BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: AB 438 HEARING: 7/6/11 AUTHOR: Williams FISCAL: No VERSION: 6/27/11 TAX LEVY: No CONSULTANT: Weinberger COUNTY LIBRARIES Imposes requirements on a city or library district that intends to withdraw from a county free library system and operate libraries with a private contractor. Background and Existing Law Exactly one century ago, the Legislature authorized counties to establish county free library systems (SB 289, Hans, 1911). Before Proposition 13 (1978), a county could levy a separate property tax rate to support its library system. Nearly 30 county free libraries had separate rates. A county could extend the property tax rate to parcels in a city that wanted to join the library system and would cease to levy the rate within a city that withdrew from the system. After Proposition 13, the Legislature divided the remaining property tax revenues among local governments. Although they were not separate institutions, state law treated county free libraries as if they were special districts because they had their own property tax rates before Proposition 13. The county free libraries received shares of the property tax revenues and they could receive money from the Special District Augmentation Fund (AB 8, L. Greene, 1979). In general, to withdraw from a county library system, a city must negotiate the amount of property tax revenues, if any, that it will receive from the county library system. Different procedures apply to city withdrawals from county free library systems in Los Angeles and Riverside counties (AB 1998, Mountjoy, 1996 and AB 927, Thompson, 1997). Instead of participating in a county free library system, a city can provide library services to its residents in several other ways: by operating its own libraries, AB 438 -- 6/27/11 -- Page 2 through a library district, or by contracting with another public agency or private firm. For charter cities, contracting arrangements with private firms can be governed by their charters. General law cities must follow the standards and procedures in the state statutes. While general law cities' specific statutory authority to contract for services is limited, court opinions have recognized general law cities' authority to enter into contracts to carry out necessary functions, including those expressly granted and those implied by necessity. State law requires state departments that contract for personal services to follow specific criteria: a clear demonstration of cost savings, a clear definition of costs, ensuring that work will not be contracted out solely on the basis of lower pay or benefits, and justification of savings based on the contract's size and duration. State law requires school and community college districts to comply with the same standards that apply to state departments (AB 1419, Alarcón, 2002). Riverside County and the Cities of Camarillo (Ventura County), Moorpark (Ventura County), Redding (Shasta County), and Santa Clarita (Los Angeles County) contract with a private corporation, Library Systems and Services, Inc. (LSSI), for library services. In response to some cities' recent efforts to contract with LSSI, some library advocates and labor unions want the conditions that apply to state, school district, and community college district service contracts to apply to any city that intends to withdraw from a county free library system and contract with a private firm for library services. Proposed Law If the legislative body of a city or the board of trustees of a library district intends to withdraw from the county free library system and operate the city or district's library with a private contractor that will employ library staff to achieve cost savings, Assembly Bill 438 imposes requirements relating to: Public notice Demonstrated cost savings Wages and benefits Employee displacement AB 438 -- 6/27/11 -- Page 3 Cost fluctuations Contract scope and duration Competitive bidding Staff qualifications and hiring Economic risk Eligible contractors Contract termination Public interest Contractor disclosure and performance measurement AB 438 specifies that its requirements do not apply if the city or district library or libraries are funded only by the proceeds of a special tax imposed by the city or district, pursuant to state law. I. Public notice . AB 438 requires the legislative body of the city or the board of trustees of the library district to publish a notice of the contemplated action, giving the date and place of the meeting at which the contemplated action is proposed to be taken. The notice must be published at least once a week for four consecutive weeks before the city or library district acts. II. Demonstrated cost savings . AB 438 requires the legislative body of a city or the board of trustees of a library district to clearly demonstrate that the contract will result in actual overall cost savings to the city or library district, provided that, in comparing costs, all of the following occur: The city or library district's additional cost of providing the same services as proposed by the contract must be included. These additional costs include the salaries and benefits of additional staff that would be needed and the cost of additional space, equipment, and materials needed to perform the necessary functions of the library. The city or library district's indirect overhead costs must not be included unless those costs can be attributed solely to the function in question and would not exist if that function was not performed by the city or library district. "Indirect overhead costs" means the pro rata share of existing administrative salaries and benefits, rent, equipment costs, utilities, and materials. The cost of a contractor providing a service for any continuing city or library district costs that would be directly associated with the contracted AB 438 -- 6/27/11 -- Page 4 function must be included. Continuing city or library district costs include costs for inspection, supervision, and monitoring. III. Wages and benefits . AB 438 prohibits city or library district officials from approving a contract solely on the basis that savings will result from lower contractor pay rates or benefits. Contracts are eligible for approval if the contractor's wages are at the industry's level and do not undercut city or library district pay rates. IV. Employee displacement . AB 438 prohibits a contract from causing the displacement of city or library district employees. Displacement includes layoff, demotion, involuntary transfer to a new classification, involuntary transfer to a new location requiring a change of residence, and time base reductions. Displacement does not include changes in shifts or days off, nor does it include reassignment to other positions within the same classification and general location or employment with the contractor, so long as wages and benefits are comparable to those paid by the city or library district. V. Cost fluctuations . AB 438 requires that a contract's overall cost savings must be large enough to ensure that the savings will not be eliminated by cost fluctuations that could normally be expected during the contracting period. VI. Contract scope and duration . AB 438 requires that the overall cost savings of a contract must clearly justify the scope and duration of the contract. VII. Competitive bidding . AB 438 requires that a contract must be awarded through a publicized, competitive bidding process. VIII. Staff qualifications and hiring . AB 438 requires a contract to include specific provisions pertaining to the qualifications of the staff that will perform the work under the contract, as well as assurances that the contractor's hiring practices meet applicable nondiscrimination standards. IX. Economic risk . AB 438 requires that the potential for future economic risk to the city or library district from AB 438 -- 6/27/11 -- Page 5 potential contractor rate increases must be minimal. X. Eligible contractors . AB 438 requires a contract to be with a "firm," which means a corporation, limited liability company, partnership, nonprofit organization, or sole proprietorship. XI. Contract termination . AB 438 requires a contract to provide that it may be terminated at any time by the city or library district without penalty if the contractor fails to perform and notice is provided within 30 days of termination. XII. Public interest . AB 438 prohibits the potential economic advantage of the contract from being outweighed by the public's interest in having a particular function performed directly by the city or library district. XIII. Contractor disclosure and performance measurement . If the contract is for library services in excess of $100,000 annually, AB 438 requires: A city or library district must require a contractor to disclose the following information as part of its bid, application, or answer to a request for proposal: o A description of all charges, claims, or complaints filed against the contractor with any federal, state, or local administrative agency during the prior 10 years. o A description of all civil complaints filed against the contractor in any state or federal court during the prior 10 years. o A description of all state or federal criminal complaints or indictments filed against the contractor, or any of its officers, directors, or managers, at any time. o A description of any debarments of the contractor by any public agency or licensing body at any time. The city or library district must include in the contract specific, measurable performance standards and provisions for a performance audit by the city or library district, or an independent auditor approved by the city or library district, to determine whether the performance standards are being met and whether the contractor is in compliance with applicable laws AB 438 -- 6/27/11 -- Page 6 and regulations. The bill prohibits a city or library district from renewing or extending the contract before receiving and considering the audit report. The contract must include provisions for an audit by the city or library district, or an independent auditor approved by the city or library district, to determine whether and to what extent the anticipated cost savings have been realized. The bill prohibits a city or library district from renewing or extending the contract prior to receiving and considering the audit report. Assembly Bill 438 declares that it does not preclude a city, library district, or local government from adopting more restrictive rules regarding the contracting of public services. State Revenue Impact No estimate. Comments 1. Purpose of the bill . Public libraries are vital to California's communities. Libraries provide access to books and information, offer Internet access, literacy programs, educational opportunities, job search assistance, and other services. A city can withdraw from a county free library and contract out library services to a private firm with minimal public notice, little opportunity for public input, and few safeguards to ensure that a contract makes fiscal sense. In light of public libraries' essential role, public officials should privatize library services only if their decision is subject to thorough public scrutiny and can be clearly justified as being in the public's best interest. Assembly Bill 438 ensures that cities engage in appropriate research, planning, and analysis of contracts before contracting out library services. It protects the public, taxpayers, and library employees from the contracting out of library services without proper evaluation and public review. 2. Home rule . Deciding how to provide municipal services to city residents is what city council members are elected AB 438 -- 6/27/11 -- Page 7 to do. AB 438 erodes local officials' ability to manage local affairs, making it hard for them to preserve essential public services during tough financial times. Local elected officials are well-positioned to judge the merits of a library service contract and can either negotiate better terms or reject a contract altogether. The Committee may wish to consider whether AB 438 sets a precedent that will make it easier for legislators to impose similar conditions on city contracts for other services, further eroding local control. 3. Balancing act . AB 438 doesn't balance the public's interest in carefully scrutinizing private library services contracts with local officials' authority to make contracting decisions that respond to their community's needs. Rather than dictating the terms that city officials must include in library service contracts, the Committee may wish to consider amending AB 438 to make the contracting process for library services more deliberate, more transparent, less subjective, and more accountable to the public. Specifically, the amendments could: Public notice . Require a library service contract to be approved, or renewed, only at an open and public regular meeting of a city council. Prohibit a city council from acting on a library services contract unless a hearing notice has been posted at each library within the city at least four weeks in advance of the hearing and mailed to all library-card holders in the city. Competitive bidding . To ensure that a contract is efficient and is not awarded based on unsound, subjective factors, require a city council to award a library services contract through a competitive bidding process. Limited contract lengths . To ensure that local elected officials remain ac-countable for deciding to contract out library services, limit the term of a library services contract to no more than two years. To renew a contract, require a city council to comply with the same notice and open meeting requirements that applied to an initial hearing on awarding the contract. 4. One of these things is not like the others . Unlike school and community college districts, public libraries receive minimal state funding. While the state's AB 438 -- 6/27/11 -- Page 8 significant role in funding education may justify imposing conditions on schools and community college districts' contracts for services, the state has no similar fiscal interest in city libraries' service contracts. Unlike school and community college districts, a city library is not required to continue operating. With only limited ability to contract out library services, city officials presented with a choice between remaining as part of a county library system and closing a city's library altogether might choose to close the library. In light of these differences, the Committee may wish to consider whether state law should impose nearly identical requirements on schools' and city libraries' service contracts. 5. Just say no . Nearly a decade after the 2001 Alarcón bill imposed conditions on school and community college districts' service contracts, apparently no district has contracted with a private firm using the same requirements that AB 438 applies to cities' library service contracts. Although the Alarcón bill exempted renewals of existing contracts, school and community college districts' experience suggests that AB 438 probably is a de facto prohibition against any city's contract with a private firm. If there's no practical distinction between the Alarcón bill's contracting requirements and an outright ban, the Committee may wish to consider amending AB 438 to delete the bill's contracting requirements and simply prohibit a city that participates in a county free library from contracting with a private firm for library services. 6. Which cities does the bill affect ? The California Constitution lets charter cities control their municipal affairs. The 120 charter cities must follow statewide laws only for issues of statewide concern when the Legislature has fully occupied the field. The courts -- not the Legislature -- interpret the Constitution and decide what's a municipal affair and what's an issue of statewide concern. Because AB 438 does not challenge court opinions that have found cities' mode and method of contracting for services to be a municipal affair, the bill does not apply to charter cities. AB 438 also doesn't apply to general law cities that run their own library systems, participate in a county library system under a joint powers agreement, or receive library services through a contract with a county or public library district. The Committee may wish AB 438 -- 6/27/11 -- Page 9 to consider whether the bill's provisions should apply more broadly, rather than focusing narrowly on general law cities that are members of a county free library that receives a share of property tax revenues. To apply AB 438 to charter cities, the Committee may wish to con-sider amending the bill to include persuasive legislative findings to support the claim that that the manner in which cities provide public library services is a matter of statewide concern. 7. Not every contract ? One rule of legal interpretation is that if a law mentions some things, by implication the statute excludes other things (expressio unius est exclusio alterius). AB 438 imposes requirements on cities that intend to withdraw from a county free library to contract with a private firm that "will employ library staff to achieve cost savings." By specifically referencing cost savings, does AB 438 allow a city to contract with a private firm for library services for reasons other than cost savings? Would a contract that provides a different set of library services for the same amount of money be exempt from the bill's provisions? To close this potential loophole, the Committee may wish to amend AB 438 to clarify that a city must comply with the bill's requirements regardless of its reasons for entering into a library services contract with a private firm. 8. Timing is everything . AB 438 doesn't apply to a city that chooses to withdraw from a county free library system to run its own library system or contract with another public entity for library services. A city could avoid the bill's requirements by withdrawing from a county system to run its own library for a short time before contracting with a private firm for library services. To close this potential loophole, the Committee may wish to consider amending AB 438 to require a city to comply with the bill's provisions if it seeks to contract with a private firm at any time within three years from the date on which it withdraws from a county free library. 9. Profiteering prohibited ? Opponents of private contracts for library services argue that such contracts often lead to fee increases. Making library services more costly restricts the public's access to library resources, undermining the purpose of a public library system. Last year, California voters approved Proposition 26, which AB 438 -- 6/27/11 -- Page 10 amended the California Constitution to define any levy, charge, or exaction imposed by a local government as a tax unless it fits into one of seven exceptions. One exception lets local governments impose: A charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product. The Committee may wish to consider whether Proposition 26's constitutional requirements eliminate concerns about private firms inflating library fees to generate profits. 10. Related legislation . SB 163 (Alarcón, 2003), which died in the Senate Appropriations Committee, and SB 906 (Alarcón, 2003), which failed on the Assembly floor, would have required all general law county and city contracts for services to meet the same requirements that apply to school district and community college district contracts for services. AB 3084 (Jerome Horton, 2004), which died in the Senate Local Government Committee, would have applied the same contracting requirements to a metropolitan water district's contracts for services. Assembly Actions Assembly Local Government Committee: 6-2 Assembly Appropriations Committee: 11-5 Assembly Floor Amendments: 49-26 Assembly Local Government Committee: 6-3 Assembly Floor: 43-28 Support and Opposition (6/30/11) Support : Central Coast Alliance United for a Sustainable Economy (CAUSE) (co-sponsor); Ventura Reader's Book Group (co-sponsor); AFSCME; American Library Association Student Chapter at UCLA; Assistant Director, Public Services for the County of Los Angeles Public Library; California Labor Federation; California Teachers Association; Community Coalition; Concerned Citizens Coalition of Stockton; Democratic Alliance for Action, Santa Clarita; Democratic AB 438 -- 6/27/11 -- Page 11 Party of the San Fernando Valley; Friends of Bell Foundation; Friends of the Huntington Park Library; Friends of the Hollydale Library; Friends of the Nevada County Libraries; Los Angeles Alliance for a New Economy (LAANE); Los Angeles County Democratic Party; Los Angeles Youth Council Chapter The Multi-Taskers; Michele Diaz, City of Artesia Councilmember; Montebello Friends of the Library; Laborers' Int'l Union of North America Local 777 & 792; Santa Clara Valley Democratic Club; Santa Clarita Organization for Planning and the Environment (SCOPE); Santa Clarita Valley Fair Election Committee; Service Employees International Union; Shane Brinton, City of Arcata Councilmember; Steven Choi, City of Irvine Councilmember; several individuals. Opposition : Association of California Cities, Orange County; California Contract Cities Association; California Chamber of Commerce; Cities of Arcata; Artesia; Bellflower; Beverly Hills; Brea; Burlingame; Camarillo; Carlsbad; Cerritos; Chino Hills; Cloverdale; Costa Mesa; Culver City; Danville; Diamond Bar; Fountain Valley; Galt; Glendora; Goleta; Fillmore; Healdsburg; Highland; Holtville; Huron; Imperial Beach; Inglewood; Irvine; La Verne; Lake Elsinore; Lakewood; Lathrop; Lemoore; Livermore; Livingston; Lodi; Lynwood; Manteca; Merced; Montclair; Moreno Valley; Moorpark; Mt. Shasta; Murrieta; Norwalk; Palmdale; Paradise; Placentia; Rancho Cordova; Redding; Riverside; Rosemead; San Clemente; San Leandro; San Mateo; San Pablo; San Ramon; Santa Clarita; Santa Maria; Santa Rosa; Selma; Signal Hill; Simi Valley; South El Monte; Sunnyvale; Torrance; Tracy; Tulare; Union City; Visalia; Vista; Wasco; West Hollywood; Windsor; Ashley Swearengin, Mayor of Fresno; David Armenta, Mayor of Pico Rivera; Friends of Redding Library; Friends of the Camarillo Library; Howard Jarvis Taxpayers Association; Jeff Ira, Mayor of Redwood City; League of California Cities; Library Systems & Services, LLC; Mark Wheetley, City of Arcata Councilmember; Shasta Public Library Foundation; Town of Windsor; several individuals.