Small and Minority Business Set-aside Program

RE: Small and Minority Business Set-aside Program

You wanted to know the legislative history and intent of the act that established the set-aside for small contractors (PA 76-185) and the act that expanded the program to minority business enterprises (PA 82-358), including the major arguments made by proponents and opponents. You also wanted to know the arguments for and against subsequent amendments to the program.

The law requires most state agencies to set aside a certain percentage of the contracts they let for construction, goods, and services each year for small contractors and to reserve a certain percent of those contracts for small businesses owned by members of specified minority groups. The legislative history of the program can be divided into three phases.

In the first phase, the legislature established the program's scope, method of calculating set-aside amounts, and basic eligibility requirements. The program began as a voluntary one involving only department of Transportation and Public Works construction contracts and only small, not minority, contractors. The legislature quickly made the program mandatory and expanded it to goods and services contracts.

The formula for calculating awards and eligibility criteria have changed little since this period. Agencies had to average the value of their contracts over a three-year period and set aside a certain percent (first 15% to 25%, later at least 25%). Businesses had to operate in the state for at least a year to become eligible and had to meet gross revenue criteria.

In the middle period the legislature expanded the program in several ways. It extended it to all state and quasi-public agencies and required the separate set-aside for small, minority businesses. It extended the program to more businesses by increasing the allowable gross revenue limits, and it allowed them to obtain larger contracts. It also created a legislative committee to review state programs supporting small business.

Next, the legislature turned to compliance issues. It adopted a series of acts to ensure that larger, white male-owned businesses were not using minority-owned fronts to obtain set-aside contracts. It did this by imposing ownership and control requirements and authorizing various agencies to audit contractors and penalize violators. It also required its legislative committee to report annually on minority set-aside contracts.

PA 76-185 established a voluntary small business set-aside program. It allowed the departments of Transportation (DOT) and Public Works (DPW) (which was later placed under the Department of Administrative Services (DAS)) to reserve 25% of a construction contract over $50,000 for small businesses to bid on. The act authorized the Department of Commerce (now the Department of Economic and Community Development) to adopt regulations for awarding set-aside contracts.

The program was open to businesses with annual gross revenues under $1 million that were organized and doing business in the state for at least one year. Businesses also had to meet certain size standards set in the regulations. A single business could receive up to $250,000 a year in set-aside awards.

The state needed the bill to prevent a few large contractors from monopolizing state contracts, Senator Schneller explained during the Senate debate.

I think what we have to look at here is whether we have a philosophy that says we're going to try to preserve some work for our smaller contractors so that all the work . . . will not be gobbled up by your large major contractors. And I have no doubt that there will be a small cost to the state . . . . But I think we have to balance that cost against the economic desirabilities of maintaining some business in the contracting field for the smaller contractor (Senate Proceedings, April 20, 1976, p. 1234).

Most of the people who testified at the State and Urban Development Committee hearing on March 16, 1976 supported the bill. But most assumed that it created a minority business, as opposed to a small business, set-aside program.

Contractor Assistance Organizations. Four of the eight people who testified were affiliated with contractor assistance organizations. T.G. Walsh of the Contractors Assistance Center wanted the bill to apply to all state contracts, not just those let by DOT and DPW. In response to a question as to the practicality of this, Walsh replied that “Based on the volume of work that seems to be coming down the line from other departments, I think they should be considered. We have a lot of contractors, minority contractors and small business in the state that really need assistance . . . . (State and Urban Development Committee Public Hearings, March 16, 1976, p. 128.)

Marty Johnson with Unity Contractors Association supported the bill because “equal employment opportunity requires more than nondiscriminatory clauses alone.” Set-asides “help to eradicate the effects of the past and present discrimination against the minority in small contractors.” They do this without compromising the benefits of competitive bidding, which was Representative Mazzola's concern (p. 129).

Mazzola feared that setting aside contracts exclusively for minority contractors would undermine competitive bidding by reducing the pool of eligible contractors. He asked whether setting aside contracts for minority businesses would require the state to award a contract to a contractor if he was the only bidder; Johnson responded that it would not (p. 130).

Clarence Thomas, also with Unity Contractors, backed minority business set-asides “Because some of your large contractors have cornered the market and unless some special provisions are made to assist small contractors, you know you have virtually a monopolistic situation” (p. 130).

Steve Wilson of the Construction Contractors Assistance Center of New Haven opposed the bill because it did not apply to all departments. In response to Mazzola's concerns about shrinking the pool of potential bidders, he cited two executive orders putting the burden on the departments to seek out and inform minority contractors about state contracts.

State Agencies. Representatives of the Commerce and Public Works departments supported the bill, but the latter raised several administrative concerns. Leonard Gatison from Commerce stated that set-asides he used on the federal level effectively helped minority businesses, and “would be very vital for the Department of Commerce to aid in the economic development of small minority businesses” (p. 129).

DPW representative Matt Walton stated that his department supported the bill in principle, but identified several administrative problems. Set-asides increase administrative costs “in terms of the additional time to process the paperwork involved.” Requiring the state to break up a project into several components for separate bidding could also increase costs. Walton stated that set-asides could cause disputes between general contractors and subcontractors but did not explain why. Walton also believed that the $1 million ceiling was too high for small business set-asides. Under the bill, a firm could bid on a set-aside contract if it grossed less than this amount in the prior year. During a recession when revenues decline for all firms, the $1 million ceiling would allow relatively large firms to compete against smaller ones for set-aside contracts. Walton suggested lowering the ceiling to $250,000 (p. 131).

Walton seemed to acknowledge Mazzola's concern that the bill could require an agency to award a set-aside contract to a single bidder, but added that “I don't think they would get carte blanche as far as what we pay them to do the work” (p. 132).

Tractor Trainers Developing Office. Rudy Mendez, who spoke on behalf of this organization, supported the bill and addressed several questions posed by Mazzola and Walton.

The state could avoid the problem of awarding a set-aside contract to a single bidder by requiring at least two bids, Mendez explained. He added that “the state . . . has the right to refuse any or all bids if it is in the best interest of the state. This is a general condition.”

He argued that the lower unit costs for small contracts would offset the extra time required to administer them. And he saw no disputes arising between general contractors and their subcontractors since “the state is going to be acting more or less as the coordinator” between the two. Mendez stated that “we are not asking for a waiver of the performance bond requirement.” And he suggested modifying the $1 million ceiling by making it an average over the last two or three years (which the legislature eventually did) instead of the last year.

Mendez argued that minority business set-aside contracts preserve jobs, which saves the state money in the long run. Henry Gionfriddo, who did not identify who he represented, argued that over 50% of the construction dollars going to small contractors revert to the community compared to 5% of those dollars going to large contractors (p. 136).

The Senate amended and adopted the bill on April 30. Senator Smith introduced Senate “A,” which put a $250,000 cap on the total amount of set-aside contracts a small business could receive per year. Senator Rome supported the amendment, but “still had reservations about the bill.” He was concerned that set-asides would curtail competition and thus discourage small contractors from producing a top notch job. Senators Hennessey and Schneller spoke in favor of the amendment and the underlying bill.

Senator Schneller explained the amended bill and, in response to a question from Senator Rome, indicated that it would still require contractors to post bonds and meet the other bidding requirements (Senate Proceedings, April 20, 1996, pp. 1230-36).

The House adopted the bill on April 26 in concurrence with the Senate and with no debate on either Senate “A” or the bill.

This act made the set-aside mandatory by requiring DOT and DPW to let a certain amount of contracts each year to small businesses. It required each agency to calculate the average value of the contracts let over the three previous years, excluding any contract subject to federal laws prohibiting restrictive bidding. The agencies then had to take 15% to 25% of that amount as their annual set-aside goal. They could meet their goals by setting aside whole contracts or parts of a contract. The act also allowed them to set-aside contracts under $50,000.

It extended the set-aside program to contracts for goods and services, not just construction. It required the agencies to pay contractors no later than 30 days after a payment was due on the contract. The act doubled the total value of set-aside contracts a business could receive in one year from $250,000 to $500,000.

There was little testimony on the bill at the State and Urban Development Committee hearing. Two speakers endorsed the bill without commenting on its specifics. They were Robert Brubaker, Contract Compliance Director for the New Haven Commission on Equal Opportunities, and Albert Mero, who represented the Greater New Haven Business and Professional Men's Association and the Construction Contractors' Assistance Center.

The House amended and adopted the bill on May 12. Representative Coatsworth introduced the amendment, which exempted agencies from the set-aside requirement when it conflicted with federal law, based the share of contracts agencies had to set aside on the average value of the contracts let over the three previous years, and raised the amount of set-aside contracts a business could receive from $250,000 to $500,000 per year. The House adopted the amendment without debate on a voice vote (House Proceedings, May 12, 1977, pp. 3312-13).

During discussion of the underlying bill, Representative Stevens asked Coatsworth why it required agencies to pay set-aside contractors within 30 days of the payment due date. Coatsworth responded that the provision was added as a “way to stimulate small business” and help them overcome cash flow problems. Stevens then asked what recourse the bill gave contractors who were not paid within 30 days; Coatsworth replied that they had “the recourse of law.” Stevens stated that he supported the bill but sharply criticized the 30-day payment requirement as a “sham” since it imposed no penalty or provided any other special remedy (pp. 3315-16). The House passed the bill on a roll call vote.

On May 24, the Senate adopted the bill on consent in concurrence with the House. Senator Putnam introduced the bill. There was no debate.

PA 82-358 created a separate set-aside for small businesses owned by minority group members. It required agencies to let 25% of the small business set-aside exclusively to these businesses, which it defined as those owned by women, Blacks, Hispanics, Asians, North American Indians, and Pacific Islanders. The act established a four-member legislative committee to review public works contracts, loans, and performance bonds awarded to small businesses. It required the House speaker, House minority leader, the Senate president pro tempore, and the Senate minority leader each to appoint one member.

The act also changed certain bid and performance bond requirements. It raised the threshold value of contracts requiring these bonds from $1,000 to $10,000 for general contracts and from $1,000 to $20,000 for subcontracts.

In introducing the bill in the House, Representative Brooks indicated that the bill “basically ensures greater participation of minorities in this community by simply . . . providing under . . . certified legislation a percentage of 25% of the 15% minimum to minority contractors and suppliers” (House Proceedings, April 23, 1982, p. 4217).

Most of the 13 people who testified on the bill (HB 5153) before the Government Administration and Elections Committee supported it, and some recommended broadening its scope.

Legislators. All four of the legislators who testified on the bill supported it. Representative Brooks stated that minority businesses needed a separate set-aside because they “are suffering tremendously from . . . [the] economic downturn” and urged the committee to define minority businesses. The purpose of the review committee, he explained, was to help the legislature monitor whether the agencies were complying with the set-aside requirement, not to manage the bidding process. Representative Dyson and Senator Daniels agreed with Brooks (Government Administration and Elections Public Hearing, March 23, 1982, pp. 152-155).

Representative Mosley stated that economic conditions warranted a minority business set-aside program, “By helping out minority businessmen, this will allow them to hire more minorities and to assist in alleviating the unemployment problem in the minority community” (p. 160).

Executive Branch Officials. Representatives of the Connecticut Commission on Human Rights and Equal Opportunities (CHRO) and DOT disagreed on the need for the bill. Sam Hyman representing CHRO stated that a set-aside requirement was needed because “very few minority owned . . . businesses are participating in state contract awards,” a statement which he based on a CHRO survey of agency contract awards. The survey also found that the agencies did not meet the minimum 15% small business set-aside goal. CHRO supported extending the set-aside requirement to all agencies and to contracts for goods and services, Hyman stated. He also recommended placing the review committee within the executive instead of the legislative branch to avoid violating the separation of powers (p. 195).

DOT's Assistant Chief Administrative Officer John McGill stated that a minority set-aside requirement seemed “totally arbitrary and unfair to those small businesses who are not minority contractors or suppliers.” McGill was commenting on a provision that apparently required agencies to reserve two-thirds of the small business set-aside for minority-owned small businesses. (The requirement was eventually reduced to 25%.) He argued that the relatively small number of minority-owned firms bidding on DOT contracts did not justify reserving two-thirds of the set-aside contracts exclusively for them (pp. 178-180).

Trade Associations. Most contractor trade association representatives supported the need for a minority business set-aside requirement, but argued that the bill was flawed. Otis Smith, president of Connecticut Allied Legal Rights Association, supported the bill's intent, but criticized it for providing no mechanism to enforce the set-aside. He also backed legislative action to extend this requirement to private construction projects financed with state economic development funds (p. 182).

Jeffery Walsh, construction advisor for the Sagamore Group, also criticized the bill for lacking an enforcement mechanism. State agencies administering federal construction dollars have not complied with federal set-aside requirements, he claimed. Walsh also stated that the bill would not work unless the state provided technical assistance (unspecified) to minority businesses (pp. 183-84). Gerald Clark, president of the Greater New Haven Business and Professional Association, agreed with Walsh and implied that the lack of an enforcement mechanism could lead minority businesses to give up and go out of business (p.185).

Joseph Harrington, president of Unity Commercial Association, supported the bill, but stated that its definition of “contractor” should include minority-owned distributors and manufacturers. He claimed that government agencies had used that definition to exclude these businesses from

bidding on set-aside contracts (p. 188). He also recommended dropping the 25% ceiling on the amount of set-aside contracts agencies could let each year and raising the annual revenue limit from $1 to $2 million.

The Associated General Contractors of Connecticut opposed the bill. Its general counsel, Mark Soycher, stated that a minority-business set-aside was unnecessary since “In all likelihood, minority contractors to be assisted by this legislation are currently eligible for the same benefits under the existing small contractor set-aside programs.” The fact that minority businesses have not received many small business set-aside contracts “would appear to be more a public relations problem than a legislative problem,” he added.

Soycher implied that a separate set-aside for minority businesses would not help them secure state contracts unless other (unspecified) changes were made to the bidding system, which, he claimed prevented general contractors from “directly soliciting subcontract bids from minority contractors who may lack the financial and performance history to bid such work on their own.” (pp. 176-77).

Minority Business Representatives. Representatives of two minority businesses endorsed the bill (pp. 184-5). Carlson Harvey, representing Carlson Industry, stated only that he agreed with Walsh. Juan Scott, a minority group consultant, stated that the bill would help revitalize cities. He cited a University of New Haven study that found commercial and residential property values increased in neighborhoods where minority owned businesses grew (pp. 186-7).

Summary. The House debate centered on the bill's potential unintended consequences. Opponents claimed that the bill was self-defeating because it made a contractor's race and sex criteria for awarding a contract while containing no safeguards to keep majority-owned firms from bidding on minority set-aside contracts. Proponents argued that the bill was needed to give minority- and women-owned businesses a chance to gain experience and establish a track record by working on state projects. The debate also dealt with technical issues regarding the bill's definitions and an amendment on bid and performance bond requirements.

Discrimination. The bill's opponents claimed that setting aside contracts for any particular group was wrong. Representative Torpey stated that “Making discrimination by color either way is wrong. And two wrongs never made a right” (p. 4241). Representative Farr agreed, but supported the bill as a necessary evil: “ . . . but I think when we look at what exists in our society and what it is that we hoped to accomplish in our society, there is no other way to do it that I know of that we can employ, except what we are dealing with here today” (p. 4231). Still, Farr was concerned that setting aside contracts for specific groups would deny them the “opportunity to work together getting to know each other based upon their competency and the ability to get things done” (p. 4231).

Representative Brooks agreed that society should be blind to color and sex, but argued that the bill was needed to deal with “certain realities that exist.” Representative Dyson argued along the same lines. Representative Migliaro also supported the bill, arguing that “a lot of minorities out there of all races, creeds, and colors who aren't getting a fair shake and if this bill would help them, regardless of who they are, and if they can be given a chance to demonstrate their qualifications in that field, then so be it” (p. 4248).

Potential for Abuse. Several members argued that the bill did not prevent majority-owned firms from bidding on set-aside contracts. Representative Farr attributed this to its definition of “minority,” which included Blacks, Hispanics, Asians, North American Indians, and women but set no criteria for determining ownership and operational control. Questioned by Farr about this, Brooks stated that federal criteria would apply. Under these criteria, a firm qualified if a minority member owned 51%. Farr asked if the minority also had to be the firm's chief operating officer, to which Brooks replied “not necessarily” since “as long as the firm is owned 51% or over by a minority, that is the criteria and the bottom line” (p. 4227).

Brooks acknowledged that an individual could put his stock in a company under his wife's name and qualify as a minority firm (p. 4228). Farr argued that this is what happens under the federal set-aside law, “that minorities do in fact own 51% of the shares of stock, but most of the profits are taken out by the non-minority members of that firm” (p. 4230).

Representative Joyner agreed, adding that the bill would give certain majority-owned firms an advantage over all the others: “all we're going to do with this bill is we're going to have a lot of wives owning stock in their husband's corporations” (p. 4233). Representative Brooks countered that this was not happening on the federal level (pp. 4233-34). Representative Swennson discussed a woman-owned firm that was awarded a contract in her district. When Swennson visited the work site, she “never did see the female. There were a lot of trucks down there but the name of the company was completely covered over with tape. . . .” She later learned that the “owner” was “the daughter of one of the biggest contractors in the state” (p. 4244).

Representative Allyn cited other examples of how majority-owned firms could undermine the bill. Representative Van Norstrand also faulted the bill's definition of minority, stating that “you start out with a definition that's probably got about 70% of the population in it.” It also undermines competitive bidding, since “Anytime you set aside and have a targeted reserve, there are going to be people who will seek it rather than compete through the normal bidding process” (p. 4237).

Technical Issues. Representative Van Norstrand asked Representative Brooks if an agency had to carry over the unused portion of the set-aside amount and presumably add it to the subsequent year's goal. Van Norstrand speculated that the agencies would not meet their set-aside requirements since “There are plenty of minority applicants, but not enough qualified firms.” Brooks responded that the requirement would carry over, but argued that agencies would meet their annual set-aside goals since they had lists of “prequalified minority contractors.” Van Norstrand also stated that the bill's definition of Indian was too loose, after Brooks explained that it was the same as the federal definition. The bill defined Indians as “American Indians and persons having origins in any of the original peoples of North America and maintaining identifiable tribal affiliations through membership and participation or community identification.” Van Norstrand stated that he would “have a difficult time tracking down how you would establish a minority business enterprise if in fact the principles were Indians, based on that definition” (p. 4240).

Amendment. Representative Scully introduced an amendment raising the thresholds above which contractors had to post bid and performance bonds. He explained that the lower thresholds hurt small businesses that cannot secure these bonds or must put up cash bonds, “which again are very expensive to a small man starting out in business.”

Representative Joyner agreed with the amendment's intent, but opposed a provision raising the threshold for subcontracts to $20,000. That provision, he stated, would prevent general contractors from asking for a bond on a subcontract up to that amount and thus discourage them from using subcontractors. The House adopted the amendment.

The Senate adopted the bill on consent and in concurrence with the House. Senator Baker introduced the bill and explained its provisions. There was no debate.

Program Expansion. This act expanded the set-aside requirement to all state agencies authorized to contract for goods and services. Previously, only DOT and DAS had to set aside contracts. (DPW was incorporated into the new DAS in 1977; the two were separated in 1987.) The act required agencies to award these contracts under competitive procedures approved by DED. It also allowed towns to adopt set-aside programs similar to the state's.

Eligibility for Minority Business Set-Aside. The act tightened the definition of a minority business. It required the minority owners to hold at least 51% of the capital stock, actively participate in the firm's daily affairs, direct the management, and set the policies.

Annual Gross Revenue Limits. The act raised the annual gross revenue limits for small contractors from $1 to $1.5 million. It also raised the total amount of set-aside contracts a business could receive annually from $500,000 to $750,000.

Exemptions. The act allowed the DED commissioner to exempt goods and services small businesses customarily do not provide. But it eliminated his authority to impose size limits on small and minority businesses eligible for set-asides

The three people who spoke on the bill (SB 889) before the Planning and Development Committee supported it. Economic Development Deputy Commissioner Peter Burns stated that the bill clarified the definition of small and minority business and made other changes needed to make the set-aside program workable, such as exempting items, like fuel oil. Jeanne Milstein, speaking for the Permanent Commission on the Status of Women, stated that the bill would increase business opportunities for minority and women business owners. Sam Hyman from CHRO agreed, stating that few minority-owned businesses were receiving set-aside contracts under PA 82-358 (Planning and Development Committee Proceedings, March 3, 1983, pp. 238-266).

The Senate and House adopted the bill without debate. Senator Wilbur Smith offered two amendments, which the Senate adopted by voice votes. Senator Robertson summarized the bill. The Senate then adopted the amended bill on a roll call vote (Senate Proceedings, May 17, 1983, pp. 3022-3030). Representative Garavel introduced the amended bill in the House, which adopted the bill in concurrence with the Senate.

Adjustments. This act extended the set-aside requirement to state authorities, such as the Connecticut Development Authority. It also exempted agencies from the requirement if their contracts averaged less than $10,000 over a three-year period.

The act gave agencies more flexibility in meeting set-aside goals. An agency could require a general contractor to subcontract with an eligible small business and count the subcontract toward the set-aside goal. But it could not substitute the subcontract for the general contract when calculating the three-year average or do anything else that would diminish the annual set-aside goal.

Separate DOT Set-Aside. The act authorized a separate $5 million annual DOT set-aside for small businesses “owned and controlled by socially and economically disadvantaged persons,” as defined by the federal Small Business Administration. It also allowed the DOT commissioner to spend up to $300,000 annually to help these firms bid on contracts.

Legislative Review Committee. The act expanded the authority of the legislative review committee and renamed it the Minority Business Enterprise Review Committee. Under the act, the committee may review state-guaranteed small business loans and bonds in addition to public works contracts, loans, and bonds.

DAS's chief administrative officer Frank Rondo was the only person who testified on the bill before the Planning and Development Committee. He supported the bill because it made it easier for DAS to meet set-aside goals when letting construction contracts. Prior law required all agencies to set-aside contracts or portions of contracts. Rondo stated that it was not feasible to split up a large construction contract among two or more general contractors. He also claimed that there were not enough qualified minority- and women-owned construction contractors. The bill allowed DAS to meet its set-aside goals by requiring general contractors to subcontract with minority-and women-owned firms and count the subcontract amount toward its set-aside goal (Planning and Development Committee, March 20, 1984, pp. 413-14).

The House and Senate adopted the bill without debate. The House first referred the bill to the Government Administration and Elections Committee on April 18. That committee added a provision authorizing the separate DOT set-aside and made technical changes. The House adopted the bill on May 3 and the Senate adopted it on consent on May 7.

This act required set-aside contractors to award 25% of any work they subcontracted to businesses eligible for set-aside awards. The act also authorized state agencies to require set-aside contractors to do at least 15% of the work with their own forces.

No one testified before the Government Administration and Elections Committee on sHB 7842, which became the act.

The House and Senate adopted the bill without debate. Representative Schmidle introduced the bill and reviewed its provisions, explaining that “it is mirroring, reflecting the same kind of requirements that we have for general contractors for subcontractors who decide they must subcontract out . . . . ” (House Proceedings, May 2, 1985, p. 3988.)

Representative Krawiecki's motion to pass retain the bill was accepted. On May 7, the House referred the bill to the Planning and Development Committee, which reported it out without changes on May 10. The House then adopted the bill on consent on May 16. The Senate adopted it on consent on May 23.

The 1985 legislature also set conditions under which agencies could base their set-aside goals on the value of contracts they expect to let during a fiscal year. It allowed agencies to do this if the three-year formula for calculating annual set-aside goals yielded an amount that was less than 15% of the value of contracts the agency expected to let or more than 25% of that amount.

No one testified before the Legislative Management Committee on sHB 7725, which became the act. The original version of the bill applied only to contracts let by the Legislative Management Committee for building the Legislative Office Building (LOB) and its parking garage and for restoring the Capitol. It required the committee to set aside between 15% and 25% of the total value of these contracts, instead of 15% to 25% of the average value of the contracts it let for the three previous fiscal years.

The bill was referred from Legislative Management to the Planning and Development Committee, which reported the bill out without changes, and then to the Government Administration and Elections Committee, which did not act on it. The Senate petitioned the bill out of that committee on May 15.

Senator Matthews introduced the bill and offered Senate Amendment “A,” which was adopted without discussion on a voice vote. That amendment rewrote the bill, extending the exception for calculating set-aside goals to all agencies. Matthews stated that the underlying bill was needed to correct “statistical anomalies” that would arise when Legislative Management calculated set-aside goals for the years during which it was constructing the LOB and restoring the state capitol. Before these projects were approved, Legislative Management normally let less than $2 million in contracts a year. The value of these projects far exceeded that amount. As a result, the formula for calculating set-aside amounts created “an unusual bulge in legislative expenditures” that “would throw the present system out of balance and would distort the intent and spirit of the set-aside law,” she stated (Senate Proceedings, May 15, 1985, p. 2947).

If Legislative Management calculated its set-aside based on the three years before the LOB and restoration contracts were let, small and minority-owned businesses would qualify for a relatively small share of the contracts. It would then have to set-aside almost all of its contracts in the subsequent years, Matthews explained. The bill based the average on the value of the construction contracts instead of the contracts that had been let over the three previous years. The amendment extended the option to other agencies when the three-year average yielded an amount less than 15% of the value of contracts an agency expects to let or more than 25% of that amount. The Senate adopted the amended bill on consent.

The House adopted the bill in concurrence with the Senate without debate. Representative Abercrombie introduced the Senate Amendment, making the same points as Senator Matthews (House Proceedings, May 24, 1985, p. 8497-8501).

Enforcement. The act added measures to insure that set-aside contractors complied with the law. It established procedures allowing agencies or the DED to audit contractors, imposed a $10,000 penalty for each violation, and authorized agencies to suspend contract payments when contractors failed to comply.

The act also allowed agencies to require a contractor to provide certain documents, including certificates of incorporation, partnership agreements, or other organizational documents; federal income tax returns; and bills showing that fair market value was paid for any equipment bought or leased from another contractor.

Eligibility. The act expanded the program in several ways. It raised the minimum annual revenue limit from $1.5 to $3 million and doubled the total set-aside contracts a business could receive annually from $750,000 to $1.5 million. The act also made small businesses owned by people of Spanish and Portuguese descent eligible for minority business set-aside awards. Lastly, it authorized funds to help minority businesses buy the materials and labor needed to complete work under a set-aside contract.

Contract Compliance. The act required set-aside contractors to do 15% of the work with their own forces. (PA 85-364 left this to the agencies' discretion.) All small businesses receiving set-aside contracts also had to show that 51% of the ownership rested with the people who control the management and run the firm daily. Previously, this requirement applied only to minority-owned businesses. The act prohibited a contractor from subcontracting any part of a set-aside contract with a business that he managed, or in which he had employees or an interlocking ownership.

The Planning and Development Committee heard HB 7440, which became the act. DED Commissioner John Carson supported those sections of the bill raising the minimum revenue limits and doubling the total set-aside awards a firm could receive per year, but only stated that he wanted to work with the committee on those sections dealing with compliance. Former Senator Wilbur Smith opposed the bill for raising the minimum revenue limits, while John Norton, the executive director of the Transportation Accountability Board, claimed that the set-aside program was driving up construction costs.

Raising Program Limits. Carson cited administrative and economic reasons for raising the annual gross revenue limit. He stated that it was needed to conform the set-aside program eligibility criteria to DED's grant and loan programs, which had a $5 million limit. (The bill the committee reported did not raise the limit, but the legislature ultimately raised it to $3 million.) Raising the limit would also allow more firms to qualify for set-aside awards, Carson stated.

Representatives Maddox and Meyer expressed concern that raising the limit would simply make it harder for businesses to receive set-aside awards. Carson responded that certification did not require the state to notify businesses about set-aside contracts. The state's job “is to certify and set aside the opportunity for these companies to bid, but it is required of them, as it is of a majority companies [(sic)], to have somebody that better go out and find out who is letting contracts at this point.”

Carson stated that raising the revenue limit “would not increase the numbers participating by an obscene rate.” He also noted that state contracting jumped significantly after the set-aside program was established in 1977. The highway infrastructure projects accounted for much of the increase, allowing for “a larger pool for those agencies who are participating in the program to choose from as they let those contracts, so that they can get a maximum amount of participation and, hopefully, the best competitive bids possible” (p. 1006).

Carson stated that increasing the annual amount of set-aside contracts a firm could receive from $750,000 to $1.5 million would make it easier for DOT and DAS to award set-aside contracts.

Again, state agencies have indicated that this would benefit them from the inherent economy of not being required to break down contracts on larger projects for inclusion in meeting their goals in the State's Set-Aside Program. Expectations are that this would be particularly beneficial to the DOT and the DAS by increasing the number of eligible firms who will be able to bid on projects (Planning and Development Committee, March 23, 1987, p. 1002).

Wilbur Smith testified against the bill's raising the revenue limits, disputing claims that the current limits made it difficult for agencies and general contractors to comply with set-aside requirements (p. 1031).

Tighter Enforcement. Carson did not explicitly oppose provisions tightening enforcement and compliance standards. He hinted that the committee may have been overreacting to newspaper articles about how one firm abused the program and stated that DED was going to study several randomly chosen firms to determine if the problem went further. He asked whether tightening the requirements could unintentionally preclude the participation of minority- and women-owned businesses and other small businesses (p. 1003).

But Carson later speculated that the law did not effectively prevent majority-owned firms from bidding on set-aside contracts. In responding to Senator Barrows' question as to why the state has not prosecuted these firms, Carson said “under the law, you could set up a small business, a minority- or women-owned business, and utilize the facilities and have some acting interacting management or directorships, use some of the resources of majority firms, which I think everyone has always known is one way of giving business a helping hand to get going, and the question is—do we want to continue the process where there is a spirit of spouses or employees who are doing this, as opposed to genuine interested minority- and women-owned businesses (p. 1007).

Smith said that the state did not effectively enforce set-aside requirements, dismissing claims that the law was flawed or that agencies did not have enough staff to enforce it. He also claimed that state agencies knowingly certify illegitimate set-aside contractors. He cited a 1984 legislative study of set-aside abuses that lead DOT to decertify “24 firms in one fell swoop” without first investigating them. “That says to the mind, if you really want to look at it, how they knew that they were fraudulent to begin with. And they let them do business--so they know what firms that they wanted to decertify because the feds had told them to clean up their act” (p. 1032).

Other Issues. John Norton, The Transportation Accountability Board's executive director, used the public hearing to critique the set-aside program, making many points that did not address the bill. He claimed that the program was generating “excessively high, non-competitive bids” and that its requirements did not prevent “the fraudulent attempt by any company to establish a paper company, set it up, get benefits . . . , and without any equipment or employees or its own office or anything—simply turn that job over to another going concern who then goes ahead and does the work . . . .” (p. 1018). He then described how the set-aside requirement artificially inflated bids during the bidding process.

Norton stated that set-aside contractors should do at least half the work with their own forces, not 15% as the bill provided. He also supported uniform eligibility standards for certifying minority- and women-owned businesses and set-aside percentages that change to reflect the economy.

The House referred the substitute bill to the Judiciary Committee, which stripped the sections imposing civil penalties on wilful violators and suspending payments to them and made firms owned by Spanish and Portuguese people eligible for minority business set-aside awards.

The House added three amendments. Representative Blumenthal introduced House “A,” which raised the maximum gross revenue limit from $1.5 to $3 million and increased the total dollar value of set-aside contracts a firm could receive in a year from $750,000 to $1.5 million. Blumenthal stated that these changes would “increase the availability and effectiveness of the set-aside program . . . (House Proceedings, May 28, 1987, p. 10916).

Blumenthal then introduced House “B,” which restored the $10,000 fine and the suspension of payments provisions the Judiciary Committee removed. Blumenthal explained that the penalties were needed to enforce the other changes the bill was making. He specifically mentioned the ownership requirement and the prohibition against certain contractor-subcontractor relationships, stating that these changes “preclude the kind of selective abuse, and I emphasize the word 'selective' because we don't think it's been very frequent, that may have occurred in certain instances” (p. 10918). The amendment also added a notice, hearing, and possible court action process for accomplishing enforcement.

Representative Perry introduced House “C,” which required the DED commissioner to establish an interim financing program for minority-owned firms that must purchase materials and labor needed to complete a state contract (p. 11975).

Representative Young asked several questions about the application of the set-aside requirement. He asked what would happen if no small businesses bid on a set-aside contract, to which Blumenthal replied that the awarding agency could bid the contract to any bidder. In light of this, Young asked if it were possible for an agency never to meet the 25% requirement, “because cumulatively we may not find enough small contractors . . . . ” Blumenthal stated that the law was flexible in that it required agencies to set-aside between 15% and 25% of the average value of contracts they let over the three previous years (pp. 11077-78).

The Senate adopted the bill on consent in concurrence with the House. Senator Barrows introduced the bill, explaining that it imposed several restrictions on contractors' eligibility and their relationships with subcontractors, allowed agencies to audit contractors and to request certain documents from them, and made Spanish- and Portuguese-owned businesses eligible for set-aside awards (Senate Proceedings, June 1, 1987, p. 5011-13).

Set-Aside Goal. The act changed the set-aside goal. (It also made many changes to affirmative actions requirements governing state contracts.) Prior law gave agencies a range for meeting their annual set-aside goals, from 15% to 25% of the average value of the contracts let over the three previous years. The act eliminated the 25% cap and instead made it the minimum required amount.

Contract Requirements. The act extended the subcontracting requirement to more types of contractors. Under prior law, agencies could only require general contractors to subcontract a part of their work with set-aside eligible contractors. The act allowed them to impose this requirement on trade contractors and other entities such as nonprofit corporations. It also reimposed the requirement (removed by PA 87-577) that minority-owners actively manage their own firms.

Enforcement. The act allowed the CHRO to audit small and minority contractors, a right that was previously limited to DED and the contracting agencies.

It increased the membership of the Minority Business Enterprise Review Committee from four to eight members, giving each of the four appointing authorities one extra appointment. It required the committee to study minority business set-aside awards on an ongoing basis. The act permitted the committee to request contract compliance information from agencies, but required it to consult with DOT, DED, DPW, and CHRO in contract matters. It required the committee to report its findings and recommendations to the Legislative Management Committee annually by February 1.

The Judiciary Committee heard HB 6025, which became PA 88-351. There was no testimony on the set-aside changes since the House added them after the bill reached the floor.

Representative Coleman introduced the House amendment that changed the set-aside program. He stated that it increased “the percentage of work set aside under the state set-aside program from a minimum of 15% to a maximum of 25% and expanded the Minority Business Enterprise Review Committee and authorized it to conduct studies and make annual reports to the Legislative Management Committee (House Proceedings, May 3, 1988, pp. 8059-60).

Several legislators questioned whether the amendment addressed problems that arose during the LOB construction and State Capitol restoration. Representative Krawiecki asked if the amendment incorporated comments that were made at the “the last Legislative Management meeting.” Coleman responded that it reflected “a consensus of a variety of people who sit down together and discuss some of the problems related to the set-aside programs and affirmative action on state construction projects.” He added that the provision allowing agencies to impose set-aside requirements on trade contractors and other entities came from the attorney general and Morganti, Inc. (The law initially allowed agencies to meet set-aside goals by imposing set-aside requirements only on general contractors.)

Senator Barrows introduced the amended bill as an affirmative action measure and did not mention its set-aside provisions. Senator Robertson opposed House “A,” which raised the set-aside goal to 25% for all agencies. He cited reports from DOT indicating that it had difficulty meeting the 15% minimum and from DPW indicating that it had met the 15% but would have great difficulty reaching the higher level. Robertson argued that requiring agencies to set aside 25% would extend the bidding process and increase project costs. He moved to reject House “A.” The motion was defeated on a roll call vote. There was no further debate, and the bill passed in concurrence with the House.

This act extended the prohibition against a set-aside program contractor subcontracting with a business with which it shares ownership, management, or employees to any business with which it is affiliated. Affiliation covers situations in which the contractor or the other business directly or indirectly controls, is controlled by, or are under common control of a third party. The act allowed DED, CHRO, and the awarding agency to investigate the small contractor or minority-owned business to determine its eligibility for the program or compliance with its requirements. And it required DED to study racial discrimination against minority and ethnic contractors before and after the set-aside program began.

No one testified on the bill (HB 5051) during the Government Administration and Elections Committee public hearing.

Neither house debated the bill. The introducers (Rep. Coleman and Senator Abercrombie) explained the bill as described above.

This act makes people with physical disabilities a minority group for purposes of the set-aside program.

No one testified on the bill (5201) in the Government Administration and Elections Committee public hearing.

This act allowed nonprofit corporations to bid on small and minority business set-aside contracts let by the Department of Housing (now Department of Economic and Community Development) to cover the predevelopment costs (e.g., title searches, appraisals, legal fees) of a housing project. The nonprofit must have been doing business in Connecticut and maintained its principal place of business here for at least one year before applying for DED certification. To bid on a minority set-aside contract, more than half of the people who daily operate and direct the nonprofit must be members of a minority group or people with disabilities.

The bill originated in the Housing Committee. In its original form it extended the set-aside program to all nonprofit corporations. The Connecticut Association of Housing Development Corporations and Pat Spring of Co-Opportunities, Inc, a nonprofit developer, supported the concept. Raphael Podolsky of Connecticut Legal Services and others (unfortunately large portions of the day's hearing were not recorded so we cannot identify many of those who testified on the bill) suggested it be limited to nonprofits that were operated by members of groups eligible for the set-aside program. The Public Works Department opposed the bill on the grounds that it would dilute the set-aside program; the Transportation Department opposed it because it believed nonprofits' tax exempt status would give them an unfair competitive advantage over small and minority for-profit contractors.

The House amended the bill to limit nonprofits' participation to DOH predevelopment costs. There was no discussion. In the Senate, Senator Milner introduced the bill as correcting a technical problem created when DOH redefined business to exclude nonprofits. He explained that limiting nonprofits' eligibility for set-aside contracts to predevelopment costs restored past practice.

This act increased the number of firms that can participate in the set-aside program by raising the eligibility limit on contractors' annual gross revenues from $3 to $10 million. And it raised the annual ceiling on contracts a single contractor may receive from $1.5 to $10 million. The act required (1) agencies awarding contracts to accept letters of credit from contractors instead of performance bonds, (2) participating agencies to set annual program goals and report on their result, (3) DED to establish a two-year contractor certification process, and (4) the DED commissioner to adopt through regulations a process involving all state agencies to ensure that small and minority businesses have fair access to all state competitive contracts.

The bill (SB 984) originated in the Planning and Development Committee. The Department of Transportation submitted the only testimony on it. The department favored making the program more accessible by increasing the revenue limits and adopting regulations.

The debate in both houses focused on the use of letters of credit instead of performance bonds. Senator Milner indicated that the provision was intended to overcome the problem of small businesses' inability to secure performance bonds. He indicated that DOH had discontinued using such letters because it wanted to conform to the practice of other departments, which did not use them. He indicated that the governor's office supported the idea.

In the House, Representative Prelli questioned allowing letters of credit to cover only 25% of contracts over $100,000. He believed that this amount did not sufficiently protect the state. Representative Coleman informed him that agency practice was to break projects into five parts; if the credit were carried over from part to part it would cover the project. Representative DiMeo questioned whether small businesses would find it any easier to obtain letters of credit rather than bonds. Representative Coleman responded that participants in the Housing Department letter of credit program had not had difficulty securing these letters.

This act (1) extended the use of letters of credit to all bonds required in the state contracting process (e.g. bid, labor, and material bonds), not just performance bonds; (2) specified that companies must have done business in Connecticut and maintained the same ownership and management for the year immediately preceding applying for set-aside certification; (3) gave state agencies three extra months, from July 1 to September 30, to set their annual set-aside contracting goals for the year and an extra month, to November 1, to begin submitting their quarterly status reports; and (4) required CHRO to receive the quarterly status reports.

The House added the set-aside sections to the bill (HB 7007) that became PA 95-334 through an amendment. They were originally part of SB 1151, which originated in the Commerce Committee. That bill was requested by DED.

Deputy Commissioner Peter Dibble testified that the requirement to have done business in the state for one year immediately before certification was already DED policy. He maintained that postponing goal setting and reporting was requested by a variety of agencies that let set-aside contracts. Setting goals by July 1 was difficult because agencies closed their books on June 30, and, since the first quarter ended September 30, extending the reporting deadlines gave agencies a month to prepare the reports.

CHRO supported the bill. It testified that requiring the businesses to have been doing business for the year prior to certification would (1) allow the business to establish a track record thus providing DED a better basis on which to make a certification decision, (2) weed out under-capitalized businesses that might have presented a risk to the state if they received a contract on which they could not perform, and (3) prevent companies from trying to change their corporate structure to qualify as a minority-owned business. The reporting deadline changes, CHRO believed, were more realistic. The agency also asked for an amendment to the bill (which was incorporated in PA 95-334) to receive agencies' quarterly progress reports. This would help CHRO perform its statutory responsibilities to monitor contractors good faith efforts to subcontract with minority-owned business and investigate and prosecute fraudulent minority-owned businesses.

Representative Betkowski introduced House Amendment “A,” which contained the set-aside provisions. The changes, he said, strengthened the program against fraud and abuse. He also contended that requiring the business to have the same ownership for at least one year was already implied in the law. The House passed the amended bill without debate, and the Senate passed it on consent without discussion.