October 2, 2014

Tallahassee Report: Negative on Affirmative Action

John D. McKinnon | 2/1/1996
A surprising new report, done by the Florida State University (FSU) College of Business, recommends scrapping Florida's main minority business program. The report concludes there's not enough discrimination, and too much abuse of the program, for it to continue.

Big contractors are using the report in a quiet but determined lobbying campaign to end the program, which sets percentage goals for state spending on firms owned by women and racial and ethnic minorities. "The study confirms what we have been saying for many years," says Rick Watson, a lobbyist for Associated Builders and Contractors of Florida Inc. "The program is poorly administered and does not accomplish its purpose."

Opponents of the affirmative-action measure haven't gained the upper hand yet, however. Many moderate and liberal lawmakers, especially many African-Americans, are likely to put up stiff resistance.

"There's going to be quite a fight," says state Rep. Alfred Lawson, Jr., D-Tallahassee, chairman of the House Governmental Operations Committee and former head of the Legislature's black caucus. Lawson's own take on the report: "It's a conspiracy to adopt what the bigger businesses want."

Gov. Chiles reportedly opposes any bill that eliminates the program. Chiles' Department of Commerce, which houses the program, already has asked a qualified consultant to analyze the study's methods, and that could undercut its findings.

Regardless of how the legislative debate turns out, significant damage might have been done to the program. The report is likely to become strong evidence in anticipated new legal challenges to the set-asides.

The $400,000 report offers penetrating criticism of the Women and Minority Business Enterprise (W/MBE) program. Its primary conclusion: Goals for W/MBE participation were too ambitious when they were created five years ago. For example, the current goals call for spending 21% of the state's construction money on certified W/MBE firms and 25% in architectural and engineering services.

As the study points out, however, those percentage goals were based on an earlier report that examined the potential number of available minority firms ? about 192,000 ? and not on the actual number of firms that have been state-certified ? currently, only about 2,200, or less than one quarter of one percent of the state's business population. That's led to extreme over-utilization of certified firms, the report contends. Many industry officials appear to agree. "There just aren't the businesses out there to support those percentages," says Robert G. Burleson, president of the Florida Transportation Builders' Association. In the last fiscal year, W/MBE expenditures totaled about $190 million.

The new study's authors say they were forced by recent federal court decisions to consider only actual state-certified contractors. Significantly, the study was limited to current disparity and didn't consider historical discrimination, says FSU business school dean Melvin Stith.

The report concludes that because of the "widespread inability" of state agencies to meet the goals, bureaucrats have begun to enforce them like quotas. The W/MBE program also has generated abuses such as fronting (new W/MBE firms started or backed by non-minorities) and brokering (a W/MBE firm subcontracting the work back to a non-W/MBE firm for a fee).

Stith says the state should concentrate instead on helping minorities form and sustain businesses. "If you want to help minorities, you've got to help them at the business formation level," argues Stith, who is African-American. "It's a very daunting process these days. So what's happening is that minorities just aren't forming businesses anymore."

Bill Nelson's Shell Game
State officials billed their meeting on Nov. 30 with about 100 insurance representatives as an "Open House." But once you got past all the graphs and charts, it felt more like a Kmart Blue Light Special.

The meeting at Tampa's Westshore Marriott was set up so Insurance Commissioner Bill Nelson could peddle some 220,000 homeowners' policies to several dozen insurance company executives. The policies currently are held by the state's massive Residential Property and Casualty Joint Underwriting Association (RPCJUA), created in the wake of Hurricane Andrew as an insurer of last resort. But Nelson desperately wants to sell them.

Here's why: As almost everyone now knows, the RPCJUA has grown to become the state's third-largest insurer, with a total of more than 800,000 policies. It is so large, in fact, that it operates as a significant disincentive to the entire private market because the RPCJUA's hurricane losses would have to be covered by assessments on carriers, based on their market shares. In effect, private insurers face a double whammy when they write new business in Florida - their own risk and the RPCJUA's. No wonder many companies are easing out of the state as fast as the state will let them.

And no wonder that shrinking the bloated RPCJUA is so important to Nelson. Obviously, a smaller RPCJUA would signal restored vitality in the private marketplace, leading insurers to stop withdrawing from Florida and start writing new policies.

Wouldn't it?

Not necessarily. The reason: The 220,000 policies Nelson currently is hawking contain little or no catastrophic wind risk, and many specifically exclude it. So getting those policies out of the RPCJUA won't reduce its frightful hurricane exposure at all. And that means the big potential assessments on established insurers won't go away either.

"To the extent that you end up with only the worst risk left in the [RPCJUA], you haven't accomplished as much as you might," explains Paul Sanford, a Jacksonville lawyer who lobbies for the Florida Insurance Council. Besides, as an inducement to carriers to accept the RPCJUA policies, the state is promising not to count those policies toward their market share for assessment purposes. In effect, big companies with large existing shares of the market get almost no relief from the removal of the 220,000 policies.

In fact, established carriers say the entire program of transferring RPCJUA policies - known as "take-outs" - sounds a lot better than it is.

The other big part of the year-old take-out program involves transferring blocks of policies from both high-risk coastal areas and low-risk inland areas. In those exchanges, carriers get cash inducements of up to $100 per policy. Nelson and some legislative leaders also are pushing those transfers hard.

But the cash transfers promise even fewer benefits for established carriers primarily because the money to pay for the take-outs could come from - where else? - assessments on the private market.

At the same time, the cash transfer program isn't necessarily injecting a lot of new blood into the market. At least some of the companies that are applying for take-outs are startups with minimal experience and qualifications, industry insiders complain. If a big storm puts them out of business, the established companies could wind up paying their claims anyway, through the state's backup guaranty fund.

Still, the take-out program could help dig Florida's insurance market out of the hole it's in, especially the take-outs that include significant numbers of high-risk South Florida policies, says state Rep. John Cosgrove, D-Miami, the chairman of the House Insurance Committee. "If every existing insurance company in Florida is telling us they're overexposed, the key is that we have to bring in new capital," Cosgrove says.

Cosgrove also defends the startup companies as being better than the alternative: "I would argue that any new company being formed probably has a better-understood and better-capitalized book of business than the longstanding companies that now claim they're overexposed," he says. Even if one of the new companies goes belly-up in a big storm, Cosgrove argues, at least it will have injected some capital into the market to meet statutory requirements. By contrast, the RPCJUA has no capital, no reserves, no surplus - and an operating deficit.

Cosgrove hopes the take-outs can help resolve the RPCJUA crisis. His counterpart in the Senate, John Grant of Tampa, is less optimistic. "I am concerned that the take-out legislation isn't going to significantly depopulate the JUA," he says. That would leave the 1996 Legislature with the task of passing yet another major reform of the state's property insurance business, nearly four years after Hurricane Andrew wrecked it.

Taxing Schemes
Local governments, increasingly starved by state-mandated tax caps, are coming up with their own home-grown money-raising schemes. Many are creating special taxing districts, according to data being developed by the House Community Affairs Committee. An interim project shows that the obscure districts, which are created by the Legislature at the request of local citizens, now number more than 900. That's compared to 67 counties and about 400 incorporated cities and towns.

The reasons for the districts range over the entire spectrum of local government services, from municipal golf courses, law libraries, street lighting, ambulance service, security guards and the arts to civic centers, schools, historic preservation, downtown redevelopment and industrial promotion. Legislators this year likely will try to rein in the districts, just as they've restricted other government spending habits in recent years.

Tags: Florida Small Business, Politics & Law, Business Florida

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