BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 2249
                                                                  Page  1

          Date of Hearing:   April 20, 2010

          ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
                               V. Manuel Perez, Chair
                    AB 2249 (Ruskin) - As Amended: April 13, 2010
           
          SUBJECT  :   Disabled Veteran Business Enterprise: Tax Returns

           SUMMARY  :  Requires the Department of General Services (DGS) to  
          require a Disabled Veteran Business Enterprises (DVBEs) to file  
          a completed form 4506-T from the federal Internal Revenue  
          Service (IRS), also known as a Request for Transcript of Tax  
          Return, in both of the following circumstances:

          1)If DGS has received a complaint regarding the DVBE; or

          2)If the DVBE is being audited by DGS.

           EXISTING LAW:  

          1)Provides that DGS, except for contracts for certain  
            professional bond services, is the administering agency of the  
            California DVBE Program.   

          2)Sets an annual DVBE contract participation goal of 3% for each  
            state department which awards contacts, including school  
            districts, when expending certain state moneys for goods and  
            services.

          3)Requires state entities contracting for materials, supplies,  
            equipment, alterations, or repairs to meet specified DVBE  
            participation goals when submitting a bid for a state  
            contract, including the requirement that the bid go to the  
            lowest responsible bidder that meets the goal.

          4)Defines "DVBE" as a business certified by the administering  
            agency as meeting all of the following requirements:

             a)   It is a sole proprietorship at least 51 % owned by one  
               or more disabled veterans or, in the case of a publicly  
               owned business, at least 51 percent of its stock is owned  
               by one or more disabled veterans; a subsidiary that is  
               wholly owned by a parent corporation, but only if at least  
               51 % of the voting stock of the parent corporation is owned  
               by one or more disabled veterans; or a joint venture in  








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               which at least 51 % of the joint venture's management,  
               control, and earnings are held by one or more disabled  
               veterans.

             b)   The management and control of the daily business  
               operations are run by one or more disabled veteran. The  
               disabled veterans who exercise management and control are  
               not required to be the same disabled veterans as the owners  
               of the business.

             c)   It is a sole proprietorship, corporation, or partnership  
               with its home office located in the United States, and it  
               is not a branch or subsidiary of a foreign corporation,  
               foreign firm, or other foreign-based business.

           FISCAL EFFECT  :   Unknown

           COMMENTS  :  

           1)Purpose  :  According to the author, this bill gives DGS an  
            effective tool when determining the eligibility of a business  
            for certification and recertification as a DBVE.  The author  
            has received a great deal of information that makes him  
            suspect that some applicants are being certified when there  
            are indications that they should not be, such as  the  
            applicant not being domiciled in California or the applicant  
            for certification not being the true owner of certain  
            equipment.  

            Even though DGS now requires DVBEs to file a copy of their  
            income tax returns for the past three years, under penalty of  
            perjury, as part of the application for certification, this  
            bill gives DGS the ability to verify those tax returns by  
            requiring a true copy of an applicant's federal income tax  
            return through the use of federal Form 4506-T.  

            The April 13, 2010 amendments narrow the bill to require the  
            use of federal Form 4506-T when there is a complaint lodged  
            against a DBVE, or when there is an audit of an already  
            certified DBVE.

           2)DVBE Certification:   Under the provisions of the DBVE program,  
            each state agency is required, when awarding contracts  
            throughout the year, to include DVBEs by taking all practical  
            actions necessary to meet or exceed the annual 3% DVBE  








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            participation goal.  In order to become a certified DVBE, the  
            business must adhere to several requirements.  For example,  
            businesses must be owned, at a minimum of 51% by a disabled  
            veteran, must be a California resident and the DVBEs home  
            office must be located in the U.S., just to name a few.  
           
             As part of the DVBE certification process, DVBE businesses  
            must re-apply for certification on a yearly basis.  At the  
            time of re-certification, the business must submit an  
            application along with copies of the DVBE's income tax returns  
            for the previous three years.  The author contends that if  
            complaints have been filed against the DVBE in the prior year,  
            then a more stringent review should be required and the tax  
            returns filed with the IRS should be part of that review.  

           3)Limited success in meeting state DVBE participation goals  :   
            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 to honor California's disabled veterans by taking  
            all practical actions necessary to meet or exceed the 3% DVBE  
            state procurement participation goal.   

            However, success in meeting the 3% goal has been elusive.   
            Even in 2007, when the state exceeded its 25% small business  
            participation goal, the state only awarded 2.8% of its total  
            contract dollars, $186 million, to contracts involving DVBE  
            contractors and subcontractors.  Unfortunately, in 2008 DGS  
            reported that the DVBE contract participation rate decreased  
            to 2.39%. 

            California's progress in meeting this 3% goal has been further  
            limited by a significant number of claims that DVBEs have been  
            fraudulently added to contracts without any real intention  
            that they would perform a commercially useful function and  
            that too many bidders were fraudulently claiming to have made  
            a good faith effort to hire a DVBE without taking meaningful  
            action to offer the subcontract.  While some progress has been  
            made in tightening the rules related to ensuring that DVBEs  
            perform a commercially useful function, little progress had  
            been made in strengthening the good faith effort provisions  
            prior to their elimination on July 28, 2009 (AB 21, 4th  
            Extraordinary Session, Chapter 19, Statutes of 2009).








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           4)California Small Business  :  California's dominance in many  
            economic areas is based, in part, on the significant role  
            small businesses play in the state's $1.8 trillion economy.   
            Businesses with fewer than 100 employees comprise nearly 98%  
            of all businesses, and are responsible for employing more than  
            37% of all workers in the state.  

            As an example, small- and medium-sized businesses are crucial  
            to the state's international competitiveness and are an  
            important means for dispersing the positive economic impacts  
            of trade within the California economy.  Of the over 52,000  
            companies that exported goods from California in 2006, 95%  
            were small- and medium-sized enterprises (SME) with fewer than  
            500 employees.  These SMEs generated nearly half (44%) of  
            California's exports in 2006.  Nationally, SMEs generated only  
            29% of total exports. 

            Historically, small businesses have functioned as economic  
            engines, especially in challenging economic times.  During the  
            nation's economic downturn from 1999 to 2003, microenterprises  
            (businesses with less than five employees) created 318,183 new  
            jobs or 77% of all employment growth, while larger businesses  
            with more than 50 employees lost over 444,000 jobs.  From 2000  
            to 2001, microenterprises created 62,731 jobs in the state,  
            accounting for nearly 64% of all new employment growth.   
            Unfortunately during the current recession, small business  
            have been especially hard hit, with small business  
            bankruptcies up 81% for the 12 months ending September 2009,  
            as compared to the same period in the previous year.   
            Nationally, bankruptcy filings were up 44%, according to  
            Equifax Inc.

            Because of their importance in the state economy, small  
            business issues have been a particular focus of the Assembly  
            Committee on Jobs, Economic Development and the Economy (JEDE)  
            for the past several years.  In March 2009, JEDE produced a  
            state economic recovery strategy that included several key  
            recommendations on the needs of small business, including  
            helping small businesses meet their short term capital needs.   
            In May 2009, JEDE held a special hearing to learn more about  
            how the recession was impacting small businesses and in  
            October, JEDE's review of the California Enterprise Zone  
            Program included a panel on how the program responds to needs  
            of small business.  








                                                                  AB 2249
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            The JEDE committee has previously passed legislation to  
            increase enforcement of state procurement laws, AB 177  
            (Ruskin/VM Perez).  AB 2249 furthers these actions by ensuring  
            the credibility of an applicant's tax returns.  

           5)Related legislation  :  Related legislation includes the  
            following:

              a)   AB 31 (Price) - Small Business Procurement Contracts  :   
               This bill made several key changes to state procurement  
               procedures, including increasing the maximum contract  
               threshold amount for awards to a small business or DVBE,  
               under a specific streamlined procurement process, from  
               $100,000 to $250,000.  Further, the bill requires  
               contractors that made contract commitments to include small  
               business or DVBE participation to report the final  
               percentage of the contract actually paid to these entities.  
                Status:  Signed by the Governor, Chapter 202, Statutes of  
               2009.

              b)   AB 177 (Ruskin and V. Manuel P?rez) - Penalties under  
               the Small Business Act  :  This bill increases and conforms  
               penalties for persons who falsely engage in activities  
               relating to the Small Business Procurement and Contract  
               Act, including small businesses, microbusinesses, and  
               disabled veteran-owned business enterprises.  Status:  The  
               bill is pending in Senate Governmental Organization.

              c)   AB 309 (Price) - Small Business Participation:   This  
               bill requires the establishment of a 25% small business  
               participation goal for all state entities and directs the  
               Department of General Services (DGS) to monitor each  
               agency's progress in meeting this goal.  Status:  Held on  
               suspense in Assembly Appropriations Committee in 2009.

              d)   AB 2708 (Bill Berryhill) - Small Business Procurement:    
               Prohibits the Department of General Services (DGS) and the  
               directors of other state departments or agencies that enter  
               into contracts from engaging in the bundling of contracts  
               and other requirements as specified.  Status:  Pending in  
               Assembly Jobs, Economic Development and the Economy  
               Committee.
           
             e)   AB 2627 (Nielsen) - DVBE Contracts  :  This bill would  








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               deem a disabled veteran business enterprise that rents  
               equipment to a contractor to be an equipment broker, would  
               revise various related definitions pursuant to those  
               provisions, including "broker" or "agent," "equipment,"  
               and" equipment broker.  This bill also requires the  
               broker's commission fees of state funds expended through a  
               broker or equipment broker to be credited toward the  
               participation goals as DVBEs.  Status:  Pending in Assembly  
               Jobs, Economic Development and the Economy Committee.

              f)   AB 2773 (Price) - Small Business Procurement Contract  
               Act:   This bill would have increased the maximum contract  
               threshold amount for awards to small business, including  
               microbusiness and DVBEs under the streamlined procurement  
               process, from $100,000 to $250,000, as specified.  Further,  
               the bill required contractors that made contract  
               commitments to include small business or DVBE participation  
               to report the final percentage of the contract actually  
               paid to these entities.  Status:  Held under submission in  
               Senate Appropriations Committee in 2008.  

              6)   Technical amendment  :  Currently there are three separate  
               codes that include procurement laws.  The author may wish  
               to address how this measure integrates into the existing  
               statutory requirement all three codes addressing DVBEs.  

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          None received

           Opposition 
           
          None received
           
          Analysis Prepared by  :    Mercedes Flores / J., E.D. & E. / (916)  
          319-2090