BILL ANALYSIS AB 177 Page 1 Date of Hearing: January 21, 2010 ASSEMBLY COMMITTEE ON APPROPRIATIONS Kevin De Leon, Chair AB 177 (Ruskin) - As Amended: January 4, 2010 Policy Committee: Jobs, Econ Development and the Economy Vote: 6 - 0 Urgency: No State Mandated Local Program: No Reimbursable: SUMMARY This bill increases penalties for people who falsely engage in activities relating to the Small Business Procurement and Contract Act (Small Business Act), including small businesses, microbusinesses, and disabled veteran-owned business enterprises (DVBE). Specifically, this bill: 1)Increases penalties for falsely obtaining small business certification. 2)Requires a business that has been found to have fraudulently obtained classification as a small business to pay the awarding department for the costs incurred during the investigation. 3)Increases penalties for a variety of other fraudulent activities related to certified small businesses. 4)Extends the length of time a DVBE certification can be suspended, from three years to five years for a first offense and to a minimum of 10 years for subsequent offenses. 5)Clarifies that a vendor is prohibited from knowingly making false statements in order to obtain a small business or DVBE bid preference or state contract. FISCAL EFFECT Increasing the penalties for fraudulent activity and allowing departments to recoup the costs of investigations should not require the Department of General Services to conduct any AB 177 Page 2 additional investigations. That requirement already exists in current law. Therefore, costs associated with this legislation should be minor and absorbable within existing resources. COMMENTS 1)Rationale . This bill stems from an issue that has arisen in several states where large companies, particularly Office Depot, have included small businesses in their contracts in order to receive a bid preference established to benefit small businesses. There is some question as to whether or not the small businesses contained in the contracts are actually doing the work included in the contracts or are simply passing through the money to the large business. This bill would require the state auditor to determine, prior to any contracts being signed, whether or not a small business is being used as a front for a large business in order to receive small business bid preferences. 2)Background . There have been reports of questionable billing practices and charges of over-billing from Office Depot in North Carolina, Georgia, Florida, and Nebraska. The state of Georgia recently cancelled its contract with Office Depot because they determined they had been significantly over-billed for supplies and equipment. Recently, in Nebraska the state auditor concluded an investigation that determined the state overpaid for office supplies and equipment because of a series of pricing errors and overcharges from Office Depot. The author's office contends the cancelled office supply contract in Georgia is almost identical to California's current contract and that it was set up by the same law firm. In 2006, state officials announced they had been successful in getting small businesses involved in selling office supplies to state agencies. In addition, it was noted that these small businesses would be partnering with Office Depot, whose purchasing power would allow the state to significantly reduce the cost of office supplies and equipment. A San Jose Mercury News investigation found that nine small businesses that handle 98% of the state contracts for office supplies and equipment were not actually responsible for any of the orders placed by the state departments. Their investigation showed that none of the employees of any of the companies works at the Lafayette office where the orders are processed. That office is staffed by an Office Depot subcontractor. In AB 177 Page 3 addition, a review of expenditures shows a 20% increase in the cost of office supplies over the last two years. 3)Small business bid preferences. Current law establishes preferences for bids made by certified small businesses and microbusinesses, including: a) Providing a 5% preference for awards of state procurement contracts where solicitations are made either on the basis of lowest responsible dollar bid, or on the basis of highest score, considering factors in addition to price. b) Limiting a single bid preference to $50,000. In instances where a small business qualifies for multiple bid preferences, the preference cannot be greater than the bid price or more than $100,000. Application of the bid preference is also prohibited from resulting in a bid which exceeds the amount of funds appropriated by the Legislature, as specified. c) Permitting non-small businesses that subcontract at least 25% of their contracts with small businesses to qualify for the small business bidder's preference. 4)The DVBE Program was established in 1989 to address the special needs of disabled veterans seeking rehabilitation and training through entrepreneurship, and to recognize the sacrifices of Californians disabled during military service. Under the provisions of the program, each state agency is encouraged, in awarding contracts, to honor California's disabled veterans by taking all practical actions necessary to meet or exceed a 3% DVBE participation goal. 5)Related Legislation . This bill is virtually identical to AB 1942 (Ruskin) from 2008 that was vetoed due to the late passage of the 2008-09 budget. In the message the governor wrote, "I am only signing bills that are the highest priority for California. This bill does not meet that standard and I cannot sign it at this time." Analysis Prepared by : Julie Salley-Gray / APPR. / (916) 319-2081