------------------------------------------------

    \1\ Adarand 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. Sec. 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. 
Sec. 637(a)(5)(6), Sec. 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.
    \2\ Adarand, 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.
---------------------------------------------------------------------------

    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 race-conscious 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
---------------------------------------------------------------------------

    \3\ Adarand 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).
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \4\ The 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.
---------------------------------------------------------------------------

    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

[[Page 26051]]

opportunities for members of racial and ethnic minority groups.5
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \6\ Congress 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 Women-
Owned Enterprises--Breaking the Boundaries (1995); 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., 2d Sess. (1994).
---------------------------------------------------------------------------

    It is important to emphasize that, even though the government has a 
compelling interest in taking race-conscious 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
---------------------------------------------------------------------------

    \7\ See 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).
    \8\ See 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).
    \9\ See 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).
    \10\ See 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'').
    \11\ Croson, 488 U.S. at 490, 504; Fullilove, 448 U.S. at 502-03 
(Powell, J., concurring).
---------------------------------------------------------------------------

    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

[[Page 26052]]

theme that emanates from this record is unequivocal: Congress has 
adopted race-conscious 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 
minority-owned 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
---------------------------------------------------------------------------

    \12\ Congressional 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); 
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).
    \13\ Affirmative Action Review: Report to the President 55 
(1995).
    \14\ See 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).
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

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

    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
---------------------------------------------------------------------------

    \16\ That program targets federal procurement opportunities for 
small firms owned and controlled by individuals who are socially and 
economically disadvantaged. See 15 U.S.C. Sec. 637(a). Members of 
certain minority groups are presumed to be socially disadvantaged. 
13 C.F.R. Pt. 124.
    \17\ 15 U.S.C. Sec. 644(g).
    \18\ H.R. Rep. No. 468, 94th Cong., 1st Sess. 2 (1975).
    \19\ S. Rep. No. 1070, 95th Cong., 2d Sess. 14 (1978). See also 
H.R. Rep. No. 949, 95th Cong., 2d Sess. 8 (1978).
    \20\ Pub. L. No. 95-507, Sec. 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).
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \21\ H.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).
---------------------------------------------------------------------------

    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

[[Page 26053]]

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
---------------------------------------------------------------------------

    \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, Sec. 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, Sec. 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, Sec. 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. 
Sec. 7601 note; see also 42 U.S.C. Sec. 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).
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \23\ 10 U.S.C. Sec. 2323.
    \24\ See 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).
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \26\ H.R. Rep. No. 870, 103d Cong., 2nd Sess. 5 (1994).
    \27\ 140 Cong. Rec. H9242 (Sept. 20, 1994) (statement of Rep. 
Dellums).
---------------------------------------------------------------------------

    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 
race-conscious 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
---------------------------------------------------------------------------

    \28\ Beginning 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, Sec. 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).
    \29\ Croson, 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. Sec. 631 et seq.
    \31\ 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 
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 Minority-Owned Business 
Development of the Senate Comm. on Small Business, 101st Cong., 2d 
Sess. 39-44 (1990) (statement of Andrew Brimmer).

---------------------------------------------------------------------------

[[Page 26054]]

    The foregoing is just a sampling from the legislative record of 
congressionally-authorized 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:
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

      Minorities make up more than 20 percent of the 
population; yet, minority-owned businesses are only 9 percent of all 
U.S. businesses and receive less than 4 percent of all business 
receipts.33
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

     Minority firms have, on average, gross receipts that are 
only 34% of that of nonminority firms.34
---------------------------------------------------------------------------

    \34\  Id. at 3.
---------------------------------------------------------------------------

     The average payroll for minority firms with employees is 
less than half that of nonminority firms with employees.35
---------------------------------------------------------------------------

    \35\  Id. at 4.
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \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 self-employment 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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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)).
    \40\ H.R. Rep. No. 870, 103d Cong., 2d Sess. 5 (1994).
---------------------------------------------------------------------------

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,

[[Page 26055]]

managers and technicians.'' 41 A history of discrimination by 
unions and employers helps to explain this unfortunate phenomenon.
---------------------------------------------------------------------------

    \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)).
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

     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
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

     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
---------------------------------------------------------------------------

    \49\  Steve Askin & Edmund Newton, Blood, Sweat and Steel, Black 
Enterprise, Vol. 14, at 42 (1984).
---------------------------------------------------------------------------

     In 1969, only 1.6 percent of Philadelphia construction 
union members were minorities.50
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \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.'').
---------------------------------------------------------------------------

    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

[[Page 26056]]

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
---------------------------------------------------------------------------

    \54\  478 U.S. 421 (1986)
    \55\  Id. at 476.
    \56\  Id. at 433-34.
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \63\ See 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).
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \64\ H.R. Rep. No. 238, 92d Cong., 2d Sess. 3 (1972).
    \65\ Id. at 7.
    \66\ See, 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).
    \67\ See, 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) (word-of-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).
    \68\ See, 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.'').
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \69\ Barbara Bergmann, In Defense of Affirmative Action 32-33 
(1996).
    \70\ Id. at 33.
    \71\ Id. at 62.
    \72\ Id. at 63-82.
---------------------------------------------------------------------------

    The results of recent ``testing'' studies--in which equally matched

[[Page 26057]]

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
---------------------------------------------------------------------------

    \73\ Cross 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).
    \74\ Adarand, 115 S. Ct. at 2135 (Ginsburg, J., dissenting).
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \75\ Federal 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.
---------------------------------------------------------------------------

     97 percent of the senior level managers in the nation's 
largest companies are white.77
---------------------------------------------------------------------------

    \77\ Id. at 9.
---------------------------------------------------------------------------

     Black and Hispanic men are half as likely as white men to 
be managers or professionals.78
---------------------------------------------------------------------------

    \78\ Id. at iv-vi.
---------------------------------------------------------------------------

     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
---------------------------------------------------------------------------

    \79\ Id. at 15-16.
---------------------------------------------------------------------------

     Because private sector opportunities are so limited, most 
minority professionals and managers work in the public sector.80
---------------------------------------------------------------------------

    \80\ Id. at 13.

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
---------------------------------------------------------------------------

    \81\ Id. at 10-11.
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \82\ See, 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'').
---------------------------------------------------------------------------

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 minority-owned businesses.85 The sad fact is that, 
through countless hearings, Congress has learned that lending 
discrimination plays a major role in this regard.86
---------------------------------------------------------------------------

    \84\ 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. 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).
    \85\ See 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.'').
    \86\ See 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 
Set-Asides 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).
---------------------------------------------------------------------------

    Over and over again, studies show that minority applicants for 
business loans are more likely to be rejected and,

[[Page 26058]]

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, white-owned firms 
receive fifty times as many loan dollars as black-owned firms with 
identical equity.88
---------------------------------------------------------------------------

    \87\ Timothy 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).
---------------------------------------------------------------------------

     Minorities are approximately 20 percent less likely to 
receive venture capital financing than white firm owners with the same 
borrowing credentials.89
---------------------------------------------------------------------------

    \89\ Bradford & 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.'').
---------------------------------------------------------------------------

     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
---------------------------------------------------------------------------

    \90\ Faith Ando, Capital Issues and the Minority-Owned Business, 
The Review of Black Political Economy, Vol. 16, No. 4, at 97 (1988).
---------------------------------------------------------------------------

     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
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \92\ The 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.
    \93\ The Colorado Center for Community Development, University 
of Colorado at Denver, Survey of Small Business Lending in Denver v. 
(1996).
    \94\ Id.
    \95\ Id.
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \96\ There 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.
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \97\ United 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).
---------------------------------------------------------------------------

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, minority-owned firms are 
seldom or never invited to bid for subcontracts on projects that do not 
contain affirmative action requirements.99 In addition, when

[[Page 26059]]

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
---------------------------------------------------------------------------

    \98\ See 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'').
    \99\ 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) (``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 Woman-Owned 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 
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]'').
    \100\ See 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 non-minority 
subcontractors until they could find a non-minority 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).
    \101\ See, 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).
---------------------------------------------------------------------------

    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 white-owned firm.103
---------------------------------------------------------------------------

    \102\ Brimmer & 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.'').
    \103\ Brimmer & Marshall, Public Policy and Promotion of 
Minority Economic Development: City of Atlanta and Fulton County, 
Georgia, Pt. III, 15, 34 (1990).
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \104\ New Haven Board of Aldermen, Minority and Women 
Participation in the New Haven Construction Industry 10 (1990).
    \105\ National Economic Research Associates, The Utilization of 
Minority and Women-Owned Businesses by the City of Hayward 6-23 
(1993).
    \106\ See BBC Research and Consulting, City of Tuscon Disparity 
Study IX-23 (1994).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \107\ Bailey & 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.'').
---------------------------------------------------------------------------

    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,

[[Page 26060]]

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
---------------------------------------------------------------------------

    \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).
    \109\ See, 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' 
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''.).
    \110\ United 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).
---------------------------------------------------------------------------

    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 minority-owned 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 minority-owned 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
---------------------------------------------------------------------------

    \112\  This is accomplished by, for example, specifying that 
bidders must use certain brand-name 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).
---------------------------------------------------------------------------

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
---------------------------------------------------------------------------

    \114\  40 U.S.C. Secs. 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.'').
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \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 Women-Owned 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 Women-
Owned 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).
---------------------------------------------------------------------------

     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
---------------------------------------------------------------------------

    \119\  D.J. Miller & Associates, State of Louisiana Disparity 
Study Vol. 2, pp. 35-57 (June 1991).
---------------------------------------------------------------------------

     An Atlanta study found that 66 percent of minority-owned 
construction

[[Page 26061]]

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
---------------------------------------------------------------------------

    \120\  Brimmer & Marshall, Public Policy and Promotion of 
Minority Economic Development: City of Atlanta and Fulton County, 
Georgia, Pt. III, 131-38 (1990).
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \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).
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    In one glaring case, a firm in Georgia began sending white 
employees to purchase supplies posing as owners of a white-owned 
company. The ``white-front'' 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
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    \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).
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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 minority-owned 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 race-conscious 
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.
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    \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.
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    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
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    \127\ The 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.
    \128\ To 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.
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     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
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    \129\ UI'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.
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     Minority-owned businesses receive on average only 59 cents 
of state and local expenditures that those firms

[[Page 26062]]

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
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    \130\ United States Commission on Minority Business Development, 
Final Report 99 (1992).
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     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
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    \131\ Id.
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     Awards to minority-owned businesses in Hillsborough 
County, Florida, fell by 99 percent after its program was struck down 
by a court.132
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    \132\ Id.
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     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
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    \133\ Id.
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     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
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    \134\ BPA Economics, et al., MBE/WBE Disparity Study for the 
City of San Jose, Vol. III, 118-19 (1990).
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    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.
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    \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'').
    \136\ See Croson, 488 U.S. at 492.
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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

[[Page 26063]]

discriminatory barriers. The very same discriminatory barriers that 
block contracting opportunities for minority-owned 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