SJR 474

Joint Subcommittee Studying State Government Procurement Practices and Procedures

July 29, 1999, Richmond

Focusing specifically on minority participation in state procurement, the joint subcommittee held its first meeting to consider its charge under SJR 474 and to review state policies concerning minority participation. The joint subcommittee was also briefed on relevant court cases and received an overview on a 1997 study conducted by The Urban Institute which examined disparity studies and disparity calculations.

State Policies

The Virginia Public Procurement Act (VPPA) establishes the procedure for the award of public contracts based on competitive principles and provides that all public contracts with nongovernmental contractors for the purchase or lease of goods or for the purchase of services be awarded after competitive sealed bidding or competitive negotiation, unless otherwise provided by law. Provisions of the Code of Virginia prohibit discrimination on the basis of race, religion, color, sex and national origin. Preferences, set-asides, quotas or firm goals for minority-owned businesses do not exist in the Commonwealth. The state does have, however, several policies aimed at preventing discrimination and promoting participation by minority-owned businesses in the procurement process and encouraging the development of small businesses and businesses owned by women and minorities. These policies are overseen primarily by the Department of Minority Business Enterprise and the Department of General Services.

The Department of Minority Business Enterprise (DMBE) was established to "foster and promote the development and growth of the Commonwealth's minority section" through a program which certifies minority businesses. DMBE certifies businesses to participate in the Commonwealth's minority business program and distributes a list of "certified minority enterprises" to all state agencies on an annual basis.

Under § 2.1-64.32 of the Code, a "minority business enterprise" is owned and controlled by one or more socially and economically disadvantaged persons. Such disadvantage may arise from cultural, racial, or chronic economic circumstances or background or other similar cause. Such persons include, but are not limited to, Blacks, Hispanic Americans, Asian Americans, American Indians, Eskimos, and Aleuts.

The Department of General Services (DGS) is the state's lead agency over public procurement practices and policies and provides assistance and training to state agencies. In addition, the DGS publishes Virginia Business Opportunities, the Agency Procurement and Surplus Property Manual, and other like publications related to public procurement.

The joint subcommittee also reviewed the findings of a Joint Legislative Audit and Review Commission (JLARC) study conducted in 1995, Minority-Owned Business Participation in State Business (House Document No. 53, 1996). That study found that in FY 1995, the state expended $2.78 billion in the procurement of goods, services, and construction. Of that amount, $108 million (3.9 percent) went to minority business enterprises. JLARC found that minority participation in agency procurement ranged from less than one percent to 42 percent. Of the 126 state agencies surveyed, only 52 indicated that they had established written programs regarding minority business solicitation, as required by state law.

Relevant Legal Precedent

The joint subcommittee was also briefed by staff concerning two U.S. Supreme Court cases relating to the legality of preferences and set-asides.
In City of Richmond v. J.A. Croson Co., decided by the U.S. Supreme Court in 1989, the city required prime contractors to whom the city awarded construction contracts to subcontract at least 30 percent of the dollar amount of the contract to one or more minority business enterprises. The Croson Co., in its bid, did not meet the required 30 percent set-aside, was not awarded the city's construction contract, and brought suit alleging that the city's ordinance violated the equal protection clause of the Constitution.

The Croson case marked the first time that a majority of the Supreme Court held that race-based affirmative action measures are subject to strict scrutiny. The Court held that the city had not ascertained how many minority enterprises were present in the local construction market nor the level of their participation in city construction projects. The city pointed to no evidence that qualified minority contractors had been passed over for city contracts or subcontracts. Under such circumstances, the court held, it is simply impossible to say that the city had demonstrated a strong basis in evidence for its conclusion that remedial action was necessary. Because the city failed to identify the need for remedial action in the awarding of its public construction contracts, its treatment of its citizens on a racial basis violated the dictates of the equal protection clause. Notably, the Court said that significant statistical disparities between the level of minority participation in a particular field and the percentage of qualified minorities in the applicable pool could permit an inference of discrimination and would support the use of racial and ethnic classifications intended to correct those disparities.

In the second case, Adarand Constructors v. Frederico Pena, decided by the U.S. Supreme Court on June 12, 1995, the federal government awarded the prime contract for a highway construction project in Colorado to Mountain Gravel Co. As required by federal law, the primary contract stated that Mountain Gravel would receive additional compensation if it hired subcontractors certified by the Small Business Administration (SBA) as small businesses controlled by "socially and economically disadvantaged individuals." As is also required by federal law, the contract directed Mountain Gravel to presume that socially and economically disadvantaged individuals included Black, Hispanic, Native, and Asian-Pacific Americans, other minorities, and individuals found by the SBA to be disadvantaged. Mountain Gravel let out a subcontract for the guardrail portion of the prime contract. Adarand Co., which is not an SBA-certified business, submitted the low bid. The contract was awarded, however, to Gonzales Co., an SBA-certified business. Mountain Gravel testified that it would have accepted Adarand's bid had it not been for the additional payment it received by hiring Gonzales instead. Adarand filed suit in federal district court, alleging that the presumption set forth in the SBA-certification statute (and, consequently, in the prime contract) discriminated on the basis of race in violation of the federal government's obligation to provide equal protection under the law.

In a divided 5-4 opinion, the Supreme Court, following the earlier Croson case, held that "all racial classifications, imposed by whatever federal, state, or local actor, must be analyzed under strict scrutiny. In other words, such classifications are constitutional only if they are narrowly tailored measures that further compelling governmental interests."

Disparity Calculations

The joint subcommittee was provided with an overview of the findings of a 1997 study conducted by The Urban Institute titled Do Minority Owned Businesses Get a Fair Share of Government Contracts? The study analyzed 58 disparity studies conducted after the Croson decision to determine the use of minority-owned businesses by state and local governments. The central element of most of the disparity studies included in the analysis is a comparison of government utilization of minority-owned business and the availability of such business to perform government work. The utilization of minority-owned businesses typically is measured as the proportion of government contract dollars awarded or paid to minority-owned businesses. Availability is the minority-owned share of firms available to do government work. The disparity studies would typically provide estimates regarding contracts in broad industry groups, with the most common being construction, professional services, other services and goods. The disparity, if any, between government utilization of minority-owned businesses and their availability is expressed as utilization divided by availability -- the disparity ratio. A disparity ratio equal to one means that minority contractors are used exactly in proportion to their availability for government work, while a disparity ratio below one means that minority firms are being disproportionately underutilized.

The disparity studies included in the analysis were conducted by state and local governments in 18 states, though none in Virginia. The analysis showed on average that minority-owned firms received fewer contract dollars from state and local governments than would be expected based on their availability. It was noted that one-third of the studies included in the analysis did not find any disparity.

Discussion within the joint subcommittee centered around the need to determine the level of compliance by state agencies with current provisions of the law. The joint subcommittee also discussed the need to receive comment from the minority business community and other affected organizations and individuals on the effectiveness of the state's policies concerning minority participation in the procurement process. An opportunity for public comment will be offered at the joint subcommittee's next meeting.

The Honorable Benjamin Lambert, Chairman
Legislative Services contact: Amigo R. Wade