The following opinion is presented on-line for informational use only and does not replace the official version. (Mich. Dept. of Attorney General Web Site - http://www.ag.state.mi.us)
STATE OF MICHIGAN
BILL SCHUETTE, ATTORNEY GENERAL
CONST 1963, ART 1, § 26:
Constitutionality of State Housing Development Authority’s Equal Employment Opportunity policy.
The Michigan State Housing Development Authority’s Equal Employment Opportunity policy, as applied through its loan agreements with developers, violates article 1, § 26 of the Michigan Constitution, which requires non-discriminatory, equal treatment in public contracting. The Constitution prohibits state instrumentalities, such as the Authority, from using public contracts to mandate that private parties grant preferential treatment to individuals or groups on the basis of race, sex, color, ethnicity, or national origin.
Opinion No. 7308 December 21, 2018
Earl J. Poleski, Executive Director
Michigan State Housing Development Authority
P.O. Box 30044
Lansing, MI 48909
The Honorable Shane Hernandez
Lansing, MI 48909
You have asked whether the Michigan State Housing Development Authority’s (Authority or MSHDA) Equal Employment Opportunity (EEO) policy violates article 1, § 26, subsection 2 of the Michigan Constitution of 1963. This Constitutional provision, which was approved by ballot initiative in 2006, provides:
The state shall not discriminate against, or grant preferential treatment to, any individual or group on the basis of race, sex, color, ethnicity, or national origin in the operation of public employment, public education, or public contracting. [Const 1963, art 1, § 26(2).]
Specifically, you question whether the Authority’s application of its EEO policy results in the state granting preferential treatment to individuals or groups on the basis of race, sex, color, ethnicity, or national origin in the operation of public contracting, which is contrary to Michigan’s constitutional requirement of equal treatment and non-discrimination for all individuals in Michigan.
This section of the Constitution defines “state” to include not just the state itself but also any “governmental instrumentality” of the state. Const 1963, art 1, § 26(3). The Michigan Supreme Court has expressly concluded that the Authority is an instrumentality of the state, as it is a “body politic and corporate” created by the State Housing Development Authority Act of 1966 (Act), 1966 PA 346, MCL 125.1401 et seq. Advisory Opinion re: Constitutionality of PA 1966, No 346, 380 Mich 554, 562-563, 575 (1967).
The Act provides that the Authority may “make or purchase loans” for affordable housing projects. MCL 125.1422(i). Accordingly, the Authority frequently issues bonds and loans bond proceeds to private developers, who in turn use those loan proceeds to finance the construction or renovation of affordable housing. The Authority sometimes uses federal funds to finance development projects and may “agree and comply with conditions attached to federal financial assistance.” MCL 145.1422(c). Notably, the constitutional provision in question excepts actions necessary to remain eligible for federal funding. Const 1963, art 1, § 26(4). Federal equal employment opportunity requirements apply to all contractors and subcontractors that hold construction contracts in excess of $10,000, and any portion of the loan is federally funded. 41 CFR § 60–4.1. This opinion does not address either construction contracts in excess of $10,000 for work performed on projects involving federally funded loans or federal equal employment opportunity requirements.
MSHDA’s Equal Employment Opportunity Policy
Section 46 of the Act dictates that the Authority “shall require . . . that contractors and subcontractors . . . shall take affirmative action to assure an equal opportunity for employment[.]” MCL 125.1446. You indicate that the Authority’s EEO Policy (entitled “Michigan State Housing Development Authority Equal Employment Opportunity Goal Requirements”) provides that contractors constructing Authority-financed developments must implement an EEO plan approved by the Authority. According to the EEO Policy, an EEO plan must include goals for “contracting and employment” of minority-skilled tradespeople and female-skilled tradespeople. Contractors must meet the approved plan’s EEO goals or, alternatively, take “all feasible steps” or make “a good-faith effort” to achieve the EEO goals. If a contractor fails to do this, the Authority will deem the contractor “non-awardable” for up to six years, depending on the circumstances, meaning contracts for work on Authority financed projects would be unavailable to the contractor:
If you fail to meet the established equal employment opportunity goals for contracting and employment of minority-skilled trades’ people or female skilled trades’ people or to demonstrate a good faith effort to achieve these goals, you will be non-awardable for a period of two years [from] the contractor’s next immediate (3 months) submission or maximum period of six years following date of 100% completion of the housing development for which equal employment and contracting goals were met. [Michigan State Housing Development Authority Equal Employment Opportunity Goal Requirements, p 1.]
The Authority further explained that “this determination” is based on a “review” of the contractor’s performance:
This determination will be made by the Manager of Construction Disbursement & EEO based on a review of contractor’s documented performance with respect to the MSHDA assisted housing developments. [Id.]
The EEO Policy defines minorities to include all persons classified as Black, African American, Hispanic, Latino, American Indian, Alaska Native, Asian, Native Hawaiian, or other Pacific Islander. Under the policy, there is a goal percentage for total project hours worked by minorities in each trade, although that goal percentage varies by EEO plan based on the demographics of the community in which the work is to be performed. Also, a contractor must strive to ensure that 6.9% of total project hours worked are by women in each trade.
The Authority has two primary loan structures to which this EEO policy applies—direct loans and pass-through loans.
1. Direct loans
In a direct loan, the Authority directly lends bond proceeds to a developer. The Authority and the developer enter into a Building Loan Agreement, which requires that the developer execute all “Contract Documents” and deliver them to the Authority; these “Contract Documents” cannot be modified without the prior written consent of the Authority. (Building Loan Agreement, Section 3). “Contract Documents,” in turn, is defined to include the General Contractor’s EEO plan, as approved by the Authority. Id. In other words, the Building Loan Agreement requires the developer to include an Authority-approved EEO plan in its contracts with construction contractors.
The Building Loan Agreement also requires the developer to attach the Authority’s “General Conditions of the Construction Contract” (General Conditions) to its contracts with construction contractors. Id. Article 15 of the Authority’s General Conditions is entitled “Employment Practices” and may be enforced by the Authority. General Conditions, Art 15.1. In this Article, the contractor agrees to “comply with all of the Authority’s Equal Employment Opportunity and Affirmative Action Plan Compliance Reporting Requirements[.]” Id. at Art 15.3.1(d). The Article describes where in the contract one can find goals and timetables for minority and female participation. Id. at Art 15.3.2(a). And it requires contractors to “implement . . . specific affirmative action standards[.]” Id. at Art 15.3.2(b)(3). For example, contractors “where possible” must assign two or more women to each construction project. Id. at Art 15.3.2(b)(6)(a). Article 15 mandates that contractors “utilize . . . best efforts in successfully implementing the provisions of the [EEO] Plan,” or face financial consequences in its future dealings with the Authority. Id. at Art 15.3.3.
This office has previously opined that the term “preferential treatment” as used in article 1, § 26 means “the act or fact of giving a favorable advantage to one person or group over others based on race, sex, color, ethnicity, or national origin.” OAG, 2007-2008, No. 7202, p 37 (April 9, 2007). Such an action would violate the principle of equal treatment and non-discrimination reflected in Michigan’s Constitution. Even though the EEO Policy, as implemented through an EEO plan and the General Conditions, describes the requisite percentages as “goals” and permits compliance through “good-faith effort,” it still requires contractors to strive to employ only women and minorities for an explicit percentage of jobs. In doing so, the EEO policy establishes a fixed percentage, requiring that contractors give favorable advantage to women and minorities, or otherwise be subject to an examination whether their conduct was in “good faith” and face the loss of Authority financing for up to six years.
While the Authority uses the term “goal,” the EEO Policy nonetheless expressly sets numerical objectives based on race, sex, color, ethnicity, and national origin. See Regents of Univ of Cal v Bakke, 438 US 265, 288-289 (1978). And those numerical objectives, even if they are labeled as “goals,” require preferential treatment because they command contractors to hire women and minorities, not merely to solicit or reach out to women and minorities, because the failure to meet the fixed percentage triggers a review for “good-faith effort.” Safeco Ins Co of America v City of White House, 191 F3d 675, 689-692 (CA 6, 1999); see also Michigan Rd Builders Ass’n, Inc v Milliken, 571 F Supp 173, 177 (ED Mich, 1983) (concluding that Michigan state government procurement law that set interim and expenditure goals for minority- and woman-owned businesses in the form of percentages “must be viewed as giving deference, if not preference, to minorities and women”). Michigan law prohibits these kinds of preferences in public contracting. OAG No. 7202 at p 39 (“Michigan treats all individuals equally in the areas of public contracting, education, and employment.”).
In sum, the Authority’s direct loans require developers to implement an Authority-approved EEO plan and the General Conditions, both of which incorporate the EEO policy and thus require construction contractors to prefer minorities and women—or otherwise be subject to an examination for good faith under the threat of loss of Authority financing for up to six years—when contracting with subcontractors and employing construction workers. This office has previously concluded that the City of Grand Rapids’ analogous bid discount process for construction contracts resulted in preferential treatment based on race, sex, color, ethnicity, and national origin and violated the constitutional provision in question. OAG No. 7202 at p 32 (describing the bid discount process). This was because city contract bidders received discounts based on the percentage of subcontractors that qualified as disadvantaged business enterprises, defined by race, sex, ethnicity, and national origin. But that opinion did not address what is meant by the phrase “the operation of . . . public contracting,” which is an issue at the core of your question as it applies to the Authority’s direct loans. Const 1963, art 1, § 26(2).
Article 1, § 26 of the Constitution was passed by ballot initiative in November 2006 and applies to actions taken after December 23, 2006: OAG No. 7202 at pp 35-36. In 2014, this provision was upheld by the United States Supreme Court as consistent with the United States Constitution’s Equal Protection Clause. Schuette v Coalition to Defend Affirmative Action, 134 S Ct 1623 (2014). The Court explained the rationale behind the ballot initiative:
The electorate’s instruction to governmental entities not to embark upon the course of race-defined and race-based preferences was adopted, we must assume, because the voters deemed a preference system to be unwise, on account of what voters may deem its latent potential to become itself a source of the very resentments and hostilities based on race that this Nation seeks to put behind it. [Id. at 1638.]
Again, Michigan’s Constitution has adopted the principle of non-discrimination in public contracting. See OAG No. 7202 at p 39. See also Parents Involved in Community Schools v Seattle School District No.1, 551 US 701, 748 (2007) (Roberts, C.J., plurality opinion) (“The way to stop discrimination on the basis of race is to stop discriminating on the basis of race.”).
The rules of construction for constitutional provisions apply in this instance. “The primary objective in interpreting a constitutional provision is to determine the text’s original meaning to the ratifiers, the people, at the time of ratification.” Wayne Co v Hathcock, 471 Mich 445, 468 (2004). This is known as the rule of “common understanding[.]” Id. In the event of a constitutional provision ratified by ballot initiative, the intent of the voters who passed the initiative is determined by looking at the language of the provision itself. Durant v State Bd of Ed, 424 Mich 364, 378 (1985). The common understanding can be determined by examining the dictionary definitions in effect at the time of ratification. Studier v Mich Pub Sch Employees Retirement Bd, 472 Mich 642, 653-654 (2005). If the constitutional language is clear, extrinsic evidence should not be consulted. American Axle & Mfg, Inc v Hamtramck, 461 Mich 352, 362 (2000).
The adjective “public” is defined, in part, to mean “of or relating to a government[.]” Merriam-Webster’s Collegiate Dictionary (11th ed, 2006). And the verb “contract” means “to establish or undertake by contract[.]” Id. In turn, the noun “contract” means “a binding agreement between two or more persons or parties[.]” Id. Accordingly, in 2006, “public contracting” was commonly understood to mean the establishing of a binding agreement between two or more parties that relates to a government. Because this language is clear, there is no need to consult extrinsic evidence of meaning. American Axle, 461 Mich at 362.
When the Authority makes a direct loan, the government entity—the Authority—is not a party to the construction contract. But the Authority is a party to the Building Loan Agreement. Consequently, the Building Loan Agreement, rather than the construction contract, would be commonly understood to be a public contract because a government entity is a party to that agreement. Here, the Building Loan Agreement does not itself give favorable advantage to one person or group based on these factors. But, as described above, the Building Loan Agreement incorporates by reference the EEO Policy, EEO plan, and General Conditions, which require the contractors benefiting from the loan proceeds to give favorable advantage to minorities and women by meeting fixed percentages or otherwise being subject to a review that examines whether the contractors acted in “good faith.”
Significantly, the Constitution prohibits preferential treatment in “the operation of . . . public contracting” not just in “public contracting” itself. Const 1963, art 1, § 26(2). The verb “operate” means, in part, to “bring about, effect” or “to cause to function[.]” Merriam-Webster’s Collegiate Dictionary (11th ed, 2006). The Supreme Court relied on a similar definition when interpreting a Michigan statute: “ ‘operate’ means . . . ‘to bring about, effect, or produce, as by action or the exertion of force or influence.’ ” DaimlerChrysler Corp v State Tax Comm, 482 Mich 220, 227-228 (2008).
Given these definitions, “the operation of . . . public contracting” means more than just the act of public contracting itself—it also means the bringing about or effectuating of public contracting, such as by exerting force or influence. To say otherwise would render the phrase “the operation of” meaningless. But Michigan courts have long held that “every word, every phrase and, a fortiori, every distinct provision of the constitution . . . must be construed to have its own specific and appropriate meaning, office and effect.” Sears v Cottrell, 5 Mich 251, 260 (1858) (Christiancy, J.); accord In re Lapeer Co Clerk, 469 Mich 146, 162 (2003) (providing that “no constitutional provision should be construed to nullify or impair another”).
While Michigan courts have not interpreted the phrase “the operation of . . . public contracting,” a California case provides guidance. Article I, § 31, subsection (a) of the California Constitution is identical to Michigan’s article 1, § 26. In Hi-Voltage Wire Works, Inc v City of San Jose, 24 Cal 4th 537; 12 P3d 1068 (2000), the Supreme Court of California concluded that the City’s policy that required “contractors bidding on city projects to utilize a specified percentage of minority and women subcontractors or to document efforts to include minority and women subcontractors in their bids” was unconstitutional under California’s identical provision. Id. at 541.
Although the California case did not involve loan agreements, here, the Authority’s Building Loan Agreement—a public contract—commands the developer to require contractors to favorably advantage minorities and women or be subject to scrutiny regarding whether their conduct was in “good faith.” Accordingly, like the City of San Jose’s bid process, the Authority’s direct loan process unlawfully results in preferential treatment on the basis of race or sex in the operation of public contracting. Id. at 570 (Mosk, J., concurring) (California’s prohibition “is not limited to barring such actors from improperly assigning burdens or benefits themselves. Rather, it extends to barring them from enabling, facilitating, encouraging, or requiring private parties to do so as well.”).
2. Pass-through loans
The second type of loan structure used by the Authority is a “pass-through loan.” A pass-through loan is conduit lending of the Authority’s bond proceeds. In this situation, the Building Loan Agreement and the General Conditions of the Construction Contract are not used. Instead, the Authority, the developer, and the contractor enter into a tri-party contract—the “Construction Oversight and Equal Employment Opportunity Agreement” (CO Agreement). The CO Agreement requires the developer and contractor to submit an EEO plan to the Authority for approval. Id. at Recital E. The purpose of the CO Agreement is to “establish reporting, implementation, and enforcement requirements for the effectuation of the [EEO plan].” Id. at Recital I.
Section 10 of the CO Agreement outlines the equal employment opportunity requirements applicable to the contractor and largely mirrors Article 15 of the General Conditions of the Construction Contract. Thus, the preferential treatment of minorities and women required in direct loans through the Building Loan Agreement and General Conditions also exist in pass-through loans but are instead applied through the CO Agreement. And because the Authority, a government entity, is a party to the CO Agreement, it is even more apparent that this preferential treatment occurs in the operation of public contracting. Accordingly, the Authority’s pass-through loan process also results in preferential treatment on the basis of race and sex in the operation of public contracting.
MCL 125.1446 remains valid
You explained that the Authority’s EEO Policy was developed in response to MCL 125.1446, which provides, in relevant part:
The authority shall require . . . that contractors and subcontractors engaged in the construction of housing projects . . . shall take affirmative action to assure an equal opportunity for employment[.] [Emphasis added.]
The phrase “shall take affirmative action” was added to the statute in 1976 by Public Act 410. The Legislature has not defined the term “affirmative action,” but the term has generally been understood to mean “[a] set of actions designed to eliminate existing and continuing discrimination, to remedy lingering effects of past discrimination, and to create systems and procedures to prevent future discrimination.” Black’s Law Dictionary (9th ed. 2009). The type of preferential treatment called for in the Authority’s EEO policy and discussed above falls within this definition and is thus authorized by the statute.
The Constitution, however, controls over conflicting statutes, and article 1, § 26 prohibits preferential treatment in public contracting. Smith v Dep’t of Public Health, 428 Mich 540, 641 (1987) (“In light of the preeminence of the constitution, statutes which conflict with it must fall.”). But a “basic rule of constitutional interpretation is that ‘wherever possible an interpretation that does not create constitutional invalidity is preferred to one that does.’ ” Id., quoting Traverse City School Dist v Attorney General, 384 Mich 390, 406 (1971). See also Silver Creek Drain Dist v Extrusions Div, Inc, 468 Mich 367, 379 (2003).
Here, MCL 125.1446 may be interpreted as authorizing the Authority to direct contractors and subcontractors to engage in “affirmative action” activities so long as those activities do not result in the preferential treatment of individuals or groups on the basis of race, sex, color, ethnicity, or national origin. Thus, the Authority is not “barred from pursuing its policies of ensuring nondiscrimination and equal opportunities within the contracting process. It must do so, however, employing race- and sex-neutral means.” OAG No. 7202 at p 39, citing Hi-Voltage, Inc, 12 P3d at 1085 (“Plainly, the voters intended to preserve outreach efforts to disseminate information about public employment, education, and contracting not predicated on an impermissible classification.”). Thus, if the Authority provided incentives for the employment of individuals who can demonstrate “economic disadvantage,” id., such a criterion would not be dependent on race or sex and so would not rely on impermissible classifications.
As affirmed by the United States Supreme Court, our Michigan Constitution requires equal, non-discriminatory treatment to our citizenry and prohibits preferential discriminatory treatment in the application of Michigan’s laws and statutes.
It is my opinion, therefore, that the Authority’s EEO policy, as applied through its direct loan and pass-through loan processes, violates article 1, § 26 of the Michigan Constitution, which requires non-discriminatory, equal treatment in public contracting. The Constitution prohibits state instrumentalities, such as the Authority, from using public contracts to mandate that private parties grant preferential treatment to individuals or groups on the basis of race, sex, color, ethnicity, or national origin.
 See OAG No. 7202 at pp 39-40 and nn 18, 22-23, briefly discussing possible changes to public contracting process to comply with article 1, § 26.