BILL ANALYSIS Ó AB 740 Page 1 Date of Hearing: April 5, 2011 ASSEMBLY COMMITTEE ON BUSINESS, PROFESSIONS AND CONSUMER PROTECTION Mary Hayashi, Chair AB 740 (Blumenfield) - As Introduced: February 17, 2011 SUBJECT : Personal services contracts. SUMMARY : Requires a state agency to immediately discontinue a contract that has been disapproved by the State Personnel Board (SPB), unless otherwise ordered. Specifically, this bill : 1)Requires a state agency to immediately discontinue a contract that SPB or its delegate disapproves, unless otherwise ordered by SPB or its delegate. 2)Prohibits the state agency from entering into another contract for the same or similar services, or from continuing the services that were the subject of the contract disapproved by SPB or its delegate. 3)Requires a state agency ordered to discontinue a contract to serve notice to the vendor within 15 days from SPB's final action, unless another time period is specified, and requires the state agency to provide a copy of the notice to SPB and the employee organization that filed the contract challenge. 4)Declares that failure of the state agency to provide notice to the vendor, SPB, and employee organizations may be grounds for rejection of future contracts for the same or similar services that were discontinued. 5)Makes findings and declarations. EXISTING LAW : 1)Governs contracting between state agencies and private contractors, and sets forth requirements for the procurement of supplies, materials, equipment, and services by state agencies. 2)Provides that contracting is permissible to achieve cost savings when specified conditions are met, and all efforts are made to use civil servants to provide services. AB 740 Page 2 3)Provides that contracting is permissible, after all efforts are made to use civil servants to provide services, and when any of the following can be met: a) The services are exempt as defined by the State Constitution; b) The services are for new state functions and the Legislature has specifically authorized contracting for the services; c) The work is of a highly technical nature and the skills needed cannot be provided by civil servants; d) The services are incidental to the purchase of goods; e) The services are contracted to avoid a conflict of interest; f) Emergency services are being provided; g) Legal services are provided to avoid a conflict of interest; h) It is infeasible for the state to provide the services; i) Service providers are training civil servants on an interim basis; or, j) Services provided are temporary, urgent, or of an occasional nature. FISCAL EFFECT : Unknown COMMENTS : Purpose of this bill . According to the author's office, "The state in 2009 paid an estimated $34 billion for 13,600 personal services and consulting contracts. A recent report by the California State Auditor (Auditor) cited serious flaws in the process for personal services contracts ordered terminated. AB 740 would implement key recommendations by the Auditor to remedy the serious flaws. AB 740 Page 3 "The Auditor concluded that a serious problem was the lack of knowing whether state agencies are complying with SPB's decision to disapprove a contract. The Auditor also stated that under current law state departments are able to enter into new contracts for substantially the same services that had already been reviewed and rejected." "This bill would: specify that contracts disapproved by SPB must be terminated; require state agencies that have had contracts ordered terminated to notify and provide documentation of compliance to SPB and applicable unions; and, prohibit state agencies from entering into subsequent contracts for substantially the same service that had been under SPB review and rejected." Background . On March 12, 2008, the Assembly Business and Professions Committee along with the Assembly Public Employees, Retirement and Social Security Committee, held a joint hearing entitled, "Use of Personal Services Contracts for Informational Technology Services in State Government." A memo provided by SPB outlines the civil service mandate: "Government Code Section 19130 codifies the exceptions to the civil service mandate recognized in various court decisions. The purpose of SPB's review of contracts under Government Code Section 19130 is to determine whether, consistent with Article VII and its implied civil service mandate, state work may legally be contracted to private entities or whether it must be performed by state employees. "A state agency seeking to enter into a personal services contract on a cost savings basis must submit the contract to the SPB for review and approval prior to the contract becoming effective. Upon receipt of the request for contact review, SPB will forward the contract to the affected employee organization. The employee organization can file a challenge to the contract within ten days of receipt of the notification by the SPB. If the employee organization challenges the contract, SPB's Executive Officer will, after receipt of written briefs from the parties, issue a decision that approves or disapproves the contract." In September 2009, the Auditor prepared an audit report on the use of information technology personal services and consulting contracts (IT contracts) at Department of Health Care Services (DHCS) and Department of Public Health (DPH), following a AB 740 Page 4 request by the Joint Legislative Audit Committee. According to the Auditor, over the last five years, SPB has disapproved 17 IT contracts because the departments, upon formal challenges from a union, could not adequately justify contracting under the Government Code Section 19130. Although the union prevailed in 17 of its 23 IT contract challenges, many of SPB's decisions were moot because the contracts had already expired before SPB rendered its decisions. According to the Auditor, because SPB lacks a mechanism for determining whether state agencies comply with its decisions, the departments experienced no repercussions for failing to terminate these contracts. Although not prohibited by law from doing so, the departments entered into numerous subsequent contracts for the same services as those in the contracts previously disapproved by SPB. The Auditor recommended that the Legislature specify that contracts disapproved by SPB be terminated and require state agencies to provide documentation to SPB and the applicable unions to demonstrate to the satisfaction of SPB the termination of these contracts. The Auditor also recommended that the Legislature clarify when state agencies must terminate contracts disapproved by SPB, when payments to the contractors must cease, and for what periods of service the contractors are entitled to receive payments. Support . According to the sponsor, Service Employees International Union (SEIU) Local 1000, "This bill improves government operations and saves money in California?. After an investigation into certain IT contracts in DHCS and DPH, the Auditor concluded that there is no mechanism for knowing whether state agencies are complying with SPB's decision to disapprove a contract and made several legislative recommendations. The Auditor estimates that changes made in contracting practices and conversion of certain IT contracts to state positions saved the state more than $1.7 million. This bill would codify some of those key recommendations and ensure that when SPB takes action on an abusive contract, that action is complied with." According to the California Labor Federation, "When government services are contracted out, there is often less public oversight. Contracts may be duplicative of work already done by public employees or even more costly than keeping work in-house. At a time of such scarce public resources, we simply cannot AB 740 Page 5 afford to enter into or maintain contracts without real accountability." Previous Legislation . AB 2494 (Blumenfield) of 2010 was a similar bill that would have required a state agency to immediately discontinue a contract that has been disapproved by SPB, unless otherwise ordered. The Governor vetoed AB 2494 with the following message: "The abrupt termination of contracts that may be providing critical services could leave departments unable to meet their programmatic responsibilities and cause unknown fiscal and operational problems. Furthermore, it is unclear if the immediate discontinuation of a contract as a result of this bill may conflict with the termination language in the terms and conditions of that contract." REGISTERED SUPPORT / OPPOSITION : Support Services Employees International Union (SEIU) Local 1000 (sponsor) California Labor Federation California State Employees Association Professional Engineers in California Government Opposition None on file. Analysis Prepared by : Joanna Gin / B.,P. & C.P. / (916) 319-3301