BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 1510
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          Date of Hearing:   July 3, 2012

          ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
                               V. Manuel Pérez, Chair
                    SB 1510 (Wright) - As Amended:  June 12, 2012

           SENATE VOTE  :   37-0
           
          SUBJECT  :   Department of General Services: small business 
          contracts 

           SUMMARY  :   Tightens the bidder requirements for demonstrating 
          that a small business or microbusiness will serve a commercially 
          useful function (CUF) in carrying out a state contract.  By 
          meeting the CUF requirements, a bidder may claim a 5% bid 
          preference on competitive state contract awards.

          Specifically,  this bill  expands the CUF requirements to include 
          demonstrating that the small business or microbusiness has 
          responsibility for:

          1)Its own accounts receivable, and that the accounts receivable 
            of the certified small business or microbusiness are not 
            directly or indirectly controlled by the prime contractor, 
            supplier, or wholesaler.

          2)Negotiating price, determining quality and quantity, ordering, 
            installing, if applicable, and making payment for the 
            products, inventories, materials, and supplies required for 
            the contract. 

           EXISTING LAW  : 

          1)Designates The Department of General Services (DGS) as the 
            administrator of the state Small Business Procurement and 
            Contract Act (Small Business Act), including, but not limited 
            to, a small business certification process and a 5% preference 
            program for bids made by certified small business and 
            microbusinesses. 

          2)Establishes a 25% small business participation goal for 
            contracts financed with the proceeds of the 
            infrastructure-related bond acts of 2006.  Through Governor 
            Executive Order, a 25% annual small business procurement 
            participation goal is set for all state contracts made by 








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            state entities under the authority of the Governor.

          3)Establishes a 5% preference for bids made by certified small 
            business and microbusinesses for the award of state 
            procurement contracts.  A single bid preference is limited to 
            $50,000.  Non-small businesses must subcontract at least 25% 
            of their contracts with small business to qualify for the 
            small business bidder's preference.

          4)Requires, as a condition for receiving the preference, that 
            the small business or microbusiness perform a commercially 
            useful function (CUF) in executing the state contract. 

          5)Specifies that information in the bid package demonstrate that 
            the small business or microbusiness does all of the following:

             a)   Is responsible for the execution of a distinct element 
               of the work of the contract.

             b)   Carries out its obligation by actually performing, 
               managing, or supervising the work involved.

             c)   Performs work that is normal for its business services 
               and functions.

          6)Applies civil penalties for any person who knowingly and 
            fraudulently represents that a CUF is being performed in order 
            to obtain or retain a bid preference or a state contract.

          7)Defines a small business as independently owned, not dominant 
            in its field of operation, domiciled in California, employing 
            100 or fewer employees, and earning $14 million or less in 
            average annual gross revenues for the three previous years.  

          8)Defines a microbusiness as a small business which, together 
            with its affiliates, has an average annual gross receipts of 
            $2.5 million or less over the previous three years, or is a 
            manufacturer with fewer than 25 employers.

           FISCAL EFFECT  :   The measure was referred from the Senate 
          Committee on Appropriations to the Senate Floor pursuant to 
          28.8.

           COMMENTS  :    









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           1)Bill Purpose  :  According to the author, "SB 1510 will codify 
            and strengthen existing laws pertaining to small businesses 
            bidding on state work in order to stop the practice of using 
            sham small businesses to get state contracts.   

            SB 1510 seeks to strengthen these existing policies by 
            providing DGS with clearly defined language to identify phony 
            small businesses.  Right now, DGS' ability to enforce 
            compliance is hindered, due to the very broad definitions of 
            compliance requirements.  The current statute sets a very low 
            threshold, thereby allowing CSBs/DVBEs with little or no 
            employees or inventory to compete against CSBs/DVBEs who do 
            hire their own employees.  

            SB 1510 will clarify that the small business: Must be 
            responsible for negotiating price, determining quality and 
            quantity and pay for the material itself.  SB 1510 will 
            provide a clear set of rules so that legitimate small and 
            disabled veteran businesses can fairly compete for state 
            business."

           2)Small Business Preferences  :  The Small Business Act, 
            administered through DGS, was implemented more than 30 years 
            ago to increase the participation of small business within the 
            state's procurement process.  In 1989, a disabled veteran 
            owned business enterprise (DVBE) component and a 3% annual 
            procurement participation goal was added to SBA.  While 
            existing law has no annual small business goal, since 2001 
            there have been four Executive Orders (EOs) specifying a 25% 
            annual goal for small business participation in state 
            procurement.  

            In order to assist state government entities in reaching the 
            small business and DVBE participation goals, contracting 
            entities are provided a number of specific tools, including 
            bid preferences, a streamlined procurement method, and 
            designation of small business procurement liaisons at every 
            agency.  SB 1510 proposes to tighten the requirements for 
            claiming the small business and microbusiness bid preference.

            Certified small business and microbusiness bidders and other 
            bidders that commit to using certified small business and 
            microbusiness subcontractors are eligible for a 5% bid 
            preference where the solicitations are made either on the 
            basis of lowest responsible dollar bid, or on the basis of 








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            highest score, considering factors in addition to price.  DVBE 
            bidder and firms that commit to using DVBEs may also receive a 
            bid preference of between 1% and 5%.  There are programmatic 
            limits to the overall value of these preferences with a single 
            bid preference limited to $50,000 and the combination of all 
            preferences not exceeding $100,000 (many DVBEs are also 
            certified small businesses allowing for two preferences).  

            The purpose of these preferences is to help these targeted 
            businesses to successfully compete with larger size firms and 
            national chains for state contracts.  In applying these 
            preferences to a state contract, a bidder is required to 
            demonstrate that the small business, microbusinesses or DVBE 
            will perform a CUF in executing the contract.  The CUF 
            requirement is designed to prevent a bidder from using a 
            business as a "pass through" or "front" for another business 
            that would otherwise not qualify for the small business, 
            microbusiness or DVBE bid preference.  The CUF requirement 
            applies to all state purchasing activities, including 
            contracts for goods, services, informational technology and 
            public works. 

            Current law requires a business to (1) be responsible for a 
            distinct element of the contract; (2) actually perform, 
            manage, or supervise contract related work; and (3) perform a 
            task that is normal for its business, in order to be 
            considered as serving a CUF.

            A contractor or subcontractor is not considered performing a 
            CUF if the contractor's or subcontractor's role is limited to 
            that of an extra participant in a contract, through which 
            funds are passed to other businesses, which actually perform 
            the contract work.  The contracting entity has the challenging 
            task of making a CUF determination prior to awarding the 
            contract, as the bid preference is likely to be a determining 
            factor in a business obtaining the bid.  Small business and 
            DVBE advocacy groups, like those sponsoring SB 1510, believe 
            that the CUF rules are being exploited in practice, resulting 
            in state contacts being awarded to inappropriate bidders based 
            on the use of small businesses that are simply "fronts" for 
            other businesses.

            SB 1510 adds to the CUF requirements by having the bidder also 
            demonstrate that the small business and microbusiness is 
            financially and administratively independent of the prime 








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            contractor, suppliers or wholesaler.

           3)Proposed DGS Regulations  :  Existing law only applies the CUF 
            requirement to small businesses and microbusinesses.  Statute 
            does not currently address the standards by which a DVBE is 
            certified including requirements for material financial and 
            administrative control.  In 2011, DGS began a comprehensive 
            update of its DVBE regulation to reflect a range of statutory 
            changes between 2003 and 2010.  In addition, DGS is proposing 
            the inclusion of language substantially similar to the 
            existing and proposed CUF provisions in SB 1510.  

            The Committee may wish to consider codifying DVBE CUF 
            requirements to ensure that future regulatory changes are kept 
            consistent with the CUF requirements for small business, 
            microbusiness.

           4)Historical Small Business Procurement Participation  :  Despite 
            the longstanding existence of the Small Business Act, periodic 
            statutory upgrades, and EOs, the state's success in achieving 
            small business and DVBE participation goals in state 
            procurement contracts has been inconsistent. 

            Since 2001, when the first EO set the 25% small business 
            participation target, the state has met its goal only three 
            times.  In the most recent report on procurement, 2008-09, DGS 
            reported that $2.4 billion (26.8%) out of a total of $8.96 
            billion of all state contracts to small businesses.  This 
            represents a $2.0 billion increase in small business contracts 
            from 2007-08.  The state has only once achieved its 3% DVBE 
            participation goal, that being in 2007-08 when $190 million in 
            contracts (3.04%) were awarded to bids that included DVBEs.  

           5)California's Small Business Economy  :  California's dominance 
            in many economic areas is based, in part, on the significant 
            role small businesses play in the state's $1.9 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.  

            Among other advantages, small 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.  Small businesses have 
            consistently functioned as economic engines.  According to the 








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            Small Business Administration's Small Business Economy 2011, 
            small businesses nationally outperformed large firms in net 
            job creation nearly three out of four times from 1992 through 
            2010 when private-sector employment rose.   

            Small businesses have also played an important role in 
            challenging economic times.  During the nation's economic 
            downturn from 1999 to 2003, microenterprises (businesses with 
            fewer 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.  


            During the most recent recession, however, small businesses 
            have been especially hard hit.  Equifax reported that 
            bankruptcies in California rose by 81% in 2009, as compared to 
            44% nationally.  This trend continued in 2010 where the 
            Equifax report stated that while in general bankruptcies were 
            down across the nation (26% decrease), small business 
            bankruptcies in California accounted for almost 20% of all 
            small business bankruptcies in the nation.  In 2011, the 
            metropolitan statistical areas (MSAs) in western states 
            continued from the final quarter in 2010 to lead the nation in 
            small business bankruptcies.  The region, however, also 
            experienced the most significant decrease in bankruptcy 
            filings year over year from Q1 2011 to Q1 2012-more than a 40% 
            decline in some MSAs.


           6)Related Legislation  :  The following is a list of related 
            legislation.

              a)   AB 31 (Price) Small Business Contract Preferences and 
               Enforcement  :  This bill made several key changes to state 
               procurement procedures including increasing the maximum 
               contract threshold amount for awards to a small business 
               and DVBE, under a specific streamlined procurement process, 
               from $100,000 to $250,000. Further, the bill required 
               contractors that made contract commitments to include small 
               business or DVBE participation to report the final percent 
               of the contract actually paid to these entities. Status:  
               The bill was signed by the Governor, Chapter 212, Statutes 
               of 2009.

              b)   AB 926 (Ruskin) Loss Leader Notice Requirements  :  This 








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               bill required certain advertising of state contracting 
               opportunities to include a specified statement relating to 
               an existing prohibition against the use of "loss leaders."  
               Specifically, the bill requires every solicitation that 
               appears in the California State Contracts Register 
               including informational technology equipment to contain the 
               following statement, "It is unlawful for any person engaged 
               in business within this state to sell or use any article or 
               product as a "loss leader."  Status:  The bill was signed 
               by the Governor, Chapter 490, Statutes of 2009.

              c)   AB 761 (Coto) Small Business Preference for 
               Infrastructure Bonds  :  This bill required each state agency 
               awarding contracts that are financed with proceeds from the 
               infrastructure bonds approved by voters in November 2006 to 
               establish a 25% small business participation goal for state 
               infrastructure construction contracts and to provide 
               specified assistance to small businesses bidding on state 
               infrastructure bond-related contracts.  Status:  The bill 
               was signed by the Governor, Chapter 611, Statutes of 2007.

              d)   SB 115 (Florez) DVBE Procurement Preferences  :  This bill 
               made various changes to the DVBE Program, including 
               requiring DGS to establish a state agency-wide mandatory 
               DVBE participation incentive.  The bill also requires the 
               DGS Small Business Advocate to provide specified services 
               to small businesses and certified DVBEs.  Additionally, 
               this bill requires DGS to adopt a streamlined reporting 
               procedure for state agencies to use in reporting their DVBE 
               participation to the Department of Veterans Affairs.  
               Status:  The bill was signed by the Governor, Chapter 451, 
               Statutes of 2005.

           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          California Small Business Association (joint-sponsor)
          Coalition of Small and Disabled Veteran Businesses 
          (joint-sponsor)
          California Asian Pacific Chamber of Commerce 
           
            Opposition 
           
          None received








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           Analysis Prepared by  :    Toni Symonds  / J., E.D. & E. / (916) 
          319-2090