BILL ANALYSIS SENATE COMMITTEE ON VETERANS AFFAIRS JEFF DENHAM, CHAIRMAN Bill No: AB 1918 Author: Davis Version: As amended April 5, 2010 Hearing Date: June 22, 2010 Fiscal: Yes SUBJECT OF BILL Public Utilities and procurement for Disabled Veterans' Business Enterprises (DVBE). PROPOSED LAW 1. Extend DVBE requirements to telecommunication providers. EXISTING LAW AND BACKGROUND 1. Since 1989 California has encouraged a goal of awarding a 3% set aside to DVBE on state contracts. 2. In the early 2000s, rampant fraud was exposed in the program, and the state legislature has attempted to close fraud loopholes ever since. 3. Among other forms of fraud were "pass through" companies that did not manufacture or compete in the market place. They only added their mark- up to the state's price for commodities. AB 669 of 2003 (Cohn) codified the requirement for a DVBE to perform a "commercially useful function" (CUF). E.g.- State Department "X" needs 100 widgets. Corporation "A" sells them for $10 a piece. Corporation "A" sold 100 widgets to "DVBE widget salesman", who in turn sells the widgets to the state for $1025. State department "X" then claimed $1025 worth of business with a DVBE instead of $25. 4. Another form of fraud that had been detected was the use of limited liability corporations (LLC) to hide the fact that disabled veterans were no longer owners of companies in spite of the fact that the state was awarding contracts to those companies as part of the DVBE program. SB 1008 of 2003 (Machado) eliminated LLC for DVBEs unless the company was 100% owned by disabled veterans. 5. Fraud also came in the disguise of "equipment brokering." SB 1008 of 2003 (Machado) also eliminated counting brokered equipment costs towards satisfying the DVBE goal. 6. AB 1942 of 2008 (Ruskin) increased the penalty for violating the CUF clause and allowed the Department of General Services (DGS) to recover fraud losses. The bill made to the governor's desk but was a vetoed casualty of the governor's budget ultimatum that year. 7. SB 548 of 2009 (Huff), which was signed into law, required proof after completion of the contract that DVBEs listed on contracts were actually paid. 8. After those fraud loopholes were closed the most often used fraud was the exploitation of a "Good Faith Effort" (GFE) in which companies would pretend to contact a DVBE, or contact a DVBE for work in fields other than the work DVBE did, and then report to the state that the contractor in question had in good faith attempted to hire a DVBE. At the time a GFE could substitute for actual participation in the program. ABx4 21 of the 2009 Budget Act eliminated the GFE. COMMENT 1. This bill recodifies outdated provisions of the Page 2 DVBE program that have the potential to reintroduce fraudulent DVBEs back into the California marketplace. 2. This committee's concern should be obvious. Since the DVBE program was wracked with fraud in the early 2000s, the Legislature in general, and the Senate in particular, have worked to close loopholes and end fraud within the DVBE program. 3. If this bill passes in its present form, then it will set the precedent for undoing all the reforms that this Legislature, this house, and this committee have worked on since 2003 by recodifying the elements of the Public Utilities Code that allow the Public Utilities Commission (PUC) to certify what is a DVBE without any regard to state law or the legitimacy of those DVBEs. Page 3 STRONGLY SUGGESTED AMENDMENTS- 4. Section 8283 of the Public Utilities Code must be amended to bring DVBE definitions in line with those used by DGS. This section also needs to clarify that the PUC can only use those DVBEs that are certified and in good standing with DGS. 5. Section 8284 must also be amended to bring DVBE definitions in line with those used by DGS. Like section 8283 this section also needs to clarify that the PUC can only use those DVBEs that are certified and in good standing with DGS. 6. Likewise section 8285 of the Public Utilities Code needs to be amended to implement the already existing penalties for violation of the DVBE program. There is no more a reason for the PUC to be able to set its own penalties apart from DGS then there is to allow it to arbitrarily determine what constitutes a DVBE. 7. AB 2758 (Bradford) is a companion bill (scheduled for hearing on June 29 in the Senate Energy, Utilities, and Communications Committee) to this one and needs chaptering language and/or double jointing language. If this bill is not signed but AB 2758 is, then that bill will recodify the same fraud loopholes and undo the work of this house and committee in the same manner as AB 1918 if this bill leaves this committee unamended. PRIOR ACTIONS Assembly Jobs 4-2 Assembly Appropriations 11-5 Assembly Floor 45-26 Senate Energy 7-2 SB 548 (Huff) 9/2/2009 Denham Aye Correa Aye Cedillo Aye Page 4 Negrete-McLeod Aye Wyland Aye ABx4 21 (Evans) 7/23/2009 Denham Aye Correa Aye Cedillo No vote recorded Negrete-McLeod Aye Wyland Aye AB 1942 (Ruskin) 8/11/2008 Denham Aye Correa Aye Cedillo Aye Negrete-McLeod Aye Wyland Aye SB 1008 of 2003 (Machado) Senator Denham Aye 9/10/2003 Senator Cedillo Aye 9/10/2003 Assemblywoman Negrete-McLeod Aye 9/8/2003 Assemblyman Wyland Aye 9/8/2003 AB 669 of 2003 (Cohn) Senator Denham Aye 9/2/2003 Senator Cedillo Aye 9/2/2003 Assemblywoman Negrete-McLeod Aye 5/15/2003 Assemblyman Wyland Aye 5/15/2003 SUPPORT None received OPPOSE Elite SDVOB Network, Northern CA Chapter Compliance News and Paving Net Page 5 Page 6