Local Business Preferences - Race-Neutral Affirmative Action After Proposition 209?

Transcription

1 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 of California, 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 (9 th Cir. 1987) 813 F. 2 nd 922; Domar Electric Inc. v. City of Los Angeles (1994) 9 Cal. 4* 161, ) 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 conscious affirmative 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 on Minority and Women-Owned Businesses in California" (Oct. 2003) 2, suggests that a well-crafted and implemented small, local business program may serve some of the policy objectives underlying race and gender conscious affirmative action legislative efforts. The purpose of this paper is to identify the likely legal issues government attorneys will face when or if their public sector clients ask about race-neutral affirmative action, a local business preference program 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 and gender conscious affirmative action: Is it dead after Proposition 209? The proponents of Proposition 209 would say that any state or local legislative or governmental classification 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 and gender neutral, such as one which focuses on disadvantage or local status. The opponents of Prop. 209 would argue otherwise - that not all race and gender specific affirmative action efforts are barred. Both sides 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 California Supreme Court's decision in Hi-Voltage Wire Works, Inc. v. City of San Jose (2000) 24 Cal. 4 th 537. The opponents of Prop. 209 have the better of the argument, although the safe harbor for race/gender affirmative action is quite limited. Proposition 209, codified as Article 1, Section 31 of the California Constitution, provides that state and local government "shall not discriminate against, or grant preferential treatment to, any individual or group 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 , the California Supreme Court defined the key terms of Proposition 209 as follows: '"[Discriminate 1 means to make distinctions in treatment; show partiality (in favor of) or prejudice (against)"...; 'preferential 1 means giving "preference" which is 'a giving of priority or advantage to one person...over others." Applying these definitions to San Jose's MBE/WBE program, the Court concluded the program was unconstitutional. (Ibid.) However, a close 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 study showing a statistically significant variance in the number and dollar value of contracts and subcontracts awarded to MBEs and WBEs. The legislative purpose of the program was to encourage nondiscriminatory subcontracting. (Hi-Voltage, at 542.) After Proposition 209 was passed, San Jose modified its policy and adopted a "Nondiscrimination/Nonpreferential Treatment Program Applicable to Construction Contracts in Excess of $50,000 program." The purpose of this program was to "clarify the City's policy of nondiscrimination and nonpreference in the subcontracting of its construction projects to 'ensure that the historical discrimination does not continue. 1 " (Id. at 543) The Supreme Court rejected the City's defense of its well-intentioned affirmative action efforts, stating at page 560 of its decision: [San Jose's] Program is unconstitutional because the outreach option affords preferential treatment to MBE/WBE subcontractors on the basis of race or sex, and the participation option discriminates on the same basis against non-mbe/wbe subcontractors as well as general contractors that fail to fulfill either of the options when submitting their bids. Although the Court found San Jose's program to be constitutionally prohibited, the Court was careful not to send the message that all affirmative action policies were unacceptable. As Justice Brown notes in her majority opinion: Although we find [San Jose's] outreach option unconstitutional under section 31, we acknowledge that outreach may assume many forms, not all of which would be unlawful. (Id. 24 Cal.4 th at 565.) Chief Justice George makes the point most clearly: "[Proposition 209] was not intended to preclude all governmental affirmative action programs..., but rather was intended to prohibit only those affirmative action programs that discriminate against or grant preferential treatment to any individual or group on the basis of race or gender." (Id. at 587.) -2-

3 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 types of programs appear to be within the realm of acceptability. First, the majority opinion 3 suggests Los Angeles' outreach program, addressed in Domar Electric Inc. v. City of Los Angeles, supra. 9 Cat. 4 th.161, is one example of a permissible affirmative race and gender conscious program (Hi-Voltage at 565.) Although the court does not opine as to the legality of such a policy it describes Domar as a "pre-proposition 209 decision upholding city requirement 'mandating reasonable 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 Los Angeles MBE/WBE/Other Business program as "a good example of a general, nontargeted outreach program 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 target deliberate exclusion of minorities and women may not be prohibited by Proposition 209's language and intent. (Id. at 568 ["Where the state or a political subdivision has intentionally discriminated, use of a raceconscious or race-specific remedy necessarily follows as the only, or at least most likely, means of rectifying the resulting injury."].) In a case where MBE/WBE policies are adopted as a remedy for the deliberate exclusion of MBE/WBEs in public contracting the remedy would not constitute "discrimination against" or "preferential treatment" as those terms are defined in Hi-Voltage. These types of affirmative action efforts ensure equal opportunity and fairness to all competitors. (See Hi-Voltage, supra, 24 Cal.4 th at 587 [proponents of Prop. 209 state "[programs designed to ensure that all persons - regardless of race or gender - 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 contracting programs, 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 federal law or the United States Constitution, the section shall be implemented to the maximum extent that federal law and the United States Constitution permit. What does this provision mean? In Hi-Voltage Wire Works, Inc. v, City of San Jose, the Supreme Court addressed this provision by considering whether San Jose's MBE/WBE outreach program was constitutionally necessary under federal law. (24 Cal.4th at ) The Court made two points relevant here. 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. -3-

4 MBE/WBEs. (Id. at 568.) The Hi-Voltage Court cited a MBE/WBE ordinance case, Associated General Contractors of California v. City and County of San Francisco, supra, 813 F.2d 922,929, where the Ninth Circuit held: Like the federal government, a state or political subdivision has the authority - indeed the "constitutional duty" [citations, emphasis in original] - to ascertain whether it is denying its citizens equal protection of the laws, and if so, to take corrective steps. It is well established that where federal law imposes a duty on a local government entity, that duty trumps 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 racebased student assignments because the ban conflicted with school officials' constitutional duty: Just as the race of students must be considered in determining whether a constitutional violation has occurred, so also must race be considered in formulating a remedy. To forbid, at this stage, all assignments made on the basis of race would deprive school authorities of the one tool absolutely essential to the fulfillment of their constitutional obligation to eliminate existing dual 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 statutory law, the supremacy clause as well as the express terms of Proposition 209 would 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 that it is denying its citizens equal protection of the law in its public contracting practices must take corrective steps to remedy that inequality, consistent with federal constitutional standards set forth in Croson v. City of Richmond, supra, 488 U.S 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 which has based its affirmative action program on findings and evidence of intentional discrimination against MBE/WBEs. Thus, for most governmental bodies wishing to embark on affirmative action, a race neutral or local 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 most common types have a defined geographical scope (e.g. within the city or county boundaries) and -4-

5 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 or profession. To be considered race and gender neutral, it is preferable that the race and gender of the business owner not be referenced. However, it is noteworthy (as stated earlier) that the Chief Justice in Hi-Voltage Wire Works. Inc. v. City of San Jose, supra, 24 Cal. 4 th at 594 (George, C. J. cone, and dissent opn.) has indicated that Los Angeles' Minority/Women/Other Business outreach program "provides a good example of a general, non-targeted outreach program that ordinarily would 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 and Requirements: Does the public agency have the legal authority to adopt the LBE program? If the agency is a charter city the decision to adopt the program is a "municipal affair." (R & A Vending Services. Inc. v. City of Los Angeles (1985) 172 Cal. -5-

6 App. 3d 1188, ; 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 local business program. 2. Competitive Process Requirements: Will the adoption of a LBE policy violate competitive bidding/process requirements? Statutory requirements that a contract be subject to a competitive bid process may prevent the adoption of a LBE policy. (See Associated General Contractors of California v. City and County of San Francisco, supra 813 F. 2 nd 922, ("AGC I"). [Ordinance granting LBE bid preference inconsistent with charter requirement that construction contracts over $50,000 be let to the lowest, reliable and responsible bidder}; see also Associated General Contractors v. Coalition for Economic Equity (9 th Cir. 1991) 950 F. 2 nd 1401,1410 [change in charter language allows for LBE program].) 3. Equal Protection Clause: Does a LBE program trigger Equal Protection Clause concerns? A LBE program, because it is race and gender neutral, is subject to scrutiny under the "rational basis" test. That is, the program has to be supported by a legitimate government purpose (e.g. encourage business to move into the jurisdiction) and the means employed (LBE preference or requirement) has to be rationally related to the legitimate government purpose. (AGC 1,813 F. 2 nd at ) 4. Privileges & Immunities Clause/Commerce Clause Concerns Although less likely to be raised, attorneys should be aware of the privileges and immunities clause/commerce clause issues that may be implicated by LBE 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 on several legal grounds - lack of governmental authority to adopt the program, state or local competitive bidding requirements and constitutional provisions. Local business participation programs are generally good for the local economy and for government's relationship with the business community. These programs, if well drafted to focus on smaller, disadvantaged contractors, may serve as a good substitute for race and gender affirmative action prohibited by Proposition

7 Exhibit Discrimination based on race, sex, color, ethnicity, or national origin; gender-based qualifications in public employment, education, or contracting Sec. 31. (a) The state shall not discriminate against, or grant preferential treatment to, any individual or group 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 bona fide qualifications based on sex which are reasonably necessary to the normal operation of public employment, public education, or public contracting. (d) Nothing in this section shall be interpreted as invalidating any court order 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 which must 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 necessarily be limited to, the state itself, 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 or governmental 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, 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 conflict with federal law or the United States Constitution, the section shall be implemented to the maximum extent that federal law and the United States Constitution permit. Any provision held invalid shall be severable from the remaining portions of this section. (Added by Initiative Measure (Prop. 209, approved Nov. 5, 1996).) 418

8 Exhibit 2 LOSING GROUND: THE IMPACT OF PROPOSITION 209 ON MINORITY AND WOMEN-OWNED BUSINESSES IN CALIFORNIA Chinese for Affirmative Action 17 Walter ULum Place San Francisco, CA October 2003 This report was made possible by generous grants provided by the Akonadi Foundation and the VanLobelSels/RemebeRock Foundation

9 Executive Summary This study evaluates the impact of Proposition 209 and University of California Regents resolution SP-2 on the ability of minority and women business enterprises to compete for public contracts. Both measures prohibit public agencies in California from providing affirmative action to minorities or women in contracting. Chinese for Affirmative Action compiled a list of public agencies that had repealed or significantly changed their affirmative action policies in response to anti-affirmative action measures. 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 they repealed 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 of Oakland, East Bay Municipal District, Contra Costa County, City of Sacramento, City of San Jose, and City of Fresno. With the exception of Fresno, which stopped collecting race and gender data after it discontinued its affirmative action policy, the other seven agencies provided contract award information for limited periods before and after they changed their policies. An analysis of the data found that these anti-affirmative action initiatives have severely limited contracting opportunities to minorities 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 of at 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 minority businesses than to women-owned businesses. Of the five agencies that reported separate numbers for minorities and women, contract awards fell 26% for minorities but only 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 requirements experienced the least decline in participation by minority- and women business enterprises. Of the agencies studied in this report, Proposition 209 had the least effect on the Port of Oakland and East Bay Municipal Utility District (EBMUD). The Port saw a small rise in the percentage of contract dollars awarded to minorities and women after suspending its race- and gender-conscious policy, while EBMUD experienced a similar increase for women. Both agencies attributed their performance to the adoption of programs designed to increase participation by small and local businesses as well as aggressive outreach requirements. The following report provides a detailed analysis of the impact of Proposition 209 and the UC Regent resolution on individual agencies and discusses how other agencies can learn from the successful programs at the Port of Oakland and EBMUD.

10 INTRODUCTION In November 1996, California voters passed Proposition to amend the California Constitution to prohibit preferences based on race, ethnicity, or gender in public sector education, employment and contracting. Initially enjoined from implementation by court order, the initiative did not go into effect until August Although proponents of Proposition 209 originally claimed that this initiative would not eliminate affirmative action, most government agencies in California responded by dismantling such policies. In November 1998, Chinese for Affirmative Action and Equal Rights Advocates released a study entitled, Opportunities Lost, analyzing Proposition 209's impact during its first year of implementation. 2 The study surveyed 68 government agencies across California, including state agencies, local governments, higher education institutions, and school districts, to find out how they were responding to the new law and the impact of these changes on people of color and women. We found that most government agencies were in the process of repealing affirmative action programs not required by federal laws or funding requirements. The study concluded that Proposition 209, combined with court actions and policy changes, had "begun to seriously erode the gains made by minorities and women in California." 3 As a follow up to the Opportunities Lost report, CAA began to conduct this study in 2001 to focus specifically on Proposition 209's effects on public contracting. The following is a report of that study and also includes analyses on quantitative data that were not available in PUBLIC CONTRACTING Every day, state and local agencies contract with private businesses to carry out government's work. The state may hire a construction company to build a highway or an architect to design a new office building. Governments regularly purchase office supplies and equipment, 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 Census Bureau reported that as of 1997, minorities and women combined to operate 1,219,158 businesses in California, approximately 48% of the state's privately-owned firms. 4 Yet, these firms have received only a small portion of government contracts. For example, in 1996, the California community colleges awarded approximate 4.8% of contracts to minority business enterprises (MBEs) and 4.6% to women business enterprises (WBEs). A similar report from the California Department of Transportation in the mid-1990s indicated MBEs and WBEs received 11% and 5% respectively of the total contract dollars. Unfortunately, more recent data from state agencies is unavailable. In 1995, former Governor Pete Wilson ordered state agencies to stop compiling contract awards by race and gender. A recently passed bill, AB 1084, restores data 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 a primary 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 competing for government contracts. These barriers include access to information about bid opportunities, prime contractors who reject low bids from MBE or WBE subcontractors, and government

11 officials who manipulate the contracting process to by-pass competitive bidding requirements or favor contractors who have political or social connections with the agency. 5 Although government contracts are supposed to be awarded based on competitive bids, there are a number of loopholes in these laws that provide government officials with a great deal of discretion. The controversy arising from the $95 million software contract awarded by the State of California to Oracle in 2001 illustrates how even very large government contracts can be awarded without going 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 adopt race-conscious public contracting programs only in response to documented discrimination. Typically, government agencies spend years studying their procurement systems before developing affirmative action policies. Even if these policies are crafted in response to discrimination, they must be narrowly tailored to address only specific conditions. Agencies are prohibited from using any forms of quotas, and affirmative action programs are only available to qualified contractors. At the time Proposition 209 took effect, most affirmative action public contracting programs simply required that prime contractors make good faith efforts to meet MBE and WBE participation goals. Prime contractors could either meet the participation goals or demonstrate they had made outreach efforts in compliance with state law. 8 Approximately twenty local governments were using some version of a "good faith efforts" program prior to the passage of Proposition 209, and state agencies were also implementing similar programs. 9 Because most public contracting programs were enacted in response to documented discriminatory conditions, many minority and women contractors and civil rights advocates feared that Proposition 209 would result in reduced and unequal access to public contracting system throughout California. In Opportunities Lost, we describe a number of anecdotal observations by contract compliance officers and MBEs and WBEs on the chilling effects of the new law. Even in the first year after Proposition 209 took effect, these firms were receiving less opportunities to bid, and contract compliance officers reported resistance by prime contractors to conduct outreach. For instance, Carolyn Garrety, president of Continental Building Specialty Co. in San Francisco reported the number of bid requests that she received from prime contractors went from 50 down to 2-3 requests per day. Similarly, Lisa Campbell, a Southern California environmental cleanup contractor, reported that prime contractors were no longer even sending her information on business opportunities. After Proposition 209, explains Campbell, "I'm lucky to get two [bid requests per week]. Maybe, on a good week, five, and that's it. And there are weeks that go by when we get nothing. And it's not that the work's not out there. There's plenty of work." 10 This current study goes beyond personal anecdotes to evaluate how Proposition 209 and related anti-affirmative action policies in California have affected public contract awards to MBEs and WBEs. We sought contract award data from public agencies that changed their programs in response to these measures. In addition, we tried to identify innovative practices or new strategies that have helped MBEs and WBEs maintain access to public contracting systems despite the rollback of affirmative action.

12 METHODOLOGY We initially compiled a list of California state and local government agencies that operated affirmative action contracting programs prior to the passage of Proposition 209 and a similar resolution, SP-2, adopted by the University of California Regents in 1995." We then sent public records requests to those agencies that significantly changed or repealed race- and gender-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 Proposition 209 and UC Regent resolution, and (3) contract awards by race and gender for a minimum of three years prior and after they repealed or changed the race- and gender-conscious elements of their affirmative action policies. After a number of follow-up letters and phone calls, the following 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 stopped tracking 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 the most complete data describing the participation of MBEs and WBEs across different types of contracts. A growing number of agencies, including Contra Costa, San Jose, and City of Oakland, compiled this information only for construction contracts. Despite the limited response to our public records requests, the aggregate contract dollars awarded by the agencies analyzed in 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 MBEs and WBEs in the years in which these public agencies operated affirmative action programs to those years after the race- and gender-conscious elements had been suspended or were significantly modified. The timing of when these changes occurred differs by agency. For example, the University of California was the first to eliminate its affirmative action contracting program in But many of the other agencies did not change to their policies until 1998 or later. We will discuss the general findings of this evaluation followed by a more detailed analysis by agency.

13 GENERAL FINDINGS Contract dollars awarded to MBEs and WBEsfell by 22% after government agencies repealed or changed their affirmative action programs. This reduction resulted in a loss of at least $94.5 million per year to MBEs and WBEs in the period covered by this study. Combining data from the seven studied agencies, the dollar amounts awarded to MBEs and WBEs dropped sharply after these agencies eliminated race- and genderconscious elements from their public contracting programs. MBEs and WBEs were awarded 17.6% of the contract dollars in the pre-proposition 209 period compared to 13.7% after the initiative took effect, a drop of 22%. Assuming that contract award rates for MBEs and WBEs would have remained at the same level as in the pre-proposition 209 period, this decline resulted in an annual loss of approximately $94.5 million to firms owned by minorities and women who contract with these seven agencies. Since the agencies studied in this report represent only a small segment of the total public contracting dollars available through state and local governments, the real loss caused by Proposition 209 is probably much greater. Proposition 209 appears to have been more harmful to minority businesses than to women-owned businesses. Of the five agencies that reported separate numbers for minorities and women, contract awards fell 26% for MBEs but only 7% for WBEs. The primary source of this difference appears to be in construction, where WBEs did not experience a significant drop off in contract awards. As discussed below, it is unclear why Proposition 209's impact on WBEs was different relative to MBEs. Agencies that developed successful small business programs or maintained outreach requirements experienced the least decline in participation by minority- and women business enterprises, and in some situations actually experienced increases. Of the agencies studied in this report, Proposition 209 had the least effect on the Port of Oakland and EBMUD. The Port saw a small rise in the percentage of contract dollars awarded to MBEs and WBEs after suspending its race- and gender-conscious policy policy, while EBMUD experienced a similar increase for WBEs. Both agencies attributed their performance to the adoption of programs designed to increase participation by small and local businesses as well as aggressive outreach requirements. A number of government agencies have either stopped or limited the collection of race and gender data on contract awards after Proposition 209 took effect. Proposition 209 does not require government agencies to change the manner in which it collects race and gender data, 12 yet some agencies either stopped or curtailed their data collection efforts at the same time that they cut back their affirmative action programs. These changes have made it increasingly difficult to assess the ability of minorities and women to compete for public contracts, and whether the discriminatory conditions that were supposed to be addressed by the pre-proposition 209 affirmative action programs still exist. Below is a description of some of the ways in which government agencies have limited their reporting of MBE and WBE information: > The City of Fresno stopped compiling race and gender data after it eliminated its affirmative action program.

14 > Only two agencies, EBMUD and the City of Oakland, provided us with ethnic- or race-specific data (i.e., data broken down by the contract dollars awarded to African American, Asian Americans, Latino, etc.). Because data from these two agencies represented a relatively small sample size, this study is unable to assess the effects of Proposition 209 on any specific racial group or whether there are differences across groups. > The City of Oakland, San Jose, and Contra Costa County only provided race and gender data for construction contracts and not for services or supplies contracts. > Two agencies (Sacramento, and San Jose) reported only combined MBE and WBE contract awards, making it impossible to assess whether the impact of Proposition 209 differs between minorities and women at these agencies. AGENCY SPECIFIC FINDINGS University of California The 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 and three years thereafter. Prior to 1996, UC's procurement staff had the discretion to set participation goals for minority- and women-owned firms on large contracts and to require prime contractors to make good faith efforts to utilize them. Businesses owned and controlled by racial minorities which meet the small business thresholds in the regulations promulgated by the Small Business Administration are categorized by UC as "Disadvantaged Business Enterprises" or DBEs. Although non-minority owned firms can theoretically qualify for DBE status if they demonstrate compelling reasons for being treated as a disadvantaged business, interviews with UC contract compliance staff confirmed that there were very few non-minority firms in this category. Accordingly, we treated firms within UC's DBE category as the equivalent to minority-owned businesses. UC receives a number of federal contracts, some of which require that the university implement affirmative action in its purchases and procurement of services. To minimize the impact of any federal affirmative action requirements, we excluded from our study all of the contracts 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 to exclude other federally funded contracts, our study probably understates the negative impact of UC's affirmative action ban on MBEs and WBEs since a number of UC's federal contracts may require that the university continue to conduct outreach to minorities and women.

15 Table I: University of California Average Annual Aggregate Contract Awards and Amounts Awarded to Minority and Women Business Enterprises (Before SP2 FY95J After SP2 (FY97-00) % Change in Contract Awards $1,715,956,706 $1,964,517,614 DEE 7l %, % -36% WBE $99^040^651^ 5.8% $108,354, % -7% Table II: University of California Average Annual Construction Contract Awards and Amounts Awarded to Minority and Women Business Enterprises Before SP2 (FY95) After SP2 (FY97-00) % Change in Contract Awards Total $ $418,220,323 $392,977,419 DBE $54,258,354 13,0% $29,289, % -42% WBE $19,856, % $23,253, % +26% Table III: University of California Average Annual Design Contract Awards and Amounts Awarded to Minority and Women Business Enterprises [Before SP2 FY95) After SP2 (FY97 : pq) % Change in Contract Awards Total $ $73,430,692 $88,188, % -87% WBE $8,329, % $3,789,970-62% Table IV: University of California Average Annual Purchasing Contract Awards and Amounts Awarded to Minority and Women Business Enterprises * '?' Before SP2 (FY95) After SP2 (FY97.00) % Change in Contract Awards Total $ $1,224,305,691 $1,483,352,017 DBE.*<&< $97,495,365" - 8.0% ; $91384,838""""" 6.5% -19% WBE $70,854, % $81,310, % -7%

16 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 use affirmative action compared with the years following its ban. Total contract dollars awarded to DBEs 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 contract losses 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% in construction. WBEs also experienced a large decrease in design contracts (-62%), but relatively little 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 not surprising given the well-documented history of discrimination against minorities in these industries. 13 However, the magnitudes of the change were extremely large and appear to corroborate the experiences of MBEs who described in our earlier Opportunities Lost report of how they were receiving little or no information about bidding opportunities from prime contractors. Because UC awards relatively large contracts, most DBEs and WBEs participate in construction projects through subcontracts. In public works projects, prime contractors often subcontract up to 50% of their total work to smaller firms. Since UC no longer requires prime contracts to conduct outreach to DBEs to inform them of subcontracting opportunities, these firms have little chance of working on university projects. The most surprising finding was that contract awards to WBEs increased by 26% after affirmative action was prohibited by the UC Regents. We were puzzled by this finding and interviewed UC contract compliance staff to try to understand why participation by women actually went up in the construction industry. Although several possible explanations were suggested, we were unable to confirm any of them. For instance, contract compliance staff members pointed out that in recent years, a growing number of construction firms are owned by married couples in which the woman owns a 51% share of the business, thereby allowing these firms 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 2000 may have been due to changes in the legal status of businesses rather than an actual increase in contract awards to firms that are exclusively owned by women. Because UC uses a "selfcertification" system, whereby the university accepts information about the racial or gender identify of businesses without any corroborating information, it is difficult to evaluate the validity of this observation without conducting an extensive investigation of the firms that have self-identified as WBEs. Ultimately, we were unable to obtain data from UC to confirm or disprove this theory. East Bay Municipal Utility District Prior 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, prime contractors were required to either meet specific goals for a contract or demonstrate that they had made good faith efforts to recruit and utilize MBEs and WBEs as subcontractors.

17 fl/wbe Program (FY96-98) IE Program (FY99-01> % Change in Contract Awards Table V: EBMUD Average Annual Aggregate Contract Awards and Amounts Awarded to Minority and Women Business Enterprises $128,025,304 $128,762,000. $23329^ % $17>88, % -23% WBE $8,516, % $9,330, % +7% Table VI: EBMUD Average Annual Construction Contract Awards and Amounts Awarded to Minority and Women Business Enterprises M/WBE Program (FY96-98) CE Program (FY99-01) % Change in Contract Awards Total $ $48,483,338 $48,916,654 MBE $10,107* %! $7, % -27% WBE $2,140, % $2,950, % +36% Table VII: EBMUD Average Annual Purchasing Contract Awards and Amounts 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, ' ""i : r ii.i% $3>69,44«;"*~"" as.lw 1 " " : i -25% WBE $3PJ05~7 eg 7.4% $27932, % -10% Table VIII: EBMUD Average Annual Professional Service Contract Awards and Amounts Awarded to Minority and Women Business Enterprises ifl/wbe ; Prd'gram (f Yjle^SJ 2E Program FY99-01;) % Change in Contract Awards. -!?*!-!_ $37,811,325 $36,060,202. MBE ^ $7,977, % $6,610, % -13% WBE $3,305, % $3,473, %^_ +3% EBMUD's affirmative action policy remained in effect until mid On August 1, 1998, EBMUD adopted a new "Contract Equity" program, which requires prime contractors to

18 conduct outreach to women, minorities, and white contractors to inform them of bidding opportunities. Under the policy, EBMUD staff can set race and gender participation goals for large contracts. However, a firm cannot be denied a contract for failing to meet these goals so as along as it conducts the required outreach to all potential groups. As part of its new program, EBMUD also adopted a policy to increase small businesses in its contracting. Under the policy, small businesses are eligible for a 5% bid preference when competing against a non-small business. In addition, EBMUD staff can set aside up to 25% of the contracts below $500,000 for bidding by only small businesses. Table V summarizes the impact of the new program on MBEs and WBEs. While contract 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 the largest drop occurring in construction. In contrast, WBE participation increased by 36% in construction and by a small amount in professional services contracts. WBE received fewer purchasing contracts after the program was modified but the decline was again smaller than that experienced by MBEs. EBMUD believes that the relatively good performance by WBEs under its new Contract Equity 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 worked nearly as well for MBEs. The EBMUD results, combined with the findings from UC, suggest that the removal of affirmative action policies from public contracting may have had a more severe impact on minorities than women. Port of Oakland Prior 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 Small Local Business Utilization Policy with the following key elements: 1. Construction Preference Points: The Port allots preference points based on the percentage of 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 the Local Impact Area (Oakland, San Leandro, Emeryville and Alameda) for a maximum total of 10% points. These points are then translated into a bid discount, to be applied when determining the lowest responsible bidder. 2. Consultant Preference Points: The Port allots preference points for the percentage of work being performed by small business consultants located in either the Local Business Area (Alameda and Contra Costa County) or the Local Impact Area (Oakland, San Leandro, Emeryville and Alameda) and for community involvement for a maximum total of 15 points. These points are added to a maximum of 85 technical points for a composite maximum of 100 points in evaluating consultant proposals. 10

19 3. Small Business Projects: Smaller construction contracts can be set aside for bidding by small businesses. These projects are selected by the Port's staff and are approved by the Board of Port Commissioners. In addition, the Port also had a strong outreach program, requiring prime contractors to inform firms owned by minorities, women, and white males about bidding opportunities. 14 Table IX: Port of Oakland Average Annual Aggregate Contract Awards and Amounts Awarded to Minority and Women Business Enterprises Total $ MBE WBE $8,130,509 $1,107,633 $36,758, % 3% $34,981,065 $4,654,817 $140,246, % 3.3% *- f > ^Ip^fl ' *v ^ " ^ "?" ^ 1 :i t ;iefom<f!r$3<&) - AfterN[FtM-Of *, %,Cr attge j v Contract Awards I: +13% +10% Table X: Port of Oakland Average Annual Public Works Contract Awards and Amounts Awarded to Minority and Women Business Enterprises "f ''' s.^ * -^ s y^- «efo 6 (Fir a 97) After (FY98-01K % Change in Contract AWards ^ Total $ $23,573,063 93,129,803 : MBlf3tlv' s - <$5,i9,8lirtv : ' '""' 22:<i3G --- $18,356,997 '19.7%-' : -11% WBE $113, % $489, % 0% Table XI: Port of Oakland Average Annual Consulting Contract Awards and Amounts Awarded to Minority and Women Business Enterprises Before (FY93-97) After (FYS8-99f 99* )* % Change in Contract Awards Total $ $13,185,004 $47,116,247 *No data were available for consulting for FYOO '- ' ' ->Sv.![ BBv ; : $2,l3l *2% $16,624, % +59% WBE $994, % $4,165, % +17 Tables IX to XI summarize the impact of the Port's new policies in the areas of construction and consulting contracts. Overall, the policies appeared to be very effective in maintaining access by MBEs and WBEs during a period of strong economic growth for the agency. The amount of contracts let by the Port increased over fourfold over the course of the 1990s, as Oakland's Port and Airport expanded and required extensive construction-related 11

20 services. The data indicates that MBEs and WBEs were able to benefit from the Port's expansion activities. The proportion of contracts awarded to MBEs increased by 13% and WBEs by 10% under the Port's new race- and gender-neutral policies. MBEs and WBEs saw most of this increase in professional service contracts, where their participation increased by 59% and 17% respectively. The performance in construction was less impressive. MBEs experienced a slight decline in construction contract awards. While WBE participation rates remained at the same level, women-owned construction firms received less than 1% of all construction contracts in both periods. City of Oakland The 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 race and gender participation goals or to make good faith efforts to utilize MBEs and WBEs. This policy was suspended in 1997, when the City adopted a small business program that provides local, small businesses with a bid preference of 5 percent. Table XII: City of Oakland Average Annual Construction Awards and Amounts Awarded to Minority and Women Business Enterprises Before (FY94-96) After"""""" (FY98) % Change in Contract 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, % $1,430,142 _2.2% -54% Table XII shows that both MBEs and WBEs experienced relatively large declines in construction contract awards after the City eliminated its affirmative action policy. However, it should be noted that MBE participation rates in construction were very high both in the pre- and post- periods. Even under the new race-neutral contracting policies, MBEs won almost one-third of the City's construction contracts, a rate that is higher than any other agencies evaluated in this study. Contra Costa County Contra Costa suspended its goals and good faith efforts program shortly after Proposition 209 took effect in At the time of our research, the county's public contracting programs have been completely race- and gender-neutral, and the county has not adopted any additional outreach or small business requirements. In response to our public records request, Contra Costa County provided data for contracts awarded in construction, purchasing and services categories for the period before it repealing its affirmative action policy. Since repealing its affirmative action policy, the county has stopped collecting data on contract awards outside of construction. Therefore, the only data available for comparing performance before and after the suspension of the county's affirmative action policy is in construction. 12

21 Table XIII: Contra Costa County Average Annual Contracts by Contract Type, Race & Gender (in $millions) Before (94-96) After (97-98*) % Change in Contract Awards Total Construction MBE % 0,7 18% -28% WBE 0.7 9% 0.2 5% -44% Total 20.9 rt/a Purchasing MBE % n/a WBE % n/a Prof./Personal Services Total 40.9 n/a MBE % n/a WBE % n/a Table XIII summarizes the county's performance over a three-year period. Even with an affirmative action policy in place, the county awarded only a handful of purchasing and servicerelated 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-proposition 209 period, with MBEs and WBEs receiving approximately 25% and 9% of the total contract awards. Since suspending its affirmative action policy, the county has experienced a 28% contract award drop for MBEs and 44% for WBEs. City of San Jose San 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 gender participation goals, or to make good faith efforts to utilize MBEs and WBEs. Shortly after Proposition 209 was adopted in November 1996, San Jose modified its policy to require that prime contractors need only demonstrate they had contacted MBEs and WBEs and provided them with information about bidding opportunities. After this policy was struck down by a court decision in 1997 for violating Proposition 209, San Jose's contracting practices have been completely race and gender neutral. At the time of our research, it did not operate any programs requiring targeted outreach or provide preferences for small businesses. Table XIV shows that Proposition 209 has had a severe impact on the ability of MBEs and WBEs to obtain construction contracts. Contract awards to MBEs and WBEs fell by 86% in the period after San Jose eliminated its affirmative action policy. Minorities and women won only 2.5% of all construction contract dollars awarded by the city in the three years after it adopted its new policy. Unlike most of the agencies in this study, San Jose does not track the participation rates of MBEs and WBEs separately. Instead, the city only reports the combined contract awards to minorities and women as one figure. As we have discovered in analyzing the results of the other agencies, the impact Proposition 209 can differ between MBEs and WBEs. Unfortunately, given 13

22 limitation of San Jose's data, it is impossible to evaluate whether such differences exist within the city's contracting system. Table XIV: City of San Jose Average Annual Construction Awards and Amounts Awarded to Minority and Women Business Enterprises Before (FY94-97) After (FY98-01) Total $ $63,483,722 $76,056,616 % Change in Contract Awards r -86% City of Sacramento The 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 other prime contractors to make good faith efforts to utilize MBEs and WBEs as subcontractors. In 1997, Sacramento amended the program to eliminate the bid preferences. In March 1999, Sacramento repealed the remaining race- and gender-conscious elements of its program and established an "Emerging and Small Business Development Program." The new program provides a 5% bid preference to small businesses and allows procurement officials to set aside contracts for exclusive bidding by small businesses. We had a great deal of difficulty obtaining data from Sacramento. Numerous public records requests were made both in writing and by telephone. We eventually received useable data in the areas of purchasing and services contracts. However, we were unable to obtain MBE and WBE contract data for construction in the period after the city suspended its affirmative action policy. Table XV: City of Sacramento Average Annual Purchasing and Services Contract Awards and Amounts Awarded to Minority and Women Business Enterprises M/WBE Program (FY94* 98),, ><> I E/S8EProgram (FYQO- % Change Ji Contract Awards 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 to determine whether there are differences in participation rates between different types of contracts. In addition, Sacramento also combined the data for MBE and WBE into one figure so 14