BILL ANALYSIS                                                                                                                                                                                                    �




                   Senate Appropriations Committee Fiscal Summary
                            Senator Kevin de Le�n, Chair


          SB 399 (Wright) - State contracts: penalties for late payment.
          
          Amended: May 14, 2013           Policy Vote: GO 9-0
          Urgency: No                     Mandate: No
          Hearing Date: May 20, 2013      Consultant: Mark McKenzie
          
          This bill does not meets the criteria for referral to the  
          Suspense File. 

          
          Bill Summary: SB 399 would increase the penalty for late  
          payments to contractors performing emergency work for state  
          agencies.

          Fiscal Impact: Unknown, likely minor to moderate state costs to  
          pay a higher penalty on late payments for emergency work or  
          remedial measures performed under contract with state agencies.   
          Actual costs depend on the volume of uncontested payments for  
          emergency or remedial work performed by certain businesses, the  
          volume of contract dollars that are paid after the 45 day grace  
          period, and the average number of days between the due date and  
          the payment date.

          Background: Existing law, the Prompt Payment Act, generally  
          requires state agencies to pay undisputed invoices for goods or  
          services provided under a contract within 45 calendar days.   
          State agencies are required to pay a penalty at a rate of 1%  
          above the Pooled Money Investment Account (PMIA) rate, up to a  
          maximum of 15%, for payments not issued within 45 days of  
          receipt of an undisputed invoice.  If the claimant is a  
          certified small business or nonprofit organization, the state  
          agency must pay a higher penalty at a rate of 10% above the U.S.  
          Prime Rate.

          Proposed Law: SB 399 would require state agencies to pay a  
          penalty for payments not made within 45 days of an undisputed  
          invoice from a contractor performing emergency work or remedial  
          measures, as specified, at a rate of 10% above the U.S. Prime  
          Rate.  This would increase penalties on certain late payments to  
          the rate currently paid on late payments to certified small  
          businesses and nonprofit organizations.









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          Staff Comments: The current penalty rate for late payments made  
          to certified small businesses and nonprofits is 13.25% (10% plus  
          U.S. Prime Rate of 3.25%), while the penalty rate for late  
          payments made to all other businesses is only 1.358% (1% plus  
          PMIA rate of 0.358%).  This bill would make late payments for  
          undisputed invoices submitted by a contractor performing  
          emergency work or remedial measures subject to the higher  
          penalty rate, whether the contractor is a small business,  
          nonprofit, or other entity.

          The fiscal impact of the increased penalty rate would depend on  
          the volume of payments on uncontested invoices related to  
          contracts for emergency or remedial work that are paid late, and  
          the average number of days after the due date that the invoices  
          were paid.  Staff notes that the increased penalties would only  
          apply to business who are not certified small businesses or  
          specified nonprofits, since those entities currently qualify for  
          the higher penalty rate.  For illustrative purposes, if $5  
          million in late payments were an average of 30 days late, the  
          net difference in penalties would be less than $50,000.  There  
          is no data available to make an accurate calculation since  
          payments are not identified as emergency or remedial contract  
          payments when invoices are submitted to the Controller for  
          payment.  Staff estimates that the costs could be minor to  
          moderate for individual agencies.

          Staff notes that the bill specifies that "emergency work and  
          remedial measures" is tied to a definition in Section 10101 (b)  
          of the Public Contract Code which states:

               (b) Contracts for which emergency work or remedial measures  
               are required are not subject to this chapter if the work or  
               remedial measures are necessary to immediately avert,  
               alleviate, repair, or mitigate destruction of property  
               caused by the accidental or unplanned release of toxic  
               substances and are necessary to protect the health, safety,  
               and welfare of the general public.

          By referencing this particular statute rather than the  
          definition of emergency that exists elsewhere in the Public  
          Contract Code, the bill could be interpreted to apply only to  
          contracts for emergency work or remedial measures that are  
          caused by the accidental or unplanned release of toxic  
          substances.








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