BILL ANALYSIS Senate Appropriations Committee Fiscal Summary Senator Christine Kehoe, Chair 727 (Nielsen) Hearing Date: 7/13/2009 Amended: As Introduced Consultant: Bob Franzoia Policy Vote: G O 11-1 _________________________________________________________________ ____ BILL SUMMARY: A B 727 would include resource conservation districts (RCD) within the list of entities entitled to late payment penalties when a state entity fails to make payment for goods and services to an RCD pursuant to a contract. This bill would permit late payment penalties to accrue to an RCD, a certified small business, or a nonprofit organization in the event a state agency fails to make timely payment because no Budget Act has been enacted. _________________________________________________________________ ____ Fiscal Impact (in thousands) Major Provisions 2009-10 2010-11 2011-12 Fund Expanded state late Unknown, minor to major costs to payGeneral/ payment penalties late payment penalties or whenever thereSpecial is a delay in the adoption of the Budget Act _________________________________________________________________ ____ STAFF COMMENTS: This bill meets the criteria for referral to the Suspense File. Under the Prompt Payment Act, state agencies that acquire property or services pursuant to a contract with a business are required to make payment on the date required by the contract, and within 45 days of the state agency's receipt of an undisputed invoice or be subject to a late payment penalty of 0.25 percent per day of the amount due if the contractor is a small business, or one percent above the Pooled Money Investment Account rate for all other businesses. A nonprofit organization shall only be eligible to receive a penalty payment if it has been awarded a contract or grant in an amount less than $500,000. A nonprofit public benefit corporation means a corporation as defined by subdivision 9b) of Section 5046 of the Corporations Code, that has registered with the Department of General Services as a small business. Late payment penalties have been increasing from $1.8 million to $3.8 million annually over the past five fiscal years. While the State Controller's Office (SCO) processes late payments and reports pursuant to Government Code 927.9, it does so on behalf of state agencies that have the initial responsibility of ensuring grant payments are made on time. At this time, there is no central database of grants. Specific information on late payment penalties is difficult to obtain because not all payment information is provided to the SCO in formats that can be readily aggregated. In general, the contracting state entity has 30 days to submit the claim and the SCO has 15 days to issue the warrant (check). When the contracting state entity submits a late claim, this may be unknown to the SCO because the entity adjusts the claim to include any late payment penalties. Late payments may occur for a variety of reasons including administrative decisions Page 2 AB (727) Nielsen relating to cash flow or the timely sale of bonds, delays in meeting conditions set forth in federal legislation and so forth. Numerous state entities have contract authority. For example, the State Water Resources Control Board (SWRCB) has an estimated 73 grant agreements with a balance of $18 million that would be subject to the provisions of this bill. If the SWRCB was 30 days late with 20 percent of grant payments to nonprofit public benefit corporations, the costs to the SWRCB would be an estimated $90,000 for the fiscal year. If the SWRCB was late on all such grant payments, staff estimates the total cost would be over $433,000 for the fiscal year. In some case, these costs would be a General Fund obligation as bond funds that are the source of SWRCB grants, cannot be used for late payment penalties. For purposes of illustration, if $5,000,000 in grants was delayed ten days, the late payment penalty would be $125,000 ($5,000,000 x 0.0025 x 10). There are 103 RCDs in the state which are mostly funded through state and federal grants. RCDs are special districts organized under the Public Resources Code and have a locally elected or appointed volunteer board of directors made up of landowners in that district. RCDs address a wide variety of conservation issues including forest fuel management, water and air quality, wildlife habitat restoration, soil erosion control, and conservation education. This bill is similar in intent to SB 553 (Wiggins) and SB 643 (Denham) which are on the Suspense File.