BILL ANALYSIS �
AB 550
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Date of Hearing: April 9, 2013
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
Jose Medina, Chair
AB 550 (Brown) - As Amended: March 14, 2013
SUBJECT : State government: Office of Small Business and
Disabled Veteran Business Enterprise Services
SUMMARY : Makes several key changes to state procurement
procedures for the purpose of increasing small business,
including microbusiness, and disabled veteran-owned business
enterprise (DVBE) participation rates. More specifically, the
bill :
1)Expresses legislative intent that, among other things, state
that:
a) California spends billions of dollars each year on state
contracts;
b) Small businesses are the principal source of new jobs in
the state;
c) Disabled veterans have made incomparable sacrifices
while serving and protecting our country; and
d) Enhancing opportunities for small businesses to
participate in state contracting is "good" business for
California.
2)Increases the maximum contract threshold amount for awards to
a small business and DVBE, under a specific streamlined
procurement process, from $250,000 to $500,000.
3)Sets an annual 25% small business participation level for each
state agency's contracting activity. State agencies that fail
to achieve the participation rate are required to submit an
explanation and remediation plan to the Governor's Office and
the Legislature. Directs the Department of General Services
(DGS) to provide guidance on the remediation plan.
4)Requires state agencies to promote the use of small businesses
in state contracting, to review small business participation
levels, and to develop a plan for increasing small business
participation levels within 60 days if participation levels
are low.
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5)Requires DGS to research and examine best contracting
practices for utilizing small businesses and present these
findings and make recommendations to the Legislature.
6)Provides that the 25% small business participation
requirements should not be construed to require an action that
would violate a court order or result in the loss of federal
funding.
EXISTING LAW :
1)Designates DGS to administer the state Small Business
Procurement and Contract Act (Small Business Act), including a
streamlined procurement process which is exempt from
advertising, bidding, and protest provisions in the State
Contract Act for the acquisition of goods, services, or
information technology.
2)Defines a small business as 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.
3) Defines a microenterprise as a small business that has on
average annual gross receipts of $250,000 or less during the
previous three years or is a manufacturer with 25 or fewer
employees.
4)Defines a DVBE as a business entity that is at least 51% owned
or controlled by one or more disabled veterans, as specified.
5)Establishes the State Contract Act for the purpose of
governing contract practices between state agencies and
private contractors, covering, among other items, contracts
for projects with a value of over $250,000, adjusted
biennially for changes in the California Construction Index,
as specified.
FISCAL EFFECT : Unknown
COMMENTS :
1)Author's Purpose : According to the author, "In 2006, Governor
Arnold Schwarzenegger issued Executive Order S-02-06 and in
2001, Governor Gray Davis issued Executive Order D-37-01,
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which, among other directives, called for California to lead
the nation in creating an optimum environment which affords
all business equal access to state agency contracting
opportunities. Their orders, which required all state agencies
to aggressively pursue an annual 25 percent small business
participation level in state contracting, helped spur a state
commitment to the success of small businesses and acknowledged
that enhancing opportunities for these entities to participate
in the state contracting process was "good business" for
California.
AB 550 seeks to solidify the state's commitment to small
businesses by codifying both Executive Order S-02-06 and
Executive Order D - 37-01. Specifically, the bill requires
state agencies and departments to aggressively pursue a 25%
participation level in state contracting and increases the
maximum amount under the Small Business Procurement and
Contract Act from $250,000 to $500,000."
2)Framing the Policy Issue : The measure proposes a range of
activities for improving state procurement practices relative
to small business and DVBE contract participation. Given the
significance of small businesses within the California economy
and the significant contributions DVBEs have made to national
security, the author proposes that that the state must do a
better job to ensure greater contract participation of small
businesses and DVBEs.
The analysis includes more specific information on the role of
small businesses in the California economy, the state's
limited progress in meeting existing small business and DVBE
mandates.
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
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accounted for over 44% of total exports in the state.
Nationally, small businesses represented only 31.9% of total
exports. These numbers include the export of only goods and
not services.
Historically, small businesses have functioned as economic
engines, especially 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.
From 2000 to 2001, microenterprises created 62,731 jobs in
the state, accounting for nearly 64% of all new employment
growth. More recently, the federal Small Business
Administration's Small Business Economy 2011 report, stated
that 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.
4)Income Disparity : Policies that encourage small businesses
access to state procurement opportunities can help to redirect
the increasing income disparity dynamic. Unlike other forms
of income, business income, as a proportion of total income,
has continued to increase in value as other forms of income,
such as wages, has remained relatively stagnant.
According to 2011 Congressional Budget Office report on
after-tax incomes of American households between 1979 and
2007, income for households at the higher end of the income
scale rose much more rapidly than income for households in the
middle and at the lower end of the income scale. Most
significantly, by the end of the report period (2005 and
2007), the after-tax income received by the top 20% exceeded
the after-tax income of the remaining 80%. The chart below
illustrates the Congressional Budget Office's findings in more
detail.
------------------------------------------------------------
| After-Tax Income Growth 1979 to 2007 |
------------------------------------------------------------
|-----------+-------------+--------------+-------------------|
| Income | Income | Percentile | Percentage Growth |
| Bracket | Earners | | |
|-----------+-------------+--------------+-------------------|
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| 1 |Top 1% | 100th | 275%|
|-----------+-------------+--------------+-------------------|
| 2 |Next 20% | 81st to 99th | 65%|
|-----------+-------------+--------------+-------------------|
| 3 |Next 60% | 20th to 80th | 40%|
|-----------+-------------+--------------+-------------------|
| 4 |Bottom 20% | 1 to 19th | 18%|
------------------------------------------------------------
------------------------------------------------------------
| Source: Trends in the Distribution of House Income Between |
|1979 and 2007,3 Congressional Budget Office, 2011 |
------------------------------------------------------------
The two primary reasons for the increase in income disparities
were the uneven distribution in the sources of household
income and the differing economic circumstances of those
sources during the 28-year report period. Households in the
higher income brackets (1 & 2) received a majority of their
income through capital gains and business income, which as a
share of total income increased in value, while individuals in
the bottom two brackets (3 & 4) received a majority of their
income from labor income and capital income, which decreased
in value. With the recession, this income disparity is
expected to have continued to increase, in part, because of
the impact of long term unemployment on wages, a core
component of labor income, and rental rates, a core component
of capital income.
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
disabled veteran-owned business enterprise 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
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during military service.
The state's success in obtaining small business and DVBE
participation in state contracts 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 were awarded to
small businesses. The state has three times achieved its 3%
DVBE participation goal, that being in 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)Streamlined Procurement Process : Streamlined procurement
process: In order to assist agencies in reaching state
participation goals, contracting entities are authorized to
use a streamlined procurement method. This method allows the
process for awarding contracts to bypass the advertising,
bidding, and protest provisions in the State Contract Act.
Under the provisions of the Act, a contract may be made
directly with a certified small business or DVBE at a contract
price established by checking the proposed rate with two other
small businesses or DVBEs.
Contracts offered under the streamlined procurement process
are currently limited to contracts between $5,000 and
$250,000. AB 550 would increase this amount to $500,000 for
contracts for goods, services, and information technology. In
2010-11, 12,302 contracts were initiated using this
streamlined procurement process, which accounts for $263.3
million (11%) of the total DVBE and small business contracts
(112,276). The $250,000 threshold was only instituted in
2010, pursuant to AB 31, Chapter 212, Statues of 2009, and DGS
has not publically reported its impact.
7)Removal of Streamline Process Provisions : Staff understands
the author will be proposing the removal of the streamlined
procurement process provisions.
8)Technical Amendments : AB 550 requires the head of state
agencies to actively promote the use of small businesses and
DVBEs. Technical amendments may assist in implementation.
9)Related Legislation : Below is a selected list of related
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legislation. While there has been an abundance of effort by
the Legislature to increase small and microbusiness
participation in state contracting, many 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 the Department of
General Services to monitor each agency's progress in
meeting this goal. The bill also would have required the
Office of the Small Business Advocate to receive progress
reports and DGS to work collaboratively with state entities
in meeting their small business procurement goals. This
goal is currently provided for in Executive Order (EO)
D-37-01 and EO S-02-06. Status: Held under submission in
the Assembly Committee on Appropriations in 2010.
c) AB 1783 (Perea) Streamlining Small Business
Certification : This bill required the Department of General
Services 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 the Department
of General Services 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 on the Suspense
File of the Assembly Committee on Appropriations in 2011.
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e) 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 on the Suspense File of the Assembly
Appropriations Committee in 2010.
REGISTERED SUPPORT / OPPOSITION :
Support
The California Black Chamber of Commerce (Sponsor)
Antelope Valley African Chamber of Commerce
California Asian Pacific Chamber of Commerce
California Association for Micro Enterprise Opportunity
Central San Diego Black Chamber of Commerce
Coalition of California Welfare Rights Organization
Fresno Metro Black Chamber
Moreno Valley Black Chamber of Commerce
North Bay Black Chamber of Commerce
Regional Black Chamber of Commerce
Vallejo-Solano Black Chamber of Commerce
Opposition
None received
Analysis Prepared by : Toni Symonds / J., E.D. & E. / (916)
319-2090