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.   








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          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.









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          "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 








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          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 








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          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