Women, Minorities Still Lag in Government Contracting : Jobs: Affirmative action programs have been largely ineffective, records show. Red tape and fraud are problems.

Despite years of affirmative action programs, minorities and women remain largely shut out of the billions of dollars in public contracts awarded each year by California’s three biggest government entities, documents show.

Companies owned by white males continue to receive the great majority of public contracts with the state of California, city of Los Angeles and county of Los Angeles.

“Even with affirmative action, we’re still only getting crumbs,” Latino state Sen. Richard G. Polanco (D-Los Angeles) said of minorities and women. “It’s crumbs. Absolutely crumbs.”

Although there have been spectacular success stories, a Times examination of affirmative action awards of government contracts in California found that such programs are generally ineffective for several primary reasons:

* Red tape and bureaucratic bungling frustrate business owners who try to navigate a labyrinth of government contracting rules and regulations. Two years ago, the California Department of Transportation--the only state agency that examines and certifies companies claiming ownership by minorities or women--systematically rejected 770 applications to eliminate a backlog.

* Contracting programs are highly vulnerable to exploitation by “fronts”--white-male-controlled businesses that fraudulently claim ownership by minorities or women. Last year, state audits of 700 contracts determined that almost a third involved fronts or other subversions of affirmative action. In Los Angeles, a firm claiming to be run by a woman lost its city certification because it was deemed a front for male operators, but records show that the company later won nearly $30 million in city contracts while using a woman-owned business certification issued by Caltrans.

* Financial constraints have caused some state agencies to abandon rigorous efforts to verify that businesses are truly owned by minorities or women. Instead they have adopted an honor system known as self-certification, which has further encouraged misrepresentation and fraud.

* Minority contracting programs have not succeeded in breaking up what one study called an “old boys network” of white-owned enterprises that dominates public contracting. Members of this network “have resisted or found ways to subvert the process by which minorities can effectively participate,” said a former top official in a Los Angeles minority contracting program.

* Court decisions severely limit what public agencies can do to ensure that women- and minority-owned companies receive a share of government contracts. As a result, minority contracting programs are forced to rely on voluntary compliance to achieve admittedly modest goals. The approach in Los Angeles is so cautious that one top official is hesitant to call it affirmative action.

“The program has raised expectations that are not and cannot be met because of the way it is run,” concluded the Little Hoover Commission, the California government watchdog agency, in a 1993 report.

The report is considered the most comprehensive examination of affirmative action in state contracting--and little has happened to alter its conclusions, said Jeannine English, the group’s executive director.

Affirmative action in contracting, she said, is simply “a promise that the state made in law to minorities and women . . . and it never paid off.”

Criticized from every quarter, these programs draw as many complaints from minority and women business owners as from their white male counterparts. Whether they are exasperated by the proliferation of fronts or bureaucratic hoops, all complain that the programs have not operated as intended and have not fulfilled their goal of fairness.

The critics differ, however, over visions of the future. Affirmative action backers point out that there have been many individual successes and say that now, more than ever, women and minorities who pay their share of taxes are entitled to their share of government contracts. They argue that affirmative action should be restructured and strengthened. “Until you get the proper level of administration and enforcement, how can you question whether it works or not?” said Cliff Tong, an Asian American businessman in Lafayette.

Opponents claim the programs are reverse discrimination that take business away from competent contractors and give it to unqualified companies. Affirmative action can’t work, say opponents, because the programs undermine the free enterprise system.

Amid this wave of resentment and anger, Gov. Pete Wilson has made the elimination of affirmative action a cornerstone of his presidential campaign and is suing to kill the state programs. At the same time, other opponents are gathering signatures for a proposed November, 1996, ballot initiative to abolish most affirmative action programs in California.

At stake are many thousands of jobs and billions of dollars in government contracts for goods and services ranging from the building of new freeway bridges and prisons to the purchases of food and paper.

To assess the impact of affirmative action on government contracting, The Times examined programs in the city of Los Angeles, the county of Los Angeles and the state. Together they award more than $7 billion a year in contracts.

Minorities and women get only a small percentage of the public contracting business in the three jurisdictions, according to government-funded studies, audit documents, court cases and interviews with dozens of public officials and contractors.

Bad Data

The existing statistics are so sketchy and inconsistent that it is impossible to determine exactly how many government dollars actually were channeled to legitimate minority- and women-run businesses.

But the figures indicate that the state and the city and county of Los Angeles all have experienced trouble meeting modest goals for nourishing existing minority- and women-owned enterprises and fostering new ones.

California officials report that the share of contracts going to minorities has increased somewhat over the years, but disadvantaged companies still receive only a small portion of public dollars spent. While half of California’s population is made up of women and a third of minorities, the state reported that it awarded 6% of $3 billion in contracts to women’s companies in 1993-94 and 9% to minorities.

Even those figures are suspect, however, because an additional $1 billion in awards was omitted from the tally.

“When you go back and inject the dollars they left out, we estimate the real figure for minorities and women is about 4%,” said Paul Guerrero, president of United Minority Business Enterprises.

In Los Angeles County, the most recent minority-contracting figures fail to account for one-fourth of the dollars spent. The county study showed that in 1992-1993 9% of $1.7 billion went to minorities and 6% to companies owned by women--this in a county that is half female and 44% minority.

City of Los Angeles statistics also are seriously flawed.

A study of minority and women contracting with the city of Los Angeles had to be abandoned last winter after three years of effort because municipal records were so poor.

George Pla, president of Cordoba Corp., the company that attempted the study, described the problem: “Some records were computerized, some were practically in shoe boxes. Some [departments] didn’t keep records at all.”

City officials agree that contract record-keeping was not adequate for the study, which required statistics going back several years.

Even so, a confidential draft of the Cordoba study shows that minority firms received 12% of municipal business and women-owned companies 6% between 1987 and 1991. The population of the city is half female and half minority.

The Mayor’s Minority Business Opportunity Committee reports that the share of city contract money awarded to companies run by nonwhite women and men has averaged 17% during the past year and a half. The figures do not include contracts awarded to firms run by white women. Officials say the report is based on city data that--while somewhat improved over previous years--is still not uniform.

Diane Castano Sallee, director of the mayor’s committee, cautioned that the statistics should be used only as a “barometer” of minority contracting: “I’m not saying they are accurate numbers. They’re not based on any standard threshold.”

Red Tape and Bungling

No state agency has been more immersed in minority contracting than Caltrans which, in addition to following state affirmative action rules, must follow separate U.S. regulations whenever federal dollars are involved.

Over the years, the rigorous Caltrans system for certifying disadvantaged businesses and weeding out fronts and fraud has become so respected that many other governmental entities rely on its findings.

But in 1993, a huge backlog developed. Businesses complained that they were waiting up to a year or more before Caltrans processed their applications, prompting an outcry from state legislators.

To erase the backlog, Caltrans officials made a decision that would affect hundreds of small contractors and stifle their ability to do business with government. Sources said that the agency rejected as many applications as possible with barely a cursory investigation.

“They made a concerted effort to clean up the backlog simply by denying a high percentage,” remembered one former administrator, who spoke on condition of anonymity.

In July, August and September of 1993, records show, 770 applications were turned down--nearly three times the number rejected during all of 1992.

“It was unethical, horrible and callous--a totally unacceptable act of bureaucrats to throw somebody’s livelihood out the window,” said Polanco, who learned of the mass rejection from The Times.

Michelle Horan, an owner and chief executive officer of Rail Technology, a Sacramento consulting company, remembers her anger and surprise when she was notified in July, 1993, that her certification would not be renewed. “It was an arbitrary denial,” she said. “There was no visit to my business, no phone interview. Nothing.”

Caltrans Director James van Loben Sels said he ordered the department to eliminate the backlog by the fall of 1993, but denied that he had directed that it be done by a wholesale rejection of pending applications. “[If that happened] that would be very disappointing,” he said. “I haven’t been able to find any indications of that, and it certainly wasn’t my intention.”

Fronts and Fraud

Weaknesses in the certification systems also help open the door to companies that pose as minority- or women-owned businesses.

Most state departments, for example, certify firms as minority- or women-owned strictly on the word of contractors--without any verification.

“Self-certification encourages misrepresentation and even fraud,” the Little Hoover Commission found.

When one segment of the state program was audited in 1994, the amount of suspected fraud was significant. After examining 700 contracts valued at $375 million, auditors hired by the Office of Public School Construction reported that 30% involved fronting or other violations of affirmative action requirements.

The audit findings were turned over to the attorney general’s office for prosecution, but no action has been taken. Meantime, state officials were so startled by the findings that in the last year the school construction office has become one of the few agencies to eliminate self-certification and require verification of women- and minority-owned businesses.

State officials initiated self-certification of minority firms in the 1980s as a money-saving method over the objections of critics such as Polanco.

“I remember personally sitting in my office with them and letting them know this is crazy,” he said. “Self-certification is a disaster, and it’s going to give a black eye to a program that can work. They just didn’t hear it.”

Contractors are required merely to file a paper swearing under penalty of perjury that their companies are minority- or women-owned. There is no further examination to determine if the claim is true, nor is there a procedure to investigate and prosecute complaints about companies that are believed to be fronts. The only recourse for competitors who suspect fraud is to file a bid protest that puts the burden of proof on them.

One contractor, who asked that her name not be used, said that even though her company was rejected by Caltrans, it continued to qualify as woman-owned with other state agencies through self-certification.

There have been no criminal prosecutions for fraud committed by fronts on the state level, according to officials.

Under an executive order issued by Wilson in June, state officials said they are now precluded from eliminating self-certification. “We’ve been given fairly clear direction to continue to administer the statutes as they exist and the statutes don’t point to a full certification program,” said Steven A. Olsen, chief deputy director of the Department of General Services.

But even certification systems that require verification are troubled by fronts, and companies designated as minority- or women-owned are seldom decertified, according to interviews with local officials throughout California.

Los Angeles County certifies 90% of the firms that apply for such status and has never decertified a company. The city of Los Angeles reports an 80% certification rate and less than half a dozen decertifications in the last four years. There were no known prosecutions for fraud in connection with fronts.

And even when a company is decertified, it does not necessarily mean that it stops getting business as a disadvantaged firm.

In 1990, Domar Electric Inc. of Riverside County lost its city of Los Angeles certification as a woman-operated company on the grounds that its titular head, Mary McClean, did not own 51% of the firm nor did she control the company operations, city officials said.

“It was a sham,” said Assistant City Atty. Christopher M. Westhoff.

Nevertheless, a loophole in city regulations allowed Domar Electric to use its Caltrans certification as a woman-owned company as it gained $29,644,000 in city subcontracts over the next four years, according to city and court records. Domar was not decertified by Caltrans until 1994, according to state records.

Theresa McClean, operations manager of Domar and adopted daughter of Mary, denied that all of the eight contracts between 1991 and 1994 were awarded to the company because of its certification as woman-owned.

“The thing you have to remember is we got those contracts not necessarily because we were a [woman-owned company], but because we were the low bidder,” she said. “I can recall only a couple of times we got it because we were a [woman-owned company].”

Asked why Domar was decertified by the city, she said: “I guess what they found was that Mary was not playing an active enough role in the company for them.” The company appealed the decertification but lost.

Theresa McClean said her brother Michael, also adopted, is now the main officer of the company and is trying to gain minority company certification on the grounds that he is half Latino.

‘Old Boys Network’

Another obstacle to minority contracting programs, critics say, is a thriving “old boys network” in which established contractors prefer to do business with companies they know.

When Cordoba Corp. conducted public hearings into affirmative action contracting in Los Angeles in 1993, a steady stream of minority and women contractors testified that they were being shut out of public work by white male contractors who do business primarily with companies they know.

At the conclusion of a hearing in January, 1993, Alberto Juarez--who had worked for eight years as deputy director of the Office of Small Business Assistance under former Mayor Tom Bradley--testified that such complaints were well-founded.

“Middle level managers . . . who [have] created a very strong relationship with the ‘good old boy network’ . . . and have found ways to somehow subvert the process by which minorities can effectively participate,” he said.

This old boys network, concluded the Cordoba study, “has dissuaded many [disadvantaged] firms from attempting to do business with the city. . . . The city has been a passive participant in the discrimination that has occurred.”

Pedro Echeverria, senior assistant city attorney, responded that most of the complaints made in the Cordoba study involved “anecdotal evidence” that lacked corroborating details. He argued that in most cases, city contracts are awarded to the low bidder, preventing insiders from receiving preferential treatment.

Impact of Court Rulings

Affirmative action contracting also is stymied by court decisions that set strict conditions under which preferences may be given to minority firms.

The U.S. Supreme Court has ruled that government agencies may set aside percentages of contracts for minority companies only if “disparity studies” show that such firms have been victimized by past discrimination.

Neither the state, county nor city has completed such a study that would hold up in court, government officials say. Lacking such studies, these government entities have taken cautious approaches to affirmative action and set modest goals for minority and women participation.

County officials have an outreach program to certify minority and women firms and to inform such businesses of upcoming contracts. The county has a goal that 25% of its contract funds will go to disadvantaged companies, but white male contractors are not required to make any special effort to hire such disadvantaged companies.

“We definitely encourage our prime contractors to hire minority and women firms,” said May Kingi, county coordinator for contracting with disadvantaged businesses, “but we don’t have the leverage to put a percentage in the contracts--it’s strictly voluntary.”

Los Angeles city officials are reluctant to call their program affirmative action.

“In fact,” said Echeverria of the city attorney’s office, “it would be more appropriately called an equal opportunity program for minority contractors.”

Various city contracts set different target levels for minority and women participation. But, fearing legal repercussions, municipal officials shy away from using the term goals and instead use the euphemism, “anticipated levels of participation.”

“It only requires that they [white male prime contractors] do outreach,” Echeverria said. “It doesn’t require that they attain a certain level of participation [by minorities or women].”

The Los Angeles Mayor’s Business Opportunity Committee has an outreach program to help with certification of minority firms and referrals to prime contractors.

But the city policy is uneven. No city department requires white male companies to make “good-faith” efforts to hire minority sub-contractors. The huge Public Works Department, for example, does not require such efforts, but officials there have recently asked the city attorney’s office for advice on the issue.

The state, like some city departments, requires prime contractors to make good-faith efforts to hire women and minority subcontractors to qualify for contracts. The state has set a modest goal that 15% of its contracting dollars will go to minority companies and 5% to those owned by women.

Good Faith

But in practice, the good-faith policy allows prime contractors to bypass compliance with goals simply by documenting efforts to locate minority- and women-owned businesses, according to minority and white contractors.

Minority contractors say good faith is often nothing more than a loophole, and white contractors complain that it can unfairly penalize those who legitimately try to meet the goals.

“The existence of a paper-shuffling loophole allows many vendors to ignore the intent behind the program,” the Little Hoover report said.

Paul Guerrero, a Latino who founded Andero Construction Co. in San Jose, confirmed the commission’s finding. He said minority businesses are flooded with calls from contractors who have no intention of hiring them but merely want to show that they made the required good-faith effort.

“The other thing that you get is letters requesting subcontract bids,” he said. “But they’re not even from the contractor--they’re from Joe Letter Factory who guarantees the contractor that for a price he can take care of good-faith requirements for him.”

White contractors, on the other hand, say competition often forces them to simply document good-faith efforts rather than to actually meet goals.

Because it is more costly to seek out and hire minority and women contractors, say white business operators, the company that meets goals is forced to swallow a bigger expense than competitors who simply go through the motions of good-faith efforts.

“What it does, it puts hard-working companies that are going out of their way to achieve these goals . . . at a disadvantage,” computer executive James Waterman told the Little Hoover Commission.

Operators of minority and women businesses complain that white contractors sometimes list their companies as subcontractors on bid documents, but that they are subsequently cut out of the jobs.

Juarez, former small-business official in the Los Angeles mayor’s office, testified at a Cordoba hearing that sometimes minority and women contractors are not even aware that they have been listed on bid documents.

“In one case,” he said, “I was at a cocktail party, I said [to a Hispanic contractor], ‘Congratulations. I heard you were on the list.’ And the guy said, ‘That’s news to me.’ ”

Impact on Businesses

Despite the frustrations with affirmative action, many of the business people who have prospered under the program say it would be a mistake to scuttle the effort.

“We [black businesses] usually get less than 1% [of state contracts], but we’d rather have the program the way it is with three wheels on the wagon than no wheels on the wagon,” said Ezekiel Patten Jr., a former chairman of the Black Business Assn. and owner of Patten Energy Enterprises, a Sun Valley oil distributor.

Initially, large contractors sought him out as a subcontractor, Patten said, only because they saw his business as an avenue to fulfill affirmative action requirements. But once they learned that his company could do a good job, he said, some have come back to do business even when they didn’t need affirmative action points.

“Relationships are built up now,” he said. “Now, we’re business people doing a job rather than a white guy and a black guy.”

But across the state a core of angry white businessmen believe affirmative action has fostered a new kind of discrimination, aimed directly at them. They say that large contractors, pressed to meet affirmative action goals, are increasingly giving minority- and women-owned enterprises the business that once went to white-male-owned companies.

Phillip R. Fowler, a vice president of Fontana Steel in Rancho Cucamonga, wants to eliminate affirmative action because he believes it is killing his company.

Fontana Steel is owned by Paul Ware, an octogenarian who started the company half a century ago. By the 1980s, the company had $50 million a year in sales and 500 workers.

But Fowler said sales have dropped to about $22 million a year and the staff has plunged to 120. He blames affirmative action for most of the decline.

He said big construction contractors have discovered that of all their potential subcontractors, only the steel suppliers have a large number of minority-owned companies. So, he said, they increasingly hire these firms, not Fontana Steel.

“We’ve had opportunities just taken away from us because of one person in our company who happens to be a white male and that’s the owner,” he said.

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About this Series

* In this series: The Times examines affirmative action, a policy that has left its imprint on the workplace and college campuses over the last 30 years. With some now questioning whether giving preferences to minorities has been fair to all, this series, which will appear periodically throughout 1995, will measure its impact on American institutions, ideas and attitudes.

* Previously: Why affirmative action became an issue in 1995, its legal underpinnings, its impact on presidential politics, the difficulties of defining a minority, the views of its beneficiaries, a Times poll showing ambivalent attitudes on the issue, how informal preferences have molded American life, the mind at work in racial stereotyping, the evolution of diversity programs in the workplace, affirmative action in sports and recruiting minorities.

SUNDAY: Affirmative action has cut an uneven swath across America’s workplaces, benefitting some groups much more than others.

TODAY: Attacked from all sides, affirmative action contracting programs in California fail to deliver on promises of giving women and minorities significant shares of public business.

TUESDAY: Forces more powerful than affirmative action have helped relegate many minorities to lower paying jobs in small and large businesses throughout California.

Mixed Results for Government Contracts

Most of the major cities and counties in California have inserted affirmative action requirements into their contracting programs by encouraging government contractors to subcontract a percentage of their work with minority- and women-owned businesses. But the success of this affirmative action effort has varied widely from locality to locality. And for some government entities that do not have a certification system, comparisons are difficult because of fraud.

State of California

Goals: 15% to minorities; 5% to women

Share to minority firms: 9%

Share to women firms: 6%

Self-employed among minorities: 24%

Self-employed among women: 25%

Period reported: 1992-93

****

L.A. County

Goals: 25% to minorities, women and disabled vets

Share to minority firms: 9%

Share to women firms: 6%

Self-employed among minorities: 36%

Self-employed among women: 24%

Period reported: 1992-93

****

City of L.A.

Goals: Vary with contracts

Share to minority firms: 12%

Share to women firms: 6%

Self-employed among minorities: 31%

Self-employed among women: 23%

Period reported: 1987-91

****

San Diego County

Goals: Vary with contract

Share to minority and women firms: 17%

Self-employed among minorities: 16%

Self-employed among women: 26%

Period reported: 1993-94

****

City of San Diego

Goals: None

Share to minority firms: 4%

Share to women firms: 4%

Self-employed among minorities: 17%

Self-employed among women: 26%

Period reported: July-Dec., 1994

****

Orange County

Goals: None

Share to minority firms: Blacks, Latinos, Asians, 8%*

Share to women firms: 6%

Self-employed among minorities: 19%

Self-employed among women: 22%

Period reported: 1993-94

****

San Bernardino County

Goals: 15% minority, 5% women

Share to minority firms: 13%

Share to women firms: 4%

Self-employed among minorities: 23%

Self-employed among women: 24%

Period reported: July-Sept., 1994

****

Riverside County

Goals: 25% minority, women, disabled vets

Share to minority firms: 11%

Share to women firms: 11%

Self-employed among minorities: 19%

Self-employed among women: 26%

Period reported: 1994-95

****

Ventura County

Goals: Federal contracts only

Share to minority firms: 7%

Share to women firms: 11%

Self-employed among minorities: 16%

Self-employed among women: 26%

Period reported: 1993-94

****

City and County of San Francisco**

Goals: Vary for Asians, blacks, Latinos and women

Share to minority firms: 13%

Share to women firms: 5%

Self-employed among minorities: 33%

Self-employed among women: 28%

Period reported: 1993-94

****

City of Oakland

Goals: Vary by industry

Share to minority firms: 36%

Share to women firms: 10%

Self-employed among minorities: 23%

Self-employed among women: 29%

Period reported: 1993-94

Sources: State, county and city governments, Cordoba Corp. report and U.S. Census

* Another 29% of contracts were awarded to contractors describing themselves as “other” minorities.

Orange County officials say they have not verified minority status of any contractors.

** Figures apply to prime contractors only

Researched by JOHN HURST and VIRGINIA ELLIS / Los Angeles Times

Fraud Facts

Audits conducted by the state Office of Public School Construction, the agency that provides bond construction funds to school districts, documented for the first time the extent of fraud and misrepresentation in one segment of the state’s affirmative action contracting program. The auditing began in November, 1993, and was completed in September, 1994.

* Number of contracts reviewed: 693

* Total dollar amount of contracts reviewed: $374.9 million

* Number found to be violating affirmative action laws: 203

* Total dollar value of contracts found in violation: $132.9 million

* Percentage in violation: 29.3%

Source: Office of Public School Construction

How It Works, How It Doesn’t

Programs to assist disadvantaged businesses began decades ago after a federal Civil Rights Commission report showed that only one-sixth of 1% of government contract dollars were going to minority enterprises. But it was not until the 1980s and early 1990s that the state of California and major local governments developed their own programs. Although varying in design, the programs all attempt to stimulate the growth of disadvantaged enterprises by giving prime contractors incentives to hire minority- and women-owned businesses as subcontractors.

STEPS IN THE PROCESS

Outreach: government agencies try to inform minority and women owned firms of various contracts and encourage them to bid.

Certification: Businesses apply for certification as minority and women owned enterprises. Must prove a women or minority has 51% ownership and is in control of the company.

Verification: Government agency, through field visits and examination of documents, attempts to vertify the legitimacy of minority or women owned enterprise.

Bids: Once certified, the disadvantaged firm submits bid to become subcontractor on specific projects.

Award: Contract is awarded to prime contractor who is low bidder, provided affirmative action requirements are met. If contractor has failed to meet goals for the use of minority and women subcontractors or has not made a good faith effort to do so, contract is awarded next lowest bidder. Commonly, prime contractors are merely urged rather than required to hire minorities or women as sub-contractors.

OBSTACLES

Old Boys Network: An old boys network of established white male companies and government procurement officers who are comfortable doing business with one another tend to shut out minority and women firms, despite affirmative action requirements.

Fronts: White male-run companies pose as minority or women owned enterprises by using fronts to get a share of affirmative action contracts. Programs that have no verification system particularly vulnerable to this type of fraud.

Red Tape: Red tape and long delays in certification and bureaucratic blunders result in legitmate minority and women firms being decertified or dropping out of competition.

Source: Study by the Little Hoover Commission and other government reports