Stateline Story

States Look Beyond Quotas to Promote Minority Firms

The reality TV program, produced by the state's Office of Minority Affairs, selected two lucky winners for an overhaul of their marketing strategies, management style and office space. The show, whose pilot episodes aired in October and November, is one example of the innovative ways states are promoting business ownership among minorities and women while avoiding the legal snares that can entangle traditional preference or "set-aside" programs.

Since the 1960s, states and the federal government have experimented with goals or requirements that induce government agencies to set aside some portion of contracts for minority or female business owners. But those programs have met legal challenges with mixed results, leading states to devise other sorts of solutions to promote minority and female entrepreneurs.

Colorado has stayed away from set-asides, but officials make a special push to help minority-owned firms do business with the state. Wisconsin, like Maryland, has a preference system for state contracts but a new initiative from Gov. Jim Doyle (D) aims part of his "Grow Wisconsin" drive at minority business development.

Last year, in addition to the TV show, Maryland strengthened its already-existing set-aside program by toughening rules that require state agencies to reserve an ambitious 25 percent of contracts for minority-owned businesses.

Maryland's new law effective Oct. 1, 2004 was inspired by the findings of a commission created by Gov. Robert Ehrlich (R) in 2003 that noticed contractors taking advantage of a loophole and dropping minority-owned supply firms once the contract was awarded, a problem Special Secretary of Minority Affairs Sharon Pinder called "contract amnesia."

"There were a few contractors who would forget' about the folks they had named," she said. Under the new law, contractors must list the minority-owned firms they will use on initial proposals for state jobs.

But legal challenges to racial set-aside laws may inhibit the growth of programs like Maryland's. Preference goals or laws that require state agencies to use a certain percentage of minority- or women-owned businesses in their work have come under fire in more than 100 state and local courts since 1989, according to Franklin M. Lee, attorney and former chief counsel for the Minority Business Education and Legal Defense Fund.

In the case of Croson v. City of Richmond, the U.S. Supreme Court in 1989 struck down as unconstitutional Richmond's preference law, which required 30 percent of the city's construction spending to go to minority contractors. The court ruled that states must prove minorities were being shut out of contracts, according to Ian Pulsipher of the National Conference of State Legislatures.

"They have to prove that there is a disparity between procurement for minorities and non-minorities, a difference in what contracts they're getting," he said.

Since then, contractors usually white males who have been passed over for jobs have challenged set-asides in court. The legal challenges in many cases have been successful, according to George La Noue, professor of political science at the University of Maryland-Baltimore County and director of the Project on Civil Rights and Public Contracting.

"Some [programs] are completely shut down, some are modified, some become race-neutral small business programs," La Noue said.

In a handful of cases, though, courts have upheld programs in which a state or city proved that existing racial discrimination made set-asides necessary.

As a result, some states have steered clear of the programs altogether and devised creative ways to assist fledgling firms without making themselves vulnerable to lawsuits.

Colorado, for instance, has a minority business department in the governor's office but does not regulate a set-aside program for state contracts.

"Colorado would rather go ahead and teach people to be competitive as opposed to saying, Here's something we'll go ahead and buy from you,'" said John Cisneros, small business coordinator for the Colorado state purchasing office. "We teach them how to fish rather than give them the fish."

In Wisconsin, top officials aggressively are trying to make more minority-owned firms economically viable. As a part of Doyle's statewide economic initiative, the state is releasing more funds to support minority entrepreneurship, said Cory L. Nettles, Doyle's secretary of commerce.

Now, Nettles said, the state buys down loan rates to get start-up capital to minority firm owners and encourages major Wisconsin operations to consider smaller, unknown subcontractors for jobs.

"We try to make deals happen when they might not otherwise happen," he said. "If the state economy is going to be successful, we can't afford to leave any talent parked on the sidelines."

Wisconsin also has participation goals for state-funded projects and is meeting them on jobs such as the $145 million Marquette Interchange Project in downtown Milwaukee. Twenty-five percent of the work on that road construction project is being completed by minority firms, according to Tony Hozeny, communications director for the Wisconsin commerce department.

But some say set-aside programs such as Wisconsin's will fade.

"Set-asides were a political solution of a particular political era," said La Noue of the University of Maryland. "They were attractive because they became a sort of racial patronage that was politically acceptable. Overwhelmingly, the minority businesses didn't get a dime out of them. ... It never solved what the real problems were."

La Noue said North Carolina is the only state with pending litigation challenging the constitutionality of a minority business program. It's unlikely that more states will adopt new preference programs, he said. "They're very difficult to defend, the existing ones," he said.

Attorney Lee said that in the absence of further rulings from the Supreme Court, the legal issues surrounding set-asides remain unsettled. "At least for the near future, there will continue to be minority business programs at the state and local level. Litigation will continue."

In the United States, businesses are classified by federal, state and local authorities according to their majority interest-holder. If a woman or minority holds 51 percent or more of a firm's stock, it qualifies for certification as a female- or minority-owned business enterprise.

At least 27 states have minority business certification and development programs, according to NCSL. It does not track set-aside or preference programs.

In 1997 the last time the U.S. Census Bureau collected data on business ownership less than five percent of businesses were owned by minorities in 14 states (Idaho, Iowa, Kentucky, Maine, Minnesota, Montana, Nebraska, New Hampshire, North Dakota, South Dakota, Vermont, West Virginia, Wisconsin and Wyoming). At the top of the list, more than 20 percent were owned by minorities in six states (California, Florida, Hawaii, Maryland, New Mexico and Texas).