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Municipal Purchasing Guidelines for Disadvantaged Businesses Nature of the Program

Nature of the Program

The mandate for municipal purchasing to give windows of opportunity to small business, women-owned and minority-owned enterprises stems from federal guidelines. Organizationally, the Office of Government Contracting (GC) of the Small Business Administration (SBA) advocates the interests of small, disadvantaged, and woman-owned businesses. The goal is to maximize access directly to federal contracts and indirectly via high-profile subcontracts for work won by larger businesses (U.S. Small Business Administration 2009a 1).

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Being considered pejorative in some sense, the general term “small business” has tended to give way to “MBE/WBE” (minority business enterprise/women-owned business) or “HUB” (for Historically Under-utilized Businesses) that the President’s Commission on Minority Business Development offered in 1990 as more edifying than “disadvantaged” (Minority Business Entrepreneur 2009 1).

To qualify under federal and local guidelines, the legal definitions encompass:

  • MBE – a minimum of 51% or greater ownership by minorities, which means either male and female stockholders who are African American, Hispanic, Native American, Native Alaskan, Asian Pacific, Subcontinent Asian Americans (East Indian), and such other ethnic groups as the SBA might designate in future. Besides ownership, “minority” status must extend to management and control of daily business operations; the certification process also screens for experience or technical track record for the core product or service of the business.
  • WBE — In this case, ownership and control can be held by non-minority women. All other certification conditions apply as described above.

Table 1: Definitions for Small Business

NAICS Industry Sector Size Standard
Manufacturing 500 employees
Wholesale Trade 100 employees
Agriculture $750,000
Retail Trade $7 million
General & Heavy
Construction (except
Dredging)
$33.5 million
Dredging $20 million
Special Trade Contractors $14 million
Travel Agencies $3.5 million
(commissions & other
income)
Business and Personal
Services Except:
$7 million
Architectural, Engineering,
Surveying, and Mapping
Services
$4.5 million
Dry Cleaning and Carpet
Cleaning Services
$4.5 million
  • SDB for “small disadvantaged business” — The criteria being gross dollar revenue that varies by industry (see Table 1 above) and a maximum of 499 employees (fewer than 500). The term “disadvantaged” refers to minority ownership only.
  • DBE for “Disadvantaged Business Enterprise” — a more ambivalent designation that can encompass ownership by minorities, the disabled and those living in economically depressed localities or city zones. Some federal agency and municipal legislation cover ownership by women of any race.

The broader compass of HUB extends to DVBE’s or SDV’s (Disabled Veteran Business Enterprise or Service Disabled Veteran). California is one state that stands out for including disabled veteran-owned businesses in purchasing quotas. (On the other hand, Proposition 209 in the state also eliminated preferential treatment for MBE/WBE, including at the municipal level ((Minority Business Entrepreneur 2009 1).

The absence of hard-and-fast regulations and incentives or sanctions means implementation can vary at the state and city/municipal levels. It may be necessary, as in the state of New Jersey, to organize coordinating bodies that request compliance information from lower-level units of government. Thus, Governor Corzine promulgated Executive Order 34 (2006) to concretize assistance for minority and women-owned businesses throughout the State. The EO constituted a Division of Minority and Women Business Development under the Department of the Treasury to track MBE/WBE allotments by state departments, agencies, authority and state college/university (State of New Jersey 2007 1). Procedurally, the government commits itself to regulate via the certification process; as well, there are associated financial and management assistance programs for MBE/WBE.

Origin and Rationale

Institutionalization of government’s preferential policy small business development is directly traceable to the 1953 enabling law for the Small Business Administration. In fact, the underlying philosophy and mission go back to the Great Depression, when support for small enterprises seemed one way to reduce hardship at the grassroots. Certain initiatives also emerged in World War II, in part because the economy remained sluggish and partly because government was convinced small businesses ought to participate too in the largesse from wartime production.

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Three years into the Great Depression, President Herbert Hoover pushed legislation for the creation of the Reconstruction Finance Corporation (RFC). To help mitigate the financial hardship of the time, RFC became a channel for loans to any size of business that had been demonstrably hurt by the depression. RFC remained a pillar of successor President Franklin D. Roosevelt’s “New Deal” programs to deal with the aftermath of the Crash of 1929.

As wartime production geared up beginning 1940, Congress made the first step in supporting small business owing to the observation that large companies like General Motors and Boeing were monopolizing defense contracts. By 1942, Congress had passed the enabling law for the Smaller War Plants Corporation (SWPC). Like RFC, this federal agency made loans directly to entrepreneurs. More importantly, SWPC provided incentives to large banks for private loans to small enterprises and commenced what became the modern advocacy of preferential treatment for SBEs in federal procurement agencies and subcontracting by large corporations.

This wartime initiative was not lost after Japan capitulated. RFC merely absorbed the loan programs and contract regulation powers of SWPC. At the same time, the Department of Commerce tasked its Office of Small Business (OSB) to be proactive about educating small businessmen about their opportunities with the government. In a harbinger of what the SBA would undertake, OSB also coached individual entrepreneurs on management systems and techniques.

Less than a decade later, the Korean War erupted. Congress reprised SWPC with the Small Defense Plants Administration (SDPA). To avoid overlapping authority and loan programs, SDPA partnered with RFC. Essentially, the SDPA merely registered and certified small businesses to the RFC as capable of fulfilling work required by military contracts.

As the Korean War petered off into an armistice, it became clear that the U.S. economy had finally emerged from the devastation of the Great Depression. Stock values were back to where they were in the summer of 1929, just before the Crash. Hence, the “reconstruction” goals of the RFC seemed redundant. Nevertheless, President Dwight Eisenhower saw fit to continue official support for small business. Under his sponsorship, the Congress created the new small business agency, the Small Business Administration (SBA), on July 30, 1953. Congress created the Small Business Administration. In general, the SBA was mandated to “aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns” and see that small businesses garnered a “fair” share of government contracts, as well as access to bid at auctions for surplus property (U.S. Small Business Administration 2009b 1).

Subsequently, to more enabling laws broadened the support the SBA could provide this important sector. In 1958, the Investment Company Act capitalized the Small Business Investment Company (SBIC) Program. Now, the SBA had licensing functions and the ability to make loans to private venture capital investment firms. The latter emphasized the long-term debt and equity investments that high-risk small businesses could not get elsewhere for the loan periods a venture needed before it could break even. Secondly, the Equal Opportunity Loan (EOL) program was launched in 1964. SBA now had a specific mandate to mitigate poverty by lending at concessional terms to individuals who lived below the poverty line but were desirous of going into business for themselves. The quid pro quo, of course, was that such persons had to have a sound feasibility and business plan.

These days, consistent with its outreach to municipalities, the SBA also has regional Small Business Development Centers regional centers that furnishes counseling, managerial and technical consultation to current and planned small businesses. By marshalling the efforts of the private sector, educational institutions, federal, state and local governments, SBDCs in effect provide one-stop assistance to individuals and small businesses in locations dispersed for geographic reach and convenience of its stakeholders. There is one SBDC in each of the 50 states and three more in Guam, Puerto Rico and the U.S. Virgin Islands (Office of Small Business Development Centers 2009 1; 2009c 1).

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Minority Business Entrepreneur (2009 1) reports that other government agencies complement the work of the SBA. There is, for one, the National Women’s Business Council (NWBC), a bipartisan federal advisory panel initiated in 1988 and tasked to formulate recommendations to the Executive and Congress that will enhance the potential contribution of WBE. At the Department of Commerce, secondly, there is the counterpart for MBEs, the MBDA for Minority Business Development Agency, which is claimed to be the only agency focused on nurturing and seeing to the growth of minority businesses around America. Like the SBA, the MBDA ensures dispersed access with regional Minority Business Development Center. Thirdly, every federal agency and most state, county and municipal agencies have Office of Small Disadvantaged Business Utilization (OSDBU).

Implementation in Practice

Small businesses respond to a contract solicitation that designates the applicable size desired for a contract being bid out, according to the industry classification of the goods or services being procured (Table 1 above). To start, a business self-certifies that meets the supplier size specified in the solicitation.

In case of questions or protests, the size of the business at the time of self-certification applies for the duration of the contract, irrespective of whether the firm exceeds the size limit prior to, or after, the contract. If the size standard is average revenue for the three years prior to the bid, for instance, that is taken literally. It does matter, therefore, if the supplier-applicant had one great year when revenue exceeded the standard: as long as the average meets the specification, no further questions will be entertained.

Since there is preferential treatment accorded small businesses, misrepresentation of size status naturally enough makes the erring applicant liable for criminal penalties. Equally, any third party may enter a protest about the self-certified size of a bidder or industry classification decided on by the contracting officer. (U.S. Small Business Administration. 2009d 1).

Coming to examples of municipal implementation, the example of San Diego (CA) is particularly enlightening. Small businesses, the City claims, are in the driver’s seat here since they number more than 70,000 (or 11 in 12 business establishments in the City) and, for sheer number, are reported to have contributed half the job generation since 1991. Beyond giving priority to small business in purchasing processes, however, the city government has opted to let the municipal Office of Small Business (one of the first to be set up in the state) focus on aiding the growth of small business.

Through the well-intentioned vehicle of a citizen’s Small Business Advisory Board, the San Diego OSB has veered toward regulatory relief and policy reform, eliminating regulations, streamlining the permit process and lowering taxes for small businesses. Recently, accomplishments that directly impacted small business in the city included: accepting Advisory Board inputs toward the structure of the City’s Small Business Enhancement Program; lowering the Business License Certificate fee in half for micro-enterprises; being more “pragmatic about fire regulations when the chance came to put up affordable mass housing; easing reporting requirements and 30-day holds of merchandise for secondhand dealers; convincing the state Legislature’s Revenue and Taxation Committee to cut Minimum Franchise Tax for corporations with gross receipts of $1 million or less (City of San Diego 1). In addition, the City administers more than a dozen types of loans and guaranty programs, including those originating from the SBA.

In Omaha, NE, municipal support for purchasing from small and disadvantaged businesses is more proactive and direct to the point, for all that it seemed at an embryonic stage earlier in the decade. Section 10-200 of the Omaha Municipal Code had already pronounced it desirable to embark on a “good faith effort” with respect to historically under-utilized businesses. But rather than wait for disadvantaged enterprises to realize the opportunity they were missing, the municipal government agreed that reaching out was called for. Accordingly, the Omaha mayor issued an Executive Order and labeled the effort “Affirmative Action Marketing of Protected Business Enterprises (PBE) and Disadvantaged Business Enterprises (DBE) in Municipal Contracting and Purchasing”.

Actions, benchmarks and oversight/responsibility were set out as follows:

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  • The entire initiative is packaged as a “marketing” program.
  • The Mayor’s Office as the spearhead for surveying the PBE and DBE vendors and contractors in the city and carrying out a needs and barriers assessment with respect to carrying out business with the city..
  • Using the results of the city canvass to have the Purchasing Division of the Finance Department augment existing Vendors’ Notification Lists.
  • Crafting and distributing an educational pamphlet, “How To Do Business With The City Of Omaha”. This served to demolish unfounded barriers or points of resistance. More concretely, the City informed small businessmen that they replace bonds that required cash on hand with e.g., certificates of deposit or lines of credit
  • Having the obscure Bonding and Technical Center (BTC) in City Hall go out of its way and, in cooperation with the Omaha Small Business Network (OSBN), train PBE and DBE to more easily meet City standards and documentary requirements.
  • In an unusual role assignment, City Hall’s Human Relations Department (HRD) was made responsible for certifying PBE and DBE.
  • Once the HRD shortlist was ready, the Purchasing Division of the Finance Department took over by contacting the candidate PBE and DBE vendors about their status and pending requests for goods and services. Record-keeping was naturally enough entrusted to Purchasing Division.
  • From then on, the Architecture and Engineering Committee and all agency and department heads were mandated to obtain from the Purchasing Division the PBE and DBE interested in supply the City and include these among their solicitation targets.
  • Progress was to be tracked with monthly disbursement reports from the Finance Department, broken down by number and share of transactions and payments in total going to WBE, MBE, and DBE.
  • Most important of all, affirmative quotas were set at: 5% of both vendors contracted and dollar volume to minority firms, 8% for WBE, and 13% of payments on construction contracts for DBE’s.
  • Finally, responsibility was delegated to Finance Department for administrative oversight and to Human Relations Department with respect to compliance oversight (Fahey 2002 1).

It is likely that many municipalities are to be found somewhere between the vacuum that seems to characterize the San Diego attitude and the vigorous integrated marketing Omaha undertook to make accommodation of BDE a reality. This is the situation in Fresno (CA) where the municipality engages in just as much token effort as federally-funded projects with the city will tolerate.

This is evident, first of all, in a mission statement that is plain vanilla and bespeaks no commitment to working with MBE/WBE, “To provide prompt and effective procurement services which meet the needs of City departments, in accordance with the spirit and requirements of the City Charter and Municipal Code while affording equal access to all entities seeking to do business with the City of Fresno” (City of Fresno 2009a 1)

True, the Fresno Purchasing Division is organized into (regular) Purchasing and a section for Disadvantaged Business Enterprise (DBE Program). The budget source for the former is more explicit since the Division operates on the basis of billing internal clients for services rendered. Where that puts the DBE program in the funds pecking order may be unclear. But the tale of procurement dollars dispensed by both sections is dismal. All regular needs of the municipality aggregate to about $195 million annually and all of this is administered by 17 staff in Purchasing section. On the other hand, the DBE section of two persons manages only about $30 million in DBE funds, particularly from the U.S. Department of Transportation. The section does engage in some outreach to DBEs but this seems to be merely in compliance with federal funding conditions.

This is not for lack of any manpower. The municipality has in place an online purchasing management system that accommodates vendors of any size from anywhere in the country to register, avail of automated e-mail solicitations and other notices, and even bids over the Internet.

As may expected, the tiny DBE section is capable enough at rudimentary activities and there it stops. The section accepts applications, certifies DBEs, assists DBEs through the intricacies of the bidding process, manages and reports on the MBE-oriented programs of the Department of Transportation. Otherwise, the only other initiative of this section worth noting is the commitment to conduct “at least” one seminar per year for DBEs and/or prime contractors. But there has been just one so far, last year, and attendance proved to be a mix of prime contactors, major media and a handful of DBE’s. (City of Fresno 2009b 1)

Arguments Against the Program

While well-intentioned, affirmative action on procuring goods and businesses from disadvantaged segments of the business community has not been free from legal challenges.

As demonstrated in the employment discrimination case Ricci v. Sotomayor, some judges and jurisdictions can overreach their legal mandate and be tempted to engage in reverse discrimination. Then Appellate Court Judge Sotomayor had ruled in favor of black firemen who argued that their total failure in a promotion test (which they had been consulted on while it was being formulated) which only white firemen had passed (Ricci among them) entitled them to a Title VII disparate impact claim. On appeal, Sotomayor agreed that the blacks had been discriminated against. But the Supreme Court disagreed that affirmative action was needed and sided with New Haven in confirming the test results.

In principle, affirmative action favors DBEs as a class but is subject to review when the circumstances of a particular applicant clearly lift him above the revenue and employment cut-off’s for his industrial category. Nonetheless, putting affirmative-action quotas in schools and in municipality purchasing processes can cause unsettling questions about situations where “all other things equal” cannot be proven to be true.

At the end of their 1994 summer recess, the Supreme Court pondered a school desegregation case and a suit brought that alleged a DBE had been awarded a bid despite evidence that the majority, White supplier had the patently better bid. The latter, a Colorado construction company, invoked the constitutional guarantee of equal protection in challenging the bidding outcome based on Federal law race must be acknowledged when awarding Federal contracts.

By way of background, the Department of Transportation gives prime contractors an incentive to comply with the Small Business Act in the form of a 1.5% bonus if no less than 10% of contract value goes to a “disadvantaged business.” Non-minority contractor, Adarand Constructors Inc. challenged the award on the basis that they had posted the lower bid for a federally-financed highway project. Both the Federal District Court in Denver and the United States Court of Appeals for the 10th Circuit, also in Denver, denied Adarand’s claim that they were entitled to equal protection and that the bid should have been won on the basis of price more advantageous to the municipality and the federal government.

At that time, the Democratic Clinton Administration had tried to persuade the Supreme Court to summarily dismiss the case. By accepting Adarand Constructors v. Pena, No. 93-1841, the Court evidently saw an opportunity to once more review the constitutional standard that applies to Federal affirmative action programs after a lapse of several years. Previously, the Supreme Court had sided with the Federal government but chose to deny the validity of a municipality’s racial and DBE preference program (Greenhouse 1994 A23).

Seven years later, Justice Sandra Day O’Connor’s expressed her opinion that the Federal transportation law mandating “not less than 10 percent” of highway and transit funds should go to DBE’s was probably unconstitutional, a view that four very conservative Justices – Chief Justice William H. Rehnquist, Justices Antonin Scalia, Anthony Kennedy and Clarence Thomas – would heartily agree to. The largely conservative court has tended to deny any race-based affirmative action, except in actual and exceptional cases of discrimination against minorities. (Houston Chronicle 2001 4).

There have also been lapses and grievous errors in implementation. In St. Paul (MI), an independent audit pointed up misdirected administration and inferior outcomes in the Vendor Outreach Program, the municipality program to comply with the Small Business Act and improve on opportunities for disadvantaged businesses. And this ahead of a market-based disparity study, costing $250,000, to cull feedback from the targeted population segments on the preference actually given disabled-person-, minority- and female-owned firms.

The bottom line was St. Paul could be faulted for coordination and oversight lapses, as well as inadequate resource use, when trying to embrace WBE and MBE in municipality contracts.

The audit found, among others, that outcomes were poor. Less than 7% of contracts aggregating to $220 million in 2006 actually flowed to MBEs and WBEs. Not surprisingly, criticism about discrimination in contract awards had already crystallized in two lawsuits against the municipal government.

In defense, Council President Kathy Lantry declared that the municipality had never set out to be “…intentionally or maliciously discriminatory” (Havens 2007 B5).

Summary and Conclusion

Municipal programs revolving on some measurable preference for historically underutilized enterprises stems from precedents going back eight decades now and emulates the work of the Small Business Administration in the federal government. In particular, predecessor agencies had been established to help the impoverished get a new start in the middle of the Great Depression and for SMEs to get a fair share of bids for wartime production. In contemporary times, the implementation of preference programs for MBE, WBE and other historically underutilized businesses is uneven. As shown by the example of Omaha City, getting off to a running start actually requires strong political support from the top, teamwork within the municipal government, empirical barriers analysis, proactive marketing to a numerous population of small enterprises, alternatives for performance bonds on which entrepreneurs are loathe to spend on, quantitative performance benchmarks for utilization of small businesses, designation of responsibilities and frequent monitoring.

Works Cited

  1. City of Fresno. 2009a. General Services Department – Purchasing Division.
  2. City of Fresno. 2009b. Small Business Development Day.
  3. City of San Diego. n.d. Economic Development: Small Business Assistance.
  4. Fahey, Mike. 2002. Executive Order No: Affirmative Action Marketing of Protected Business Enterprises (PBE) and Disadvantaged Business Enterprises (DBE) in Municipal Contracting and Purchasing.
  5. Greenhouse, Linda. 1994. High Court to Review Kansas City School Desegregation Case. New York Times. (Late Edition (East Coast)). New York, N.Y.: pg. A.23.
  6. Havens, Chris. 2007. Audit Finds Flaws in St. Paul Contract Process; Lack of Accountability, Lack of Communication and Lack of Resources Were the Three Main Faults That an Independent Audit Found. Star Tribune. Minneapolis, Minn.: pg. B.5
  7. Houston Chronicle. 2001. Court to Hear Case That Puts Affirmative Action to the Test. [3 STAR Edition] Houston, TX.: pg. 4.
  8. Minority Business Entrepreneur. 2009. “Acronyms and Terminology.” MBE Magazine.
  9. State of New Jersey. 2007. Taking Care of Business: About MBE/WBE. Web.
  10. Office of Small Business Development Centers. 2009 Entrepreneurial Development.
  11. U.S. Small Business Administration. 2009a Government Contracting: Mission.
  12. U.S. Small Business Administration. 2009b Overview and History.
  13. U.S. Small Business Administration. 2009c SBDC Locator.
  14. U.S. Small Business Administration. 2009d Understand ther Basics: What is a Small Business?

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