BILL ANALYSIS Ó
AB 1125
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Date of Hearing: April 21, 2015
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT, AND THE ECONOMY
Eduardo Garcia, Chair
AB 1125
(Weber) - As Introduced February 27, 2015
SUBJECT: State agency contracts: small business
SUMMARY: Increases the maximum financial value of an individual small
business bid preference and reflects this additional value in the
aggregate value that may be applied to a bid package that includes
multiple preferences, when one of the preferences is a small business
preference. The bill also modifies the base of that calculation from
being the lowest responsible bidder to the lowest responsible
non-small business bidder. Specifically, this bill:
1)Increases the maximum financial value of the 5% small business
procurement preference from $50,000 to $100,000.
2)Increases the maximum financial value of all combined preferences
from $100,000 to $150,000 for any bid that includes a small business
preference, as specified.
3)Modifies the calculation of the small business 5% preference by
basing it on the bid of the lowest responsible non-small business
bidder rather than just the lowest responsible bidder. A
responsible bid means a bid that is fully compliant with all
contract requirements.
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EXISTING LAW:
1)Designates the Department of General Services (DGS) as the
administrator 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 (DVBEs).
2)Authorizes a 5% preference for state contract bidders that are
either a certified small business, microbusiness, or a larger
business that commits to using a certified small business or
microbusiness in undertaking the contract. This 5% is calculated
based on the bid of the lowest responsible bidder, which may be a
small or non-small business.
3)Authorizes a 5% Target Area Contract Preference (TACPA) preference
for a state contract bidder that agrees to perform the contract work
in a designated "distressed area" and 1% to 4% workforce bidding
preference in specified state service and commodity contracts valued
in excess of $100,000.
4)Authorizes contracting departments to offer a DVBE incentive. The
application of an incentive varies from that of the small business
and TACPA both when it is incorporated into competitive
solicitations and how the incentive percentages are determined and
calculated. Unlike preferences where there is a 5% standardized
value included in competitive solicitations, discretion is left to
departments to determine incentive percentages for a particular
transaction based upon a business strategy to achieve their annual
3% DVBE procurement participation goal.
5)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.
FISCAL EFFECT: Unknown
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POLICY ISSUE FRAME:
This bill increases the maximum dollar value of the 5% small business
preference from $50,000 to $100,000 and adjusts the current aggregate
financial value of all preferences within the bid package to reflect
the increase.
The author advocates that the current financial limit does not allow
small businesses to successfully compete for state contracting
opportunities as either a prime or as a subcontractor. Evidence and
commentary by DGS suggests that the $50,000 limitation is too low
given the increasing size of state contracts.
The Comment section of the analysis includes information on the role
of small businesses within the California economy, the Small Business
Act, and how procurement incentives are applied to state contracts.
Comment 6 includes a recommendation for a technical amendment.
COMMENTS:
1)Author's Purpose: According to the author's statement, "Small
businesses are the lifeblood of the economy in California. According
to the Public Policy Institute of California, small businesses
comprise more than 98.3% of all businesses, and are responsible for
employing more than 57.9% of all workers in the state. Currently,
California small businesses get a 5 percent preference when bidding
on state contracts. However, currently the ceiling for the
preference is $50,000. This means that the preference starts losing
its value for contracts valued over $1 million. California small
businesses have less-and-less benefit from the preference in higher
value contracts, which are more difficult to prepare bids for, and
where small businesses need the help most. AB 1125 increases the
ceiling to $100,000. This gives California small businesses a
fighting chance at contracts up to $2 million; a good size contract
for a small business and supports the State's current commitment to
enhance small business participation."
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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. 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.
Businesses with no employees make up the single largest component of
businesses in California, 2.9 million out of an estimated 3.6
million firms in 2012, representing over $149 billion in revenues
with the 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. Even if you exclude
non-employer 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) in 2008 to 2.8 million
firms ($138 billion in revenues) during 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
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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 disabled veteran owned business
enterprise (DVBE) 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
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 procurement participation goal, and a 2006 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 |
--------------------------------------------------------------
|-----------+------------+------------+------------+------------|
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| Fiscal | Total |Total Small | Total | Total |
| year | 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| | |
---------------------------------------------------------------
--------------------------------------------------------------
| 2013-14 DGS Statewide Consolidated Annual Report|
--------------------------------------------------------------
--------------------------------------------------------------
|Small Business and Microbusiness Contracting Activity - Total |
| Reporting |
--------------------------------------------------------------
|-----------+------------+------------+------------+------------|
| Fiscal | Total |Total Small | Total | Total |
| year | 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 |
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| | 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|$2,098,648,9| 23.74% | 135,206 |
| | 29| 69| | |
---------------------------------------------------------------
--------------------------------------------------------------
| 2013-14 DGS Statewide Consolidated Annual Report|
| |
| |
| |
--------------------------------------------------------------
Unfortunately, participation rates have not been as high as desired,
with state agencies meeting the 25% small business goal in only five
out of the last 15 report years. Further, in comparing year to year
numbers, it is important to note that not all mandatory reporters
provide annual data to DGS for inclusion in the report. As an
example, only 80% of the mandatory reporters provided data for
2013-14.
4)Increasing Small Business and DVBE Procurement Participation: Every
year, Members of the Legislature craft a range of bills to improve
outreach, increase targeted preferences, and use their bully pulpit
to advocate for small business participation in state contracting.
Over the years, direct and innovative approaches have been added
including mandating small business and DVBE liaisons at every
agency, establishing official state-level Small Business and DVBE
Advocates, and requiring the state join a national on-line
contracting platform (BidSync), which is soon to be transferred back
to a state-only web platform (F$SCAL).
Among other challenges is the high concentration of contracting
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within just 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. This 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% participation rate) and California Transportation Commission
(89.44% participation rate), the state's largest contracting
entities must do a better job in contracting with small 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.
---------------------------------------------------------------
| Top 10 Contracting Agencies in 2013-14 |
---------------------------------------------------------------
----------------------------------------------------------------
|Department| Total | Percentage | Small | DVBE |
| s | 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 | | | | |
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|----------+----------+-------------+--------------+-------------|
|Correction|$2,196,722| 30.93% | 36.03% | 3.60% |
| s and | ,703| | | |
|Rehabilita| | | | |
| tion | | | | |
|----------+----------+-------------+--------------+-------------|
|Transporta|$1,0174,83| 15.14% | 28.24% | 3.70% |
| tion | 3,768| | | |
|----------+----------+-------------+--------------+-------------|
| Health |$1,069,021| 15.05% | 2.36% | 0.45% |
| Care | ,018| | | |
| Services | | | | |
| (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| | | |
|----------+----------+-------------+--------------+-------------|
| 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| | | | |
| | | | | |
|----------+----------+-------------+--------------+-------------|
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| 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
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 (20.28%) among all other agencies
in the state.
5)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 5%
preference is limited to $50,000 and the combined value of two or
more preferences cannot exceed 15% or $100,000, whichever is lower.
The state currently recognizes two preferences based on the type of
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business and one preference based on the location of the business.
Business type preferences include a 5% preference for bids that
include a small business or microbusiness as either a prime or
subcontractor. The geographically-based TACPA provides a 5%
preference for completing the contract in an economically distressed
area and up to an additional 4% for hiring economically
disadvantaged workers.
The state also offers a DVBE business incentive, which is similar to
a preference, but the exact percentage value is determined by the
contracting entity on a per bid basis and applied at a different
point in the bid review process than the 5% procurement process. It
is not uncommon for a bidder to apply a combination of preferences,
as well as the DVBE incentive in his or her bid package.
When a small business preference is claimed, it is calculated as 5%
of the net bid price of the lowest responsible bidder. As an
example, Bidder A is the lowest responsible bidder with a $5 million
bid and does not qualify for the small business preference. The
contracting agency would multiply $5 million by 0.05 = $250,000 to
establish the maximum value of the preference. Because of the
financial cap, the total value of the preference would be limited to
$50,000.
Bidder B is a certified small business and submits a $5.1 million
bid. In evaluating Bidder B's bid price, the contracting department
would subtract the preference adjustment from the net bid price
($5.2 million - $50,000 = $5.05 million). In this example, under
existing law, the nonsmall business bidder, Bidder A, would be
awarded the contract because the value of the incentive is
insufficient to compete with the lowest bid.
AB 1125 proposes to change the procurement process by increasing the
financial cap of the small business preference to $100,000.
Applying the AB 1125 proposed change to the example above, Bidder B
would now be awarded the contract because a greater percentage of
the 5% preference would be counted. More specifically, Bidder B's
adjusted bid would be $5 million, which is the same as Bidder A.
All things being equal, the bid goes to the lowest responsible bid
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after applying preferences which is lower than Bidder A's $5 million
bid ($5.2 million - $250,000).
While a 5% preference was sufficient to have the small business be
awarded the contract, sometimes the differences between bids are
larger and existing law allows for the combining of preferences. If
the small business bidder was in a low-income area, they could also
apply the TACPA preference and/or DVBE incentive. Please note the
preference and incentive do not change the actual bid price, the
calculations are performed in order to compare and rank bids.
1)Technical Amendments: AB 1125 increases the maximum financial value
of the small business preference including the higher preference
value to bids that use more than one preference that include the
small business preference.
Technical amendments may be needed to make a similar change to the
TACPA preferences so that the higher value of the small business
preference can be recognized in the bid evaluation process. These
amendments would result in the maximum value of all preferences in a
bid package to be $150,000 to the extent that a small business
preference was included.
2)Related Legislation: Below is a list of related legislation. While
there has been an abundance of effort by the Legislature to increase
small business 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 businesses (SME), including
microbusiness, and disabled veteran-owned business enterprises
(DVBE) under the states streamlined procurement process, from
$100,000 to $250,000, as specified. It required contractors to
report the contract amount allocated to SMEs and DVBEs with which
they made contract commitments. Status: Signed by the Governor,
Chapter 212, Statutes of 2009.
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b) AB 172 (Weber) State Contracting Microbusiness: This bill
would have increased the microbusiness procurement preference
from 5% to 7% for state contracts to purchase goods, services,
information technology, and construction of state facilities, and
allowed the preference to 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.
c) AB 351 (Jones-Sawyer) 25% Small Business Goal: This bill
would have required each state agency to establish and achieve a
25% small business participation goal. Status: Scheduled to be
heard on April 21, 2015 in the Assembly Committee on Jobs,
Economic Development, and the Economy.
d) AB 550 (Brown) State Procurement Procedures for Small
Businesses: This bill 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. Status: Held on the
Suspense File of the Assembly Committee on Appropriations, 2013.
e) AB 1734 (Jones-Sawyer) Public Contracts and Small Business and
DVBE Participation: This bill would have required each state
agency to establish and achieve a 25% small business
participation goal and increases the annual procurement
participation goal for disabled veteran business enterprises
(DVBEs) from 3% to 5% of the value of state contracts: Status:
Status: Held in the Assembly Committee on Appropriations, 2014.
f) 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
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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.
g) AB 2278 (Weber) Small Business Procurement Preferences: This
bill would have revised the maximum small business bid preference
amount and make related changes to the maximum value of all
procurement preferences. Status: Held in the Assembly Committee
on Appropriations, 2014.
h) 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 in the Assembly Committee on Appropriations, 2011.
i) 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 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, 2011.
REGISTERED SUPPORT / OPPOSITION:
Support
California Association for Micro Enterprise Opportunity
Natoma Technologies
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Small Business California
Opposition
None received
Analysis Prepared by:Toni Symonds / J., E.D., & E. / (916) 319-2090