Did Adarand Kill Minority Set-Asides?

Did Adarand Kill Minority Set-Asides?Author(s): Mitchell F. Rice and Maurice MongkuoSource: Public Administration Review, Vol. 58, No. 1 (Jan. - Feb., 1998), pp. 82-86Published by: Wiley on behalf of the American Society for Public AdministrationStable URL: http://www.jstor.org/stable/976893 .

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Did AdarandKill Minofity Set-Asides? Mitchell F. Rice, Texas A & M University Maurice Mongkuo, Policy Research Consulting

In Adarand Constructors Inc. v. Pena (115 S. Ct. 2097, 1995) the Supreme Court ruled thatfederal affirmative action preference programs must undergo the strict scrutiny standard ofjudi- cial review. A program or policy subject to strict scrutiny is one that cannot pass muster under the Constitution 's equalprotection mandate unless there is a compelling government interest in its

objectives and the program is narrowly tailored to meet the objectives. After an introductory discussion of minority business contracting opportunities in the business and federal sectors, this article reviews the Adarand decision and discusses the implications of the decision for minority business federal contracting.

Federal minority contracting opportunities serve as a major point of entry for socially and economically disadvantaged business entrepreneurs and small business concerns into the mainstream of American business enterprise. In 1994, the Minority Business Development Agency (MBDA) in the U.S. Depart- ment of Commerce reported that the value of all federal minority business enterprises prime and subcontracting procurement was 14.6 billion dollars or 8.3 percent of the total federal procurement (Parrott- Fouseca, n.d.). This amount represented an increase of more than 100 percent since 1984. Further, 68 of the top 100 Black Enterprise Magazine businesses are federal government contractors (Parrott-Fouseca, n.d.). About 32 of the top 100 largest African Amer- ican firms and 17 of the top 100 largest Hispanic firms were or had been in the Section 8(a) program of the Small Business Administration (Affirmative Action Review: Report to the President, 1995).

In fiscal year 1994, 5.8 billion dollars worth of federal contracts were awarded competitively to minority businesses; representing an increase of some 152 percent from 2.3 billion dollars awarded in fiscal year 1984 (Parrott-Fouseca, n.d.). Additionally, 6.1 billion defense dollars were spent with minority firms in 1994 and from 4.4 to 4.9 billion federal dollars were spent with 5,400 firms in the Section 8(a) program in 1994 (D. J. Miller and Associates, n.d.; Affirmative Action Review: Report to the President, 1995).

Provisions in federal law allowed set-asides to provide opportunities for socially and economically disadvantaged and small business enterprises to win federal contracts. For example. Section 502 of the Small Business Act (Public Law, 95-507) provides:

The President shall annually establish government- wide goals for procurement contracts awarded to small business concerns and small business concerns owned and controlled by socially and economically disadvantaged individuals. The Govern- ment-wide goal for participation by small business contracts shall be established at not less than 20 percent of the total value of all prime contract awards for each fiscal year. The Government-wide goal for participation by small business concerns owned and controlled by socially and economically disadvantaged individuals shall be established at not less than 5 percent of the total value of all prime contract and subcontract awards.

82 Public Administration Review . January/February 1998, Vol. 58, No. 1



The Section 8(a) program represents some 40 percent of all federal procurement dollars received by small and socially and economically disadvantaged enterprises (Henderson, 1995). Further, the U.S. Department of Defense's Section 1207 programs allows the agency to implement a limited set-aside program for small businesses-in addition to the Section 8(a) program-to meet a statutory goal of 5 percent for socially and economically disadvantaged business enterprises (Public Law, 99-661). The intent of these and other similar federal procurement programs is to address historical patterns of discrimination and poor market access of minority business enterprises (Henderson, 1995).

However, a number of these programs were called into question as a result of the Supreme Court's decision in Adarand Constructors, Inc. v. Pena (115 S.Ct. 2097, 1995). The social and political con- troversy generated by the Adarand decision prompted President Clinton to issue a memorandum on June 19, 1995, to the heads of executive departments and agencies with the following directive:

in all programs you administer that use race, ethnicity, or gender as a consideration to expand opportunity or provide groups that have suffered discrimination, I ask you to take steps to ensure adherence to the following policy principles. The policy principles are that any program must be eliminated or reformed if it: (a) creates a quota; (b) creates preference; (c) creates reverse discrimination; (d) or continues even after its equal opportunity purposes have been achieved.

The court ruled in Adarand that a much higher level of scrutiny was needed to justify minority set-asides in federal law than had been required. This ruling weakened set-asides and in some cases resulted in their elimination. This article examines the Adarand decision and discusses the decision's implications for minority business federal contracting.

Adarand Background: Players and Issues

The Players

In 1989, the Central Federal Lands Highway Division, which is part of the United States Department of Transportation, awarded a $1 million plus prime contract for a 4.7 mile highway construction project (known as the West Dolores project) in Colorado to Mountain Gravel and Construction Company. Mountain Gravel then solicited bids from subcontractors for the guardrail portion of the contract. Adarand Constructors, Inc., a Colorado-based highway construction company specializing in guardrail work, submitted the low bid. Gonzales Construction Company also submitted a bid.

The contract's terms provided that Mountain Gravel would receive additional compensation if it hired subcontractors certified as small businesses controlled by socially and economically disadvantaged individuals. The subcontracting compensation clause included in the contract reads as follows:

Monetary compensation is offered for awarding subcon- tracts to small business concerns owned and controlled by socially and economically disadvantaged individuals. Compensation is provided to the Contractor to locate,

The court ruled in Adarand that a much higher level

ofscrutiny was needed to justfj' minorie set-asides in

federal law than had been required. This ruling weakened

set-asides and in some cases resulted in their elimination. train, utilize, assist, and develop DBEs [disadvantaged business enterprises] to become fully qualified contractors in the transportation facilities construction field. The Contractor shall also provide direct assistance to disadvantaged subcontractors in acquiring the necessary bonding, obtaining price quotations, analyzing plans and specifications, and planning and management of the work. The Contractor will become eligible to receive payment under this provision when the dollar amount of the DBE [disadvantaged business enterprise] subcontract(s) awarded exceeds [10% for Colorado] of the orig- inal [prime] contract award (see Adarand Constructors, Inc. v. Pena, 16 F.3d 1537, 10th Cir, 1994, at 1541- 42).

The subcontracting compensation clause does not compel but rather induces prime contractors to hire socially and economically disadvantaged businesses (see Adarand at 1538). It is entirely at the discretion of the prime contractor whether to exercise its option under the clause or to ignore it and forego the monetary incentive reward.

Gonzales Construction Company was certified as a socially and economically disadvantaged business. Adarand Constructors, Inc. was owned by a white and was not certified as such a business. Therefore, Adarand did not meet the requirements for the minority set-aside. Mountain Gravel awarded the subcontract to Gonza- les, despite Adarand's low bid. Mountain Gravel's chief estimator had submitted an affidavit that Mountain Gravel would have accepted Adarand's bid had it not been for the additional payment it received for hiring Gonzales instead. The Gonzales bid was $1,700 higher than Adarand's on the project. By selecting Gonza- les as a subcontractor, Mountain Gravel exceeded its socially and economically disadvantaged business goal by 100,000 dollars, which qualified the company for a 10,000 dollars bonus-10 percent of the amount above the goal (see Adarand Constructors, Inc. v. Pena, United States Law Week at 4 5 24).

The Issue

At issue was the U.S. Department of Transportation's subcontracting compensation clause, which provided financial incentives to general contractors to hire certified socially and economically disadvantaged businesses on the basis of a race-based presumption of social and economic disadvantage. The clause was implemented in 1979 by the Federal Lands Highway Program of the Federal Highway Administration, an agency within the Department of Transportation. The Colorado Federal Lands Highway Division, as a regional office of the federal program, utilized the clause as a means of meeting its apportioned shares of the Department of

Did Adarand Kill Minority Set-Asides? 83



Transportation's goal for disadvantaged business enterprise participation (see Adarand 16 F.3d at 1540). The Colorado division office has thirteen states in its jurisdiction (Arizona, California, Hawaii, Kansas, Nebraska, Nevada, New Mexico, North Dakota, South Dakota, Texas, Utah, and Wyoming). At the time of the contract award, the Colorado division's apportioned goal was a disadvantaged business enterprise participation rate of 12 to 15 percent in all contracts let by agency (see Adarand 16 F.3d at 1541).

The subcontracting compensation clause is authorized by Sec- tion 8(d) of the Small Business Act (Public Law 95-507). It autho- rizes incentives by federal agencies to encourage prime contractors to make subcontracting opportunities to both small business concerns and small business concerns owned and controlled by socially and economically disadvantaged persons. Such businesses are certified according to the tests set forth under Section 8(a) of the act. The subcontracting compensation clause does not set aside government contracting opportunities for a group defined by race or ethnicity. Eligibility depends on social and economic disadvantage. The Department of Transportation awards financial incentives to prime contractors in order to help satisfy its annual minority contracting goals mandated by the act. Adarand alleged that the subcontracting compensation clause discriminated on the basis of race in violation of the equal protection clause of the U.S. Constitu- tion. Adarand sued in 1990, contending that the agency's subcontracting policy was an unlawful set-aside based on race. The federal district judge and the 10th U.S. Circuit Court of Appeals ruled against Adarand.

What Are Socially and Economically Disadvantaged Businesses?

Section 211 of the Small Business Act (Public Law, 95-507) requires any prime contractor with a federal construction contract that exceeds one million dollars to establish percentage goals for the utilization of both small businesses and small businesses owned and controlled by socially and economically disadvantaged individuals. These provisions exclude individuals in racial and ethnic minority groups who cannot meet the criteria for disadvantage, and include individuals not in such groups if they can meet the criteria (Thomas, 1995). Such groups as disabled Vietnam veterans, Appalachian white males, and Hasidic Jews may be eligible if they demonstrate that they are socially and economically disadvantaged.

The legislation defines a disadvantaged business as one that is at least 51 percent unconditionally owned by one or more individuals who are both socially and economically disadvantaged. Socially disadvantaged individuals are defined "as individuals who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities" (Public Law, 95-507). Economically disadvantaged individuals "are 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" (Public Law, 95-507). Individuals who identify and certify themselves as African Americans, Hispanic Americans, Native Americans, Asian-Pacific Americans, or subcontinent Asian Americans are presumed to be socially and economically disadvan-

taged (Public Law, 95-507). The Small Business Administration measures economic disad-

vantage in a three-part test: the individual's net worth, the financial condition of the firm, and the firm's access to credit. For entry into the Socially and Economically Disadvantaged Program, personal adjusted net worth cannot exceed $250,000 during the first four years in the program and it cannot exceed $750,000 during the last five years of the program. The maximum length a firm can be in the Section 8(a) program is nine years (U.S. Small Business Admin- istration, 1994). After nine years socially and economically disadvantaged firms must "graduate" from the Section 8(a) program.

The Court's Opinion In its 5-4 opinion, the Supreme Court conducted a lengthy

examination of prior case law and concluded that the strict scrutiny standard of review was appropriate for all governmental action based on race, whether taken by the states or by the federal government. Stated another way, federal affirmative action programs using racial criteria as a basis for decision making are subject to the strict scrutiny standard. The strict scrutiny standard focuses on the following question: Is the program or policy meeting a compelling government interest and is it narrowly tailored to meet the program or policy objectives. According to the U.S. Department of Justice (1996), the decision "applies to race-based decision making in all areas of federal activity, including employment." In Adarand the Court based its ruling on the case of City of Richmond v. J. A. Croson Co. (480 U.S. 469, 1989) in which the strict scrutiny standard was applied to void Richmond's local set-aside ordi- nance. The Croson decision affected numerous state and local jurisdictions across the country (Rice, 1993).

The Adarand decision, however, overruled the post Croson case of Metro Broadcasting v. Federal Communications Commission (497 U.S. 557, 1990). In Metro Broadcasting, the Court used the intermediate scrutiny standard to uphold the set-aside provisions of the Federal Communications Commission (Rice, 1991). The commission had permitted a limited category of existing radio and tele- vision stations to be transferred only to minority-controlled firms. Intermediate scrutiny as opposed to strict scrutiny is concerned only with whether racial qualifications designed to further remedial purposes serve an important governmental objective and are substantially related to the achievement of the objective (Thomas, 1995). Stated more succinctly, under intermediate scrutiny con- gressionally mandated federal preference programs had to be "substantially related" to an important government objective (see Metro Broadcasting, at 564-65).

To stress its focus on scrutiny, the Court in Adarand used the term scrutiny 89 times in its opinion ("The Scrutinizers," 1995). The majority opinion requiring strict scrutiny was written by Jus- tice O'Connor who was joined by Justices Scalia, Rehnquist, Kennedy, and Thomas. Of note here is that Justice O'Connor dis- sented in Metro Broadcasting where she supported the strict scrutiny standard rather than the majority's intermediate scrutiny standard. Using Croson as its guide, the Adarand Court ruled that federal programs containing race-based preferences will be upheld only if they are "narrowly tailored measures that further compelling government interests." The "narrowly tailored" measure

84 Public Administration Review * January/February 1998, Vol. 58, No. I



takes into account the method by which the government seeks to meet the objective of racial or ethnic classification. The "compelling government interest" measure focuses on the purpose of the classification.

Justice Scalia wrote separately to state his view that government preferences based on race can never survive strict scrutiny. Justices Stevens, Souter, Ginsburg, and Breyer were the dissenters. Justice Thomas (the only African American on the Court) who in this case can be viewed as the swing vote, equated race-based governmental programs to the invidious and malicious discrimination which previously oppressed minorities. He espoused the view that such government programs perpetuate inferiority among minorities (see Adarand, at 2119). Justice Thomas also stated that "government may not make distinctions on the basis of race" and that it is "irrelevant whether a government's racial classifications are drawn by those who wish to oppress a race or by those who have a sincere desire to help those thought to be disadvantaged" (Adarana at 2119-2120).

Further, the Adarand decision also overruled Fullilove v. Klutznick (448 U.S. 448, 1980), a decision rendered by the Court 15 years earlier, which held federal racial classifications to a less rig- orous standard (intermediate scrutiny) than the strict scrutiny standard. In Fullilove the Court held that a provision in the Public Works Employment Act of 1977 which set aside 10 percent of the funds generated for local public work projects to minority-owned businesses was constitutional. The intermediate scrutiny reasoning changed in the Croson decision in which the Court applied the strict scrutiny standard.

Implications and Conclusion The Adarand Court did imply that a federal preference program

may survive strict scrutiny under certain conditions. Again, the Court relied heavily on the Croson decision in which a disparity analysis was suggested. According to the Croson Court, a signifi- cant disparity must be shown between the number of qualified minority contractors willing and able to perform the service and the number of such contractors engaged in a locality and by the locality's prime contractor(s) (see Croson, at 725-30). In a disparity analysis, this process is referred to as an availability/utilization analysis (Rice, 1993.)

The resulting data, which are known as a disparity index, are then tested for validity through the application of a standard devia- tion analysis. According to the Eleventh Circuit Court of Appeals in Peightal v. Metropolitan Dade County (26 E3d 1545, 11th Cir., 1994), a presumption of discrimination may be raised if the differ- ence between the expected value and the observed number is greater than two or three standard deviations (Peightal at 1556). The disparity index is then followed by a regression analysis to account for discrimination factors contributing to a systematic pat- tern that is not attributed to chance. After identifying these factors, the disparity analysis must substantiate the extent to which a jurisdiction acted either as an "active" or "passive" participant in a system of racial exclusion.

A passive participant can be a jurisdiction that pays public contract dollars to prime contractors who then discriminate in selecting subcontractors. Under such a circumstance, a state or local

since theAdarand decision nearly two dozen states have introduced bills or resolutions to substantially limit or ban preferentialpolicies.

jurisdiction could act to dismantle the closed business system (i.e., the construction trade) by taking appropriate measures. One such measure might be "some form of narrowly tailored preference necessary to break down patterns of deliberate exclusion" (see City of Richmondv. J A. Croson, at 730).

In recent years, state and local jurisdictions have successfully used disparity studies as a way of justifying continuation or adop- tion of their policy preference programs (see Rice, 1992; 1993). These studies, for the most part, have recommended that governmental jurisdictions adopt race-neutral or targeted programs to increase the opportunities for socially and economically disadvantaged businesses to bid successfully on contracts. Yet, the Adarand Court did not specify what quantity and quality of evidence would be required (Dellinger, 1995).

Utilizing disparity analysis methodology at the federal level raises a number of difficult questions. What geographic area or boundary serves as a unit of analysis-a federal region, several states com- bined, or the entire country? From where are qualified minority businesses to be drawn to form the basis for a disparity study? How will the disparity analysis account for different concentrations of minority businesses in various locales across the country? What body would finance the cost of a national or multistate disparity study? Since the federal government procures in a wide variety of areas, what industries, trades, and services are to be included in such a study? Should the evidence of discrimination provided by Congress consist of national statistical data or a national documen- tary? Should minority underrepresentation in a particular industry or business sector be based on national minority population?

In conclusion, since the Adarand decision nearly two dozen states have introduced bills or resolutions to substantially limit or ban preferential policies. At the congressional level, former U.S. Senator and Republican presidential candidate Robert Dole introduced the Equal Opportunity Programs in the Federal Govern- ment Act. The bill sought to end racial and gender preferences. Ironically, a similar bill was introduced in the House of Represen- tatives by former Representative Gary A. Franks (R-CT) ("Minori- ty Set-Asides: Change Ahead," 1995). Further, the U.S. Depart- ment of Defense recently suspended its $1 billion a year procurement program known as the Rule of Two. Under this program, the Pentagon had reserved contracts for minority owned businesses whenever two or more such businesses were available and qualified. In 1994 nearly $750 million was awarded to minority owned businesses under the Rule of Two (Barrett, 1995).

As a matter of public policy, Adarand dealt a severe blow to minority set-aside programs at the federal level while maintaining the Croson decision at the state and local levels. In essence, Adarand federalized Croson. By holding federal preference programs to the same level of strict scrutiny as state and local programs, federal minority set-aside programs will be increasingly sus- ceptible to equal protection challenges and will face problems

Did Adarand Kill Minority Set-Asides? 85



concerning administrative implementation. Until the Supreme Court provides further guidance, the Adarand decision will be interpreted as a major setback to federal policy preference programs.

Mitchell F. Rice is director of the Race and Ethnic Studies Institute and a faculty member in the Department of Political Sci-

ence and the Bush School of Government and Public Service, Texas A&M University. He has written extensively on set-asides and minority business development. He is the editor of Diversity and Public Organizations (Kendall Hunt Publishers, 1995).

Maurice Mongkuo is president and CEO of Policy Research Consulting, a firm that specializes in performing disparity studies for governmental jurisdictions.

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Did Adarand Kill Minority Set-Asides?