Albion Monitor /Commentary
[Editor's note: In today's news section appears an article ("Privileged Exploit Program for Minorities, Poor") about a little-known government controversy. In brief: The GAO discovered that a Small Business Administration (SBA) program to help minorities and the poor appears to be routinely abused by whites and the wealthy, often in collusion with high-ranking SBA officials. Even the GAO isn't sure how deep the problem goes; the report suggests that as many as two-thirds of the companies in the program might not be qualified, with billions of dollars going to help those who don't need the money.

But unless you're an avid reader of trade magazines or a major policy wonk, you probably haven't heard about this ugly little story. Why not? The timing would seem perfect; the GAO report appeared on September 7, in the middle of a slow news week. Washington was pouring over the just-released Packwood diaries, the women's summit in Beijing was wrapping up, Republicans in Congress were grandstanding on welfare, and, of course, every front page carried the latest non-doings at the O.J. trial. Seems to me like editors would have welcomed a hard news story about government scandal and fraud.

What makes matters worse, of course, is that affirmative action programs are routinely slammed by conservatives because they supposedly bestow "special rights" to women, ethnic minorities, and the poor. This report showed it was the whites and the rich who mainly benefited, and because they cheat the system. A news story about this would have provided some much-needed balance.

So what's the government planning to do about this mess? In a June report entitled, "The New SBA," the Clinton administration called for a "reinvention" of the Small Business Administration. For this program, Clinton calls for little more than simplification of the paperwork.

About the same time, the SBA issued its own report on agency reform. What's proposed for this troublesome program? Easier forms to fill out and more publicity. The SBA also recommends a cap on the contracts received by program participants. That's a good idea that might stop some of the abuse. But the SBA also wants to eliminate the requirement of filing quarterly statements. which will make it easier for unqualifed companies to avoid detection -- particularly if they're cozy with SBA officials, as was found with the businesses in the GAO report.

The SBA also proposes to "attempt each year to award some 8(a) contracts to firms in each region that have not previously received them." That the SBA only promises to "attempt" to make it a nationwide program is bad enough; but as Senator Bond points out below, many of the recipients of program benefits are in the Washington D.C. suburbs. The 8(a) program seems to have become a nice little entitlement for Beltway insiders.

While we don't agree with all of Senator Bond's recommendations, it's clear to us that the 8(a) needs far more reform than either President Clinton or the SBA have planned. ]

Reform the 8(A) Program

by Senator Christopher S. Bond (R - Missouri), Committee on Small Business Chairman

Senate - September 6, 1995

Even those who have accumulated substantial wealth are still welcomed into this program

Earlier this summer the Clinton administration released its report on affirmation action. The President's report devotes considerable attention to the Small Business Administration's 8(a) Minority Contracting Program. The report details the 8(a) program's failings and abuses, but in the end the President concludes that the program should be saved in the name of affirmative action.

As the chairman of the Committee on Small Business, I have first hand familiarity with the 8(a) program. It is a program that gives a very valuable government contracting preference to members of certain minority groups without requiring proof of specific discrimination or social disadvantage.

The 8(a) statute requires proof of economic disadvantage. But in practice, even those who have accumulated substantial wealth are still welcomed into this program. An applicant to the 8(a) program is deemed economically disadvantaged if the applicant has a net worth less than $250,000, excluding the value of his or her home and the value of the small business owned by the applicant.

Let's focus for just a minute on what this economic disadvantage test really means. According to data provided to me by the Administrator of the Small Business Administration, 81.6 percent of all small businesses owners in the United States have a net worth under $250,000.

But the 8(a) limit for economic disadvantage doesn't stop at $250,000. Once you are in the program, net worth can grow to $750,000 without jeopardizing participation in the 8(a) program. The SBA Administrator has informed me that 91.6 percent of all small business owners have a net worth below this level. And President Clinton's affirmative action report correctly notes that business owners with excessive wealth even above these levels have managed to avoid detection and wrongfully remain in the 8(a) program.

So let's review where we are on the 8(a) program. We have a program supposedly for small business owners who are socially and economically disadvantaged. But an applicant is eligible for the 8(a) program without an individual showing of specific discrimination. Then, under the economic disadvantage test, over 80 percent of all small business owners in the United States would be small enough to be eligible. And on top of that, an 8(a) participant's wealth can triple in size once in the program and still remain eligible for special government contract preferences.

It doesn't surprise me that participants in the 8(a) program are fighting to save it. It is a good deal for anyone who can get in.

8(a) companies were not locating in and hiring people from needy neighborhoods and distressed inner cities with large numbers of unemployed members of minority groups

In April 1995, I chaired a hearing before the Committee on Small Business, and we heard a great deal of passionate testimony about the 8(a) program -- both in favor of and opposed to the program. One of the witnesses was Josh Smith, founder of Maxima Corp., one of the best known companies to have participated in the 8(a) program. Mr. Smith discussed how the 8(a) program fails to benefit low-income communities and low-income minorities.

Mr. Smith testified that 8(a) companies were not locating in and hiring people from needy neighborhoods and distressed inner cities with large numbers of unemployed members of minority groups. To the contrary, too often 8(a) firms can be found in northern Virginia or suburban Maryland. I think its wrong that the important objective of this program -- bringing economic opportunity and jobs to historically disadvantaged areas and small businesses -- has been lost.

Today, the 8(a) program builds wealth among a small group of individuals who own small businesses and who gain acceptance into the program. The program makes no effort to encourage hiring of minorities or residents of distressed areas, nor is there any requirement that the 8(a) company assist community redevelopment effort by locating in or performing work in distressed areas. The social disadvantage requirement of the 8(a) program is satisfied merely if the owner, who controls 51 percent of the company, is a member of a prescribed racial or ethnic group.

I believe the 8(a) program as we know it today should be replaced with a race neutral program specifically designed to use Federal contracting expenditures to help attract small businesses and employment to distressed areas with low income and high unemployment. Such areas might be located in the inner city, on an Indian reservation, or in Appalachia.

I suggest we call these areas historically underutilized business zones or HUBZones. My proposal will allow any small business located in a HUBZone and employing people in the HUBZone to obtain a reasonable and meaningful preference in competing for Federal Government contracts against other businesses not located in a HUBZone.

My proposal begins to return the idea behind the 8(a) program to its roots, when it was targeted to inner city areas after the riots following the assassination of Martin Luther King. In this case, government contract set-asides were used to bring in new businesses to areas trying to recover from the dramatic damage and tension that accompanies a riot, such as those that occurred in 1968.

The HUBZone replacement for today's 8(a) program should not be limited, however, to inner cities. My program creates hope and opportunity for all cities, rural areas, and Native American communities that have not prospered while other more affluent areas of our country have flourished.

For too long, we have overlooked programs to bring jobs and wealth to economically distressed areas of our Nation. We now have an opportunity to take a positive step to provide long overdue help where help is needed in our country. The HUBZone proposal will create a powerful private-public partnership to give opportunity to small businesses who locate in economically distressed areas and to give hope to people who have not had much chance until now to pull themselves up the economic ladder.

Albion Monitor November 14, 1995 (

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