Why is it Hard for Minority Businesses to Win Government Contracts?

Understand How California’s Unique Business Landscape Impacts Minority-Owned Firms

There are more minority-and-women-owned firms in California than in any other state. In fact, almost one in four of all minority businesses in the nation reside in California. Sure, we’re the most populous state in the county, but California’s total minority-owned businesses total over 228,000. That’s a lot of minority-owned businesses. California leads the nation in the number of women-owned businesses too! With over 140,000 women-owned businesses, California has approximately 13% of all women-owned firms in the United States (1).

The California economy is the largest in the United States, boasting a $3.0 trillion gross state product as of 2018. As a sovereign nation, California would rank as the world’s fifth largest economy (2). So, it makes sense that California would attract more minority-owned and women-owned businesses than any other state. Minorities make up more than 60 percent of the Golden State’s population. Latinos and Asian Americans are the driving forces behind this trend, along with the fact that the white population is aging rapidly.

So, what’s holding back minority-owned businesses? According to census data, minority-owned firms make approximately half the revenue of non-minority firms. There are several reasons for this. One reason is that California does a terrible job helping small businesses, which is what most minority-and-women-owned businesses are. According to the Thumbtack annual business survey (3), California received an F for Overall Business Friendliness in the past three annual surveys. California also ranked 47th in a Tax Foundation report on the relative value of $100 in each state, which further demonstrates how expensive that state is for businesses in general.

California-based minority- and women-owned businesses must also contend with the fact that California’s public procurement process does not have an affirmative action program. Proposition 209 was passed over 20 years ago, ending the use of race and gender conscious decision-making in public employment, education, and contracting. Some minority- and women-owned businesses never recovered. Since Proposition 209, California minority and women business enterprises (MWBEs) have lost over $1 billion (4). Growth rates for California-based minority- and women-owned businesses are significantly lower than states that have policy-enhanced programs.

But wait, there’s more. In late 2005, the 9th Circuit Court of Appeals ruled in the Western States Paving case (5) that the Disadvantaged Business Enterprise (DBE) Program implemented under 49 CFR Part 26 was constitutional. The DBE Program allows for race and gender-based contract goals on U.S. DOT funded projects. However, the court held that race and gender conscious elements of a national program, to be narrowly tailored as applied, must be limited to those parts of the country where its race- and gender-based measures are demonstrably needed. Whether race- and gender-based measures are needed depends on the presence or absence of discrimination or its effects in a recipient’s transportation contracting industry as applied to each specific group that have actually suffered discrimination or its effects.

What the Western States Paving case did to California is require any recipient of federal funds subject to the DBE Program to demonstrate evidence that each specific group covered by the Program is suffering from discrimination or the effects of discrimination. This created the need for an Availability and Disparity Study. These studies must be legally defensible and are expensive to conduct. Before any public entity receiving U.S. DOT funds subject to the DBE Program includes DBE contract goals, they must first conduct a study to gather evidence that each specific group is actually suffering from the effects of discrimination. This is another obstacle to minority- and women-owned businesses as many smaller recipients of these U.S. DOT funds can’t afford to conduct such a study and therefore have race-neutral programs with no DBE contract goals.

How do we help minority- and women-owned businesses succeed in California in light of the obstacle filled business landscape? There are many things we can do to support minority- and women-owned businesses. First, we must continue to fight to remove regulatory barriers and unnecessary procurement policies to make it easier for small firms to do business. Second, we must encourage private companies and public agencies to develop effective suppler diversity programs. Third, since so many California small businesses are minority- or women-owned, we should develop strong race-neutral measures that help small businesses. Race-neutral measures avoid the level of high scrutiny race and gender measures require, therefore, being easier to implement without facing the same legal challenges. One final thing we can do is overturn Proposition 209

1. U.S. Census Bureau’s Annual Survey of Entrepreneurs, Release Number CB17-116 2. Wikipedia, The Free Encyclopedia, Economy of California 3. The 2019 Thumbtack Small Business Friendliness Survey – Ewing Marion Kauffman Foundation 4. The Impact of Proposition 209 on California’s MWBEs by Tim Lohrentz, January 2015 5. Western States Paving Co., Inc. v. Washington State Department of Transportation, No. 03-35783

By: Edward Salcedo, Jr.

President of GCAP Services, Inc.

March 25, 2020