OFF ICE OF THE NE W YOR K S TATE COM P TROLLE R

DIV IS ION OF STATE GOVERNMENT ACCOUNTABIL ITY

Thomas P. DiNapoli • State Comptroller

Taking Affirmative Action to Improve New York State’s MWBE Program

Summary

• Procurementcanbeapotentiallypowerfultoolforgovernmentstopromoteequaleconomicopportunitiesandtocounteractdiscriminationinthemarketplace.Overthelastseveraldecades,federal,stateandlocalgovernmentsthroughoutthenationhavedevelopedprogramswiththeexpressintentofincreasingthenumberandvalueofgovernmentcontractsawardedtominority-ownedbusinessenterprises(MBEs)andwomen-ownedbusinessenterprises(WBEs).

•Despitethecollectiveeffortsofminority-andwomen-ownedbusinessenterprise(MWBE)programsatthefederal,stateandlocallevels,minoritiesandwomenarestillsignificantlydisadvantagedinboththeworkplaceandthemarketplace.U.S.CensusBureaudatashowthatminoritiesandwomenearnsubstantiallylessfromtheirlabor–bothasemployeesandasentrepreneurs–thantheirnon-minoritymalecounterparts.ThisistruebothinNewYorkandinthenationasawhole.

• TheOfficeoftheStateComptroller(OSC)hasdemonstrateditscommitmenttoimprovingtheState’sMWBEprogramthroughvariousagencyactivitiesandhastakenaleadershiproleinpromotingMWBEbusinesses.In2009,OSCdevelopedanewapproachtoexaminingthestatewideprogramwhichconcentratedonpromotingcommunicationandprovidingagencieswithmoreinformationaboutperformance;conductingfocusedauditsofprogramactivitiesandresultsattheagencylevel;andidentifyingbestpracticesandcommonobstaclesthataffectprogramsuccess.

•WhileNewYork’sMWBEprogramhasgiventargetedbusinessesaccesstoopportunitiesthatmaynototherwisehavebeenavailabletothem,therearepersistentproblemswithvendorcertification,goalsetting,programresults,reporting,programoversightandoutreachefforts.

•AgencyperformancedataoverthelastthreeyearsshowthatutilizationofMWBEfirmscontinuestoberelativelystagnant.ThecombinedpercentageofMWBEutilizationincreasedonly1.5percentagepointsfrom8.1percentofagencydiscretionarycontractexpendituresinStatefiscalyear2007-08to9.6percentin2009-10.

ResearchBrief

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• Specificfindingsinrecentlycompletedauditsindicatethatagenciestendtosetlowgoalsononlyaportionoftheirexpenditures,failtomeeteventhoseminimumgoals,lackcoordinatedoutreacheffortstoidentifyandutilizecertifiedMWBEfirms,andpoorlymonitorcontractorcompliance.

•NewYorkrecentlycompletedadisparitystudy–astudytoexaminethedifferencebetweentheavailabilityofMWBEsandtheirutilizationingovernmentprocurement–whichconcludedthatMWBEsinNewYorkStatearepresentinsubstantiallylowernumbers,earnsubstantiallylessandaresubstantiallymorelikelytobedeniedaccesstocreditthanwouldbethecaseifthemarketoperatedinaneutralmannerwithrespecttoraceandgender.

• Although29percentoffirmswereidentifiedasMWBEsinthedisparitystudy,only5percentofNewYork’sprocurementcontractdollarswerespentwithMWBEfirmsfromStatefiscalyears2004through2008.Thestudyconcludedthatthestatisticalandanecdotalevidencesupportstheconclusionthattheseoutcomesaretheresultofdiscrimination.

• Recommendationsincludedinthisreportfocusonatwo-prongedapproachtoimprovingtheState’sMWBEprogram.ThisapproachfirstseekstostrengthentheState’srace-andgender-neutralinitiativestoimproveeconomicopportunitiesforallsmallbusinesses,andthentotailorrace-andgender-basedinitiativesnarrowlytoremedyanyremainingimbalancesineconomicopportunitiesforminoritiesandwomen.WhilesomeoftheserecommendationswerepartiallyaddressedinStatelegislationenactedinJuly2010(Chapters173,174and175oftheLawsof2010),someotherscanbeimplementedadministrativelywithoutlegislativechange.

Introduction

Overthelastseveraldecades,affirmativeactionprogramsintheUnitedStateshavefocusedontherelativesuccessofminoritiesandwomeninthreemainareas:employment,educationandeconomicopportunity.Governmentprogramshaveattemptedtocreateandenhanceeconomicopportunitiesbyprovidinggeneralsupportforsmallbusinessesandtargetedsupportforminority-andwomen-ownedbusinessesthroughvariousmeans,includinggovernmentprocurement.Assuch,governmentprocurementisseenasapotentiallypowerfultoolforgovernmentstopromoteequaleconomicopportunitiesandtocounteractdiscriminationinthemarketplace.

Asaresult,thefederalgovernmentandstateandlocalgovernmentsthroughoutthenationhavedevelopedprogramswiththeexpressintentofincreasingthenumberandvalueofgovernmentcontractsawardedtominority-ownedbusinessenterprisesandwomen-ownedbusinessenterprises.TheseprogramsareintendedtoprovidedirecteconomicbenefittoMWBEfirms,aswellastoincreasethepresenceofthesefirmsinthegovernmentcontractingprocess,therebyreversingtheeffectsofdirectorpassivediscriminatorypracticespresentinmanyaspectsofgovernmentprocurement.

National Background

Nationally,itisestimatedthatgovernmentprocurementrepresentsabout10percentoftheGrossNationalProduct(GNP),withstateandlocalgovernmentspendingaccountingformorethanhalfofallpublicprocurement.InNewYork,annualStateandlocalgovernmentcontractualspendingtotalsabout$70billion,orabout6percentoftheGrossStateProduct,includingabout$7billionforStatecontractualspendingongoodsandservices.

However,despitethecollectiveeffortsofMWBEprogramsatthefederal,stateandlocallevels,minoritiesandwomenarestillsignificantlydisadvantagedinboththeworkplaceandthemarketplace.U.S.CensusBureaudatashowthatminoritiesandwomenearnsubstantiallylessfromtheirlabor–bothasemployeesandasentrepreneurs–thantheirnon-minoritymalecounterparts.ThisistruebothinNewYorkandinthenationasawhole.

Nationwide,minorityfirmsaccountforabout17percentoftotalbusinessesinthecountry,butearnlessthan3percentoftotalsalesandreceipts.InNewYork,thepatternisevenmorepronounced,withthe25percentoffirmsownedbyminoritiesearninglessthan3percentofsalesandreceipts.

Thesituationisnobetterforwomen.Nationally,womenown28percentofthebusinessesintheUnitedStates,butgenerateonly4percentofthesalesandreceipts.InNewYork,thepatternissimilar,with30percentoffirmsownedbywomenearningabout4percentofsalesandreceipts.Incomparison,menown57percentofbusinessesandaccountfor31percentofsalesandreceiptsnationally,whileinNewYorkmenown60percentofbusinessesandearn31percentofrevenues.

Otheranalysesalsoindicatethatminority-andwomen-ownedbusinessesreceivelessthantheirfairshareinthepubliccontractingarena.Anoft-citedreportproducedbytheUrbanInstitutein1997examinedstateandlocalgovernmentexpenditures–utilizingdozensofdisparitystudiesavailableatthetime–andfoundthatminorityfirmsreceivedfarfewergovernmentcontractdollarsthanwouldbeexpectedbasedontheiravailability.Infact,minoritybusinessesasagroupreceivedonly57centsofeverydollartheywouldhavebeenexpectedtoreceivefromgovernmentcontracting,basedontheirnumbersandavailability.Thistranslatedintoapotentialpoolofmorethan$20billioninadditionalcontractdollars.

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National Trends

Thefederalgovernment,moststatesandmanylargemunicipalitiesintheUnitedStateshaveprogramsdesignedtoencourageeconomicopportunitiesforminority-andwomen-ownedbusinessesthroughparticipationingovernmentprocurementofgoodsandservices.Althoughthestructuresofsuchprogramsvaryfromonestatetothenext,atleast30statescurrentlyhaveMWBEprograms.

Severalstateshaveconducteddisparitystudies–studieswhichexaminethedifferencebetweentheavailabilityofMWBEsandtheirutilizationingovernmentprocurement–similartoonerecentlycompletedforNewYorkState(seebelow).Generally,thesestudieshavefoundevidenceofcontinuingdiscriminationofminority-andwomen-ownedfirmsinthemarketplaceaswellasunderutilizationofsuchfirmsinstateprocurementactivities.Statelegislationrequiringdisparitystudiesoftenprovidesthatsuchstudiesbeconductedperiodically(forexample,everyfiveyears)toensuretheavailabilityoftimelyinformationuponwhichtoevaluateprograms.

ProgramsdesignedtoencouragetheeconomicgrowthofMWBEsinvariousstatesusuallyhavesomecommonelements,including:

• Administration–MWBEprogramsareusuallyadministeredbyastate’sdepartmentofadministrationorgeneralservices,wherecentralizedprocurementishandled.Occasionally,aprogramisadministeredbyastand-aloneagency(e.g.,VirginiaandSouthCarolina)orislocatedinthestate’scommercedepartmentoreconomicdevelopmentagency,asitisinNewYorkState.

• CertificationProcess–Proceduresusuallyrequirebusinessestofirstregisterwithastate’ssecretaryofstateordepartmentoftaxandfinancepriortoapplyingforMWBEcertification.Thecertificationprocessusuallyinvolvesalengthyapplicationform(oftensubmittedonline)tocollectinformationaboutafirm’sowner,productsandservices,finances,equipment,facilitiesandcontroloffunctions;supplementaldocumentstosubstantiateinformationrepresentedintheapplication;andascheduledsitevisittoverifyinformationandtoascertainthatthebusinessisunderthedailycontrolofaminorityorwomanowner.ManystatesrequireMWBEfirmstoverifyannuallythattheycontinuetomeettheeligibilitycriteriaoftheprogram,withoutresubmittingfulldocumentation.

•Reciprocity–MoststateMWBEprogramsprovideforreciprocaland/oracceleratedcertificationwithotherprograms.DualcertificationisusuallyprovidedforfirmscertifiedunderthefederalDisadvantagedBusinessEnterprise(DBE)programfortransportationcontractsfundedbytheU.S.DepartmentofTransportation.Inaddition,severalstateshavereciprocalcertificationprogramswithmunicipalitiesintheirjurisdictions(NewYork,IndianaandNewJersey),otherstatesintheirregions(Delaware,MarylandandVirginia)and/orstatewideandnationalminority/women’sprocurementorganizations.

•DirectoryofCertifiedFirms–States,includingNewYork,usuallymaintaindirectoriesofcertifiedMWBEfirmstofacilitateagencysearchesofavailablevendors.Thesedirectoriesvaryintheireaseofuse,withthosebeingmostusefulthatincludecontactinformationandaresearchablebytypesofproductsorservices.

•DatabaseofContractOpportunities–Manystatesprovidecentralizeddatabasesofcontractopportunitieswhichincludespecificinformationaboutthegoodsandservicesthatagenciesareinterestedinprocuring.AlthoughNewYorkdoesnothaveacomprehensivecentralizeddatabase,theNewYorkStateContractReporterpublishesinformationonvariousprocurementopportunitieswithStateentities.Inaddition,theOfficeofGeneralServices(OGS)offersonlinevendorregistrationforbiddernotificationservicesregardingOGScontractopportunities.

•Outreach–StatesoftenprovideavarietyofoutreachservicestoencourageMWBEfirmstobecomecertified,includingworkshops,trainingeventsandtechnicalassistancewithcertificationapplications.

•Goals–Somestateshaveestablishedoverallgoals,agency-specificgoalsorgoalsbyproduct/servicetype(Indiana)forprocurementfromcertainfirms.StatewideMWBEgoalsvaryfrom10percent(PennsylvaniaandRhodeIsland)to40percent(Virginia)ofprocurementexpenditures.Severalstateshavegoalsforsmallbusinessenterprises(SBEs),regardlessofraceorgenderownership,rangingfrom10percent(Iowa)to25percent(NewJersey).TheNorthCarolinaDepartmentofTransportationhasasmallcontractorgoalof$2millionforeachofits14regionaldivisions.

•ComplianceMonitoring–MoststatesmonitorcompliancewithMWBEgoalsbyagenciesandprimecontractors.Theseeffortsattempttoensurethatcontractorsdonotdiscriminateintheiremploymentandsubcontractingbusinesspractices.

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Federal Government Programs

Thefederalgovernmenthasanumberofprogramstoassistsmallanddisadvantagedbusinesses(manyofwhichareownedbyminoritiesandwomen),including:

• 8(a)BusinessDevelopmentProgram–ThisprogramisadministeredbytheSmallBusinessAdministration(SBA)andisintendedtohelpsmallbusinessesownedbysociallyoreconomicallydisadvantagedindividualstoaccessthefederalprocurementmarketandlearnskillsforcontinuedbusinesssuccess.Theprogramprovidestechnicalassistancetoeligiblefirmsinastructuredprocessoveranine-yeartimeframewhichresultsinthe“graduation”ofsuccessfulfirms.Eligible8(a)participantbusinessescanreceivesole-sourcecontractsuptoaceilingof$3millionforgoodsandservices.Inaddition,federalprocurementpoliciesencouragefederalagenciestoawardapercentageoftheircontractsto8(a)businessesandrequirethatallfederalpurchasesabove$3,000butunder$100,000mustbereservedforsmallbusinesses.

•DisadvantagedBusinessEnterprise(DBE)Program–ThefederalDBEprogramcertifiesbusinessesownedbysociallyoreconomicallydisadvantagedindividualsthatwishtocompeteforfederallyfundedcontractsadministeredbytheU.S.DepartmentofTransportation.Manystates,includingNewYork,providedualcertificationtobusinessescertifiedbytheDBEprogram.TheDBEprogramhaseligibilityrequirementstoensurethatfirmswhichbenefitfromtheprogramareownedandcontrolledbysociallydisadvantagedindividualswhoarealsoeconomicallydisadvantaged–asevidencedbyhavingpersonalnetworthbelow$750,000–andthatthebusinessissmallaccordingtoSBAstandards.

Until2009,thefederalgovernmentalsohadaprogramthatcertifiedsmalldisadvantagedbusinessesforDepartmentofDefense(DOD)contracts.TheSmallDisadvantagedBusiness(SDB)Programsetanoverallgoalof5percentforDODcontractswithSDBsandauthorizedvariousrace-consciousmeasurestomeetthatgoal,includingprovidingbidpreferencesofupto10percentintheevaluationofcontractbidsfromSDBs.TheprogramwasstruckdownbytheFederalCircuitCourtofAppealsandwasdiscontinued.Thiscourtcaseaswellasothercourtdecisionshaveforcedpreferentialprocurementprogramstobemorenarrowlytailored.

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New York State MWBE Program

NewYorkStatefirstauthorizeditsMinority-andWomen-OwnedBusinessEnterprisesprogram(Article15-AoftheExecutiveLaw)inJuly1988topromoteequalityofeconomicopportunitiesforminoritiesandwomenandtoeliminatebarrierstotheirparticipationinStateprocurementactivities.TheprogramisadministeredwithinEmpireStateDevelopment(ESD)bytheDivisionofMinorityandWomen’sBusinessDevelopment,whichperformsthreemajorfunctions:toencourageandassistStateagenciestoawardafairshareofcontractstoMWBEs,tocertifyMWBEbusinessesandtopromotethedevelopmentofMWBEsthroughcapacitybuildingandoutreachefforts.

StateFinanceLawSection163(6)providesathresholdbelowwhichStateagenciesmaypurchasegoodsandservicesfromcertifiedMWBEfirmswithoutformalcompetitivebids.Thisthresholdwasraisedfrom$100,000to$200,000bytherecentlyenactedChapter173oftheLawsof2010.

StateAgencies.Article15-ArequiresStateagenciesandpublicauthoritiestoactivelypromotetheparticipationofMWBEsinStatecontractsandprocurementactivities.Specifically,Stateagenciesandauthoritiesmustestablishannualgoalsforparticipation(expressedasapercentageoftheagency’stotaldiscretionarycontractspendingfortheyear),makea“goodfaith”efforttoachievethesegoals,andreporttoESDonactuallevelsofMWBEparticipationinagencycontractsandexpenditures.ESDapprovesagencygoalplans,monitorscomplianceandcompilesreportsonutilization.

MWBECertification.ESDreviewsapplicationsbybusinessesanddetermineswhetherapplicantsmeetthestatutoryqualificationsforcertification,namelythat:• Businessesmustbeatleast51percentownedandcontrolledbyminoritiesorwomen;•Minorityand/orwomenownershipmustbereal,substantialandcontinuing;•Minorityand/orwomenownershipmusthaveandexercisetheauthoritytoindependentlycontrolday-to-daybusinessdecisions;

• Businessesmustbeindependentlyowned,operatedandauthorizedtodobusinessinNewYorkState;and

• Businessesgenerallymustbeinoperationforatleastoneyear.

Inaddition,ESDmaintainsadatabaseofcertifiedMWBEfirmswhichincludesproductandserviceindustrycodestoassistStateagencies,privatesectorcontractorsandthegeneralpublicintheutilizationofMWBEs.

OutreachandBusinessDevelopment.ESDconductsworkshopsandtrainingsessionsfor:(1)Stateagencies,topromotetheutilizationofMWBEsinStatecontracts,and(2)MWBEs,toprovideassistancewithcertificationandcontractopportunities.ESDalsoadministersprogramsandservicesthatpromotebusinessopportunitiesforMWBEs,suchasconferencesandvendorfairs,andfacilitatescapacitybuildingthroughpartnershipswithorganizationsthatofferin-depthtechnicalassistancetoMWBEsonvariousaspectsofmanagementandbusiness.

New York State Disparity Study

AsrequiredbyArticle15-AoftheExecutiveLaw(Section312-a),ESDcommissionedastudyin2007toexaminetheparticipationofMWBEsinStatecontracts.ThepurposeofthestudywastodeterminewhetherthereisadisparitybetweenthenumberofqualifiedMWBEsready,willingandabletoperformStatecontractsandthenumberactuallyengagedtoperformsuchcontracts.RecentlyreleasedinApril2010,thestudy(knownasadisparitystudy)isintendedtoassisttheStateindeterminingwhetheritscurrentMWBEprogramisstillnecessarytoremedydiscriminationandtorefineexistingmeasuresand“narrowlytailor”anynewinitiativestothatremedy.

VariousU.S.SupremeCourtcaseshavemadeitclearthatinordertoimplementarace-orgender-basedprogramthatiseffective,enforceableandlegallydefensible,agovernmentmustmeetthetestof“strictscrutiny.”Strictscrutinyrequirescurrentstrongevidenceofthepersistenceofdiscriminationandanymeasuresadoptedtoremedythatdiscriminationmustbe“narrowlytailored”tothatevidence.

NewYork’sdisparitystudyconcludedthatMWBEsarepresentinsubstantiallylowernumbers,earnsubstantiallylessandaresubstantiallymorelikelytobedeniedaccesstocreditthanwouldbethecaseifthemarketoperatedinarace-andgender-neutralmanner.ThestudyfurtherfoundthatduringStatefiscalyears2004through2008,MWBEswereutilizedinStatecontractsatratesfarlowerthantheiravailabilitywouldindicate.Although29percentoffirmswereidentifiedasMWBEsinthestudy,only5percentofNewYork’sprocurementcontractdollarswerespentwithMWBEfirmsfrom2004through2008.Thestudyconcludedthatthestatisticalandanecdotalevidencesupportstheconclusionthattheseoutcomesaretheresultofdiscrimination.

New York State MWBE Performance Results and Audit Findings

SeveralpreviousauditsofNewYork’sMWBEprogramhavenotedimplementationproblemsbothattheagencylevelandwithESD’sadministrationoftheprogram.Between2001and2004,OSCundertookaseriesofauditswhichfoundthatwhiletheprogramhadgiventargetedbusinessesaccesstoopportunitiesthatmaynototherwisehavebeenavailabletothem,therewerepersistentproblemswithgoalsetting,programresults,reporting,programoversightandvendorcertification.

In2009,OSCtookaleadershiproleinaddressingtheseproblemsanddevelopedanewapproachtoexaminingtheState’sMWBEprogramtotrytohelpitsucceed.Thisapproachconcentratedonpromotingcommunicationandprovidingagencieswithmoreinformationaboutperformance;conductingfocusedauditsofprogramactivitiesandresultsattheagencylevel;andidentifyingbestpracticesandcommonobstaclesthataffectprogramsuccess.

Specifically,OSCgatheredinformationfromESDintheformofself-reportedagencydataonprogramgoalsandperformanceforthepastthreeyearsanddevelopedthisinformationintoanobjectively-orientedperformancemeasurementsystem.OSCsharedthisperformancedatawithagenciesandpromotedinteragencycomparisonsandcommunicationonagencyresults.

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OSC Best Practices

As a procurement agency itself, the Office of the State Comptroller fully supports the State’s MWBE program and has integrated its goals into the agency’s procurement processes and practices. Specifically, OSC:

• Places primary responsibility for MWBE participation in its Finance Office, where it has been incorporated into the procurement processes and culture of the agency;

• Makes a concerted effort to raise agency goals and increase MWBE participation in discretionary purchases, particularly in the procurement of office furniture, software products and miscellaneous services;

• Includes information on its website concerning policies and resources that can be used by MWBEs for opportunities in State procurement opportunities, including links to other State government websites;

• Produces and distributes the annual Directory of Frequently Purchased Commodities and Services by New York State Agencies (the 20th edition of this publication was released in January 2010);

• Supports and manages a telephone line for sharing information regarding technical support for MWBE best practices; and

• Hosts and attends various vendor fairs and workshops to facilitate MWBE participation in procurement activities.

The Comptroller has also demonstrated his commitment to MWBEs as sole custodian of State pension fund assets in the Common Retirement Fund (CRF). In February 2008, the Comptroller launched the Emerging Manager Program for the purpose of investing some of the CRF’s assets with small and upcoming firms, many of which are MWBEs, to support the development and expansion of such firms while earning attractive, risk-adjusted returns for the CRF. To date, OSC has committed to investing $1 billion in private equity and $600 million in domestic equities with emerging manager firms; in 2009-10 the Emerging Manager Program committed $160 million to MWBEs. The CRF also has a small business lending program which has provided loans of approximately $70 million (out of $200 million) to small MWBEs in the State.

The Comptroller has been at the forefront of advocating for improvements to the statewide MWBE program and has been recognized for his personal commitment and efforts to support MWBE firms. He has participated in various statewide activities, including the Governor’s MWBE Executive Leadership Council, and has provided constructive review and input, such as relevant comments on legislative proposals, to improve the statewide MWBE program.

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InAugust2009,OSCconductedanMWBEStateAuditReviewSession,incollaborationwithESD,forStateagencyfiscalofficersandpurchasingadministrators.Duringthissession,OSCreviewedagencyperformancedata,discussedmajorareasforauditreviewsandhighlightedtechnicalassistanceresourcesavailabletoagencies.Over100attendeesfrommorethan40differentagencieswererepresentedatthesessionandanadditional230peopleviewedarebroadcastofthesessionthefollowingday.

Sincethattime,OSChascontinuedtomonitoragencyperformancedataandhasconcludedthat,althoughtherehasbeenanincreaseinthedollaramountofMWBEcontractsoverthelastthreeyears,thepercentageutilizationofMWBEfirmshasbeenrelativelystagnant.FromStatefiscalyear2007-08to2009-10,utilizationofMWBEfirmsincreasedby$245millionfrom$560millionto$805million,anincreaseof44percent.

However,thisincreasemustbeviewedinlightoftotalagencydiscretionarycontractexpendituresduringthatperiod,whichincreasedby$1.5billionfrom$6.9billionto$8.4billion.Asaresult,thecombinedpercentageofMWBEutilizationincreasedonly1.5percentagepointsfrom8.1percentto9.6percentoftotalagencydiscretionarycontractexpenditures.

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

07/08 08/09 09/10

Minority Women

MWBE Percentage of Expenditures

$0$50

$100$150$200$250$300$350$400$450

07/08 08/09 09/10

Mill

ions

Minority Women

MWBE Expenditures

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Inaddition,OSCrecentlycompletedandreleasedfiveseparateauditreportsonthefollowingindividualagencies:theDivisionofStatePolice,theDepartmentofTaxandFinance,theOfficeofChildrenandFamilyServices(OCFS),theOfficeofTemporaryandDisabilityAssistance(OTDA)andtheOfficeforTechnology(OFT).AnauditoftheMetropolitanTransportationAuthority(MTA)isstillinprogress.

Asaresultoftheseefforts,continuingproblemshavebeenfoundwithESD’soversightoftheMWBEprogramandagencyresultsinthefollowingareas:

•Certification–TheMWBEcertificationprocessinNewYorkiscumbersomeandlengthy,oftentaking6monthstoayeartocomplete.Althoughnotrequired,somefirmshireattorneystocompileinformationandsubmitapplicationsforcertificationduetoitscomplexity.Iffilledoutonline,theapplicationmustbecompletedinorderandallatonce;anymissinginformationresultsinrejectionoftheapplication.SupplementaldocumentationmustbesubmittedandESDstaffreviewsandonsitevisitsareconductedtoensuretheaccuracyandveracityofinformation.ESDindicatesthatthereisacurrentbacklogofinitialapplicationreviewsof3to6months.

EligibleMWBEfirmsoftenquestionwhetherthecertificationprocessisworththeeffort,giventhattheonlytangiblebenefitofcertificationisinclusioninESD’sdirectoryofcertifiedMWBEfirmsandpotentialutilizationinState-fundedcontracts.

Asaresult,onlyafractionofeligibleMWBEfirmsinNewYorkareactuallycertifiedbyESD.TheNewYorkStatedisparitystudyexamined550,000businessesinNewYorkandidentified29percent–about160,000firms–asMWBEfirms.TheU.S.CensusBureau’sSurveyofBusinessOwnersindicatesthatmorethan420,000MBEsandmorethan500,000WBEswerecountedinNewYorkin2002.Incontrast,thedirectoryofMWBEfirmscertifiedbyESDcurrentlyincludesonly8,350firms.Furthermore,thenumberofcertifiedMWBEfirmshasnotincreasedsignificantlysince1989,when4,800MWBEswerecertifiedinNewYork.Thismeansthatanaverageofonly170firmsperyearhasbeenaddedtothelistofcertifiedMWBEsoverthelast21years.

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•GoalSetting–TargetgoalsforMWBEutilizationinStatecontractsandexpendituresareagency-specific,annuallydevelopedbyindividualagenciesandsubmittedtoESDforreviewandapproval.Thesegoalsarebasedon“discretionary”agencyexpenditures,thatis,expendituresforgoodsandservicesoverwhichtheagencyhassomecontrolandcanmakeprocurementdecisionswhichresultincontractswithMWBEfirms.Thereareseveralaspectsofthisprocessthatareproblematic:

•Comparability.Althoughthereiscentralguidanceonwhichexpendituresareconsidereddiscretionary,agencieshavewidediscretiontointerpretthatguidance,resultingingoalsandutilizationpercentageswhicharenotgenerallycomparablebetweenagencies.Sometimesagencieschangetheirexpenditurebasesfromoneperiodtothenext,resultinginnon-comparableoutcomeswithinanindividualagency.Forexample,theOfficeforTechnologyreduceditsreporteddiscretionaryexpenditurebaseby95percentfrom$57.5millioninthethirdquarterof2009-10to$3.3millioninthefourthquarter.ThischangeresultedinanincreaseinOFT’sreportedMWBEparticipationratefrom1.1percentto14.1percentwhileactualMWBEexpendituresdropped.

• LowGoals.About60percentofStateagencies(51outof85agencies)settheirMBEgoalsat5percentorlessofdiscretionaryexpendituresin2009-10,withmorethanhalfofthoseagencies(26agencies)settinggoalsof1percentorless.Similarly,72percentofStateagencies(61outof85agencies)settheirWBEgoalsat5percentorlessin2009-10.Eventhehighergoalsestablishedbysomeagenciesmustbeviewedinlightofthefractionoftotalexpenditureswhichdiscretionaryexpendituresrepresent.Forexample,althoughOCFSsetacombinedMWBEgoalof12percentfor2009-10,thatgoalwasbasedonaverysmallpoolofeligiblediscretionarycoststotalingabout$11.9million,orlessthan1percentofOCFS’$3.5billionannualnon-personalservicesexpenditures.

•GoalPlans.SomeagenciesdonotregularlyfilegoalplanswithESD(OFT),whileothersdonothaveadequatebasestosupportthattheirgoalsarereasonableandattainable(OTDA).Furthermore,ESDdoesnothaveadequatemeanstoensurethatgoalplansarefiledandsupportablewithobjectivedata.

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• PerformanceTracking–Duetotheissueswithgoalsetting,itisdifficulttodetermineifagenciesaresettingrealisticandattainablegoalsandmakinggoodfaitheffortstoreachthosegoals.Managementneedstohavedatasystemsthatprovidecomplete,accurateandreliableinformationtofacilitatemonitoringanddecisionmaking.Issuesandproblemswereidentifiedinthisaspectofprogramcomplianceasfollows:

•Reporting.ReportinganddataaccuracyonMWBEutilizationvariesbyagency,withsomeagenciesadequatelytracking,verifyingandreportinginformation(StatePoliceandOTDA).However,otheragencieswereregularlydeficientinreportingordocumentingrequiredinformation;auditscitedagenciesfornotcollectingrequiredcontractorcompliancereports(OFT),notfilingrequiredutilizationreports(OCFS),andnotprovidingadequatesupportingdocumentationforreporteddiscretionaryexpenditures(TaxandFinance).Althoughawareofthesemissingreports,ESDdidnottakeactiontoenforcecompliance.

Furthermore,auditshaveshownthatMWBEsubcontractingexpenditureswereoftennotreportedbyeitherprimecontractorsornot-for-profitorganizationsthathiredthem.Althoughnot-for-profitsarenotrequiredtoreportthisinformation,agenciescanincludesuchexpendituresinmeasuringactualMWBEutilization.

•Utilization.ActualutilizationofMWBEfirmsvariesbyagency,butmostagenciesfallshortofmeetingtheirestablishedgoals.Infact,morethantwo-thirds(60agencies,or70percent)ofStateagenciesmetlessthan70percentoftheirMBEgoalsin2009-10,whilemorethanhalf(49agencies,or58percent)metlessthan70percentoftheirWBEgoals.Theseoutcomesaretroubling,especiallygiventhatagencygoalsaresetlowandareoftenbasedononlyasmallportionofoverallexpenditures.

60

4

21

MBE Goal Attainment FY 09-10 Number of Agencies

49

7

29

WBE Goal Attainment FY 09-10 Number of Agencies

100% or More of Goal Achieved 70% - 99% of Goal Achieved Less than 70% of Goal Achieved

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•CommunicationandOutreach–AgenciesareexpectedtohelpexistingvendorswithMWBEprogramcertificationifeligible,toseekoutnewqualifyingvendorsforpotentialcertificationandtoencouragecertifiedvendorstocompeteforprocurementopportunities.Issuesidentifiedinthisaspectoftheprograminclude:

• AgencyOutreachEfforts.Agencyeffortstoidentifypotentiallyeligiblevendorsarevaried,withsomeagenciesdoingabetterjobwithoutreachthanothers.Forexample,OFThasmadesignificanteffortstoincreaseawarenessandpromoteparticipationintheState’sMWBEprogram,includinghostingvariousMWBE-focusedevents,providingextensiveinformationforMWBEsonitswebsiteandmaintainingacomprehensivelistofMWBEvendorsthatitmakesavailabletoITcompanieslookingtoformpartnershipswithMWBEs.Otheragenciesneedtoimprovetheiroutreachefforts,havingfewifanysystemsinplacetoidentifynewlycertifiedvendorsorhelpqualifiedvendorswithcertification(OCFSandOTDA).

• ProcurementOpportunities.OSCannuallypublishesaDirectoryofFrequentlyPurchasedCommoditiesandServicesbyNewYorkStateAgencieswhichprovidesrangesofagencyexpendituresforvarioustypesofexpenditureswithincategories,suchassupplies,equipmentandinformationtechnology.However,thereiscurrentlynocomprehensivestatewidedatabaseofprocurementopportunitiesthatMWBEfirmscanusetoidentifyspecificpurchasesofgoodsandservicesforwhichtheycancompete.

• VendorAwareness.TheNewYorkStatedisparitystudyindicatedthatmanypotentialMWBEfirmsdonotknowhowtobecomecertifiedorwhattypesofopportunitiesexistfortheminthepublicsector.TheybelievethatbothESDandindividualagenciescandoabetteroutreachjobthroughvendorfairsandothermeanstoprovidethisinformationtopotentialfirms.

•MWBEDirectory.ESD’sdirectoryofcertifiedMWBEfirmsdoesnotcontainlinkstovendorwebsiteswhichagenciesandprivatesectorfirmscouldusewhenseekingqualifiedfirmsforspecificpurchasesofgoodsorservices.Inaddition,manyoftheemailaddressesincludedinthedirectoryarenon-functioning,makingitdifficulttocontactfirmsdirectly.

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Recommendations to Consider

BasedonvariousU.S.SupremeCourtdecisions,thestatisticalandanecdotalevidencepresentedintheNewYorkStatedisparitystudyandthebestpracticesidentifiedinnumerousgovernmentalMWBEprograms,thereareseveralrecommendationsthatshouldbeconsideredtoimproveNewYork’sMWBEprogramandaddresstheshortcomingsfoundinitsperformancedataandOSC’srecentlycompletedaudits.WhilesomeoftheserecommendationswerepartiallyaddressedinStatelegislationenactedinJuly2010(Chapters173,174and175oftheLawsof2010),someotherscanbeimplementedadministrativelywithoutlegislativechange.

Theserecommendationsfocusonatwo-prongedapproachwhichseeksfirsttostrengthentheState’srace-andgender-neutralinitiativestoimproveeconomicopportunitiesforallsmallbusinesses,andthentonarrowlytailorrace-andgender-basedinitiativestoremedyanyremainingimbalancesineconomicopportunities.AlloftheserecommendationsareconsistentwithrecommendationsadvancedintheNewYorkStatedisparitystudyandwithnationalbestpractices,andcanbesummarizedasfollows:

• Race-andGender-NeutralInitiatives

•AdoptaSmallBusinessTargetMarketProgram.TheStateshouldconsideradoptingaprogramtargetedtosmallbusinessfirmsseekingtoworkasprimecontractorsorconsultantsfortheState.Contractssubjecttothisprogramwouldbereservedforbiddingsolelybysuchfirms.Thisapproachwouldpermitsmallfirmstocompeteonamorelevelplayingfieldwithfirmsofcomparablesize,therebyequalizingsomeofthebarriersfacedbyMWBEssuchasobtainingbonding,financingandaccessingbusinessnetworks,withoutresortingtorace-andgender-basedpreferencesthatmightnotwithstandlegalchallenge.ThisshouldalsoreducetheState’srelianceonrace-andgender-conscioussubcontractinggoalstomeetoverallannualMWBEgoals.

Programelementsshouldincludeeligibilitycriteriaforparticipation,includinglimitingthesizeofafirm(usuallybasedonthenumberofemployeesortheamountofannualrevenue),itslocation,thesizeofcontractstobeincludedandthetypeofworktobeperformed.

Manyothergovernmentscurrentlyhaveprogramswhichsetasidepercentagesorlevelsofcontractswhichareonlyavailabletocertainfirms,usuallysmallbusinesses.Forexample,thefederalgovernmentsetsasideallpurchasesabove$3,000butunder$100,000forsmallbusinesses.

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•ExpandProgramstoIncreaseAccesstoCapital.IncreasedaccesstocapitalisfundamentaltoensuringequalopportunitiesforbusinessestocompeteforStatecontracts.AllthestatisticalandanecdotalevidenceincludedintheNewYorkStatedisparitystudysupportedtheconclusionthatminoritiesandwomencontinuetofacebarrierstofinancingandgrowingtheirbusinessesinpartbecauseofraceorgenderdiscrimination.

ESDcurrentlyoperatesaCapitalAccessPilotProgram,incollaborationwiththeNewYorkBusinessDevelopmentCorporation,toprovidecapitalinconnectionwithspecificcontracts.Inaddition,theCommonRetirementFundhasasmallbusinesslendingprogram;todateapproximately$70millionofthe$200millioninloanscompletedhavebeenmadetoMWBEfirms.Theseprogramscouldbeexpandedtoprovidemorecapitaltosmallbusinessesthroughexistingavenues.

AnotherwayofexpandingaccesstocapitalwouldbetomakeloansavailabletoSBEsatfavorableinterestratesonlinesofcreditatparticipatinglendinginstitutions,usingtheirStatecontractsascollateral.

• IncreaseContractUnbundling.ItisbelievedthatthesizeandcomplexityoftheState’scontractsaremajorimpedimentstosmallfirms(includingMWBEs)obtainingworkasprimecontractorsonStateprojects.Unbundlingcontracts–breakingthemintosmaller,moremanageablepieces–isviewedasonemethodtoincreaseaccesstoStateprojectsbysmallerbusinesses.Smallercontractsshouldpermitfirmstomovefromquotingsolelyassubcontractorstobiddingasprimecontractors.However,unbundlingmustbeconsideredcarefullyinlightofpotentiallyhigherStatecostswhichcanbeassociatedwithcoordinatingseveralsmallercontractsratherthanonecomprehensivecontract(e.g.,constructionprojects).

• ImplementtheBusinessMentor-ProtégéProgramStatute.TheStateLegislaturerecentlyamendedStateFinanceLaw(Section147)torequireeveryagencythatawardsmorethan$10millioninprojectsintheprioryeartoimplementabusinessmentor-protégéprogram.Mentor-protégépartnershipsareusuallybasedonwrittendevelopmentplanswhichclearlysetforththeobjectivesandrolesforbothfirms.Generally,mentorsprovideprotégéswithassistancewithfinancing,managementandtechnicaladvice.Protégésshouldbeviablefirmswhichareinalineofworkthatissimilartothementorfirm’sbusinessoroneofitscomponents.Throughthesepartnerships,mentorsreceivecredittowardMWBEgoalsandprotégésgaingreateraccesstocontractsandincreasedopportunitiestogrowintoprimecontractors.

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• IncreaseVendorCommunicationandOutreach.Ownersofalltypesoffirmshavereporteddifficultiesinaccessinginformationaboutparticularcontractopportunities,aswellasStatecontractingpoliciesandprocedures.TheStateshouldconsiderwaystomakeiteasierforbusinessestosearchforrelevantcontractingopportunitieswithouthavingtocontactindividualagencies.Manystatesprovidecentralizeddatabasesofcontractopportunitieswhichincludespecificinformationaboutthegoodsandservicesthatagenciesareinterestedinprocuring.NewYorkneedssimilar“one-stopshopping”access.

Otherspecificsuggestionsincludeconductingregularvendorfairs,holdingbusinessseminarsfornewlycertifiedfirms,creatingadatabaseofbusinessprofilesthatdescribesthekeyproductsandservicesfromMWBEfirms,simplifyingandcoordinatinginformationonStatepoliciesandprocedures,andpostingpaymentstoprimecontractorsonagencywebsites.

Inaddition,communicationwithvendorscouldbeimprovedbyforminggroupsofStateagencieswithsimilarprocurementneedstoencourageinformationsharingandvendorcontacts.SuchasharedservicesapproachtoMWBEandsmallbusinessprocurementcouldhelpspreadbestpracticesandimprovevendoraccess.

• AnalyzeSystemstoEnhancetheAvailabilityofRelevantData.NotallStatecontractrecordscontainalltheinformationnecessaryforefficientandcomprehensivemonitoringofMWBEactivity.Thissituationcouldbegreatlyimprovedthroughananalysisandreviewofdatasystems,andincreasedtrainingandguidanceforStateagencycontractingandpurchasingpersonnel.SucheffortswouldenhancethequalityofrelevantdataavailablefortheState’snextdisparitystudy.

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• Race-andGender-ConsciousPoliciesandProcedures

•AdoptNarrowlyTailoredProgramEligibilityStandards.Currentlytherearenosize,locationorwealthstandardsplacedonbusinessesandtheirownerswhichparticipateintheState’sMWBEprogram.Firmsmaybeofanysizeandlocatedanywhere,andownersarenotrequiredtobeeconomicallydisadvantaged.InordertoensurethatNewYork’sprogramislegallydefensible,theStateshouldconsideradoptingnarrowlytailoredprogrameligibilitystandards,possiblylinkedtothefederalDBEprogram’seligibilityrequirements,including:

• Limitationonthesizeofabusiness,whichcanbebasedonthenumberofemployeesorannualrevenuesandcanvarybyindustrytype;

• Limitationonthepersonalnetworthofbusinessowners;forexample,alimitof$750,000isusedbytheDBEprogram;and

•RequirementthatbusinessesbelocatedwithinNewYork.

Chapter175oftheLawsof2010enactedinJuly2010amendedthedefinitionsofMBEandWBEincludedinArticle15-Atorestrictsuchenterprisestosmallbusinessesandtolimittheirownershiptoindividualswhosenetworthdoesnotexceed$3.5million,adjustedannuallyforinflation.Theseamendmentsbecomeeffective90daysafterenactmentinOctober2010.

• AdoptOverallAnnualMWBEAgencyGoals.Agencygoal-settingshouldbestandardized,takingintoconsiderationthefollowing:

•Clarificationofguidanceonagencyexpenditurebasestoensureconsistencybetweenandwithinagencies;

• AvailabilityofMWBEfirmsbyindustryandgeographicmarketplaceasreflectedintheStatedisparitystudy;

•DeterminationofpotentialMWBEavailabilitythatwouldbepresentinadiscrimination-freemarketplace;and

•Developmentofmultiyearplanstomoveagenciestowardlong-termprocurementgoals.

Chapter175oftheLawsof2010establishesstatewidegoalsandrequiresagenciestoestablishagency-specificgoalsforcontractingwithcertifiedMWBEsbasedonthe2010disparitystudy.

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•ExpandUseofContractGoals.TheStateshouldconsiderexpandingMWBEgoalstoallcontractswithsignificantsubcontractingopportunities,includingcentralizedStatecontractsadministeredbytheOfficeofGeneralServicesandcontractswithnot-for-profits.

• AdoptUniformStandardsforDemonstratingGoodFaithEfforts.UniformstandardsfordemonstratinggoodfaitheffortsshouldbeappliedtoprimecontractorsseekingtoutilizeMWBEs,includingstandardproceduresforobtainingwaivers.Thecurrentlackofstandardizationcreatesconfusion,errorsandresentmentamonginterestedfirms.

•EnhanceReportingbyStateAgenciesandESD.AgenciesshouldberequiredtoreportatleastannuallyregardingtheircompliancewiththeprovisionsofArticle15-A,andESDshouldannuallycompileareporttosummarizeandcompareagencyresults.Suchreportswouldincreasethetransparencyofagencyprocurementoperationsandpromotecompliance.

Chapter175addsrequirementsforannualagencyreportsandESDsummaryreports,aswellasnewrequirementsforagencieswhichfailtomeettheiragency-specificgoalstodevelopremedialactionplanstoaddresshowsuchgoalswouldbemetinthefuture.

• StreamlinetheCertificationProcess.Manystates,includingNewYork,currentlyuselengthycertificationapplicationsandprocessestoensuretheeligibilityofMWBEfirms.However,NewYork’sprocessinvolvesaparticularlylengthyapprovalprocessthatshouldbereviewedforpotentialstreamlining.Althoughitisimportanttoavoidcertificationofineligiblefirms,aprotractedandoverlycomplexapprovalprocessdoesnoteffectivelyservelegitimateMWBEfirmswhicharediscouragedfromparticipatingduetothecomplexityoftheprocess.

Specificsuggestionshavebeenmadeaboutwaystoimprovetheprocess,includingallowingforpartialonlinecompletionofapplicationswhichwouldpermitsavingenteredinformationandreturningatalatertimetocompletetheapplication.Considerationcouldalsobegiventoa“post-audit”approachtocertification,whichwouldrelyontargetedreviewsofasamplingoffirmstoprovideassuranceofthevalidityofinformationprovidedoncertificationapplications.

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•EncourageExecutiveandAgencyCommitment.Experiencehasshownthataprogram’ssuccessishighlydependentonthecommitmentofitsleadership.Chapter175createsanewstatewidepositionofChiefDiversityOfficer,whowillbeappointedbytheGovernortoprovideadviceonpoliciesrelatingtoworkforcediversityandMWBEs,andwhowillserveontheNewYorkStateProcurementCouncil.

EachNewYorkStateagencyshouldbeencouragedtoplaceresponsibilityforitsMWBEprograminitsfinanceoffice,whereprogramprioritiescanbeintegratedintotheprocurementprocessesoftheagency,andrequireagencystafftoparticipateinannualtrainingonMWBEutilization.

Finally,theprogramwouldbenefitfromspecificconnectionstoOGSwherecentralprocurementishandledfortheState.

• IncreaseMonitoringofContractPerformance.AftercontractswithMWBEcommitmentshavebeenawarded,itisessentialthatthosecommitmentsaremonitoredandthatsanctionsfornoncomplianceareavailable,includingprohibitionsonunauthorizedsubstitutionsofsubcontractors.ThiswouldstrengthencomplianceandhelperasetheperceptionamongMWBEfirmsthattheStatedoesnottakeitsprogramseriously.

Chapter175providesforenhancedpenaltiesforcontractorsthatwillfullyorintentionallydisregardtheirresponsibilitiestoutilizeMWBEfirms.

Conclusion

AsNewYorkStatestrugglestomeetthechallengesofitscurrentfiscalcrisis,StatepolicymakersmustfindwaystoencouragegrowthinvarioussectorsoftheState’seconomytoensurethelong-termfiscalhealthoftheState.Smallbusinesses–includingthoseownedbyminoritiesandwomen–areavitalpartofthateconomy.Morethan400,000smallbusinessesintheStateemploynearly4millionNewYorkers,makeannualpayrollsinexcessof$130billionandgeneraterevenuesofnearly$700billioneachyear.SupportingsmallbusinessesinNewYorkisgoodeconomicpolicyaswellasgoodsocialpolicy.NewYorkcanhelpthesebusinessescontinuetogrowbyremovingimpedimentstotheirparticipationintheStateprocurementprocessandbycreatinganatmospherethatfostershealthycompetitionandefficiency.TherecommendationsincludedinthisreportcanhelpstrengthenandimprovetheState’scurrentMWBEprogramandultimatelyaccomplishboththesegoals.

21 Division of State Government Accountability October 2010

CityofNewYork,OfficeoftheComptroller,BureauofManagementAudit,Audit Report on the Administration of The Minority- and Women-owned Business Enterprise Program by the Department of Small Business Services,ReportMD09-062A,October8,2009.

MinorityandWomenOwnedBusinessEnterpriseExecutiveLeadershipCouncil,reportpresentedtoGovernorEliotSpitzerandLieutenantGovernorDavidPaterson,December18,2007.

NationalConferenceofStateLegislatures(NCSL),Minority Business Development – State MBE Certification,postedFebruary22,2008.

NCSL,Minority-Owned Business Development,June/July2004.

NCSL,Promoting Economic Development in Vulnerable Communities,May2003.

NERAEconomicConsulting,The State of Minority- and Women-Owned Business Enterprise: Evidence from New York,preparedfortheNewYorkStateDepartmentofEconomicDevelopment,April29,2010.

NewYorkLawJournal,MunicipalLawbyJeffreyD.Friedlander,Promoting Participation by Minorities, Women in City Contracts,July24,2006.

NewYorkStateDivisionofMinorityandWomen’sBusinessDevelopment,AnnualReport,2008.

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NYSOSC,M/WBEState Audit Review Session: A Review of M/WBE Performance Data, Major Areas for Audit Review, and Technical Assistance Resources Available for State Agency Fiscal Officers and Purchasing Administrators,August4,2009.

NYSOSC,DivisionofStateGovernmentAccountability,New York State Department of Taxation and Finance: Minority and Women’s Business Enterprise Reporting,Report2009-S-82.

NYSOSC,DivisionofStateGovernmentAccountability,New York State Division of State Police: Minority and Women’s Business Enterprise Reporting,Report2009-S-81.

NYSOSC,DivisionofStateGovernmentAccountability,New York State Office for Technolog y: Minority and Women’s Business Enterprise Reporting,Report2009-S-104.

NYSOSC,DivisionofStateGovernmentAccountability,New York State Office of Children and Family Services: Minority and Women’s Business Enterprise Reporting,Report2009-S-105.

NYSOSC,DivisionofStateGovernmentAccountability,New York State Office of Temporary and Disability Assistance: Minority and Women’s Business Enterprise Reporting,Report2009-S-106.

NYSOSC,DivisionofStateServices,New York State Department of Economic Development: Participation by Minority and Women-Owned Business Enterprises in State Contracts,Report2002-S-55.

NewYorkStateProcurementCouncil,New York State Procurement Guidelines,July2009.

Stateline,States Look Beyond Quotas to Promote Minority Firms,www.stateline.org,January11,2005.

TheUrbanInstitute,Do Minority-Owned Businesses Get a Fair Share of Government Contracts?,December1,1997.

U.S.CensusBureau,AmericanFactfinder,June16,2010.

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Officeof theStateComptrollerDivisionof StateGovernmentAccountability

110StateStreet,11thFloor•Albany,NewYork12236