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Local Business Preferences -Race-Neutral Affirmative Action After Proposition 209?
By Mara E. Resales
I. INTRODUCTION
In the late 1980's state and local business participation programs were prevalent in the State ofCalifornia, although they typically took the form of minority and women business participation programs.(See e.g. Associated General Contractors of California, Inc. v. City and County of San Francisco (9th Cir.1987) 813 F. 2nd 922; Domar Electric Inc. v. City of Los Angeles (1994) 9 Cal. 4* 161,165-166.) By 1989,in light of the United States Supreme Court decision in Croson v. City of Richmond (1989) 488 U.S. 469,state and local minority/women business programs began to change (to include other business concerns)to avoid being struck down by the courts as unconstitutional. (Domar. supra at 166.)
Within two years of the adoption of Proposition 209 in 1996 (codified as California Constitution,Article I, Section 31 )1 government agencies were compelled to dismantle race and gender consciousaffirmative action programs and policies not required by federal law or federal funding requirements.A recent study by Chinese for Affirmative Action titled, "Losing Ground: The Impact of Proposition 209 onMinority and Women-Owned Businesses in California" (Oct. 2003)2, suggests that a well-crafted andimplemented small, local business program may serve some of the policy objectives underlying race andgender conscious affirmative action legislative efforts.
The purpose of this paper is to identify the likely legal issues government attorneys will face whenor if their public sector clients ask about race-neutral affirmative action, a local business preferenceprogram or a local business program that references race and gender.
II. THE FATE OF RACE/GENDER CONSCIOUS AFFIRMATIVE ACTION UNDER PROPOSITION 209
Before discussing race-neutral affirmative action it is important to pause and address race andgender conscious affirmative action: Is it dead after Proposition 209?
The proponents of Proposition 209 would say that any state or local legislative or governmentalclassification of persons by race and gender is prohibited by the express terms of Proposition 209. Thus,they would argue the only affirmative action policy that survives under Prop. 209 is one that is race andgender neutral, such as one which focuses on disadvantage or local status. The opponents of Prop. 209would argue otherwise - that not all race and gender specific affirmative action efforts are barred. Bothsides would point to the language of Prop. 209, ballot arguments in support of the initiative and the
1 Text of Proposition 209 is attached as Exhibit 1.2 Attached as Exhibit 2.
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California Supreme Court's decision in Hi-Voltage Wire Works, Inc. v. City of San Jose (2000) 24 Cal. 4th
537. The opponents of Prop. 209 have the better of the argument, although the safe harbor forrace/gender affirmative action is quite limited.
Proposition 209, codified as Article 1, Section 31 of the California Constitution, provides that stateand local government "shall not discriminate against, or grant preferential treatment to, any individual orgroup on the basis of race, sex, color, ethnicity or national origin in the operation of...public contracting."In Hi-Voltage Wire Works, Inc. v. City of San Jose, supra, 24 CaU^1 at 559-560, the California SupremeCourt defined the key terms of Proposition 209 as follows: '"[Discriminate1 means to make distinctions intreatment; show partiality (in favor of) or prejudice (against)"...; 'preferential1 means giving "preference"which is 'a giving of priority or advantage to one person...over others." Applying these definitions to SanJose's MBE/WBE program, the Court concluded the program was unconstitutional. (Ibid.) However, aclose read of Hi-Voltage reveals not all MBE/WBE policies are unlawful.
A. BACKGROUND
In 1990, the City of San Jose adopted a MBE/WBE program in response to a disparity studyshowing a statistically significant variance in the number and dollar value of contracts and subcontractsawarded to MBEs and WBEs. The legislative purpose of the program was to encourage nondiscriminatorysubcontracting. (Hi-Voltage, at 542.) After Proposition 209 was passed, San Jose modified its policy andadopted a "Nondiscrimination/Nonpreferential Treatment Program Applicable to Construction Contracts inExcess of $50,000 program." The purpose of this program was to "clarify the City's policy ofnondiscrimination and nonpreference in the subcontracting of its construction projects to 'ensure that thehistorical discrimination does not continue.1" (Id. at 543) The Supreme Court rejected the City's defense ofits well-intentioned affirmative action efforts, stating at page 560 of its decision:
[San Jose's] Program is unconstitutional because the outreach optionaffords preferential treatment to MBE/WBE subcontractors on the basis ofrace or sex, and the participation option discriminates on the same basisagainst non-MBE/WBE subcontractors as well as general contractors thatfail to fulfill either of the options when submitting their bids.
Although the Court found San Jose's program to be constitutionally prohibited, the Court wascareful not to send the message that all affirmative action policies were unacceptable. As Justice Brownnotes in her majority opinion:
Although we find [San Jose's] outreach option unconstitutional undersection 31, we acknowledge that outreach may assume many forms, notall of which would be unlawful. (Id. 24 Cal.4th at 565.)
Chief Justice George makes the point most clearly: "[Proposition 209] was not intended topreclude all governmental affirmative action programs..., but rather was intended to prohibit only thoseaffirmative action programs that discriminate against or grant preferential treatment to any individual orgroup on the basis of race or gender." (Id. at 587.)
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Accordingly, what kinds of race and gender conscious affirmative action policies are permitted?
B. PERMITTED AFFIRMATIVE ACTION
While the exact parameters of permissible affirmative action are unclear after Hi-Voltage, two typesof programs appear to be within the realm of acceptability.
First, the majority opinion3 suggests Los Angeles' outreach program, addressed in Domar ElectricInc. v. City of Los Angeles, supra. 9 Cat. 4th.161, is one example of a permissible affirmative race andgender conscious program (Hi-Voltage at 565.) Although the court does not opine as to the legality of sucha policy it describes Domar as a "pre-Proposition 209 decision upholding city requirement 'mandatingreasonable good faith outreach to all types of subcontractor enterprises,' not just MBEs and WBEs..." (HJ:Voltage at 565.) Chief Justice George concurring and dissenting, joined by Justice Werdegar, cite the LosAngeles MBE/WBE/Other Business program as "a good example of a general, nontargeted outreachprogram that ordinarily would be considered an affirmative action program." (Id. at 595.)
Second, the California Supreme Court suggests in Hi-Voltage that remedial programs that targetdeliberate exclusion of minorities and women may not be prohibited by Proposition 209's language andintent. (Id. at 568 ["Where the state or a political subdivision has intentionally discriminated, use of a race-conscious or race-specific remedy necessarily follows as the only, or at least most likely, means ofrectifying the resulting injury."].) In a case where MBE/WBE policies are adopted as a remedy for thedeliberate exclusion of MBE/WBEs in public contracting the remedy would not constitute "discriminationagainst" or "preferential treatment" as those terms are defined in Hi-Voltage. These types of affirmativeaction efforts ensure equal opportunity and fairness to all competitors. (See Hi-Voltage, supra, 24 Cal.4th at587 [proponents of Prop. 209 state "[programs designed to ensure that all persons - regardless of race orgender - are informed of opportunities and treated with equal dignity and respect will continue as before".].)(George, C.J., concur, and dissent opn.)
1. Government's Constitutional Duty May Require Affirmative Action Efforts.
Even if it were concluded that Prop. 209 prohibits all race and gender conscious public contractingprograms, there are exceptions to Prop. 209 which may allow some of these programs to survive.
Article 1, Section 31, subsection (h) provides:
If any part or parts of this section are found to be in conflict with federallaw or the United States Constitution, the section shall be implemented tothe maximum extent that federal law and the United States Constitutionpermit.
What does this provision mean? In Hi-Voltage Wire Works, Inc. v, City of San Jose, the SupremeCourt addressed this provision by considering whether San Jose's MBE/WBE outreach program wasconstitutionally necessary under federal law. (24 Cal.4th at 568-569.) The Court made two points relevanthere. First, the Court made reference to government's constitutional duty not to discriminate against
3 The Hi-Voltage majority is: Justices Brown, Mosk, Baxter and Chen.
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MBE/WBEs. (Id. at 568.) The Hi-Voltage Court cited a MBE/WBE ordinance case, Associated GeneralContractors of California v. City and County of San Francisco, supra, 813 F.2d 922,929, where the NinthCircuit held:
Like the federal government, a state or political subdivision has the authority- indeed the "constitutional duty" [citations, emphasis in original] - toascertain whether it is denying its citizens equal protection of the laws, and ifso, to take corrective steps.
It is well established that where federal law imposes a duty on a local government entity, that dutytrumps any conflicting state law. For example, in North Carolina State Board of Education v. Swann (1971)402 U.S. 43, (also cited in Hi-Voltage at p. 568) the Supreme Court invalidated a statute that banned race-based student assignments because the ban conflicted with school officials' constitutional duty:
Just as the race of students must be considered in determining whether aconstitutional violation has occurred, so also must race be considered informulating a remedy. To forbid, at this stage, all assignments made on thebasis of race would deprive school authorities of the one tool absolutelyessential to the fulfillment of their constitutional obligation to eliminate existingdual school systems. (Swann at p. 46 [emphasis added].)
The second relevant point made by the Hi-Voltage Court is at page 569 of its decision:
[l]f it were determined the City had violated federal constitutional or statutorylaw, the supremacy clause as well as the express terms of Proposition 209would dictate federal law prevails..." (Id. at 24 Cal.4th 569.)
In light of these statements, it appears that any political subdivision of the state who ascertains thatit is denying its citizens equal protection of the law in its public contracting practices must take correctivesteps to remedy that inequality, consistent with federal constitutional standards set forth in Croson v. City ofRichmond, supra, 488 U.S. 469. In these limited situations, Prop. 209 appears not to apply.
To my knowledge, the City and County of San Francisco is the only public entity in the state whichhas based its affirmative action program on findings and evidence of intentional discrimination againstMBE/WBEs. Thus, for most governmental bodies wishing to embark on affirmative action, a race neutral orlocal business program is the path to take.
LOCAL BUSINESS PREFERENCE PROGRAMS •• ISSUES TO WATCH FOR
A. What is a Race-Neutral Local Business Concern?
General Definition: Local business participation programs take different forms. The mostcommon types have a defined geographical scope (e.g. within the city or county boundaries) and
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have size limitations based on gross annual receipts of the business and/or number of employees.Some require, in addition, that the business owner be economically and/or socially disadvantaged.Still others allow that the business be a new entrant or have few years in its trade, industry orprofession. To be considered race and gender neutral, it is preferable that the race and gender ofthe business owner not be referenced. However, it is noteworthy (as stated earlier) that the ChiefJustice in Hi-Voltage Wire Works. Inc. v. City of San Jose, supra, 24 Cal. 4th at 594 (George, C. J.cone, and dissent opn.) has indicated that Los Angeles' Minority/Women/Other Business outreachprogram "provides a good example of a general, non-targeted outreach program that ordinarilywould be considered an affirmative action program."
B. What are the Pros/Cons of a Local Business Policy or Race-Neutral Affirmative Action?
PROS:> Good for local economy and relationship with local business community.> If well drafted and implemented, can be a substitute for race/gender conscious
affirmative action.> Easier for attorneys to draft.> Easier for attorneys to defend in court.> Depending on the extent of regulations, not administratively burdensome for local
government or contractors.
CONS:> Can be viewed as favoritism for local business and thus discrimination for non-local
business, prompting protests and possibly lawsuits.> Depending on the program requirements, contractors may object by declining to bid on
contracts, reducing competition for contract awards.
C. What do Local Business Enterprise (LBE) Programs Look Like?
A local business participation program can take many forms. Some examples are:• a bidding preference in the contract award process for LBEs competing as prime or
subcontractor. (This is more common for contracts which are competitively bid.)• a rating preference or extra points for LBEs. (This is more common for contracts
which are competitively processed, e.g. professional services contracts.)• a participation goal, expressed as a percentage of the contract's value, for LBEs.• a set aside of contracts for competition exclusively among LBEs.
D. Legal Issues/Authorities
1. Legal Authority to Adopt Local Business Enterprise Policies andRequirements: Does the public agency have the legal authority to adopt the LBEprogram?
• If the agency is a charter city the decision to adopt the program is a "municipalaffair." (R & A Vending Services. Inc. v. City of Los Angeles (1985) 172 Cal.
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App. 3d 1188,1191-1192; see also Domar Electric. Inc. v. City of Los Angeles(1995) 41 Cal.App. 4*810,820.)
• General law cities may need express statutory authority to adopt a localbusiness program.
2. Competitive Process Requirements: Will the adoption of a LBE policy violatecompetitive bidding/process requirements?
Statutory requirements that a contract be subject to a competitive bid process mayprevent the adoption of a LBE policy. (See Associated General Contractors ofCalifornia v. City and County of San Francisco, supra 813 F. 2nd 922,924-927("AGC I"). [Ordinance granting LBE bid preference inconsistent with charterrequirement that construction contracts over $50,000 be let to the lowest, reliableand responsible bidder}; see also Associated General Contractors v. Coalition forEconomic Equity (9th Cir. 1991) 950 F. 2nd 1401,1410 [change in charter languageallows for LBE program].)
3. Equal Protection Clause: Does a LBE program trigger Equal Protection Clauseconcerns?
• A LBE program, because it is race and gender neutral, is subject to scrutinyunder the "rational basis" test. That is, the program has to be supported by alegitimate government purpose (e.g. encourage business to move into thejurisdiction) and the means employed (LBE preference or requirement) has tobe rationally related to the legitimate government purpose. (AGC 1,813 F. 2nd
at 942-944.)
4. Privileges & Immunities Clause/Commerce Clause Concerns
• Although less likely to be raised, attorneys should be aware of the privilegesand immunities clause/commerce clause issues that may be implicated byLBE programs. (See J. F. Shear Co., Inc. v. City of Chicago (7*1 Cir. 1993)992 F. 2d 745.)
CONCLUSION
While easier to defend in the courts, local business programs can be successfully challenged onseveral legal grounds - lack of governmental authority to adopt the program, state or local competitivebidding requirements and constitutional provisions. Local business participation programs are generallygood for the local economy and for government's relationship with the business community. Theseprograms, if well drafted to focus on smaller, disadvantaged contractors, may serve as a good substitute forrace and gender affirmative action prohibited by Proposition 209.
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Exhibit 1
§ 31. Discrimination based on race, sex, color, ethnicity, or national origin;gender-based qualifications in public employment, education, orcontracting
Sec. 31. (a) The state shall not discriminate against, or grant preferentialtreatment to, any individual or group on the basis of race, sex, color, ethnicity,or national origin in the operation of public employment, public education, orpublic contracting.
(b) This section shall apply only to action taken after the section's effectivedate.
(c) Nothing in this section shall be interpreted as prohibiting bona fidequalifications based on sex which are reasonably necessary to the normaloperation of public employment, public education, or public contracting.
(d) Nothing in this section shall be interpreted as invalidating any courtorder or consent decree which is in force as of the effective date of this section.
(e) Nothing in this section shall be interpreted as prohibiting action whichmust be taken to establish or maintain eligibility for any federal program,where ineligibility would result in a loss of federal funds to the state.
(f) For the purposes of this section, "state" shall include, but not necessarilybe limited to, the state itself, any city, county, city and county, public universitysystem, including the University of California, community college district,school district, special district, or any other political subdivision or governmen-tal instrumentality of or within the state.
(g) The remedies available for violations of this section shall be the same,regardless of the injured party's race, sex, color, ethnicity, or national origin, asare otherwise available for violations of then-existing California antidiscrimi-nation law.
(h) This section shall be self-executing. If any part or parts of this sectionare found to be in conflict with federal law or the United States Constitution,the section shall be implemented to the maximum extent that federal law andthe United States Constitution permit. Any provision held invalid shall beseverable from the remaining portions of this section.(Added by Initiative Measure (Prop. 209, approved Nov. 5, 1996).)
418
Exhibit 2
LOSING GROUND:THE IMPACT OF PROPOSITION 209 ON MINORITY AND
WOMEN-OWNED BUSINESSES IN CALIFORNIA
Chinese for Affirmative Action17 Walter ULum Place
San Francisco, CA 94108www.caasf.org
October 2003
This report was made possible by generous grants provided bythe Akonadi Foundation and
the VanLobelSels/RemebeRock Foundation
Executive Summary
This study evaluates the impact of Proposition 209 and University of California Regentsresolution SP-2 on the ability of minority and women business enterprises to compete for publiccontracts. Both measures prohibit public agencies in California from providing affirmativeaction to minorities or women in contracting.
Chinese for Affirmative Action compiled a list of public agencies that had repealed orsignificantly changed their affirmative action policies in response to anti-affirmative actionmeasures. For each agency, we requested copies of their (1) current public contracting policies,(2) contracting policies prior to the passage of Proposition 209 or the UC Regent resolution, and(3) contract awards by race and gender for a minimum of three years prior and after theyrepealed or changed the race- and gender-conscious elements of their affirmative action policies.The following eight agencies responded: University of California, City of Oakland, Port ofOakland, East Bay Municipal District, Contra Costa County, City of Sacramento, City of SanJose, and City of Fresno.
With the exception of Fresno, which stopped collecting race and gender data after it discontinuedits affirmative action policy, the other seven agencies provided contract award information forlimited periods before and after they changed their policies. An analysis of the data found thatthese anti-affirmative action initiatives have severely limited contracting opportunities tominorities and women.
* Contract dollars awarded to businesses owned by minorities and women fell by 22%following the repeal of affirmative action programs. This reduction resulted in a loss ofat least $94.5 million per year to these businesses in the period covered by this study.
* The anti-affirmative action measures appear to have been more harmful to minoritybusinesses than to women-owned businesses. Of the five agencies that reportedseparate numbers for minorities and women, contract awards fell 26% for minorities butonly 7% for women.
* Agencies can take steps to mitigate the harms of repealing affirmative action policies.Those which developed small business programs or maintained outreach requirementsexperienced the least decline in participation by minority- and women businessenterprises. Of the agencies studied in this report, Proposition 209 had the least effecton the Port of Oakland and East Bay Municipal Utility District (EBMUD). The Port sawa small rise in the percentage of contract dollars awarded to minorities and women aftersuspending its race- and gender-conscious policy, while EBMUD experienced a similarincrease for women. Both agencies attributed their performance to the adoption ofprograms designed to increase participation by small and local businesses as well asaggressive outreach requirements.
The following report provides a detailed analysis of the impact of Proposition 209 and the UCRegent resolution on individual agencies and discusses how other agencies can learn from thesuccessful programs at the Port of Oakland and EBMUD.
INTRODUCTION
In November 1996, California voters passed Proposition 2091 to amend the CaliforniaConstitution to prohibit preferences based on race, ethnicity, or gender in public sectoreducation, employment and contracting. Initially enjoined from implementation by court order,the initiative did not go into effect until August 1997.
Although proponents of Proposition 209 originally claimed that this initiative would noteliminate affirmative action, most government agencies in California responded by dismantlingsuch policies. In November 1998, Chinese for Affirmative Action and Equal Rights Advocatesreleased a study entitled, Opportunities Lost, analyzing Proposition 209's impact during its firstyear of implementation.2 The study surveyed 68 government agencies across California,including state agencies, local governments, higher education institutions, and school districts, tofind out how they were responding to the new law and the impact of these changes on people ofcolor and women. We found that most government agencies were in the process of repealingaffirmative action programs not required by federal laws or funding requirements. The studyconcluded that Proposition 209, combined with court actions and policy changes, had "begun toseriously erode the gains made by minorities and women in California."3 As a follow up to theOpportunities Lost report, CAA began to conduct this study in 2001 to focus specifically onProposition 209's effects on public contracting. The following is a report of that study and alsoincludes analyses on quantitative data that were not available in 1998.
PUBLIC CONTRACTING
Every day, state and local agencies contract with private businesses to carry outgovernment's work. The state may hire a construction company to build a highway or anarchitect to design a new office building. Governments regularly purchase office supplies andequipment, and they also hire consultants of all sorts. With California's changing demographics,an increasing number of privates businesses are operated by minorities and women. The CensusBureau reported that as of 1997, minorities and women combined to operate 1,219,158businesses in California, approximately 48% of the state's privately-owned firms.4 Yet, thesefirms have received only a small portion of government contracts. For example, in 1996, theCalifornia community colleges awarded approximate 4.8% of contracts to minority businessenterprises (MBEs) and 4.6% to women business enterprises (WBEs). A similar report from theCalifornia Department of Transportation in the mid-1990s indicated MBEs and WBEs received11% and 5% respectively of the total contract dollars. Unfortunately, more recent data fromstate agencies is unavailable. In 1995, former Governor Pete Wilson ordered state agencies tostop compiling contract awards by race and gender. A recently passed bill, AB 1084, restoresdata collection of state contract awards but has yet to be fully implemented.
There are many reasons for the low contract award rates to MBEs and WBEs, but aprimary cause is the difficulties these firms face in gaining equal access to government contracts.Studies have found that minorities and women often face discriminatory barriers in competingfor government contracts. These barriers include access to information about bid opportunities,prime contractors who reject low bids from MBE or WBE subcontractors, and government
officials who manipulate the contracting process to by-pass competitive bidding requirements orfavor contractors who have political or social connections with the agency.5 Althoughgovernment contracts are supposed to be awarded based on competitive bids, there are a numberof loopholes in these laws that provide government officials with a great deal of discretion. Thecontroversy arising from the $95 million software contract awarded by the State of California toOracle in 2001 illustrates how even very large government contracts can be awarded withoutgoing through a competitive bidding process.6
Most public contracting affirmative action programs try to respond to these inequities.Under a 1989 United States Supreme Court decision,7 local and state governments can adoptrace-conscious public contracting programs only in response to documented discrimination.Typically, government agencies spend years studying their procurement systems beforedeveloping affirmative action policies. Even if these policies are crafted in response todiscrimination, they must be narrowly tailored to address only specific conditions. Agencies areprohibited from using any forms of quotas, and affirmative action programs are only available toqualified contractors. At the time Proposition 209 took effect, most affirmative action publiccontracting programs simply required that prime contractors make good faith efforts to meetMBE and WBE participation goals. Prime contractors could either meet the participation goalsor demonstrate they had made outreach efforts in compliance with state law.8 Approximatelytwenty local governments were using some version of a "good faith efforts" program prior to thepassage of Proposition 209, and state agencies were also implementing similar programs.9
Because most public contracting programs were enacted in response to documenteddiscriminatory conditions, many minority and women contractors and civil rights advocatesfeared that Proposition 209 would result in reduced and unequal access to public contractingsystem throughout California. In Opportunities Lost, we describe a number of anecdotalobservations by contract compliance officers and MBEs and WBEs on the chilling effects of thenew law. Even in the first year after Proposition 209 took effect, these firms were receiving lessopportunities to bid, and contract compliance officers reported resistance by prime contractors toconduct outreach.
For instance, Carolyn Garrety, president of Continental Building Specialty Co. in SanFrancisco reported the number of bid requests that she received from prime contractors wentfrom 50 down to 2-3 requests per day. Similarly, Lisa Campbell, a Southern Californiaenvironmental cleanup contractor, reported that prime contractors were no longer even sendingher information on business opportunities. After Proposition 209, explains Campbell, "I'm luckyto get two [bid requests per week]. Maybe, on a good week, five, and that's it. And there areweeks that go by when we get nothing. And it's not that the work's not out there. There's plentyof work."10
This current study goes beyond personal anecdotes to evaluate how Proposition 209 andrelated anti-affirmative action policies in California have affected public contract awards toMBEs and WBEs. We sought contract award data from public agencies that changed theirprograms in response to these measures. In addition, we tried to identify innovative practices ornew strategies that have helped MBEs and WBEs maintain access to public contracting systemsdespite the rollback of affirmative action.
METHODOLOGY
We initially compiled a list of California state and local government agencies thatoperated affirmative action contracting programs prior to the passage of Proposition 209 and asimilar resolution, SP-2, adopted by the University of California Regents in 1995." We thensent public records requests to those agencies that significantly changed or repealed race- andgender-conscious elements of their programs. For each agency, we requested copies of their (1)current public contracting policies, (2) contracting policies prior to the passage of Proposition209 and UC Regent resolution, and (3) contract awards by race and gender for a minimum ofthree years prior and after they repealed or changed the race- and gender-conscious elements oftheir affirmative action policies. After a number of follow-up letters and phone calls, thefollowing eight agencies responded to our request:
• University of California• City of Oakland• Port of Oakland» East Bay Municipal District (EBMUD)• Contra Costa County• City of Sacramento• City of San Jose• City of Fresno
Of these agencies, the City of Fresno did not provide any data because it had stoppedtracking contract awards by race and gender after it eliminated its affirmative action program.The responses of other agencies varied. The University of California and EBMUD provided themost complete data describing the participation of MBEs and WBEs across different types ofcontracts. A growing number of agencies, including Contra Costa, San Jose, and City ofOakland, compiled this information only for construction contracts. Despite the limited responseto our public records requests, the aggregate contract dollars awarded by the agencies analyzedin our study totaled over $9.4 billion, providing a relatively robust sample size.
To evaluate the impact of Proposition 209, we compared contract award rates for MBEsand WBEs in the years in which these public agencies operated affirmative action programs tothose years after the race- and gender-conscious elements had been suspended or weresignificantly modified. The timing of when these changes occurred differs by agency. Forexample, the University of California was the first to eliminate its affirmative action contractingprogram in 1995. But many of the other agencies did not change to their policies until 1998 orlater. We will discuss the general findings of this evaluation followed by a more detailedanalysis by agency.
GENERAL FINDINGS
• Contract dollars awarded to MBEs and WBEsfell by 22% after government agenciesrepealed or changed their affirmative action programs. This reduction resulted in aloss of at least $94.5 million per year to MBEs and WBEs in the period covered by thisstudy. Combining data from the seven studied agencies, the dollar amounts awarded toMBEs and WBEs dropped sharply after these agencies eliminated race- and gender-conscious elements from their public contracting programs. MBEs and WBEs wereawarded 17.6% of the contract dollars in the pre-Proposition 209 period compared to13.7% after the initiative took effect, a drop of 22%. Assuming that contract award ratesfor MBEs and WBEs would have remained at the same level as in the pre-Proposition209 period, this decline resulted in an annual loss of approximately $94.5 million to firmsowned by minorities and women who contract with these seven agencies. Since theagencies studied in this report represent only a small segment of the total publiccontracting dollars available through state and local governments, the real loss caused byProposition 209 is probably much greater.
• Proposition 209 appears to have been more harmful to minority businesses than towomen-owned businesses. Of the five agencies that reported separate numbers forminorities and women, contract awards fell 26% for MBEs but only 7% for WBEs. Theprimary source of this difference appears to be in construction, where WBEs did notexperience a significant drop off in contract awards. As discussed below, it is unclearwhy Proposition 209's impact on WBEs was different relative to MBEs.
• Agencies that developed successful small business programs or maintained outreachrequirements experienced the least decline in participation by minority- and womenbusiness enterprises, and in some situations actually experienced increases. Of theagencies studied in this report, Proposition 209 had the least effect on the Port of Oaklandand EBMUD. The Port saw a small rise in the percentage of contract dollars awarded toMBEs and WBEs after suspending its race- and gender-conscious policy policy, whileEBMUD experienced a similar increase for WBEs. Both agencies attributed theirperformance to the adoption of programs designed to increase participation by small andlocal businesses as well as aggressive outreach requirements.
• A number of government agencies have either stopped or limited the collection of raceand gender data on contract awards after Proposition 209 took effect. Proposition 209does not require government agencies to change the manner in which it collects race andgender data,12 yet some agencies either stopped or curtailed their data collection efforts atthe same time that they cut back their affirmative action programs. These changes havemade it increasingly difficult to assess the ability of minorities and women to compete forpublic contracts, and whether the discriminatory conditions that were supposed to beaddressed by the pre-Proposition 209 affirmative action programs still exist. Below is adescription of some of the ways in which government agencies have limited theirreporting of MBE and WBE information:
> The City of Fresno stopped compiling race and gender data after it eliminated itsaffirmative action program.
> Only two agencies, EBMUD and the City of Oakland, provided us with ethnic- orrace-specific data (i.e., data broken down by the contract dollars awarded to AfricanAmerican, Asian Americans, Latino, etc.). Because data from these two agenciesrepresented a relatively small sample size, this study is unable to assess the effects ofProposition 209 on any specific racial group or whether there are differences acrossgroups.
> The City of Oakland, San Jose, and Contra Costa County only provided race andgender data for construction contracts and not for services or supplies contracts.
> Two agencies (Sacramento, and San Jose) reported only combined MBE and WBEcontract awards, making it impossible to assess whether the impact of Proposition209 differs between minorities and women at these agencies.
AGENCY SPECIFIC FINDINGS
University of CaliforniaThe University of California (UC) provided four years of contract award data, including
one year before the UC Regents' anti-affirmative action resolution, SP-2, took effect in 1996 andthree years thereafter. Prior to 1996, UC's procurement staff had the discretion to setparticipation goals for minority- and women-owned firms on large contracts and to require primecontractors to make good faith efforts to utilize them.
Businesses owned and controlled by racial minorities which meet the small businessthresholds in the regulations promulgated by the Small Business Administration are categorizedby UC as "Disadvantaged Business Enterprises" or DBEs. Although non-minority owned firmscan theoretically qualify for DBE status if they demonstrate compelling reasons for being treatedas a disadvantaged business, interviews with UC contract compliance staff confirmed that therewere very few non-minority firms in this category. Accordingly, we treated firms within UC'sDBE category as the equivalent to minority-owned businesses.
UC receives a number of federal contracts, some of which require that the universityimplement affirmative action in its purchases and procurement of services. To minimize theimpact of any federal affirmative action requirements, we excluded from our study all of thecontracts awarded by UC national laboratories (e.g., Los Alamos, Lawrence Livermore, etc.)because much of their funding is from federal sources. To the extent that we were unable toexclude other federally funded contracts, our study probably understates the negative impact ofUC's affirmative action ban on MBEs and WBEs since a number of UC's federal contracts mayrequire that the university continue to conduct outreach to minorities and women.
Table I: University of California Average Annual Aggregate Contract Awardsand Amounts Awarded to Minority and Women Business Enterprises
(Before SP2FY95J
After SP2(FY97-00)% Change inContract Awards
$1,715,956,706
$1,964,517,614
DEE7l67
10.2%,234
6.5%
-36%
WBE$99^040^651^
5.8%$108,354,439
5.5%
-7%
Table II: University of California Average Annual Construction Contract Awards andAmounts Awarded to Minority and Women Business Enterprises
Before SP2(FY95)After SP2(FY97-00)% Change inContract Awards
Total $
$418,220,323
$392,977,419
DBE$54,258,354
13,0%$29,289,698
7.5%
-42%
WBE$19,856,519
4.7%$23,253,660
5.9%
+26%
Table III: University of California Average Annual Design Contract Awards andAmounts Awarded to Minority and Women Business Enterprises
[Before SP2FY95)
After SP2(FY97:pQ)% Change inContract Awards
Total $
$73,430,692
$88,188,178
31.9%
-87%
WBE$8,329,321
11.3%$3,789,970
-62%
Table IV: University of California Average Annual Purchasing Contract Awards andAmounts Awarded to Minority and Women Business Enterprises
* ' ?'
Before SP2(FY95)After SP2(FY97.00)% Change inContract Awards
Total $
$1,224,305,691
$1,483,352,017
DBE .*<&< •$97,495,365" -
8.0% ;$91384,838"""""
6.5%
-19%
WBE$70,854,811
5.8%$81,310,810
5.5%
-7%
Tables I - IV summarize the impact of UC's affirmative action ban on public contracting.Table I shows the aggregate contract dollars awarded in the last year that UC was allowed to useaffirmative action compared with the years following its ban. Total contract dollars awarded toDBEs fell by 36%. Contract dollars awarded to WBEs also fell but by only 7%.
Tables II to IV show contract awards to DBEs and WBEs by three categories:construction, architectural/engineering design, and purchasing. DBEs experienced contractlosses on all categories, but the declines were most severe in the construction-related industries.Contract awards to DBEs went down by an astounding 87% in the design category and 42% inconstruction. WBEs also experienced a large decrease in design contracts (-62%), but relativelylittle change in purchasing and a surprising increase of 26% in construction contract awards.
The declines in contract awards to MBEs in construction and design contracts were notsurprising given the well-documented history of discrimination against minorities in theseindustries.13 However, the magnitudes of the change were extremely large and appear tocorroborate the experiences of MBEs who described in our earlier Opportunities Lost report ofhow they were receiving little or no information about bidding opportunities from primecontractors. Because UC awards relatively large contracts, most DBEs and WBEs participate inconstruction projects through subcontracts. In public works projects, prime contractors oftensubcontract up to 50% of their total work to smaller firms. Since UC no longer requires primecontracts to conduct outreach to DBEs to inform them of subcontracting opportunities, thesefirms have little chance of working on university projects.
The most surprising finding was that contract awards to WBEs increased by 26% afteraffirmative action was prohibited by the UC Regents. We were puzzled by this finding andinterviewed UC contract compliance staff to try to understand why participation by womenactually went up in the construction industry. Although several possible explanations weresuggested, we were unable to confirm any of them. For instance, contract compliance staffmembers pointed out that in recent years, a growing number of construction firms are owned bymarried couples in which the woman owns a 51% share of the business, thereby allowing thesefirms to identify as a WBE. Without questioning the legitimacy of these business arrangements,some staff suggested that the WBE increase in construction contracts between 1997 and 2000may have been due to changes in the legal status of businesses rather than an actual increase incontract awards to firms that are exclusively owned by women. Because UC uses a "self-certification" system, whereby the university accepts information about the racial or genderidentify of businesses without any corroborating information, it is difficult to evaluate thevalidity of this observation without conducting an extensive investigation of the firms that haveself-identified as WBEs. Ultimately, we were unable to obtain data from UC to confirm ordisprove this theory.
East Bay Municipal Utility DistrictPrior to Proposition 209, EBMUD had a policy that required contractors to make good
faith efforts to meet MBE and WBE goals for large contracts. Under this program, primecontractors were required to either meet specific goals for a contract or demonstrate that they hadmade good faith efforts to recruit and utilize MBEs and WBEs as subcontractors.
Table V: EBMUD Average Annual Aggregate Contract Awardsand Amounts Awarded to Minority and Women Business Enterprises
fl/WBE Program(FY96-98)IE Program
(FY99-01>|% Change inContract Awards
$128,025,304
$128,762,000
.$23329^74-18.1%
$17>88,68414.0%
-23%
WBE$8,516,916
6.7%$9,330,074
7.2%
+7%
Table VI: EBMUD Average Annual Construction Contract Awards andAmounts Awarded to Minority and Women Business Enterprises
M/WBE Program(FY96-98)CE Program(FY99-01)% Change inContract Awards
Total $
$48,483,338
$48,916,654
MBE$10,107*977
20.8% !$7,4087850
15.1%
-27%
WBE$2,140,622
4.4%$2,950,009
. 6.0%
+36%
Table VII: EBMUD Average Annual Purchasing Contract Awards andAmounts Awarded to Minority and Women Business Enterprises
M/WBEiProg ram(FVflffJ)CE'1?rogram(FY99r01f 3
%c)i|55f?in^"" "ContrletlAwards
Total $
$42,006,271
$43,785,143
a:^ ' -7( ',"' ''t'irV-t. K " ', Msec/-'""'$5,0897742' ""i:r
ii.i%$3>69,44«;"*~""
aS.lW1" "
:i -25%
WBE$3PJ05~7 eg
7.4%$27932,513
6.7%
-10%
Table VIII: EBMUD Average Annual Professional Service Contract Awards andAmounts Awarded to Minority and Women Business Enterprises
ifl/WBE;Prd'gram(f Yjle^SJ2E ProgramFY99-01;)
% Change inContract Awards
. -!?*§!-!_
$37,811,325
$36,060,202
. MBE ^$7,977,565
21.1%$6,610,211
18.3%
-13%
WBE$3,305,726
8.7%$3,473,686
9.6%^_
+3%
EBMUD's affirmative action policy remained in effect until mid-1998. On August 1,1998, EBMUD adopted a new "Contract Equity" program, which requires prime contractors to
conduct outreach to women, minorities, and white contractors to inform them of biddingopportunities. Under the policy, EBMUD staff can set race and gender participation goals forlarge contracts. However, a firm cannot be denied a contract for failing to meet these goals so asalong as it conducts the required outreach to all potential groups.
As part of its new program, EBMUD also adopted a policy to increase small businessesin its contracting. Under the policy, small businesses are eligible for a 5% bid preference whencompeting against a non-small business. In addition, EBMUD staff can set aside up to 25% ofthe contracts below $500,000 for bidding by only small businesses.
Table V summarizes the impact of the new program on MBEs and WBEs. Whilecontract dollar awards to MBEs fell by 23%, WBEs actually experienced an increase of 7%.Tables VI-VII shows that MBE participation declined across all contract categories, with thelargest drop occurring in construction. In contrast, WBE participation increased by 36% inconstruction and by a small amount in professional services contracts. WBE received fewerpurchasing contracts after the program was modified but the decline was again smaller than thatexperienced by MBEs.
EBMUD believes that the relatively good performance by WBEs under its new ContractEquity program can be attributed to its aggressive outreach and small business requirements.While the agency's performance in this area is impressive, the new program has not workednearly as well for MBEs. The EBMUD results, combined with the findings from UC, suggestthat the removal of affirmative action policies from public contracting may have had a moresevere impact on minorities than women.
Port of OaklandPrior to the passage of Proposition 209, the Port of Oakland also required prime
contractors to meet MBE and WBE goals or demonstrate good faith efforts. On October 7, 1997,the Port repealed the race- and gender-conscious goals program and instead adopted a SmallLocal Business Utilization Policy with the following key elements:
1. Construction Preference Points: The Port allots preference points based on the percentageof work being performed by small construction contractors (regardless of race or gender)located in either the Local Business Area (Alameda and Contra Costa County) or theLocal Impact Area (Oakland, San Leandro, Emeryville and Alameda) for a maximumtotal of 10% points. These points are then translated into a bid discount, to be appliedwhen determining the lowest responsible bidder.
2. Consultant Preference Points: The Port allots preference points for the percentage ofwork being performed by small business consultants located in either the Local BusinessArea (Alameda and Contra Costa County) or the Local Impact Area (Oakland, SanLeandro, Emeryville and Alameda) and for community involvement for a maximum totalof 15 points. These points are added to a maximum of 85 technical points for a compositemaximum of 100 points in evaluating consultant proposals.
10
3. Small Business Projects: Smaller construction contracts can be set aside for bidding bysmall businesses. These projects are selected by the Port's staff and are approved by theBoard of Port Commissioners.
In addition, the Port also had a strong outreach program, requiring prime contractors toinform firms owned by minorities, women, and white males about bidding opportunities.14
Table IX: Port of Oakland Average Annual Aggregate Contract Awardsand Amounts Awarded to Minority and Women Business Enterprises
*-• f > ^Ip^fl ' *v ^ " ^ "?" ^|1:i£ t
;iefom<F!r$3<&) - |
AfterN[FtM-Of|* ,••I:
% ,Cr|attge j|vContract Awards
Total $
$36,758,067
$140,246,050
MBE$8,130,509
22.1%$34,981,065
24.9%
+13%
WBE$1,107,633
3%$4,654,817
3.3%
+10%
Table X: Port of Oakland Average Annual Public Works Contract Awards andAmounts Awarded to Minority and Women Business Enterprises
"f ••'''• s.^ * -^ s y^- ^
«efo|6£(Fir|a|97)
After (FY98-01K
% Change inContract AWards
Total $
$23,573,063
93,129,803
: MBlf3tlv's
- <$5,i9,8lirtv:
' '""' 22:<i3G • - - - „$18,356,997
'19.7%-'
: -11%
WBE$113,590
0.5%$489,709
0.5%
0%
Table XI: Port of Oakland Average Annual Consulting Contract Awards andAmounts Awarded to Minority and Women Business Enterprises
Before (FY93-97)
After (FYS8-99f 99*0000-01)*% Change inContract Awards
Total $
$13,185,004
$47,116,247
' - • ' • ' ->Sv.
services. The data indicates that MBEs and WBEs were able to benefit from the Port'sexpansion activities. The proportion of contracts awarded to MBEs increased by 13% andWBEs by 10% under the Port's new race- and gender-neutral policies. MBEs and WBEs sawmost of this increase in professional service contracts, where their participation increased by59% and 17% respectively. The performance in construction was less impressive. MBEsexperienced a slight decline in construction contract awards. While WBE participation ratesremained at the same level, women-owned construction firms received less than 1% of allconstruction contracts in both periods.
City of OaklandThe City of Oakland provided data only for construction contracts. Prior to Proposition
209, the City also had a policy of requiring construction prime contractors to either meet raceand gender participation goals or to make good faith efforts to utilize MBEs and WBEs. Thispolicy was suspended in 1997, when the City adopted a small business program that provideslocal, small businesses with a bid preference of 5 percent.
Table XII: City of Oakland Average Annual Construction Awards andAmounts Awarded to Minority and Women Business Enterprises
Before(FY94-96)After""""""(FY98)% Change inContract Awards
Total $
^47^280,671
$64,795,211
- ; :̂ |/|Bi:I*
"T^ajJaStSTiF'""'̂ -v ?43.4% f x ;' : $!ij547,(fl4'
_,iw&jyi_* -30%
WBE$2,282,615
4.8%$1,430,142
_2.2%
-54%
Table XII shows that both MBEs and WBEs experienced relatively large declines inconstruction contract awards after the City eliminated its affirmative action policy. However, itshould be noted that MBE participation rates in construction were very high both in the pre- andpost- periods. Even under the new race-neutral contracting policies, MBEs won almost one-thirdof the City's construction contracts, a rate that is higher than any other agencies evaluated in thisstudy.
Contra Costa CountyContra Costa suspended its goals and good faith efforts program shortly after Proposition
209 took effect in 1997. At the time of our research, the county's public contracting programshave been completely race- and gender-neutral, and the county has not adopted any additionaloutreach or small business requirements.
In response to our public records request, Contra Costa County provided data forcontracts awarded in construction, purchasing and services categories for the period before itrepealing its affirmative action policy. Since repealing its affirmative action policy, the countyhas stopped collecting data on contract awards outside of construction. Therefore, the only dataavailable for comparing performance before and after the suspension of the county's affirmativeaction policy is in construction.
12
Table XIII:Contra Costa County Average Annual Contracts by
Contract Type, Race & Gender(in $millions)
Construction
Before (94-96)
After (97-98*)
% Change inContract Awards
Total7.5
3.7
MBE1.8
25%0,718%-28%
WBE0.79%0.25%
-44%
Purchasing Prof./Personal ServicesTotal20.9
rt/a
MBE0.020.1%n/a
WBE0.0040%n/a
Total40.9
n/a
MBE0.050.1%n/a
WBE0.110.3%n/a
Table XIII summarizes the county's performance over a three-year period. Even with anaffirmative action policy in place, the county awarded only a handful of purchasing and service-related contracts to MBEs and WBEs during the two years leading up to Proposition 209.Participation rates for MBEs and WBEs were close to zero across these categories.
The county's performance was considerably better in construction in the pre-Proposition209 period, with MBEs and WBEs receiving approximately 25% and 9% of the total contractawards. Since suspending its affirmative action policy, the county has experienced a 28%contract award drop for MBEs and 44% for WBEs.
City of San JoseSan Jose provided only construction data for this study. Like the other agencies, prior to
Proposition 209, San Jose required construction prime contractors to either, meet race and genderparticipation goals, or to make good faith efforts to utilize MBEs and WBEs. Shortly afterProposition 209 was adopted in November 1996, San Jose modified its policy to require thatprime contractors need only demonstrate they had contacted MBEs and WBEs and providedthem with information about bidding opportunities. After this policy was struck down by a courtdecision in 1997 for violating Proposition 209, San Jose's contracting practices have beencompletely race and gender neutral. At the time of our research, it did not operate any programsrequiring targeted outreach or provide preferences for small businesses.
Table XIV shows that Proposition 209 has had a severe impact on the ability of MBEsand WBEs to obtain construction contracts. Contract awards to MBEs and WBEs fell by 86% inthe period after San Jose eliminated its affirmative action policy. Minorities and women wononly 2.5% of all construction contract dollars awarded by the city in the three years after itadopted its new policy.
Unlike most of the agencies in this study, San Jose does not track the participation ratesof MBEs and WBEs separately. Instead, the city only reports the combined contract awards tominorities and women as one figure. As we have discovered in analyzing the results of the otheragencies, the impact Proposition 209 can differ between MBEs and WBEs. Unfortunately, given
13
limitation of San Jose's data, it is impossible to evaluate whether such differences exist withinthe city's contracting system.
Table XIV: City of San Jose Average Annual Construction Awards andAmounts Awarded to Minority and Women Business Enterprises
Before (FY94-97)
After (FY98-01)
% Change in ContractAwards
Total $$63,483,722
$76,056,616
r -86%
City of SacramentoThe City of Sacramento had established a comprehensive affirmative action policy in
1994 that both provided bid preferences to MBE and WBE prime contractors and required otherprime contractors to make good faith efforts to utilize MBEs and WBEs as subcontractors. In1997, Sacramento amended the program to eliminate the bid preferences. In March 1999,Sacramento repealed the remaining race- and gender-conscious elements of its program andestablished an "Emerging and Small Business Development Program." The new programprovides a 5% bid preference to small businesses and allows procurement officials to set asidecontracts for exclusive bidding by small businesses.
We had a great deal of difficulty obtaining data from Sacramento. Numerous publicrecords requests were made both in writing and by telephone. We eventually received useabledata in the areas of purchasing and services contracts. However, we were unable to obtain MBEand WBE contract data for construction in the period after the city suspended its affirmativeaction policy.
Table XV: City of SacramentoAverage Annual Purchasing and Services Contract Awards andAmounts Awarded to Minority and Women Business Enterprises
M/WBE Program (FY94*98) , , •><> IE/S8EProgram (FYQO-
% Change Ji ContractAwards
Total $18,981,281
37,804,588
J,tl|847
ijN 9,541
-41%
Table XV summarizes the impact of Proposition 209 on purchasing and services contracts.These categories were combined in the data provided by the city, making it impossible todetermine whether there are differences in participation rates between different types ofcontracts. In addition, Sacramento also combined the data for MBE and WBE into one figure so
14
that we were unable to evaluate any differences between minorities and women. These datalimitations prevent us from conducting any in-depth analysis of Sacramento's contractingpractices. However, consistent with the overall trend, Sacramento also experienced a largedecline in contract awards provided to MBEs and WBEs after it repealed its affirmative actionpolicy.
DISCUSSION OF FINDINGS AND POLICY RECOMMENDATIONS
Our study evaluating the impact of Proposition 209 and related policies on publiccontracting found several disturbing trends.
First, contract awards to MBEs and WBEs have declined significantly since Proposition209 took effect. These contract awards decreased by an average of 22% in the period after apublic agency dismantled its affirmative action policy. Assuming that contract award rates forMBEs and WBEs had remained at the same level as in the pre-Proposition 209 period, thisdecline translates into a loss of almost $100 million annually to MBEs and WBEs in the sevenagencies analyzed in this study. However, our study also suggests that there are steps publicagencies can take to limit the harmful impact of Proposition 209. The results of the Port ofOakland and EBMUD programs demonstrate that the combination of extensive outreach and thedevelopment of small business programs can help maintain access for minorities and women.
Second, the decline in contract awards to MBEs was significantly higher than for WBEs.Contract awards to MBEs fell by an average of 26% compared to 7% for WBEs.
Third, a number of government agencies have stopped or limited their collection ofcontract award data, making it difficult to evaluate the impact of various anti-affirmative actionpolicies and to develop policy recommendations for addressing possible barriers faced byminorities or women. The City of Fresno stopped collecting race and gender related dataaltogether after it suspended its affirmative action policy. Similarly, Contra Costa Countystopped collecting the data on its non-construction contracts. In addition, several agencies onlyreport combined information about MBEs and WBEs making it impossible to evaluate theeffects of Proposition 209 on any specific racial group or whether the effects differ by gender.
These findings lead us to make the following recommendations:
Government agencies should consider adopting outreach, small business programs andother policies consistent with Proposition 209 to ensure that MBEs and WBEs have equalaccess to public contracts. After Proposition 209 passed, a number of government agenciessimply dismantled their affirmative action policies without adopting other measures to ensureequity in their public contracting systems. Our study shows that the decline in contract awards toMBEs and WBEs was particularly severe at these agencies. Even with Proposition 209 in effect,all public agencies still have a duty to ensure that their contracting systems are open, fair and donot discriminate based on race or gender.
15
The experiences of the Port of Oakland and EBMUD demonstrate that there are effectivemethods of opening up public contracting systems to minorities and women in a mannerconsistent with Proposition 209. In particular, the combination of requiring prime contractors toconduct broad and extensive outreach and developing programs to increase small businessparticipation were particularly effective. While the outreach and small business developmentpolicies are race and gender neutral, they help inform qualified MBEs and WBEs of contractingopportunities and allow smaller firms to gain access to public contracts. Programs that targetsmall businesses are also effective in reaching MBEs and WBEs because the vast majority ofthem small in size.
In the past, some public agencies were reluctant to adopt such program because ofconcerns that providing small businesses with bid preferences would violate competitive biddinglaws. However, recent changes in state law make it clear that state and local agencies haveauthority to enact programs aimed at increasing small business participation in publiccontracting. AB 1084, authored by Assembly Speaker Herb Wesson and signed into law in2001, specifically allows local agencies to use bid preferences and set aside contracts for smallbusinesses. Given the effectiveness of these programs and the clear legal authority, state andlocal agencies should develop effective outreach and other policies that encourage greaterparticipation in public contracting.
Government agencies should continue to monitor and collect data on MBE and WEEparticipation in public contracting. State and local agencies should continue to collect data ontheir utilization of MBEs and WBEs and publish this information on a yearly basis. This data isessential to monitoring discrimination in public contracting and measuring the effects of recentpolicy shifts. Responsible policymaking depends on the availability of data to assess existingpolicies and to evaluate whether policy goals are achieved. As a California appellate court statedin a recent decision upholding the state's contracting data collection requirements, "Accurate andup-to-date information is the sine qua non of intelligent, appropriate legislative andadministrative action."15 For this to occur in public contracting, government agencies need tocollect relatively detailed information about contract awards. At a minimum, contract awarddata should be collected and maintained in a manner so that they can be analyzed by specificethnicity, gender, and contract categories.
More research needs to be conducted on whether Proposition 209 has had differenteffects on MBEs and WBEs. Our study suggests that Proposition 209 has been less harmful toWBEs than to MBEs, although we were unable to identify the reasons for this difference. Moreresearch needs to conducted to determine if this finding occurs in other agencies, and if so,possible reasons behind such differences. If indeed WBEs have been able to more effectivelyadapt to the elimination of affirmative action policies, learning how they have succeeded couldoffer lessons for MBEs and others who have historically faced discriminatory barriers in publiccontracting.
16
CONCLUSION
Our 1998 Opportunities Lost report found that the passage of Proposition 209 combinedwith court actions, executive orders, and resolutions had begun to seriously erode the gains madeby minorities and women since affirmative action was first used in the 1970s. This study,through an analysis of quantitative data, confirms that the dismantling of affirmative actionpolicies has severely limited the ability of minorities and women to compete for public contracts.In many situations, these affirmative action policies were designed to remedy discrimination byreaching out to those who had been historically excluded and giving them an opportunity tocompete. Unfortunately, with Proposition 209 in place, most agencies have simply reverted backto previous policies that limit access to contracting for MBEs and WBEs.
Our study suggests that government agencies need to be proactive in ensuring that theirprocurement systems are open and fair to people regardless of their race or gender. Thesuccessful programs highlighted in this report show that Proposition 209 does not necessarilyhave to result in the exclusion of minorities and women if agencies develop equitable contractingpractices. Increased outreach and providing small businesses with contracting opportunity helpopen up procurement systems to people who have historically not had equal access. It alsoensures that our public funds are spent in fair and equitable manner.
Footnotes
1 Proposition 209 has been codified in the Article I, Section 31 of the California Constitution as follows:
SEC. 31. (a) The state shall not discriminate against, or grant preferential treatment to, any individual orgroup on the basis of race, sex, color, ethnicity, or national origin in the operation of public employment,public education, or public contracting.
(b) This section shall apply only to action taken after the section's effective date.(c) Nothing in this section shall be interpreted as prohibiting bonafide qualifications based on sex
which are reasonably necessary to the normal operation of public employment, public education, orpublic contracting.
(d) Nothing in this section shall be interpreted as invalidating any court order or consent decree whichis in force as of the effective date of this section.
(e) Nothing in this section shall be interpreted as prohibiting action which must be taken to establish ormaintain eligibility for any federal program, where ineligibility would result in a loss of federal funds tothe state.
(j) For the purposes of this section, "state " shall include, but not necessarily be limited to, the stateitself, any city, county, city and county, public university system, including the University of California,community college district, school district, special district, or any other political subdivision orgovernmental instrumentality of or within the state.
(g) The remedies available for violations of this section shall be the same, regardless of the injuredparty's race, sex, color, ethnicity, or national origin, as are otherwise available for violations of then-existing California antidiscrimination law.
(h) This section shall be self-executing. If any part or parts of this section are found to be in conflictwith federal law or the United States Constitution, the section shall be implemented to the maximumextent that federal law and the United States Constitution permit. Any provision held invalid shall besever able from the remaining portions of this section.
17
2 Opportunities Lost: The State of Public Sector Affirmative Action in Post Proposition 209 California(Nov. 1998), available at http://www.equalrights.org/affirm/index.htm.3 Opportunities Lost, at 1.4 The U.S. Census Bureau's 1997 Economic Census reports a total of 2,565,734 privately held businessesin California. 738,000 were identified as minority-owned, and 700,513 are women-owned. We arrived atthe 1,219,158 figure by taking into account that 219,355 firms which are owned by minority women.This Census information can be found at http://www.census.gov/csd/mwb/.5 See, e.g., National Economic Research Associates, Inc., THE UTILIZATION OF MINORITY AND WOMEN-OWNED BUSINESS ENTERPRISES BY MEMBER AGENCIES OF THE REGIONAL TRANSIT ASSOCIATION(1993) (finding that MBEs and WBEs faced discrimination in the procurement systems of seven localCalifornia agencies); San Francisco, Cal. Adm. Code Section 12D.2(10) (1995) (concludes based onstudy of its procurement system that "some City departments continue to operated under the 'old boynetwork'" when awarding contracts).6 See, e.g., Todd Wallack, California Spends Billions on No-Bid Deals: Contracts Cover EverythingFrom Technology to Prison Nurses, San Francisco Chronicle, May 31, 2002; Todd Wallack, How StateDodged Its No Bid Policies: Dividing Contracts Keep Contracts Under Price Cap, San FranciscoChronicle, Jun. 12, 2002; Bill Wallace, State Skirts Bid Process in PR Deals: $70 Million AwardedDuring Past 3 Years, San Francisco Chronicle, Jun. 8, 2002.7 City of Richmond v. J.A. Croson, 488 U.S. 469 (1989).8 Cal. Public Contract Code Section 2000 (describing specific actions that prime contractors mustundertake to demonstrate "good faith efforts").9 California Senate Office of Research, The STATE OF AFFIRMATIVE ACTION IN CALIFORNIA at 44-5(1995) (providing a list of agencies that had affirmative action public contracting programs in place priorto Proposition 209); Cal. Public Contract Code Section 10115 (state agency contracts); Cal.Gov. CodeSection 14132 (transportation projects); Cal.Gov. Code Section 16850(bond services); Cal.Educ. CodeSection 71028 (community colleges); Cal. Public Contract Code Section 10108 (Department ofCorrections).10 Ms. Garrety's and Ms. Campbell's situations are described in detail in Peter Y. Sussman, Reaching forthe Dream: Profiles in Affirmative Action, the Programs and the People Whose Lives They Change(1998) (available at http://wwAV.equalrights.org/aabook/index.htm).11 The University of California Regents passed the Policy Ensuring Equal Treatment in Employment andContracting (SP-2) on July 20, 1995. SP-2 effectively ended the University's public contractingaffirmative action program by forbidding campuses and prime contractors from considering race orgender as factors in contract awards.12 Connerly v. State Personnel Board, 92 Cal.App.4th 16 (2001).13 See, supra, footnote 5.14 According to staff, the outreach policy was rescinded in 2001 in response to a lawsuit.15 Connerly v. State Personnel Board, 92 Cal.App.4th 16 (2001).
18
ISSUES RELATED TO DEBARMENT OF PUBLIC CONTRACTORSBY: GEOFFREY SPELLBERG
DEBARMENT OF CONTRACTORS
A. A. The Public Contracting Law and Abuses by Contractors.
1. 1. The California Public Contract Code requires that on a publicwork where the cost is in excess of $100,000, the public agency administering thecontract must award the contract to the lowest responsible, responsive bidder. PublicContract Code section 22032. (Each public entity may set its own regulations regardingthe amount above which it must institute competitive bidding procedures.) As a result,the public agency often has little control over which contractor it must select to performthe work required. (In contrast, a private owner can simply hire whoever it wishesregardless of whether it employs a competitive bidding situation or simply awards the jobto a favored contractor.)
Because of the competitive nature of public contracting and the absoluterequirement that the lowest responsible, responsive bidder be selected, there have beennumerous occasions where contractors have intentionally or unintentionally underbidpublic works projects.
Where there is as an unintentional underbid, the contractor can attempt to
argue mistake and withdraw the bid. However, if that effort is unsuccessful, it must goforward with the project or forfeit its bid bond. An intentional underbidding situationinvolves a contractor "desperate" for work who submits a bid that it knows is too low,and then attempts to make up that deficiency through requests for changes during thecourse of the contract and for an equitable adjustment at the conclusion of the project.Failing that the contractor files a claim or lawsuit to recover additional amounts.
In both situations, the intentional and unintentional underbid, the concern
is the same-will the contractor attempt to make up the deficiency through false and orexaggerated claims.
Generally speaking, in most construction contracts, there will always be
changes in the project scope, unforeseen conditions, delay attributable to a number offactors, etc. All those circumstances are fertile ground for a contractor to claim "extras"such as unanticipated overtime, additional compensation, additional overhead expense,additional material and subcontractor expenses, etc. Many claims for extras are fair andthe claims are resolved to the mutual satisfaction of the owner and the contractor.However, it is unfortunately not uncommon for a contractor to fabricate or exaggerate itsextras. Although it is difficult to identify how wide spread the practice is, there arenumerous situations where contractors intentionally underbid a public contract job toobtain the work, and then make up the difference by submitting false and inflated claims,request for change orders, etc.
2. 2. Remedies Available to the Public Entity.
Where the contractor has acted dishonestly in attempting to obtain extra
compensation on a public contract, there are several remedies available to the publicentity.
The first and most obvious is to bring a lawsuit seeking either declaratoryrelief or seeking a return of monies improperly paid to the contractor. Standard breach ofcontract claims would be asserted in those situations. One of the claims that is availablein this situation is a violation of the California False Claims Act which is set forth atGovernment Code §12650, et seq.
1[1] The decision of Stacy Witbeck v. City and County
of San Francisco 47 Cal. App. 4th 1 (1996) ("Stacy 2") affirms the public entity's right topursue remedies set forth under the False Claims Act. In Stacy 2, the contractorcontended that its claim, which was outrageously exaggerated, was a privilegedcommunication under C.C. §47(b). The trial judge agreed, dismissing the claim, but theappellate court reversed thereby preserving the remedy for public entities.
A more draconian remedy and of most concern to the contractor is
administrative debarment. Under a debarment, the contractor is prevented from biddingon or working for the public entity for a number a years, or potentially forever. Thissanction, is severe and not only halts the contractor from working for that particularpublic entity, but is very damaging to the contractor's ability to obtain work with otherpublic entities. A debarred contractor is not a "responsible" contractor and thereforecannot qualify as a responsible, responsive bidder on a public works contract. A numberof appellate decisions have addressed the debarment issue. There is now a wellestablished procedure that a public entity can follow in a situation where a publiccontractor has acted dishonestly and the public entity seeks debarment.
B. B. Rules and Procedures Controlling the Debarment Procedure
1. 1. The right to bid is a Liberty Interest
A debarment prevents a contractor from submitting future bids for publicwork. Because that future work is only potential, there is not a property interest at issue.However, because the ability to bid on work impacts the contractor's livelihood, theappellate courts have concluded that there is a liberty interest possessed by eachcontractor to seek work from a public entity. See Stacy & Wickbeck v. City and County
1[1] The California False Claims Act is patterned after the Federal False
Claims Act and it provides various mechanisms for a defrauded public entity to seekrecovery and damages from a contractor who has intentionally submitted false claims tothe public entity. Those sections provide for litigation by the district attorney, the publicentity itself, and by qui tam citizens who believe that public contractors have defraudedthe public entity. Remedies include monetary penalties, treble damages and recovery ofamounts actually paid out in response to the false claims.
of San Francisco 36 Cal.App 4th 1074, 1087 (1995). ("Stacy 1") Since there is a libertyright, the contractor is entitled to due process before that right is abridged.
2. The administrative underpinning.
The first thing that the public entity must possess is the administrativeability to conduct the debarment proceeding. In other words, debarment cannot be usedas a remedy unless there is a "fair warning" to the contractor that the remedy can possiblybe imposed upon the improper conduct by the contractor.
In Stacy 1, the contractor fell behind and incurred significant additional
costs on a straight-forward public works construction project. The contractor submitted arequest for an equitable adjustment in which he sought loss productivity time in amountsthat were physically impossible, e.g. seeking 28 hours per day in lost work crewproductivity when there are obviously only 24 hours in a day, and when the job recordsshowed that no crew was idled for more than an hour or two at a time. In that case, Cityof San Francisco's Administrative Code did not specifically identify the procedures thatwould be followed on a debarment proceeding. Although San Francisco promptlyamended its administrative code as it brought the debarment proceedings, the contractor,argued that San Francisco lacked the administrative authority to conduct the proceeding.The appellate court held that a broad interpretation of San Francisco's then existingAdministrative Code permitted the debarment proceeding. However, the appellate Courtcautioned that without some form of publicly ascertainable administrative sanction, acontractor could not have its liberty interests abridged through a debarment proceeding.
Every public entity should set forth in its governing administrative code a
section addressing debarment.
3. 3. The Due Process Required.
Several decisions have followed Stacy 1, and all have discussed the requisite due process.In Stacy 1, the matter was heard by the City Public Utilities Commission and thecontractor was given advance notice of the charges, advance presentation of the evidence,the opportunity to present witnesses and documents in its defense, the right to berepresented by counsel and to have counsel argue on its behalf. The contractorcomplained that the PUC was not a neutral body, and further that it was denied the rightof cross examination, and that such denial constituted a denial of due process. The Stacy
1 court addressed all of the issues and concluded that Stacy had received all process thatwas due, but relied heavily on the fact that Stacy failed to establish an appropriate recordat the administrative hearing.
Two subsequent cases have addressed the issue of what constitutes due
process. Those are Golden Days School, Inc. v. State Department of Education 83Cal.App 4th 695 (2000) and Southern California Underground Contractors v. San Diego
108 Cal.App 4th 533 (2003).
The Golden Day decision involved the debarment of a non-profit childcare provider based upon audits which reflected potential financial improprieties. In thatcase, the contractor objected that one of the debarment hearing members was theindividual who had reviewed the audits and had recommended that debarmentproceedings be initiated. Further, one of the other debarment panel members at thehearing was the deputy general counsel who was representing the public entity inlitigation against the contractor. The appellate court reversed the debarment decision andheld that the contractor had not received a fair hearing because of the conflict of interestof the panel members.
In Southern California Underground, the contractor was a public works
underground contractor who had allegedly engaged in a number of dishonest and corruptpractices. The administrative hearing body ordered debarment and that was affirmed bythe trial court. The issue on appeal was whether the contractor had received due processat the hearing. Although it made numerous claims, the issue boiled down to whether therefusal of the debarment panel to allow the live cross examination of adverse witnessesconstituted a violation of due process. The appellate court concluded that it did not, andso upheld the debarment.
4. Summary of Required Due Process
The due process which must be provided based upon the distillation of the
various decisions which have addressed the issue are:
• • Any possible bias or conflict of intent must be eliminated so
that there is an impartial panel hearing the debarment proceeding.For example, in Stacy 1, the City of San Francisco was engaged inlitigation with the contractor over the same issues raised in thedebarment proceeding. The contractor sought to disqualify thePUC from hearing the matter, but the PUC stated on the record thatit was only considering only the evidence offered at the debarmentproceeding, and was not considering any of the litigation issues.The appellate court held that that statement, coupled with theabsence of the contractor showing any actual bias, was sufficient toestablish the appropriate neutrality.
• • There cannot be a conflict of interest among any member of
the debarment panel. The debarment panel can consist of a cityagency, such as the San Francisco PUC, but the panel memberscould not have been involved in the investigation or decision tocharge the contractor with the dishonest conduct.
• • The contractor must be given adequate notice and sufficient
time to prepare a defense. In other words, the charges, theevidence, etc. must be provided in advance to the contractor insufficient time so that the contractor is able to prepare a defense.
Any reasonable request for a continuance by the contractor must begranted.
• • Not only is the contractor permitted to present live testimony
at the hearing, the contractor is entitled to take depositions ofadverse witnesses and present that deposition testimony at thehearing. In fact, in Stacy 1 and in Southern California
Underground, the contractor submitted deposition testimony of itscross examination of adverse witnesses. The debarment panel isnot required to hold an evidentiary hearing where live crossexamination of witnesses is permitted. For example, in Stacy 1,the City presented live witnesses, the contractor presented livewitnesses, but no cross examination was permitted.
• • The contractor should be given the opportunity to be
represented by legal counsel who then would be permitted to fullypresent written and oral arguments.
• • It is also critical that the public entity fully document the
hearing with a court reporter and the filing of all evidencesubmitted.
5. 5. PENALTIES
In a debarment proceeding, the public entity makes a decision as to how
long a contractor is barred from bidding on public works contract. In Stacy 1, thecontractor was barred for 5 years, but was permitted to reapply after 2 years. In actuality,after 1 year and intense lobbying, the contractor was permitted to again bid on Cityprojects. In Golden Days School, the contractor was barred from bidding for 3 years. InSouthern California Underground, the debarment was lifetime.
It is up to the public entity to make its decision as to what penalty it is
seeking. It is important however for the public entity to ensure that its governingadministrative code or charter permits for such penalty, and the public entity must becognizant of the fact that a debarment removes one competitor from bidding on publiccontracts. Multiple competitors help assure a competitive price. If a key competitor isdisbarred, the potential cost of public works contracts could potentially rise. With that inmind, a short limited debarment may ultimately be preferable to a permanent bar.
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