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Minority Program Benefits Millionaires Well-Heeled Businesses Win Lucrative Government Contracts

Tue., June 6, 1995

Would you consider a millionaire “economically disadvantaged”?

Or someone with an $800,000 home?

Or a businessman with a MercedesBenz, a Corvette, a Jeep Wrangler and a boat?

Probably not, but then you’re not the federal government.

Government audits show that a federal program has classified dozens of minority millionaires as “socially and economically disadvantaged,” making them eligible for lucrative, no-competition government contracts.

The Small Business Administration program was started during the Nixon administration as a way to spur more minority-owned businesses.

But it is coming under increased scrutiny as President Clinton and Congress examine whether to modify or eliminate federal affirmative action programs.

The program is “on the firing line,” said a House Small Business Committee aide. “The problem is it has predominantly provided contracts for inside-theBeltway firms. That was not the intent. It was to be more beneficial across the nation. And it has provided big money to wealthy people.”

Last year, federal auditors picked five SBA district offices and examined 50 “disadvantaged” companies that received at least $10 million each in contracts. They found that:

Thirty-five of the 50 owners were worth more than $1 million.

Five owners received salaries and bonuses of $1 million to $2.5 million over two years. Seven others made more than $750,000, and five others made between $500,000 and $750,000.

More than a dozen had stakes in their businesses of between $1 million and $9 million.

Five had homes worth $800,000 to $1.4 million. Ten more had homes exceeding $400,000.

Critics also have complained that nearly one-third of the $4.3 billion in contracts awarded last year went to firms in the Washington, D.C., area.

Minority business owners say the SBA program helps companies without capital and connections compete in a white business world. But even some minorityowned businesses say money is diverted from needy firms when it goes to wealthy owners.

“There is a need for the program, but it should be for those in need,” said Joseph Gomez, president of an Albany, N.Y., electrical contracting firm. “The bottom line is to bring equality, but that doesn’t mean you have to surpass the average person.”

Since the SBA program began in 1969, businesses classified as “disadvantaged” have been awarded more than 95,000 contracts worth $48 billion. More than 5,000 companies now qualify.

The program, called Section 8(a), defines “disadvantaged” people as “black Americans, Hispanic Americans, Native Americans, Indian tribes, Pacific Americans, Native Hawaiian organizations and other minorities.” White women do not automatically qualify, but can apply for the program.

Eligible firms can win contracts from government agencies without competitive bidding for amounts less than $5 million for manufacturing and $3 million for other industries. Businesses can participate in the program for nine years.

To qualify, a business owner’s net worth can’t exceed $250,000. Eventually, the limit rises to $750,000.

The rub is that when it calculates net worth, the SBA doesn’t include owners’ equity in their companies and homes, or their spouses’ wealth, according to federal auditors.

Loopholes and flaws allowed businesses to stay in the program long after owners got rich, contrary to the program’s intent, the auditors complained.

“This reduces the opportunities available to disadvantaged individuals and undermines public support for the program,” they wrote.

Federal auditors point to Navcom Systems Inc., a Northern Virginia engineering and telecommunications firm, as an example of a company that shouldn’t be in the program anymore. The SBA said Navcom has received $47 million in federal contracts since 1987.

In a report last year, auditors said the company’s owner earned $2.3 million from two companies over two years and had a net worth of $11 million. While the report did not name Navcom, sources said it referred to that company. The owner’s personal financial statement listed a Mercedes-Benz, a Corvette, a Jeep Wrangler, a van and a boat.

Navcom’s owner, Elijah Jackson, did not return several telephone calls, but his executive assistant, Stevie Hendley, said: “We are in disagreement with the SBA audit report. We did provide numerous responses to their findings, and they were ignored. We intend to appeal any termination decision by the SBA.”

Jackson’s attorney, Pari White, said her client “disagrees vehemently” with the auditors’ estimation of his worth and salary. “We contest the finding … that we are no longer socially and economically disadvantaged,” she said.

Robert L. Neal, SBA associate deputy administrator for minority enterprise development, said the SBA has been trying to persuade Navcom to voluntarily leave the program for nearly a year. But the company doesn’t want to do that, he said, so the department is trying to terminate it from the program.

Neal said SBA has been hamstrung by Congress in trying to disqualify wealthy companies because the law “explicitly tells us to exclude the interest in a business and house. Our hands are tied unless Congress changes the statute. We are stuck with trying to implement it.”

Some minority business owners say criticism about the millionaires shows a double standard because some federal programs, notably farm subsidies, assist wealthy people.

“I have no problem with people getting wealthy off this program,” said Harry Alford, chairman of the National Black Chamber of Commerce. “You take a guy in the SBA (program) making $4 million and compare it to the salary of the CEO of General Motors.”

But federal auditors have found other problems with the program. They said:

Fewer than one percent of the nation’s minority businesses are helped by the program. Of those that do participate, only half ever receive federal contracts. Too few companies get most of the contracts. The 200 largest companies received 54 percent of the biggest-dollar contracts.

Some minority businesses hire large, white-owned companies to do the work, thus undermining the program’s intent of helping minorityowned businesses.

Another concern is that the windfall has gone to firms in the Washington, D.C., area, instead of the nation’s inner cities. Companies in the District of Columbia, Virginia and Maryland won about one-third of the $4.3 billion in contracts last year. The big states of Michigan, Pennsylvania and Ohio won about 7 percent combined. Florida got about 3 percent, and California got about 9 percent.

While supportive of the program overall, Fernando Galaviz, vice chairman of the National Federation of 8(a) Companies, said his organization is critical of the millionaire loophole.

“Way before it became chic and popular with the new Congress to be conservative, we’ve been saying the program should be designed to help those who need it,” Galaviz said. “There are too many loopholes for abuse.”

Still, he said, there is a sentiment that the politicians and the public want minority firms to succeed - but not too much.

“It’s like: we do want you to succeed but don’t start wearing Rolex watches or driving Mercedes Benzes,” Galaviz said.


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