Mr. Chairman and Members of the Committee:

I welcome the opportunity to appear before the Subcommittee today to discuss the Department of Transportation's Disadvantaged Business Enterprise program for highway and transit projects. This program was originally signed into law by President Reagan in January 1983, continued by President Bush with bipartisan support, and it remains highly beneficial to our nation today. The Disadvantaged Business Enterprise program --also known as the DBE program--has been critical in our effort to remedy the pervasive discrimination that confronts thousands of small businesses owned by women, minorities, and other socially and economically disadvantaged individuals in the construction industry. The DBE program has made the federally assisted transportation program a fair place to do business and has offered opportunity to many who would otherwise not have had a chance to compete.

Although this hearing is titled "Unconstitutional Set-Asides," the fact is that the Disadvantaged Business Enterprise program is neither unconstitutional nor is it a set-aside.

Let me state clearly: the Supreme Court has not ruled that the Department of Transportation's DBE program is unconstitutional. What the Supreme Court did hold in the Adarand case is that federal affirmative action programs must meet "strict scrutiny," that is, they must serve a "compelling governmental interest" and be "narrowly tailored." What this means in plain English is this: before the government can pay attention to race it must have a really good reason to do so--and must do so very carefully.

In fact, seven of the nine members of the Court in Adarand recognized that affirmative action is still necessary to remedy discrimination. As the Court stated:

We wish to dispel the notion that strict scrutiny is "strict in theory but fatal in fact." The unhappy persistence of both the practice and the lingering effects of racial discrimination against minority groups in this country is an unfortunate reality, and the government is not disqualified from acting in response to it." (515 U.S. 200 (1995))

Given this clear direction by the Supreme Court, we disagree with the opinion of the Colorado District Court Judge that no program based on race could meet a Constitutionaltest for narrow tailoring. We believe the Department's DBE program meets this test today.

The Disadvantaged Business Enterprise program is not a set-aside program. Nor is it a quota program. This program does not fix rigid numerical targets that must be met to avoid penalty. Nor does it set aside contracts or dollars for a specific set of businesses. No state or local government has ever been sanctioned under this program for not achieving its goal. Moreover, if a bidder is unable to meet a specific contract goal under the program, the recipient can waive the goal after the bidder has made a showing of good-faith effort.

With that introduction, Mr. Chairman, let me explain precisely why the need for this program is clear. The sad fact is that the effects of discrimination still linger in the construction industry. While minorities make up over 20 percent of the U.S. population, minority-owned businesses are only 9 percent of construction firms, and get only 5 percent of construction receipts. Similar inequities apply to women-owned businesses. Women own a third of all small businesses but received less than 3 percent of federal procurement contract dollars in 1994.

Discrimination in the critical ability to secure necessary capital persists as well. White business owners in the construction industry receive over 50 times as many loan dollars per dollar of equity capital as African American owners with identical borrowing characteristics. Recent studies have shown that limited access to capital has had a similarly negative effect on firms owned by women, and that due to that lessened access to capital more women than men finance business out of their own resources.

In private contracting, discrimination is even more pronounced. Both minority- and women-owned firms report that they are routinely unable to secure subcontracts on private work where there are no affirmative action requirements, and that white-owned prime contractors reject minority or women-owned firms even when they offer the lowest bid.

Minority contracting tends to fall dramatically when use of affirmative action is severely curtailed or suspended outright. We see the continuing existence of the effects of discrimination in those jurisdictions that acted to suspend or weaken their own DBE programs in the wake of the Supreme Court's 1989 decision in City of Richmond v Croson. An example is instructive. In Michigan, within six months of ending the state DBE program, minority-owned businesses were completely shut out of state highway construction. They received no contracts at all. Participation by women-owned businesses also plummeted, to 1 percent participation within 9 months. By 1996, there was only the slightest rebound. DBE's received only 31 subcontracts worth 1.1% of state contracting dollars. Under the Federal-aid highway DBE program the same DBE's received 554 subcontracts worth 12.7% of the Federal-aid dollars. Qualified DBE's were ready, willing, and able to perform the work, but without the state DBE program, they were denied the fair opportunity to compete for state contracts. Unfortunately, we have similar examples from all over the country.

The use of statutory goals can profoundly improve the picture. The DOT DBE program has had a tremendous, beneficial effect on the participation of disadvantaged businesses nationwide. Before statutory goals were established, in 1978 for instance, the participation rate was only 1.9 percent. With the advent of the statutory goal in 1982 and the inclusion of women-owned DBE's in 1987, the participation rate reached 14.8 percent in 1996. Even so, it is important to remember that over 85 percent of the funds awarded under the Federal-aid program is still awarded to white male contractors.

The current DBE program, as I mentioned, sets a national participation goal of 10 percent for disadvantaged business enterprises. Recipients then set their own goals for participation based on the numbers of disadvantaged businesses in their local markets and the demands of specific project contracts. These goals are flexible. If a state cannot achieve a 10 percent goal then the Secretary of Transportation can -- and has -- permitted a lower goal based on availability of DBE firms and opportunities for subcontractors. The Department works collaboratively with recipients to assist them in making use of disadvantaged businesses. Likewise, if a prime contractor, despite good-faith efforts, cannot find a qualified disadvantaged business to meet a specific contract goal, then the recipient can waive the goal entirely.

The Adarand decision, and the President's government-wide review of federal affirmative action programs, have provided us all with a welcome opportunity to reexamine and improve our DBE programs. As a matter of policy and law, the President committed to mend, but not end, affirmative action. He directed federal agencies to review programs and to reform or eliminate any program that:

(1) creates a quota;

(2) creates preferences for unqualified individuals;

(3) creates reverse discrimination; or

(4) continues after its equal opportunity purposes have been achieved.

This is exactly what the Department of Transportation is doing. Immediately following the Court's decision in Adarand, the Secretary reviewed the DBE program as part of the federal affirmative action review ordered by the President. In addition, before submitting our NEXTEA proposal, we again carefully reviewed the DBE statutory provisions in conjunction with the Justice Department to be certain that the provisions are constitutional.

In May of this year we issued a Supplemental Notice of Proposed Rulemaking that recommends changes in the administration of the current DBE program that we believe will improve the program and address any doubts as to its constitutionality. The Department is now closely considering the public comments submitted in response to our comprehensive proposal.

Our proposed rule responds to the narrow tailoring standards set out by the Supreme Court. Specifically:

• Courts have said that specific goals should correspond to the availability of qualified DBE's in a given market. Our proposal would ensure that goals are set to reflect the percentage of qualified disadvantaged businesses available in a given market. The program would provide the same opportunity to DBE's that they would have received but for the presence of discrimination -- no more, no less.

• Courts have also emphasized the importance of "race neutral" measures such as outreach, training, and technical assistance. Our proposal requires that race-neutral measures must be used to achieve as much DBE participation as possible before any "race-conscious" measures are used.

• Courts have also suggested that affirmative action programs should not be unlimited in duration. Our proposal requires that race-conscious measures should only be used to the extent, and only for as long as, they are needed to achieve a level playing field.

• Our proposal reemphasizes that "goals" are not absolute requirements but, by definition, are satisfied by good-faith efforts, and cannot be operated as quotas. Our proposal will prohibit the use of set-asides except in the most severe cases of discrimination.

• Finally, our proposal provides much greater flexibility to recipients to tailor to local circumstances the way they achieve the objectives of the DBE program.

We are gratified that the bipartisan leadership of both the House and the Senate authorizing committees most concerned with these programs has determined that continuing the DBE program, consistent with the Adarand ruling, is in the national interest. While these programs have already resulted in progress, the work to end discrimination in the construction industry is far from over. By reauthorizing the DBE program, the Congress will ensure that the Department of Transportation can continue this important work.

Congress is uniquely empowered by the Constitution to remedy the problem of nationwide discrimination and its lingering effects. The DBE program does just that. The Administration urges you to support this valuable program.

Thank you, Mr. Chairman. This completes my prepared statement. I would like to ask the Committee's consent to submit several supporting documents to the record. I would be pleased to respond to any questions the Committee may have.