“I think that we ought not to begin the quota system.”
President John F. Kennedy [1]

I. Introduction

The post-Initiative 200 sensitivity which surrounds government contracting has most cities in Washington, including Seattle, tossing out their race- and gender-based preferences while at the same time struggling to retain incentives that will help minority businesses. This paper will argue that eliminating the race-neutral barriers that affect all small businesses will achieve better results for minority businesses than attempting to work around Initiative 200 by creating a new, geographically-targeted set of preferences.

Initiative 200, now law under RCW 49.60.400, says, “The State shall not discriminate against, or grant preferential treatment to, any individual or group on the basis of race, sex, color, ethnicity, or national origin in the operation of public employment, public education, or public contracting.”[2] This is the basic standard of equality to which all state, county and city contracting programs must conform.

While Seattle has not completed all its new contracting rules, the city has announced plans to replace race- and gender-based preferences with geographic-based preferences later this year.[3] The city passed four ordinances in August 1999 called the “Contract Equity Program.” Within this framework officials developed what they call the Boost program.[4] The program is designed to increase minority small business participation in city contracting by giving a special “boost” to these businesses. The advantage would go to firms that the city certifies as “small” and “disadvantaged.”[5]

The first part of this Policy Brief will outline the new Boost program as well as the new geographic-based preference policy. While Initiative 200 does not directly address geographic-based preferences, this paper will consider the impact of a geographic-based program.

The second part will address Seattle’s commitment to small minority business development. For example, the city rightly concludes that small businesses are held back by Seattle’s system of high taxes and complex regulation. City officials admit that “businesses located within the city that seek contracting opportunities operate under a competitive disadvantage with businesses located elsewhere because of higher taxes and higher operating and administrative costs.”[6]

Finally, this Policy Brief will outline ways the new program can provide a real “boost” to small businesses and encourage more minority-owned[7] business participation without using illegal race or gender preferences.

Part 1: Outline of the New Contracting Regulations

II. History of the Equity In Contracting (Boost) Program

After passage of Initiative 200 on November 7, 1998 a team of legal and operational staff from several local governments met to develop a new approach to contracting opportunities for minority small businesses. The team was brought together by King County Executive Ron Sims, Seattle Mayor Paul Schell, Port of Seattle Executive Director Mic Dinsmore, University of Washington President Richard McCormick and Seattle Public Schools Superintendent Joseph Olchefske. The group was assigned to come up with ways to promote minority contracting opportunities within the legal framework of Initiative 200.[8] They laid out four goals to guide their work.[9]

Goals of Contracting Equity Framework

    Broaden existing anti-discrimination laws to cover contracting;

    Establish new criteria for priority utilization in contracting;

    Facilitate new opportunities for small businesses;

    Support small business development.

In initiating the group Mayor Schell said, “The County, City, Port, School District and University have common values and mutual resolve to eradicate discrimination and help small and disadvantaged businesses to prosper and excel in the economic mainstream of our region.”[10]

In March 1999 the group joined the Washington State Women- and Minority-owned Business Administration in a symposium at the University of Washington to build on these goals. In June the group met again to continue the discussion. The later meeting brought in business leaders, staff from business development programs and agency staff from local governments.[11]

The four-part Contracting Equity Framework that emerged from this process provided a detailed guide for implementing the Boost program. The main points of the Framework are summarized on the next page.

The result was enthusiastically endorsed by regional leaders. King County Executive Ron Sims said, “The result of the regional planning effort is the creation of a four-part Contracting Equity Framework that pursues the important goals of combating discrimination and positioning business to thrive over the long-term.”[12]

Seattle Public Schools Superintendent Joseph Olchefske said, “We did our homework for Equity In Contracting Framework by assessing programs as far away as Texas and Milwaukee, and as close to home as San Jose and San Francisco, that attempt to deal with economic disparity and broaden contracting opportunities. Seattle Public Schools is proud to support a proposal that combines education and business development with strategies for addressing discrimination and inequities in our region.”[13]

Mic Dinsmore said, “The Port of Seattle is excited about this program for several reasons. We believe it will provide a route to economic empowerment for small businesses in our region, and strengthen networking between prime and subcontractors.”[14]

The Four-Part Contracting Equity Framework*

1. Anti-discrimination. Add new ordinances for King County and the City of Seattle to:

Prohibit discrimination in contracting by business entities doing business within un-incorporated King County and within the City of Seattle.

Apply anti-discrimination ordinances to private and public contracting and establish monetary penalties for violations.

2. Priority and Incentives in Contracting: The Boost Program. In order to create incentives for the use and development of businesses most in need, the regional work group has developed a new contracting program, the Boost Program. The program would apply to:

Small businesses, defined based on annual sales compared with the small resources of the owner (i.e., businesses with very wealthy owners or numerous affiliate businesses would be ineligible). The program may also require that local businesses be defined as those within the geographic boundaries of the participating jurisdictions.

Participation in business development program, defined based on completion or enrollment in program geared to developing competitive and technical business skills.

Businesses within economically distressed areas, defined as those boundaries set for empowerment zones, enterprise communities, HUB Zones or other areas of poverty.

3. Contracting Practices. Along with launching a new contracting discount program, the regional work group sees benefits in adjusting traditional contracting practices to create and facilitate opportunities for small businesses:

    Develop ways for small businesses to serve and succeed as prime contractors.

    Explore methods to increase the prime contractor and agency outreach to small businesses.

    Minimize bureaucratic obstacles that such businesses may experience.

4. Business Development. The contracting incentives provided to Boost participants would give those businesses the opportunity to generate income, build business connections within their respective specialties, and otherwise move toward sustainability. Business development would:

A. Provide bonding assistance for public works contracts at both the King County and City of Seattle levels.

Develop supportive options such as technical assistance and mentoring programs and other business development concepts.

(* Summarized from “Regional Leaders Launch Post I-200 Initiative ‘Equity in Contracting,’” City of Seattle news release, Mayor Paul Schell, July 2, 1999.)

Dr. William Bradford, Dean of the University of Washington’s Business School said, “The programs and strategies described in this document have consistently received wide support, and President McCormick affirms the new approach. In particular, input from the board and representative group of stakeholders enable us to refine the Boost program eligibility criteria to meet the real economic and educational needs of small businesses.”

Former Seattle City Councilwoman Martha Choe, an outspoken opponent of Initiative 200 said, “It is critical that we continue to promote diversity and ensure equal access to public contracts. Discrimination still exists in our society, and we need to find ways to address it. I appreciate the hard work that has gone into shaping a contracting framework that meets the needs of our diverse and growing region. I am especially pleased that these efforts have proactively included the participation of the businesses most affected.”[15]

III. How the Boost Program Works

Under Seattle’s “Boost” program “certified” businesses are to receive a “competitive discount of up to 10 percent whether performed as a prime contractor or when used as a subcontractor or supplier.”[16]

To be certified a firm must be located in an economically distressed area. To qualify a firm must be one which:

    Has its primary offices or distribution points (other than residential or post office box) physically located within the relevant boundaries;

    Lists its address on a valid business permit as being within the relevant boundaries;

    Has been operating within the relevant boundaries for at least 12 months, and;

    Has submitted other proof as required by the Director of the Executive Services Department.

According to Seattle’s Ordinance 119602, the city’s Executive Services Department (ESD) will decide which businesses meet these qualifications. A “small economically disadvantaged business” is defined as one in which the “business and person or persons who own and control it are in a financial condition which puts the business at a substantial disadvantage in attempting to compete for public contracts.”[17]

ESD is required to use the federal Small Business Administration’s dollar ceilings to set various business-size classifications, while adjusting each business owner’s personal net worth to account for local market conditions.[18]

IV. Does The Boost Program Conflict with Initiative 200?

Initiative 200 does not directly address geographic-based preferences. On their face, geographically-based preferences are race-neutral. Without rigorous commitment to the principle of race-neutrality, however, designation of the geographical areas that would benefit could transform the Boost program into a policy which violates Initiative 200.

“Economically distressed areas” are defined broadly in Ordinance 119602 to mean “a geographic area determined by the City Council to require the use of incentives in order to stimulate economic activity and revitalize declining neighborhoods.”[19] Since no criteria are set forth, the ordinance opens the possibility that the process of deciding exactly which areas are to benefit from the Boost program will fall victim to legislative log-rolling or to a process that favors citizens of one race over others.

Any geographically-based policy is likely to have a harmful effect on some group. To avoid legal challenges which may defeat the program, the City Council should adopt transparency as a major goal of the implementation of the program. It should establish defined economic criteria based on economic growth or resident income level for deciding which areas are in fact “economically distressed.” It should use an impartial and established data source, like the U.S. Census Bureau, to define precise geographical boundaries.

If geographic-based preferences end up being based on race, sex, color, ethnicity or national origin, then the Boost program would violate Initiative 200. By developing a transparent program, the Seattle would avoid costly lawsuits and will assure that its legitimate goals of stimulating economic prosperity throughout the city are not frustrated by improper implementation.

Part 2. A Better Way: Seattle’s Role in Promoting Economic Opportunity For All Small Businesses

I. Lesson to the City – Reduce Taxes And Regulation

One Seattle city official has remarked that, “I-200 has limited the tools available to government to address the effects of historic discrimination.”[20] One could argue the most effective policy “tool” to help struggling businesses, minority and otherwise, is near at hand – easing confiscatory taxes and regulations that hold back all businesses. In fact, one of the stated reasons behind the creation of the Boost program is to protect small businesses from the city’s own high business taxes and confusing regulations.

Luz Bazan Gutierrez, President and CEO of the Washington Association of Minority Entrepreneurs, recently commented on the harmful impact of high business taxes, licenses, registration and paperwork. Referring to immigrants who try to start up a small business, she said, “They find that there are many barriers.”[21]

Many small minority-owned businesses are run as “mom-and-pop” operations. Start-up businesses generate little enough cash as it is, certainly not enough to carry the burden of lawyers and accountants needed to penetrate the thickets of municipal licensing requirements.

An example of the pervasive and unnecessary nature of most regulation is found in the cosmetics business. African American women have been practicing traditional hair-braiding for centuries. Many such women in low-income neighborhoods braid hair to earn extra income. They provide a valuable service, but one which should not require over 1600 hours of elaborate training in nail care (100 hours), skin care (100 hours), or other cosmetic work that is simply not part of hair braider’s art. But without a government license that covers all these things, thousands of inner-city women are participating in an illegal activity.[22]

A trivial matter? Not to hardworking entrepreneurs who are reaching out to get a handhold on the economic ladder. In his book “Transformation,” Clint Bolick documents the nationwide battle against pointless licensing requirements that has been the key to opening up opportunities for enterprising minority business men and women.

Another example is the story of Denver’s Freedom Cabs, founded by Leroy Jones and three recent African immigrants, who found themselves barred from doing business by that city’s tight taxi licensing requirement. The city had last issued a new taxi operating license around the end of World War II. It took litigation and free legal assistance from the non-profit Institute for Justice before Mr. Jones and his partners could offer cab rides to Denver residents and establish themselves as successful minority businessmen.[23]

One can only conclude that the best “boost” Seattle can give to minority small businesses would be to get out of the way! Municipal leaders are in a unique position to encourage and foster small business development within their own city, because only they can lighten the burden of local taxes and regulation.

II. The Free Market Creates Opportunity for Minority-Owned Businesses

Seattle’s leaders can learn a lot from minority business people who insist on competing for contracts on the strength of their ability rather than the color of their skin. Paul Miles is African American and is President and CEO of Morrison Construction Services, Inc. The company is a major international construction firm. In 1998 it handled nearly $31 million in sales. The company has worked on projects worldwide, from mechanical and electronic upgrades at the U.S. Consulate in Turkey to in-state jobs at the Hanford nuclear reservation.[24]

In a recent interview Miles talked about competing in the marketplace. “I don’t want to focus on being black or being a minority. I want to focus on the fact that I’m a qualified contractor who is going after business in an international area.” Miles does not shirk from competition. “I like to figure I can bid on the open market with the best in the world.”[25]

Miles is no stranger to racism. In his native Texas he picked cotton as a child. He retains vivid memories of segregation and is acutely aware of being a minority in a predominantly white business environment. But that doesn’t persuade him that he should be treated differently than other business leaders seeking to win the same contracts. Miles says, “I will take advantage of all the resources available, but I want to play on a level playing field.”[26]

III. Promoting Small Minority-owned Business The Right Way

Seattle can greatly benefit from thriving small businesses. Skip Stitt is president of Competitive Government Strategies and former deputy mayor of Indianapolis. Stitt helped that city develop new contracting laws that increased small minority business participation. “We asked ourselves, why is the city in the contracting business.”[27]

Stitt said Indianapolis was able to contribute to an increase in minority business participation by using non-racial criteria. Below are six elements used by Indianapolis that helped make its contracting out policy a success.[28]

1. Contracting Out - Indianapolis increased the amount of government business to disadvantaged minority enterprises by outsourcing and privatization. The city focused efforts in areas where minority businesses had particular expertise and experience. Simply increasing the amount of business a city contracts out to the private sector helps all businesses, including those owned by minority citizens. As we have previously argued,[29] contracting out street repair, which is a major Indianapolis success story, would benefit the city as a whole. And as Stitt points out, it would especially benefit small minority businesses who seek the work.

2. Regulatory Reform – Indianapolis cut thousands of permit and license requirements that in many cases acted as de facto barriers against full minority participation in the community’s economic life.

3. Streamline and Reduce Procurement Barriers – Indianapolis found it had lots of ridiculous barriers to minority and/or small business participation. These included unnecessary biding, bonding and insurance requirements. Also, the city shortened and simplified the notices it used to ask for outside bids. Previously it was not uncommon for city managers to put out a bid request and receive contract offers that were 75 pages long. No small business could compete for that work when larger companies were making such elaborate bids. Streamlining the bidding process helped all small businesses make realistic bids for public work.

4. Pay Contractors Promptly – Indianapolis learned from minority business leaders that paying too slowly on a contract can kill any small business. Typically small businesses have limited working capital and need quick turn-around on their bills.

5. Be Aggressive in Recruiting – The city got on the phone and called eligible minority businesses to tell them how important it is for them to show up and compete. “Affirmative action” in its original sense means exactly that: letting minority businesses know they will get a fair shake and that the doors are open to them. This is not done out of charity. The public directly benefits every time the bidding pool is expanded. Wider competition always produces the best price and the best company for the job.

6. Avoid Detailed Rules and Regulations – Indianapolis learned that overly-detailed rules and regulations only add unnecessary complication, increase costs to the city and create a significant barrier to small and start-up businesses. All regulations and bidding requirements should be streamlined if Seattle truly wants to open opportunity for all.

IV. Conclusion

Indianapolis touts its contracting out program in terms of the minority-business participation it creates, and thus some of its features would be illegal in Washington state under the Initiative 200 civil rights law. But what is striking is that most elements of the program are actually race-neutral and are therefore entirely valid in Washington. It is not providing a racial preference for a city to pay its bills promptly -- yet that helps small entrepreneurs succeed -- exactly the kind of “boost” from which start-up minority businesses most benefit. Regulation reform can reduce or eliminate barriers of entry to new businesses, barriers that always fall most heavily on small entrepreneurs. (For examples see Clint Bolick, Speaker Notes, the Washington Institute Foundation, February 8, 1999.)

With the passage of Initiative 200, Seattle can look at new ways of promoting small business development. While moving away from traditional approaches that grant preferences based on race or gender, the city can increase diversity in contracting by enhancing greater opportunity for all. Seattle officials can begin to look at how some government regulations, like high business taxes and unnecessary licensing rules, work to shut small businesses out of the market.

The best “boost” the city can offer small minority businesses would be to lower taxes and cut regulations. Until that happens, burdensome city policies will continue to play a role in keeping many businesses both “small” and “disadvantaged.”

About the Author

Robert Holland is a native of Washington and a graduate of Washington State University where he earned a degree in Public Relations. Holland has served as the Director of the Equal Citizenship Project, which monitors the implementation of Initiative 200, and is a project of the Washington Institute Foundation. Holland has researched and written on Seattle School District’s controversial “integration positive” policy and on Governor Locke’s implementation of Initiative 200.

The Equal Citizenship Project was made possible by grants from The John M. Olin Foundation and The Lynde and Harry Bradley Foundation.

[1] Statement at press conference, August 20, 1963.

[2] RCW 49.60.400

[3] Gregg Johanson, Information Specialist, Contracting Services for Seattle, interview with author on November 10, 1999.

[4] “Equity in Contracting,” City of Seattle press release, July 6, 1999.

[5] Encompass is the City of Seattle’s official newsletter. Information on the Boost program is taken from the September 1999 edition, p.3.

[6] City of Seattle, Ordinance No. 119602, August 9, 1999, Section 1, “Findings,” Number 2.

[7] For ease of reference the term “minority-owned” will be used hereafter to include woman-owned businesses unless expressly stated otherwise.

[8] City of Seattle press release, “The Equity in Contracting Program,” July 6, 1999, page 1.

[9] Ibid, p. 1.

[10] Ibid, p. 2.

[11] Ibid, p. 2.

[12] Ibid, p. 2.

[13] Ibid, p. 5.

[14] Ibid, p. 2.

[15] Ibid, p. 5.

[16] Encompass, September 1999, page 3.

[17] City of Seattle, Ordinance No. 119602, August 9, 1999, Section 4.

[18] Ibid.

[19] Ibid.

[20] Encompass, September 1999, p.3.

[21] Quoted in “Is racism still an everyday part of doing business” by Lesley Holdcroft, Washington CEO magazine, November 1999, p. 14.

[22] Regulations for cosmetic licenses can be found in the Washington Administrative Code, 308-20.

[23] “Transformation, The Promise and Politics of Empowerment,” by Clint Bolick, Institute for Contemporary Studies Press, Oakland, California, 1998, pp. 76-80.

[24] “Is racism still an everyday part of doing business?” by Lesley Holdcroft, Washington CEO magazine, November 1999, p. 17.

[25] Ibid.

[26] Ibid.

[27] Skip Stitt, President, Competitive Government Strategies, interview with author on November 1, 1999.

[28] E-mail from Competitive Government Strategies, October 25, 1999.

[29] See “Competing for Highway Maintenance: Lessons for Washington State - Part I,” Policy Brief by Dennis Lisk, Washington Institute Foundation, September 1998.