BILL ANALYSIS Bill No: AB 177 SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION Senator Roderick D. Wright, Chair 2009-2010 Regular Session Staff Analysis AB 177 Author: Ruskin As Amended: June 2, 2010 Hearing Date: June 9, 2010 Consultant: Art Terzakis SUBJECT Public Contracts DESCRIPTION AB 177 increases and conforms penalties for persons 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 (DVBEs). Specifically, this measure: 1. Increases the current 3-year maximum suspension from transacting any business with the State to10-years for any person who obtains classification as a small business or microbusiness by reason of having furnished incorrect supporting information or withholding relevant information. 2. Increases the current one year revocation period to five years for a small business which has obtained certification by reason of having furnished incorrect information or withholding relevant information. Also, with respect to subsequent violations, increases the period of certification revocation or suspension to ten years instead of the current three year period. Furthermore, stipulates that additional or subsequent violations shall result in the revocation of the business' seller's permit. AB 177 (Ruskin) continued Page 2 3. Requires a business that has been found to have fraudulently obtained classification as a small business or microbusiness to pay the awarding department an amount that is equal to the costs incurred for investigating the improperly obtained certification. 4. Increases existing civil penalties, as specified, for a variety of fraudulent activities related to certified small businesses. Also, increases the existing suspension and revocation time periods, relative to fraudulent activities, to mirror those referenced in item #1 and item #2 above. 5. Adds a new provision to the Act that requires any existing contract between any awarding department and contractor to be terminated if the contractor knowingly and fraudulently represents that a "commercially useful function" is being performed by a small business or microbusiness. Also, provides that if a contractor is found to be in violation of this provision, any existing contract must be terminated and the State Controller must withhold any payments to that contractor except for outstanding invoices. 6. Requires any person who violates specified fraudulent activities to pay all costs incurred by the awarding department and DGS for any investigation involving the finding of the violation. 7. With respect to the State's DVBE program, adds a new provision to the Military and Veterans Code making it unlawful to knowingly and fraudulently represents that a "commercially useful function" is being performed by a DVBE in order to obtain or retain a bid preference. Also, provides that if a contractor is found to be in violation of this provision, any existing contract must be terminated and the State Controller must withhold any payments to that contractor except for outstanding invoices. 8. Additionally, with respect to the DVBE program, increases existing suspension and revocation penalties, as specified. EXISTING LAW AB 177 (Ruskin) continued Page 3 Under current law, the Department of General Services (DGS) generally governs state procurement activities, including acquisition of materials, supplies, and services. Under the State Contract Act and various provisions in the Local Agency Public Construction Act, state and local agencies awarding contracts are required to award the contract to the lowest responsible bidder. Existing law establishes a preference for bids made by certified small businesses and microbusinesses, including 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. Non-small businesses that subcontract at least 25% of their contracts with small businesses may also qualify for the small business bidder's preference. Existing law limits 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. Existing law imposes civil penalties and fines for businesses that fraudulently obtain classification as a small business or microbusiness. Civil penalties cannot exceed $5,000. Also, existing law provides suspensions from participation in state contracts for periods of not less than 6 months and not more than 3 years. In addition, existing law requires DGS to revoke the small business certification of a business found to have fraudulently obtained certification for a period of not less than one year. For an additional or subsequent violation, the period of certification revocation or suspension must be extended for a period up to 3 years. Under existing law, contracts awarded by state entities for professional bond services, construction, and acquisition of materials, supplies, and services are required to have annual statewide participation goals of not less than 3% for disabled veteran-owned business enterprises (DVBEs). Existing law imposes civil penalties and fines for AB 177 (Ruskin) continued Page 4 businesses that fraudulently obtain certification as a DVBE. Such violations are misdemeanors punishable by imprisonment in the county jail not to exceed six months or by a fine not to exceed $1,000, or by both. In addition, existing law provides that the person shall be liable for civil penalties of up to $30,000 for the first offense and up to $50,000 for additional or subsequent violations. Furthermore, existing law provides for certain periods of revocation and suspension for such violations. BACKGROUND Purpose of AB 177: According to the author's office, this measure is intended to address fraudulent behavior by individuals and businesses who seek to improperly obtain or retain small business and DVBE certification, bidding preferences or participation in state contracts. The author's office notes that testimony provided in legislative hearings by DGS, small business groups and DVBE advocates indicates that some current and prospective state contractors have fraudulently represented that they are a certified small business, DVBE, or that they will be utilizing the services of a certified small business or DVBE subcontractor. The author's office points out that in other reported cases, individuals and businesses have made false statements in order to assist an ineligible business to become certified or to help them retain their improperly obtained certification once the business is being investigated by state officials. Still other individuals and businesses have fraudulently submitted bid packages that commit to using a certified DVBE or small business, but in actuality the subcontract is never let or the contracted work is inconsequential and only included in order to obtain a bid preference. The author's office claims that while existing law contains penalties for contractors that fraudulently bid - enforcement of these laws has been limited. This measure would substantially increase penalties for a variety of fraudulent behaviors and extend existing periods of revocation, including terms of suspension for participating in state contracts. The author's office emphasizes that this measure would also create an enforcement incentive by AB 177 (Ruskin) continued Page 5 authorizing awarding departments to be reimbursed for the cost of successful investigations. Additionally, the measure would provide substantial deterrents to knowingly and willingly make false representations. Staff Comments: This measure is nearly identical to AB 1942 (Ruskin) of 2008 which was vetoed. The Governor's veto message stated, "The historic delay in passing the 2008-2009 State Budget has forced me to prioritize the bills sent to my desk at the end of the year's legislative session. Given the delay, 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." PRIOR/RELATED LEGISLATION AB 31 (Price) Chapter 212, Statutes of 2009. Among other things, increased from $100,000 to $250,000 the maximum contract threshold for awards to small business, including microbusinesses and DVBEs under a specific streamlined procurement process. AB 1942 (Ruskin) 2007-08 Session. Nearly identical to AB 177 (Ruskin) of 2009-10 Session. (Vetoed by Governor on the basis that the historic delay in passing the 2008-09 Budget forced him to prioritize bills sent to his desk and only sign bills of highest priority) AB 761 (Coto) Chapter 611, Statutes of 2007. Required each state agency awarding contracts that are financed with proceeds from the infrastructure bonds approved by voters in November 2006 to establish a 25% small business participation goal for state infrastructure construction contracts and to provide specified assistance to small businesses bidding on state infrastructure bond-related contracts. SB 1008 (Machado) Chapter 632, Statutes of 2004. Among other things, strengthened the sanctions that can be levied against businesses that fraudulently misrepresent their eligibility for DVBE certification. AB 669 (Cohn) Chapter 623, Statutes of 2004. Among other things, required DVBEs and small businesses, as defined, to perform commercially useful functions, as defined, in relation to any contract those businesses are awarded under AB 177 (Ruskin) continued Page 6 certain provisions of law. Also, imposed certain civil penalties for fraudulent misrepresentations regarding DVBE and small business state contracts. SUPPORT: The Elite SDVOB Network OPPOSE: None on file as of June 4, 2010. DUAL REFERRAL: Senate Veterans Affairs Committee FISCAL COMMITTEE: Senate Appropriations Committee **********