BILL ANALYSIS �
AB 172
Page 1
Date of Hearing: April 9, 2013
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
Jose Medina, Chair
AB 172 (Weber) - As Amended: April 1, 2013
SUBJECT : State Agency Contracts: Microbusiness Preference
SUMMARY : Increases the microbusiness procurement preference from 5%
to 7% for state contracts to purchase goods, services, information
technology, and construction of state facilities. The preference may
be awarded to either a microbusiness bidder or a non-microbusiness
bidder that uses a microbusiness subcontractor.
EXISTING LAW :
1)Designates the Department of General Services (DGS) as the
administer of the state Small Business Procurement and Contract Act
(Small Business Act), which includes certifying and implementing
targeted preference programs for certified small businesses,
microbusinesses, and disabled veteran owned business enterprises
(DVBE).
2)Authorizes a 5% preference for state contract bidders that are
either a certified small or microbusiness or commit to using a
certified small or microbusiness in effecting the contract.
3)Defines a small business as an independently owned, not dominant in
its field of operation, domiciled in California, employing 100 or
fewer employees, and earning $10 million or less in average annual
gross revenues for the three previous years.
4)Defines a microbusiness as a small business (see below) that has an
average annual gross receipt of $3.5 million or less during the
previous three years or is a manufacturer with 25 or fewer
employees.
FISCAL EFFECT : Unknown
COMMENTS :
1)Author's Purpose : According to the author, "California has made an
effort to ensure that State contracting agencies meet participation
goals for small businesses, microbusinesses, and DVBEs.
Small businesses with less than 100 employees comprise more than
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98.3% of all businesses, and are responsible for employing more than
57.9% of all workers in the state. Microbusinesses consist of fewer
than 25 employees, have an average income of $3.5 million or less
and are known for bringing real diversity to local economies and the
State. However, microbusiness owners are concerned that they are not
getting their fair share of California contracts and are
disadvantaged when competing against their larger small business
counterparts.
According to the Department of General Services (DGS), during fiscal
year 2010-11 of the $6 billion of contract dollars issued by State
Departments and Agencies, $1.26 billion went to small businesses and
only $413 million went to microbusinesses. Of the 93,334 contracts
issued during the same time frame, microbusinesses received only
36,980 of the contracts awarded by the state. Microbusinesses need
extra help to ensure they receive their fair share of contracts.
AB 172 accomplishes these objectives by providing an increase on the
current 5% preference to 7%. In turn, people will seek less social
benefits such as unemployment benefits, welfare, etc."
2)Framing the Policy Issue This measure proposes increasing the
comparative value of the microbusiness procurement preference from a
5% to a 7% scoring advantage.
In making the case for the change, the author notes the importance
of small and microbusinesses to the California economy and the
substantially higher number of small businesses receiving state
contracts in 2010-11 56,354 versus microbusinesses only receiving
36,980 contracts. The role of smaller size businesses within the
California economy is discussed in greater detail below.
3)Small Businesses within the California 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 less 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. California small businesses comprised 96% of
the state's 60,000 exporters in 2009, which accounted for over 44%
of total exports in the state. Nationally, small businesses
represented only 31.9% of total exports. These numbers include the
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export of only goods and not services.
Historically, small businesses have functioned as economic engines,
especially in challenging economic times. According to the federal
Small Business Administration (SBA), 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. In the future, small and microbusiness will play an
increasing important role within extended global manufacturing
supply chains and Information Technology-linked research and
professional services. Encouraging small businesses, including
microbusinesses is important to the overall California economy.
4)Small v. Micro : The term "small business" encompasses a very broad
range of businesses and depending on the definition it can include
between 95% to 99% of all businesses in the state. There are small
and microbusiness in every industry sector, which has resulted in
having definitions that include both the number of employees and
annual revenues. The definition used by the federal SBA, as an
example, includes businesses with various revenue limits per
industry sector and allows for up to 499 employees.
Definitions in state law also vary. The state Small Business Act
defines small businesses as having fewer than 100 employees and
average annual gross receipts under $10 million. Other state
programs have small business definitions that include 250 or less
employees. Microbusinesses are a sub-group of small businesses and,
under the state Small Business Act, have less than 25 employees with
average annual gross receipts of less than $3.5 million. The U.S.
Census Bureau does not report data to exactly fit California's
definition of small and microbusiness, but for comparison: of the
698,145 small businesses in the state, it is estimated that there
are 632,783 businesses with less than 20 employees, including sole
proprietors, which is the single largest group of businesses.
Some businesses are small because they are new or start-up
businesses, while others will remain smaller size because it allows
for a more flexible business model which meets specialized market
needs. Beyond market advantages, the flexibility of microbusinesses
also serve as an important business model for certain individuals
facing traditional employment challenges, including single parents,
returning veterans and individual looking to have a second job
through self-employment.
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Given their size, microbusinesses have the most challenges in
meeting regulatory requirements. Larger size businesses, including
larger size small businesses, may be able to assign one person to
checking into new regulations, attend special classes to obtain
certifications, and pulling together the required paper work.
Microbusinesses are more dependent on contracting for these
specialized services, learning about new requirements from trade
association newsletters, and sometimes getting fined because they
were just not aware of a new rule.
Procurement preferences are designed to encourage small and
microbusiness participation in that contracts by off-setting the
scale advantages of larger business. AB 172 proposes to further
equalize the advantages of larger size companies through a 2%
preference advantage.
5)The Small Business Act : The Small Business Act, administered
through DGS, was implemented more than 30 years ago to establish a
small business preference within the state's procurement process
that would increase the number of contracts between the state and
small businesses. In 1998, a DVBE component was added to state
procurement practices.
The Small Business Act states that it is the policy of the State of
California that the state aid the interests of small businesses in
order to preserve free competitive enterprise and to ensure that a
fair portion of the total purchases and contracts of the state be
placed with these enterprises. The statute further states that DVBE
participation is strongly encouraged to address the special needs of
disabled veterans seeking rehabilitation and training through
entrepreneurship and to recognize the sacrifices of Californians
disabled during military service.
The state's success in obtaining small business and DVBE contract
participation has been inconsistent. Since 2001, when the first
executive order set the 25% small business participation target, the
state has met its goal only four times. In the most recent report
on procurement, 2010-11, DGS reported that $1.26 billion (22.12%)
out of a total of $5.72 billion of all state contracts are awarded
to small and microbusinesses. For DVBEs, the state achieved its 3%
participation goal three times during the same period, that being in
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2007-08, 2009-10, and 2010-11. In 2010-11, $272 million out of a
total of $5.64 billion (4.82%) was awarded to DVBEs.
6)How State Procurement Preferences Work : In order to assist agencies
in reaching state participation goals, bidders for state contracts
may include procurement preferences. The value of any single
preference is limited to $50,000 and the combined value of one or
more preference cannot exceed $100,000.
The state currently recognizes three preferences based on the type
of business and two preferences based on the location of the
business. Business type preferences include small business,
microbusiness and DVBE, which each have a maximum preference value
of 5%. The bidder can either be one of these targeted business
types or commit to subcontracting with one. Location-based
preferences include bidders located in enterprise zones and Local
Agency Military Base Realignment Areas, which have a maximum value
of 5% for completing the contract in the location and up to an
additional 4% for hiring local workers.
It is not uncommon for a single contract bid to include more than
one preference, i.e. a small business owned by a DVBE would be
entitled to submit a bid using two 5% preferences. The value of the
preference is applied to either the bidders score or the contact
amount of the submitted bid. As an example, there are two qualified
bidders, each being a large-size business and each having bid a job
for $250,000. If one of the companies committed to using a
subcontractor that was both a microbusiness and a DVBE, their bid
would be scored as if it was $225,000 after the 10% bid preference
was applied. The state would still pay the $250,000 amount, but it
would be scored at the lower amount for competitive reasons. Since
contracts are awarded to lowest responsible bidder, the business
subcontracting with the DVBE microbusiness would be awarded the
contract.
7)Stacking and Netting : The Small Business Procurement Act provides
for preferences and the process by which DGS is to apply those
preferences. As an example, statute dictates that small business
and microbusiness bidders using preferences are required to have
precedence over nonsmall businesses using a subcontractor to become
eligible for the preference. In another instance, when there is a
tie between two lowest responsible bidders and one is a small or
microbusiness and the other is a DVBE small or microbusiness, the
later bidder is supposed to win. Concerns have been raised by the
small business community by the manner in which DGS nets out the
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value of the preference when competing bidders are being compared
side-by-side. As AB 172 increases the preference value for the
microbusiness it may be appropriate to also address exactly how
these preferences should be applied by DGS.
8)Related Legislation : Below is a list of related legislation. While
there has been an abundance of effort by the Legislature to increase
small and microbusiness participation in state contracting, a
majority of the measures fail to advance from the fiscal committees.
a) AB 31 (Price) Public Contracts: Small Business Procurement and
Contract Act : This bill increased the maximum contract threshold
amount for awards to small business (SME), including
microbusiness, and disabled veteran-owned business enterprise
(DVBE) under the states streamlined procurement process, from
$100,000 to $250,000, as specified. Requires contractors to
report the contract amount allocated to SMEs and DVBE 's with
which they made contract commitments. Status: Signed by the
Governor, Chapter 212, Statutes of 2009.
b) AB 309 (Price) Public Contracts: Small Business Participation :
This bill would have required the establishment of a 25% small
business participation goal for all state entities and directs
DGS to monitor each agency's progress in meeting this goal;
Requires that the Office of the Small Business Advocate receive
the same progress report information as state entities and
directs DGS and the Office of the Small Business Advocate to work
collaboratively to assist state entities in meeting their goal.
This goal is currently provided for in Executive Order (EO)
D-37-01 and EO S-02-06. Status: Held in the Assembly Committee
on Appropriations in May 2010.
c) AB 1783 (Perea) Streamlining Small Business Certification :
This bill required DGS to publish on the department's website,
and make available to local agencies, a list of small businesses
and microbusinesses that have been certified as such by the
department. Status: Signed by the Governor, Chapter 114,
Statutes of 2012.
d) SB 67 (Price) Small Business Participation in Public
Contracts : This bill would have authorized DGS to direct all
state entities to establish an annual goal of achieving no less
than 25% small business participation in state procurement
contracts, as specified. Status: Held in the Assembly Committee
on Appropriations in 2011.
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e) SB 733 (Price) High Speed Rail : This bill would have required
the California High-Speed Rail Authority (HSRA) to include in its
January 1, 2012 business plan a strategy for ensuring
California-certified small business participation in contracts
awarded with state and federal funds during all phases of the
high-speed rail project. It also requires the HSRA to have a
strategy for working with the Employment Development Department
to ensure that at least 25% of the project workforce at each
worksite is from the local workforce. Status: Held in Senate
Committee on Appropriations in 2011.
f) SB 1108 (Wright) Public Contracts: Small Business
Participation : This bill would have made three enhancements to
the Small Business Procurement and Contract Act including
authorizing the implementation of a 25% small business
procurement goal, the development of specific administrative
procedures for implementing the small business preference and
requiring the state to take a more active role in promoting
certification of small businesses. Status: Held in the Assembly
Appropriations Committee in 2010.
REGISTERED SUPPORT / OPPOSITION :
Support
California Association for Micro Enterprise Opportunity
National Federation of Independent Businesses
Opposition
None received
Analysis Prepared by : Toni Symonds / J., E.D. & E. / (916) 319-2090