BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                        AB 351


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       Date of Hearing:  April 21, 2015


          ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT, AND THE ECONOMY


                                Eduardo Garcia, Chair


       AB 351  
       (Jones-Sawyer) - As Introduced February 17, 2015


       SUBJECT:  Public contracts:  small business participation


       SUMMARY:  Requires each state agency to establish and achieve a 25%  
       small business participation goal.  Specifically, this bill: 





       1)Establishes a 25% small business participation goal for contracting  
         activities by state agencies, boards, departments, and commissions.



       2)Assigns the responsibility for achieving this goal to the heads of  
         the contracting departments and requires them to annually report his  
         or her agency's progress in meeting the goal. 



       3)Requires agencies that fail to meet their annual small business  
         procurement participation goal to submit a corrective plan to the  
         Department of General Services (DGS) within 45 days of the close of  
         any fiscal year. 









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       4)Requires DGS to regularly monitor the progress agencies are making  
         in meeting the 25% goal and to regularly share related information  
         with the Office of the Small Business Advocate (OSBA) including  
         providing a copy of the corrective action plans.  DGS and the OSBA  
         are directed to assist agencies, to the extent feasible, in  
         implementing their corrective action plans. 



       5)Requires all state agencies to use the streamlined small business  
         procurement process for contracts under $100,000 and construction  
         contracts under $120,000. 



       6)Requires DGS to actively outreach and promote the small business  
         preference programs and in doing so collaborate with the OSBA. 



       7)Specifies that the small business provisions of this act apply to  
         the University of California, the California State University, and  
         the California Community Colleges when contracting with state funds.  




       EXISTING LAW:   


       1)Designates the DGS as the administer of the state Small Business  
         Procurement and Contract Act (Small Business Procurement Act), which  
         includes certifying and implementing targeted preference programs  
         for certified small businesses, microbusinesses, and disabled  
         veteran owned business enterprises (DVBE). 










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       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)Authorizes a streamlined small business procurement process for  
         state contracts over $50,000 and under $250,000.  Under this  
         process, the contract is not put out to public bid, instead the  
         contracting agency is allowed to award the contract to a certified  
         small business or DVBE after obtaining a two price quotes from two  
         certified small businesses and/or DVBEs. 
       4)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.  





       5)Defines a microbusiness as a small business (refer to definition  
         above) 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


       POLICY ISSUE FRAME:


       Small businesses play an essential role within the California economy,  
       contributing the most net new jobs, offering an alternative to un- and  








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       underemployment, and helping to disburse the financial advantages of  
       the state's globally connected economy.  State procurement  
       opportunities represent an important economic tool to support small  
       business development.  In the last 15 report periods, the state has  
       met the 25% small business procurement participation goal only five  
       times including 2013-14.   


       This bill proposes to codify the 25% small business procurement  
       participation goal, assign specific responsibility for meeting the  
       goal, mandate corrective action plans, and provide support for state  
       agencies in taking remedial actions to meet the goal.   The Comment  
       section of the analysis includes additional information on the state's  
       Small Business Act, historic compliance issues, and current and prior  
       legislation.  


       COMMENTS:  


       1)Author's Purpose:  According to the author, "Codifying this  
         executive order, not only places the policy in statute, only to be  
         removed by the Legislature, but also sends a strong message to  
         potential investors that the State of California supports small  
         businesses".

       2)The Role of 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 $2.2  
         trillion economy.  Two separate studies, one by the U.S. Census  
         Bureau and another by the Kaufman Foundation, found that net job  
         growth was strongest among businesses with less than 20 employees.   
         Among other advantages, small businesses are crucial in the state's  
         international competitiveness and are an important means for  
         dispersing the positive economic impacts of trade within the  
         California economy.  

         Nonemployer firms make up the single largest component of businesses  
         in California, 2.9 million out of an estimated 3.6 million firms in  








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         2012, representing over $149 billion in revenues with highest number  
         of businesses in the professional, scientific, and technical  
         services industry sector.  As these non-employer businesses grow,  
         they continue to serve as an important component of California's  
         dynamic economy.  Excluding nonemployer firms, businesses with less  
         than 20 employees comprise nearly 90% of all businesses and employ  
         approximately 18% of all workers.  These non-employer and small  
         employer firms create jobs, generate taxes, and revitalize  
         communities. 

         In hard economic times, smaller size businesses often function as  
         economic engines.  In this most recent recession the trend  
         continued, with the number of nonemployer firms increasing from 2.6  
         million firms ($137 billion in revenues) for 2008 to 2.8 million  
         firms ($138 billion in revenues) for 2010.  In the post-recession  
         economy, small businesses are expected to become increasingly  
         important due to their ability to be more flexible and better suited  
         to meet niche market needs.  Their small size, however, results in  
         certain challenges in meeting regulatory requirements, accessing  
         capital, and marketing their goods and services.  California's  
         network of technical assistance providers assist businesses with a  
         range of services, including access to quality education, one-on-one  
         counseling, mentoring, marketing data, and other business  
         development resources.

       3)Small Business Procurement Act:  The Small Business Procurement 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.  A DBVE component was added in 1989.   
         Today, approximately 90% of DVBEs have dual certification as a small  
         business or microbusiness.

         The Small Business Procurement 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  








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         special needs of disabled veterans seeking rehabilitation and  
         training through entrepreneurship, and to recognize the sacrifices  
         of California's disabled military veterans.  Statute sets an annual  
         3% DVBE participation goal, and a 2010 executive order sets a 25%  
         goal for small businesses and microbusinesses.

         The charts below show small business and microbusiness aggregate  
         procurement participation rates for fiscal years 2011-12, 2012-13,  
         and 2013-14 for mandatory reporting agencies and total reporting  
         agencies. 




          --------------------------------------------------------------- 
         |    Small Business and Microbusiness Contracting Activity -    |
         |                      Mandated Reporters                       |
          --------------------------------------------------------------- 
         |------------+------------+------------+------------+------------|
         |Fiscal year |   Total    |Total Small |   Total    |   Total    |
         |            |  Contract  |  Business  |  Percent   | Number of  |
         |            |  Dollars   |    and     |            | Contracts  |
         |            |            |Micobusiness|            |            |
         |            |            |   Contract |            |            |
         |            |            |  Dollars   |            |            |
         |------------+------------+------------+------------+------------|
         |2013-14     |$7,101,433,4|$2,013,377,7|   28.35%   |   90,784   |
         |            |          33|          92|            |            |
         |------------+------------+------------+------------+------------|
         |2012-13     |$7,616,142,0|$1,801,695,5|   23.66%   |  105,617   |
         |            |          71|          47|            |            |
         |------------+------------+------------+------------+------------|
         |2011-12     |$7,399,022,4|$1,796,451,7|   24.28%   |  165,523   |
         |            |          25|          22|            |            |
         |------------+------------+------------+------------+------------|
         |Average     |$7,372,199,3|$1,870,508,3|   25.43%   |  120,641   |
         |            |          10|          54|            |            |
          ---------------------------------------------------------------- 
          --------------------------------------------------------------- 








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         |               2013-14 DGS Statewide Consolidated Annual Report|
          --------------------------------------------------------------- 



          --------------------------------------------------------------- 
         | Small Business and Microbusiness Contracting Activity - Total |
         |                           Reporting                           |
          --------------------------------------------------------------- 
         |------------+------------+------------+------------+------------|
         |Fiscal year |   Total    |Total Small |   Total    |   Total    |
         |            |  Contract  |  Business  |  Percent   | Number of  |
         |            |  Dollars   |    and     |            | Contracts  |
         |            |            |Micobusiness|            |            |
         |            |            |   Contract |            |            |
         |            |            |  Dollars   |            |            |
         |------------+------------+------------+------------+------------|
         |2013-14     |$8,768,140,1|$2,262,238,8|   25.8%    |  102,480   |
         |            |          14|          22|            |            |
         |------------+------------+------------+------------+------------|
         |2012-13     |$9,038,383,6|$2,011,723,1|   22.26%   |  123,668   |
         |            |          81|          30|            |            |
         |------------+------------+------------+------------+------------|
         |2011-12     |$8,733,905,6|$2,021,984,9|   23.15%   |  179,471   |
         |            |          92|          56|            |            |
         |------------+------------+------------+------------+------------|
         |Average     |$8,846,809,8|$2,098,648,9|   23.74%   |  135,206   |
         |            |          29|          69|            |            |
          ---------------------------------------------------------------- 
          --------------------------------------------------------------- 
         |               2013-14 DGS Statewide Consolidated Annual Report|
         |                                                               |
         |                                                               |
         |                                                               |
          --------------------------------------------------------------- 

         Unfortunately, participation rates have not been as high as desired,  
         with state agencies meeting the 25% small business goal in only five  
         out of the last 15 report years.  Further, in comparing year to year  








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         numbers, it is important to note that not all of the mandatory  
         reporting agencies provide annual data to DGS for inclusion in the  
         report.  As an example, only 80% of the mandatory reporters provided  
         data for 2013-14.

       4)Increasing Small Business and DVBE Procurement Participation:  Every  
         year, Members of the Legislature introduce a range of bills to  
         improve outreach and increase targeted preferences to increase small  
         business participation in state contracting.  Over the years, direct  
         and innovative approaches have been added including mandating small  
         business and DVBE liaisons at every agency, establishing official  
         state-level Small Business and DVBE Advocates, and requiring the  
         state join a national on-line contracting platform (BidSync), which  
         is soon to be transferred back to a state-only web platform  
         (F$SCAL).  

         Among other challenges, is the high concentration of contracting  
         within a few departments including several which bid contracts for  
         specialized services.  According to the 2013-14 Statewide  
         Consolidated Annual Report by DGS, the top 10 contracting agencies  
         awarded more than 83% of contract dollars in 2013-14.   The data  
         suggests that having department specific strategies to increase  
         small business participation will be required to consistently meet  
         the 25% goal.  

         In 2013-14, 61% of all state contracts were awarded by the  
         Department of Corrections (SDCR), the Department of Transportation,  
         and the Department of Health Care Services (DHCS).  This means that  
         regardless of the efforts of the California School Finance Authority  
         (88.04% of the $99.677 contracts awarded) and California  
         Transportation Commission (89.44% of the $14,291 in contracts  
         awarded), the state's largest contracting entities must do a better  
         job in contracting with small businesses and microbusiness if the  
         state is going to consistently meet its mission of offering small  
         businesses meaningful procurement opportunities.  The chart below  
         shows information on the contracting activities of the top 10  
         contracting departments for 2013-14.










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         ------------------------------------------------------------------ 
        |              Top 10 Contracting Agencies in 2013-14              |
         ------------------------------------------------------------------ 
         ------------------------------------------------------------------ 
        |Departments |  Total   |  Percentage |     Small    |    DVBE     |
        |            | Contact  |      of     | Business and | Participatio|
        |            | Dollars  |  Statewide  | Microbusiness|      n      |
        |            |          |   Spending  |              |  Percentage |
        |            |          |             | Participation|             |
        |            |          |             |   Percentage |             |
         ------------------------------------------------------------------ 
        |------------+----------+-------------+--------------+-------------|
        |    All     |$7,372,199|     100%    |    28.35%    |    3.67%    |
        | Mandatory  |      ,310|             |              |             |
        | Reporters  |          |             |              |             |
        |------------+----------+-------------+--------------+-------------|
        |Corrections |$2,196,722|    30.93%   |    36.03%    |    3.60%    |
        |    and     |      ,703|             |              |             |
        |Rehabilitati|          |             |              |             |
        |     on     |          |             |              |             |
        |------------+----------+-------------+--------------+-------------|
        |Transportati|$1,0174,83|    15.14%   |    28.24%    |    3.70%    |
        |     on     |     3,768|             |              |             |
        |------------+----------+-------------+--------------+-------------|
        |Health Care |$1,069,021|    15.05%   |    2.36%     |    0.45%    |
        |  Services  |      ,018|             |              |             |
        |   (DHCS)   |          |             |              |             |
        |------------+----------+-------------+--------------+-------------|
        |   State    | $553,519,|    7.79%    |    49.17%    |    2.12%    |
        | Hospitals  |       167|             |              |             |
        |------------+----------+-------------+--------------+-------------|
        |   Water    | $351,102,|    4.94%    |    19.79%    |    2.62%    |
        | Resources  |       439|             |              |             |
        |------------+----------+-------------+--------------+-------------|
        |  Highway   | $234,348,|     3.30    |    12.28     |    1.72     |
        |   Patrol   |       394|             |              |             |
        |------------+----------+-------------+--------------+-------------|








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        |  General   |  135,233,|    1.90%    |    42.23%    |   10.49%    |
        |  Services  |       255|             |              |             |
        |------------+----------+-------------+--------------+-------------|
        | Parks and  |  123,503,|    1.74%    |    31.49%    |    6.76%    |
        | Recreation |       810|             |              |             |
        |------------+----------+-------------+--------------+-------------|
        |   Motor    |  111,305,|    1.57%    |    25.09%    |    6.55%    |
        |  Vehicles  |       071|             |              |             |
         ------------------------------------------------------------------ 
        |   Public   |  $99,350,|     1.40    |    12.34     |    3.34     |
        | Utilities  |       011|             |              |             |
        | Commission |          |             |              |             |
        |------------+----------+-------------+--------------+-------------|
        |    Top 10  |$5,975,205|    83.77%   |    27.35%    |    3.02%    |
        |    Total   |      ,480|             |              |             |
         ------------------------------------------------------------------ 
         ------------------------------------------------------------------ 
        |   Source:  2013-14 Statewide Consolidated Annual Report prepared |
        |by DGS                                                            |
        |                                                                  |
        |                                                                  |
        |                                                                  |
         ------------------------------------------------------------------ 



         According to DGS, the state's inability to reach its small business  
         procurement goal in 2011-12 was directly attributable to DHCS' poor  
         performance.  In 2011, DHCS issued a multiyear contract for Medi-Cal  
         Dental Services worth $300 million per year without any small  
         business or DVBE participation.  Had DHCS met their small business  
         goals on this one contract, DHCS would have had a 21% small business  
         participation rate, instead of the reported 5%.  DGS suggested that  
         DHCS focus on certifying the individual dentists that will be  
         subcontracting under the master Delta Dental contract, otherwise  
         this single contract will continue to hold down the state's overall  
         participation rates for years to come. 

         In 2013-14, as shown above, DHCS contracted with small business for  








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         only 2.36% of its contracting activities.  In fact, the Health and  
         Human Services Agency had the lowest overall small business and  
         microbusiness participation rates (20.285) among all other agencies  
         in the state.

       5)Related Legislation:  Below is a list of related measures including  
         those from the current session and prior sessions.

          a)   Bills introduced in the 2015-16 Legislative Session:

            i)     AB 1125 (Weber) Small Business Procurement Incentives:  
              Increases the maximum financial value of an individual small  
              business bid preference and the aggregate value that may be  
              applied to a bid package that includes more than one  
              preference. The bill also modifies the base of that calculation  
              from being the lowest responsible bidder to the lowest  
              responsible non-small business bidder.  Status:  Scheduled to  
              be heard in the Assembly Committee on Jobs, Economic  
              Development, and the Economy on April 21, 2015.

            ii)    AB 1445 (Brown) Small Business Procurement Incentive:   
              This bill increased the maximum contract threshold amount for  
              awards to small business, including microbusiness, and DVBEs  
              under the states streamlined procurement process, from $250,000  
              to $500,000, as specified.  Status:   Pending in the Assembly  
              Committee on Accountability and Administrative Review.

          b)   Bills introduced in a prior legislative sessions:

            i)     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 DVBEs under the states streamlined  
              procurement process, from $100,000 to $250,000, as specified.   
              This bill requires contractors to report the contract amount  
              allocated to SMEs and DVBE's with which they made contract  
              commitments.  Status:  The bill was signed by the Governor,  
              Chapter 212, Statutes of 2009.









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            ii)    AB 172 (Weber) State Agency Contracts and Microbusiness  
              Preference:  This bill would have created 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.  Status:  Held  
              on the Suspense File of the Assembly Committee on  
              Appropriations, 2013.
                                                                        
            iii)   AB 177 (Ruskin and V. Manuel Pérez) Enforcement of Small  
              Business Act:  This bill increases and conforms penalties for  
              persons who falsely engage in activities relating to the Small  
              Business Procurement and Contract Act, including small  
              businesses, microbusinesses, and disabled veteran-owned  
              business enterprises.  Status:  The bill was signed by the  
              Governor, Chapter 342, Statutes of 2010.

            iv)    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.  The bill would have required 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.

            v)     AB 550 (Brown) Office of Small Business and Disabled  
              Veteran Business Enterprise Services:  This bill would have  
              codified the 25% small business participation goal in state  
              procurement, which was initially set through Executive Order  
              (EO) D-37-01 and EO S-02-06.  The bill also would have made key  
              changes to state procurement procedures for the purpose of  
              increasing small business, including microbusiness, and  
              disabled veteran-owned business enterprise participation rates.  








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               Status:  Held on the Suspense File of the Assembly Committee  
              on Appropriations, 2013.

            vi)    AB 1568 (Grove) Quotes for Public Contracts:  This bill  
              would have required state agencies that opt to acquire goods,  
              services, or information technology through a specified small  
              business and disabled veteran business enterprise contracting  
              option to solicit at least three price quotes, and obtain at  
              least two quotes before awarding the contract.  Status:  Held  
              on the Suspense File in the Senate Committee on Appropriations,  
              2014.

            vii)   AB 1734 (Jones-Sawyer) Public contracts: Small Business  
              Participation: Disabled Veterans:  This bill would have  
              required each state agency to establish and achieve a 25% small  
              business participation goal and increased the annual  
              procurement participation goal for disabled veteran business  
              enterprise from 3% to 5% of the value of state contracts.   
              Status:  Held on the Suspense File in the Assembly Committee on  
              Appropriations, 2014.  



            viii)  AB 2278 (Weber) Small Business Procurement Incentive:   
              This bill would have increased the maximum financial value of  
              an individual small business bid preference and the aggregate  
              value that may be applied to a bid package that includes more  
              than one preference. The bill also modifies the base of that  
              calculation from being the lowest responsible bidder to the  
              lowest responsible non-small business bidder. Status:  Held on  
              the Suspense File of the Assembly Committee on Appropriations,  
              2014.

            ix)    AB 2682 (Wagner) Responsible Small Business and DVBE  
              Contractors:  This bill would have required a state agency that  
              solicits offers, awards a contract, or consents to  
              subcontracts, under the Small Business Procurement and Contract  
              Act, to do so only with responsible and reliable parties.  
              Prohibits a state agency from allowing a party to participate  








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              in any procurement activity if the party has been suspended,  
              debarred, or otherwise excluded from participation in a state  
              contract.  Status:  Died in the Assembly Committee on  
              Accountability and Administrative Review, 2014.

            x)     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. 

            xi)    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 would have  
              required 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.

       6)Double Referral:  The Assembly Rules Committee has referred this  
         measure to the Assembly Committee on Jobs, Economic Development and  
         the Economy (JEDE) and to the Assembly Committee on Accountability  
         Administrative Review (AAR).  Should this measure pass the  
         committee, it will be referred to AAR for further policy discussion.
       
       REGISTERED SUPPORT / OPPOSITION:


       Support
       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