BILL ANALYSIS SENATE COMMITTEE ON VETERANS AFFAIRS JEFF DENHAM, CHAIRMAN Bill No: AB 2249 Author: Ruskin Version: As amended May 11, 2010 Hearing Date: June 22, 2010 Fiscal: Yes SUBJECT OF BILL Small Business and Disabled Veteran Business Enterprise (DVBE) certification. PROPOSED LAW 1. Add section 14840 to the Government Code, which does the following: requires a small business or DVBE to declare, under penalty of perjury, that material submitted to receive a government contract is truthful; allows the Department of General Services (DGS) to request IRS form 4506-T (Transcript of Tax Return) with "just cause"; defines just cause; requires a 3% participation goal; and recodifies Military and Veterans' Code (MVC) section 999.2 into 14840 of the Government Code. 1. Amends MVC section 999.2 to allow DGS to request an IRS form 4506-T if the department receives a complaint that the DVBE is a fraudulent business or if DGS finds reason to request one due to findings while reviewing the business. EXISTING LAW AND BACKGROUND 1. Since 1989, California has encouraged a three percent set aside 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 but 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). 4. Another form of fraud that had been detected was the use of Limited Liability Corporations (LLC) that were used 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. One of the main tools in determining fraud is the tax return, which would reveal from the revenue reported if a DVBE is or is not receiving money from an LLC and/or performing a CUF. 6. 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. COMMENT 1. Tax returns are vital in determining whether or not a DVBE is functioning as a legitimate business rather than being used as a front by a bigger company in order to obtain state contracts. This bill allows DGS to view tax returns at any time Page 2 to verify the legitimacy of a DVBE. 2. The reason for codifying MVC 999.2 into the Government Code is to make those penalties uniformly apply to small businesses, micro businesses, and DVBE. PRIOR ACTIONS Assembly Jobs 9-0 Assembly Appropriations 16-0 Assembly Floor 63-0 (Consent) SB 1008 of 2003 (Machado) Senator Denham Aye 9/10/2003 Senator Cedillo Aye 9/10/2003 Assemblymen Correa Aye 9/8/2003 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 Assemblyman Correa Aye 5/15/2003 Assemblywoman Negrete-McLeod Aye 5/15/2003 Assemblyman Wyland Aye 5/15/2003 SUPPORT None received OPPOSE None received Page 3