NEWS ANALYSIS : Ruling Clouds Contracts for Minority Firms

The Supreme Court’s ruling Monday undercutting federal affirmative action policies throws into doubt the future of federal programs that set aside billions of dollars in contracts for minority and disadvantaged businesses, potentially affecting thousands of firms nationwide, including hundreds in California.

And it could drastically alter the legal requirements that private firms actively hire and promote minorities if they do business with the U.S. government. That could affect virtually every major employer in the United States.

“It’s not a good sign for any of those programs: hiring, contracts, bidding,” said UCLA law professor Jonathan Varat. “All come under question.”

Firms that do more than $10,000 worth of business with the U.S. government in a year must have a state policy guaranteeing equal employment opportunity; those that do more than $50,000 a year and have more than 50 employees must have a written affirmative action plan and periodically report their hiring and promotion of minorities to the federal government.

Firms in both categories employ about 25% of the U.S. work force, or 26 million workers, according to the Office of Federal Contract Compliance. The ruling wouldn’t affect voluntary affirmative action programs, which amount to only a small fraction of the total.

Minority business people saw the ruling as a dramatic setback to recent hard-won gains.

“Without a requirement to do it, agencies and educational systems and employers will not take the affirmative steps they used to take before to hire and contract with minorities and women,” said Nancy Archuleta, chairwoman of the Latin American Management Assn. and head of the MEVATEC Corp., an Alabama-based science and engineering company and a federal minority contractor.

The ruling also raises questions about the Federal Communications Commission’s controversial plans to broaden bidding on coveted broadcasting and telecommunications licenses to make it easier for minorities to qualify.

Critics have attacked the set-asides as unfair to non-minority firms. Others argue that the programs funnel federal dollars to a relatively small number of minority-owned businesses, doing little to spur the creation of new ones, particularly in impoverished inner-city areas.

On the contracting side, billions of dollars of federal money are at stake.

For example, the Defense Department has a goal--mandated by Congress in the late-1980s--of seeing that minority-owned firms get at least 5% of its overall annual spending.

Similarly, under the Small Business Administration’s 8a set-aside program for disadvantaged firms, $4.37 billion in federal contract money went to 5,293 firms in 1994 alone, the General Accounting Office reported in testimony to the U.S. Senate in April. The SBA program is the federal government’s oldest and largest contracting set-aside program.

Without the SBA 8a program, as many as 40% of the 8a firms with federal contracts would go out of business by the year 2000, said Fernando Galaviz, a Latino business owner and vice chairman of the National Federation of 8a Companies in Arlington, Va.

Of the total number of firms in the SBA’s 8a program, about 580 are in California, SBA spokesman D.J. Caulfield said. Since 1988, California companies have received $2.6 billion in 8a prime contracts. In fiscal 1994, that amounted to $502 million.

The SBA’s legal staff was reviewing the court’s decision Monday to determine what action, if any, it needed to take, Caulfield said.

Galaviz’s own firm, the Centech Group, is a 210-employee computer services company that relies on federal 8a contracts for about 81% of its $16 million in annual revenues.

“You won’t find private markets to make up for the federal money,” he said.

About 50 of the 8a firms received more than one-fourth of the contract dollars awarded last year, and 56% of the firms got no money in 1994, the GAO reported. Only 18.5% of the $2.06 billion in new 1994 contracts were competitively bid.

However narrowly focused such funds are, they can spur businesses to grow. Applied Technology Associates Inc., a software firm based in Mountain View, is owned by an Asian American, John Ng, and received federal contracts under the 8a program that allowed it to grow to 1,450 employees.

The firm eventually weaned itself off the 8a program in 1991, and now competes head-to-head with other firms for the federal contracts that account for all of its more than $50 million in annual revenues, said the firm’s contracts administrator Mike Galbo.

The 8a program “gives the small people a chance to get some business,” Galbo said. “Without that, how can you compete with the IBMs, Lorals and TRWs?”

On the hiring side, the court’s ruling Monday could jeopardize federally mandated programs that cost U.S. businesses about $2 billion a year to administer, according to a study by Barnard College economics professor Cecilia A. Conrad.

Spokesmen for the Defense Department and several big defense contractors, including Northrop Grumman Corp., Hughes Electronics Corp. and McDonnell Douglas Corp., all said they were still reviewing the Supreme Court’s ruling and, therefore, could not immediately say whether it would force them to make significant changes in their programs.

But Hughes spokesman Richard Dore said that “regardless of whether it’s a legal requirement, we think there’s a business benefit to having a culturally diverse work force.” More than 30% of Hughes’ employees are minorities, Dore added.

Times staff writer James Peltz contributed to this story.