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  








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          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  








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            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